ANNUAL REPORT Adding value to patients lives

Transcription

1 ANNUAL REPORT 2005 Adding value to patients lives

2 ALTANA PHARMA AT A GLANCE ALTANA Pharma, the pharmaceuticals group of ALTANA AG, researches, develops, produces and markets a wide range of medicinal products. It focuses on innovative, prescription-only therapeutics employees on all five continents are serving the needs of doctors and patients worldwide. I think it's great that there are people researching into how asthma can be treated. Christopher (11) OVERVIEW 02 PREFACE 04 MANAGEMENT AND STRATEGY 08 LIVING WITH ASTHMA 12 MANAGEMENT REPORT 28 FINANCIALS

3 In 2005, ALTANA Pharma achieved a record profit for the tenth year running. Sales increased by 12 percent to 2.4 billion. The company is committed to medicines from its own research and concentrates on innovative products for the treatment of respiratory and gastrointestinal diseases. ALTANA PHARMA AT A GLANCE Change in million in % Sales Earnings before taxes Research and development expenditure Capital expenditure Employees (number) EBITDA in % of sales 29,2 28,7 EBIT in % of sales 25,5 24,8 1 Adjusted according to IFRS 2 Share based Payment (see p.37) SALES EARNINGS BEFORE TAXES R&D EXPENDITURE in million in million 608 in million ALTANA PHARMA ANNUAL REPORT 01

4 2005 brought another increase in profitability even though the return on sales was already very strong. This was achieved against a background of continuing and consistently high investment in Research and Development as well as activities to launch Alvesco, our new treatment for asthma, in sixteen countries. Dr. Hans-Joachim Lohrisch CEO and President of ALTANA Pharma AG LADIES AND GENTLEMEN, We are delighted to announce another record performance for ALTANA Pharma in The company has now delivered over ten years of above-average growth in sales and profits even though healthcare policy in certain countries in Germany, for example has had a substantial impact on the pharmaceutical market. Turnover has increased to almost 2.4 billion, up twelve percent on Growth in pre-tax earnings (16 percent) outperformed growth in sales. Encouragingly, we saw another increase in profitability even though the return on sales was already very strong. This was achieved against a background of continuing and consistently high investment in Research and Development, as well as activities to launch Alvesco, our new treatment for asthma, in sixteen countries. Our commercial success has secured ALTANA Pharma an excellent position that bears any comparison with our European and overseas competitors. Our bestseller, pantoprazole, once again played a major role in shaping our positive sales performance. This exceptional product still generates double-digit growth rates, particularly in Europe, even though it was launched over ten years ago. And we have yet to reach the peak of the sales curve. 02 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

5 Alvesco has already delivered some encouraging initial results, and is gaining market shares. Further important launches will follow this year. Our partners, Sanofi-Aventis and Teijin, are working with us on Alvesco licensing applications in the USA and Japan did bring one setback, however, in that we withdrew our European licensing application for Daxas, our innovative product candidate for treating COPD and asthma. At the same time we decided to add a number of other clinical trials to our development program and then resubmit for licensing with an even broader set of results. On October 12, 2005, our Research and Development held an R&D Day to showcase the programs ALTANA Pharma is currently working on for the future, and the results already achieved in clinical trials. In addition to Daxas, other important clinical trials are underway for a ciclesonide fixed combination, for soraprazan and for Venticute. A licensing application for ciclesonide nasal spray has already been submitted to the FDA. Other preclinical development candidates from P-CAB and PDE research are expected to move into the clinical phase. And in oncology, our most recent area of research, we are now preparing HDAC inhibitors for clinical development. We intend to supplement these in-house research and development projects with licensed-in and/or acquired active substances to help secure our strong position in both the medium and long term. Despite the encouraging results of this past business year, we must obviously target the long-term challenges facing us in the pharmaceutical market. We believe that opening ourselves to strategic partnerships offers a good means of supporting stable growth and improving our risk profile in the long term. We therefore intend to investigate all such options. Together with my colleagues on the Management Board I would like to thank everyone for all your endeavours and the results achieved last year. The ALTANA Pharma Management Board and indeed the entire workforce are aiming to achieve another first-class performance in Yours, Dr. Hans-Joachim Lohrisch CEO and President, ALTANA Pharma AG ALTANA PHARMA ANNUAL REPORT 03

6 MANAGEMENT AND STRATEGY As a research-driven pharmaceutical company with worldwide operations focused on innovative medicines, ALTANA Pharma creates higher quality of life for patients, jobs for highly qualified people and a good return for shareholders. The consistent focus on important markets and innovative therapeutic agents forms the core building block in the management strategy of ALTANA Pharma. As a mediumsized company with international operations, ALTANA Pharma works together with partners on the development and marketing of its own innovative medicines. Research and development are set up as a global operation and are being driven forwards systematically. INNOVATIVE THERAPEUTICS The core business of ALTANA Pharma is in the field of innovative pharmaceuticals for the treatment of common respiratory and gastrointestinal diseases. The proton pump inhibitor pantoprazole is currently the most successful medicine from a German research laboratory. It is an acid inhibitor, which is used to treat reflux disorders (such as GERD) and ulcer disorders. Alvesco, an inhaled corticosteroid, was successfully launched in 16 markets in Inhaled corticosteroids are used in the treatment of asthma to suppress inflammatory processes. Alvesco is the first product based on the molecule ciclesonide. Further ciclesonide products under development are a nasal dosage form for treating allergic rhinitis and a combination product with formoterol, a long-acting bronchodilator. We consider both the ciclesonide family and also Daxas, an innovative PDE4 inhibitor for the treatment of COPD and asthma, to have blockbuster potential. INTERNATIONAL MARKET PRESENCE ALTANA Pharma is continuing to expand its global presence. The large pharmaceutical markets in Europe and North America in particular are the main focus of its internationalization. The company is traditionally strong in Europe and Latin America. In Japan, ALTANA Pharma is working together with partners. The organization is represented by subsidiaries in all the major European countries. New local operations are currently being established also in Eastern Europe. In 2005, for example, another new company was founded in Romania. In North America, ALTANA Pharma is present in both the USA and Canada. The Canadian company was founded 9 years ago and in the intervening years has become a very successful company, which contributes substantially to the profits of the pharmaceuticals group. The US organization, which has been restructured in recent years, was established over 20 years ago. The specialized business with topical medicines for the treatment of dermatological and ophthalmologic diseases has been the subject of systematic further development and is managed by ALTANA Inc., Melville, New York. Success in the marketplace is the result of clinical data quality, clear positioning and customer-oriented strategies. Intensive communication among experts from very diverse scientific disciplines is the key to new product ideas. Dr. Ulrich Thibaut Member of the Management Board, Research and Development Dr. Otto Schwarz Member of the Management Board, Business Strategy and Commercial Operations 04 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

7 Successful products and promising new developments ensure the long-term basis for further growth. Dr. Hans-Joachim Lohrisch CEO and President Employees need transparency on objectives and on their own contribution so that they can focus their energy on our common goals. Alfred Goll Member of the Management Board, Human Resources and Information Technology Operational excellence at the highest level forms the backbone for market success. Andreas Görwitz Member of the Management Board, Finance and Operations ALTANA PHARMA ANNUAL REPORT 05

8 MANAGEMENT AND STRATEGY The innovative therapeutics for respiratory and gastrointestinal disorders is based at ALTANA Pharma US, Florham Park, New Jersey. This company has structures in place for the clinical development of new medicines, for drug registration as well as for sales and marketing. Today the sales team is already involved in the co-promotion of Protonix with Wyeth and of Pfizer products. Florham Park is also home to the Global Franchise Respiratory. The Global Franchises at ALTANA Pharma bundle all commercial aspects of ALTANA Pharma s trademarks from clinical management through trademark management to licensing programs. Together with Research & Development, the Global Franchise Teams develop treatment strategies to increase patient s benefits. The Global Franchise Teams work with the area managers and country sales organizations to implement their marketing plans. FOCUSED RESEARCH Research and development provide the basis for securing the future of any research-based pharmaceutical company. ALTANA Pharma has the strategic objective of developing innovative medicines and introducing them to market in order to improve the quality of life for as many patients as possible. To achieve this objective, the company focuses on the treatment of selected common diseases in well-defined indication areas. Research therefore focuses on gastrointestinal and respiratory disorders. Since several years, ALTANA Pharma has also been engaged in oncology research. The aim is to develop medicines for treating diseases such as asthma, COPD and allergic rhinitis. The spread of these diseases is steadily increasing, especially in industrialized countries. In the early phase of development, the research strategy also allows wider activities. For example, researchers are working on a range of highly promising and innovative biological mechanisms for inflammatory diseases. In the medium term, this could also lead to treatments outside the range of existing respiratory therapeutics. Research thrives on diversity and creativity, on new contacts and ideas and on communication between researchers of different disciplines. For this reason, ALTANA Pharma collaborates intensively with partners from different disciplines, for example medicine, medicinal chemistry, biotechnology, pharmacology and biochemistry. Cutting-edge technology from all fields is used for research. Research and Development, too, are highly internationalized at ALTANA Pharma. Clinical Research has been organized on a global basis for many years already. As a result, it is able to carry out clinical studies in the required number of patients within a reasonable timeframe. In addition to the research centre at headquarters in Konstanz, intercultural and interdisciplinary teams also work at the ALTANA Research Institute near Boston, The three pillars of the ALTANA Pharma s successful strategy > Focus on innovative therapeutics > Focus on international markets Europe, USA, Japan Partnering is key > Focus on well-defined and selected areas in research and development Gastrointestinal diseases Respiratory diseases Oncology 06 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

9 Massachusetts, and also at the recently opened R&D centre in Mumbai, India. ALTANA Pharma finances the creative interplay between global teams in different disciplines using state-of-the-art technology with about one-fifth of research-relevant income. This enables us to keep the research and development pipeline of ALTANA Pharma well stocked, thereby securing the supply of new products. PREPARED FOR THE FUTURE The strategy of ALTANA Pharma to concentrate on innovative therapeutics for the treatment of common diseases and also on the most important pharmaceutical markets has helped the company to make crucial progress in the last few years. The whole company has been focused on and prepared for future tasks in a global organization. Internationalization has not only opened up new markets, but also freed the way for new research ideas and product approaches. All employees are highly motivated targeting the challenges presented by the global pharmaceutical business.successful products and promising new developments, along with licensed-in products, acquisitions and strategic partnerships, ensure the long-term basis for the further growth of ALTANA Pharma. As part of the international R&D network, our new research centre in Mumbai is contributing to the development of innovative medicines by ALTANA Pharma for patients all around the world. From left: Mrunmayee Ajgaonkar Data Documentation Officer, Anindita Banerjee Junior Research Associate, Dr. Sujal Kamble Manager Clinical Operations, Shebeena Nair Trainee Clinical Research Associate, Vindu Seal Senior Executive Data Management ALTANA PHARMA ANNUAL REPORT 07

10 LIVING WITH ASTHMA Many asthma sufferers are plagued for years by coughing, allergic rhinitis, allergic rashes, severe infections or pneumonia until they realize what disorder it is that is ruining their lives. When it eventually becomes clear to them, a completely new chapter often opens up in the life of these patients. Disciplined therapy and modification of lifestyle are crucial factors for the success of treatment and quality of life. When the doctor diagnosed asthma, I was glad that I finally knew what it was, explains Jutta Zauche, mother of two children with asthma. Before this diagnosis, years of suffering were endured by her son Eric, whose life was a constant battle against severe bronchial infections and pneumonia from the age of eight weeks onwards. Even as an infant, he had to inhale every three hours, day and night, and undergo stressful diagnostic procedures. Not until the age of two did clarification come. At last the disease had a name, and we could start with a proper treatment, says Jutta Zauche, a nurse by profession and herself asthmatic for eight years. Shortly after Eric s diagnosis it was found that his elder sister Charlotte was also suffering from asthma, a fact that the mother initially found hard to accept. Charlotte, a bright eleven-year-old, explains the frequency of the disease in her family: Asthma does not just happen, it s inherited, and the disease can then occur in the course of one s life. FACING UP TO THE FACTS Jutta Zauche decided she had to face up to the facts. And from then on she found things started to get easier. But the severity of Eric s disorder meant that the family s daily routine had been shaped for years by the treatments he needed. Asthma sport, ergotherapy and psychomotor gymnastics alternated with regular visits to the doctor. Thanks to systematic therapy, Eric can lead the normal life of a schoolboy today and, with a few restrictions, can take part in sports and PE classes. Inhalation every morning and annual stays for several weeks at the Alpine Clinic (HGK) in Davos have since become fixed points in what is largely now a normal family life. Stephanie Mayer, too, makes the regular trek to Davos with her children Franziska (11), Lukas (6) and Julius (4). All four are asthmatic. Franziska has been to the Alpine Clinic five times and this last year she even spent her birthday and Christmas there. After years of exploring the wrong paths, we finally reached a turning point in Davos. For the first time in her life, Franziska was given the right medicines in the right dose, and our condition has visibly stabilized here, explains her mother. The change to a life with asthma was not always easy. I lost a good friend because I m allergic to a lot of pets, says Franziska. She was often fed up with me because I had to be so careful. For example, I couldn t sleep at her place. In asthma training Franziska learned how to behave when she comes into contact with pets: always have the rescue spray to hand, open windows and change clothes and wash hair as soon as possible. Sometimes it gets to me that I have to inhale every morning. But I know it helps. Charlotte (11) 08 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

11 OUR CONTRIBUTION TO IMPROVED COMMUNICATION BETWEEN DOCTOR AND PATIENT In 2005, ALTANA Pharma carried out its first quantitative, global patient/doctor survey together with well-known international asthma patients organizations. The aim of the survey was to gain a better understanding of the needs of asthma patients and how their doctors are addressing those needs. The GAPP survey (Global Asthma Physician and Patient Survey) brings to light a substantial deficit in communication between doctors and patients. Patients feel they are insufficiently informed about short-term and long-term side effects of their asthma medication and are more fearful of side effects than doctors are aware of. Numerous patients stop their treatment for this reason or change the prescribed dose on their own initiative a situation that remains concealed from many treating physicians. Consequently, their health worsens. ALTANA Pharma aims to act on the results of the study and to help make communication between doctor and patient more effective. With targeted information campaigns and our mentoring program (see Our contribution to a better life with asthma ) we are seeking to improve communication between doctors and patients, to encourage patients to exchange their experiences with each other and to draw attention to the need for better tolerated asthma medicines. TRAINING HELPS Knowing that the quality of life is crucially dependent not only on the correct drug therapy, but also on coping with the disease properly, Jutta Zauche decided to qualify as an asthma trainer. I lead a self-help group, where I can pass on my experience to others, and at the same time pick up tips from others too. I often hear that parents would have liked to have received training of this kind two or three years earlier. The demand for training is especially high among parents of small children and adolescents. Apart from exchanging experiences, says Jutta Zauche, the main benefit of training is the knowledge that one is not alone with the disease. But every often, discussion also focuses on possible side effects of the usual asthma medicines. A vague fear of serious side effects deters many parents from starting therapy in good time or complying with the prescribed treatment regimen. For Dr. Rainer Schramedei, consultant in the allergy clinic of the HGK in Davos, in-depth training on asthma management and discussions about the benefits and risks of treatment are crucial to the success of treatment. Really enlightened patients know that the benefit of correctly used medicines is greater than potential problems of side effects. However, he adds, the treating physician usually has little time in day-to-day practice for extensive discussions on these complex subjects. Competence centers, such as the Davos Alpine Clinic, adopt a holistic approach to questions on living with asthma and provide patients not only with adequate therapeutic support but also with important counseling on how to make their day-to-day life easier and improve their quality of life. ALTANA PHARMA ANNUAL REPORT 09

12 LIVING WITH ASTHMA OUR CONTRIBUTION TO A BETTER LIFE WITH ASTHMA After the diagnosis, most asthma patients are faced with a host of burning questions: What will my life be like now? How can I make sure the place where I live is compatible with my asthma? How do I behave at work, on my travels or during sports? ALTANA Pharma aims to help asthma patients learn to live with their illness. With this in mind, we have developed a mentoring program together with the European Federation of Allergy and Airways Diseases Patients Associations (EFA), which is designed to introduce newly diagnosed patients to a life with asthma. The idea is to train experienced asthma sufferers to become mentors who will pass on their knowledge to new patients. The latter not only receive emotional support, but also learn to approach things properly and experience an improvement in the quality of life. This helps to relieve the burden on the treating physician, who can increasingly focus on questions concerning the treatment. The placement of mentors is made through local patient organizations, which are in contact with medical practitioners. The mentors are provided with an integrated communication kit developed by ALTANA Pharma, which includes a DVD with original short films on typical life situations of asthma sufferers, as well as flyers, displays and brochures. As member of a study group on asthma training in children and adolescents, the Director of the Davos Allergy Clinic Center for Children and Young People, Dr. Hans- Joachim Mansfeld believes that self-help organizations can close the existing information gap and take on an important role in correct asthma training. These groups have the know-how to help inexperienced patients accept their illness and integrate it constructively into their lives, he says. ASTHMA OPENS UP NEW SIDES TO LIFE Regina Schumachers has also succeeded in mastering the trick of facing up to the disease and seeing the positive sides it offers. The qualified bank clerk and multilingual secretary, who started training to become a soprano singer, fell ill with asthma following surgery to her sinuses. The diagnosis and the prospect of having to take medicines with potentially serious side effects for the rest of my life were a bitter blow for me, she recalls. And worse still, I had no voice any more, because my vocal chords would not close any longer, and so I had to stop my vocal training. Regina Schumachers started work back at the bank, developed her career here further and became branch manager. She enjoyed We underwent a real odyssey before the diagnosis of asthma was eventually made. Stephanie Mayer with Lukas (6) and Julius (4) 10 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

13 dealing with customers and employees. Thanks to her medicines, she was able to keep her disease under control and had to put up with few restrictions, but she admits that I wanted to make sure I could function, and often took extra high doses when I wasn t well, so ultimately I was ruining my health. Apart from her worsening overall health, side effects began to emerge. Her doctor therefore advised her to give up her strenuous job and apply for a pension. A NEW START AS AN ARTIST To begin with I sat at home and railed against my fate, says Regina Schumachers. Then a trip to Mauritius brought her new impetus. She revived her love of the French language and, after her return home, she started to give private lessons and French classes for small groups. To work on her voice, she attended a vocal training course at the adult education center. This gave her the impetus to attend a course in basic acting skills for the theater. The lecturer encouraged her to take part in a performance and so aroused her interest in theater and a more in-depth training. The determination to revive her voice gave her no peace, and she underwent treatment with a Chinese acupuncture specialist. Today I m at the point where I can sing chansons in the low register and recite lyrical pieces, she explains. Later, in the course of further artistic training, she discovered her passion for water-colors and oil painting. Thanks to disciplined therapy she can perform her theatrical and singing engagements without being compromised by her illness. She also makes regular visits to the Alpine Clinic in Davos to recharge my batteries, because of the good medical care and because I can exchange my experiences with other people there who share my affliction, she says. I ve received many a good piece of advice here. And another reason is that new medicines are tried out in the Alpine Clinic, because I m very much hoping there will be new products with fewer side effects. When asked whether she could imagine taking part in a kind of mentoring program, where she could pass on her experiences to other asthma sufferers who have recently been confronted with the diagnosis, she does not hesitate. Of course, she says, I believe I could give others the courage to enjoy their lives despite their disease. After all, without my disease I would never have been able to live out my artistic vein to such an extent. My medication is arranged so that I can sing and play in the theater without being hampered by my asthma. Regina Schumachers OUR CONTRIBUTION TO OPTIMIZED THERAPY Inhaled corticosteroids (ICS) are regarded today as the gold standard in asthma therapy. They inhibit the activity of pro-inflammatory cells and promote the endogenous production of anti-inflammatory substances. With regular use of these corticosteroids, the inflammation in the lungs and airways that underlies the asthma is attenuated. ALTANA Pharma recently introduced a new-generation ICS onto the market with a novel active principle. It is activated by an endogenous protein in the lungs and thereby acts specifically on the cells in the airways. By binding to lipids in the lungs it forms a kind of depot, from which the active substance is slowly released. This allows a lower dose. For asthma patients it has an immediate impact on the quality of life. They only have to inhale the medicine once a day, and adverse effects are rarer. ALTANA PHARMA ANNUAL REPORT 11

14 MANAGEMENT REPORT 2005 ALTANA Pharma is one of the most successful European pharmaceutical companies. In 2005 both sales and earnings once again showed double-digit growth. This success is built on the foundations of the company s consistent management strategy over the last few years. A sound product range with successful medicines and focused research form the basis for long-term success. Through our global franchise teams we are able to provide our marketing managers with optimal support in their markets. From left: Dr. Otto Schwarz Member of the Management Board, Business Strategy and Commercial Operations, Dr. Christoph Leutwyler Head of Global Marketing Pantoprazole 12 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

15 SALES BY REGION SALES BY BUSINESS AREA PANTOPRAZOLE BY REGION 51% Europe 19% Germany 33% North America 12% Latin America 4% Other regions 87% Therapeutics 58% Pantoprazole 6% OTC 5% Imaging 2% Other products 55% North America 38% Europe 11% Germany 2% Latin America 5% Other regions 1. BUSINESS AND UNDERLYING CONDITIONS 1.1 OVERALL ECONOMIC SITUATION As in previous years, the global economy varied considerably from one region to another in In the USA, economic growth of more than 3 percent was achieved, which fell short of the performance in 2004 (+4.2 percent). In the euro zone, the average growth rate was only 1.6 percent, partly due to a very low growth of 0.9 percent in Germany. Japan showed a growth in gross domestic product of 2.3 percent, which indicates that a recovery is under way in Japan s economy. Some Asian countries, such as China and India, reported economic growth well above the average. In China, the growth rate was 9 percent and India 6 percent. Latin America reported economic growth of more than 6 percent. 1.2 DEVELOPMENT OF THE PHARMACEU- TICAL INDUSTRY AND DRUGS MARKET The 13 most important pharmaceutical markets in 2005 showed another substantial growth of 5 percent in US dollar terms compared with the previous year as a result of the increasing demand for medicines and thanks to medical advances (innovative medicines). The North American pharmaceutical market grew 5 percent. The most important European markets showed an average growth of 3 percent. The German market grew above-average growth with 7 percent. The Japanese pharmaceutical market reported a growth in sales of 6 percent. Apart from Japan, the second-largest national market, the strongly growing Asian markets, such as China and India became increasingly important. The Latin American markets showed a currency-related growth of 21 percent in US dollar terms. HEALTH POLICY In Europe, price-regulating measures continued in In Germany, the mandatory rebate was reduced from 16 percent to 6 percent. However, in order to compensate for the rebate-reduction, reference prices were introduced for patent-protected medicines. In other European countries, too, reference prices are gaining relevance. The regulation of drug prices remains one of the central policy measures of national governments as a means of containing costs in statesupervised health systems. This is having an attenuating impact on the growth of drugs markets in Europe. In the USA, 2005 did not see any changes to the law with a direct impact on the value of the pharmaceutical market. The downturn in growth compared with previous years is explained by an increase in the use of generics in the USA. The Medicare Modernization Act, reforming the state-funded healthcare program for the elderly, allows for a partial reimbursement on medicines from 2006 onwards, as well as a general discount card as a transitional solution. The discount cards were introduced in 2004, but did not have any notable impact on product sales in BUSINESS PERFORMANCE OF ALTANA PHARMA 2005 ANOTHER RECORD YEAR WITH DOUBLE- DIGIT GROWTH IN SALES The earnings-focused growth strategy of ALTANA Pharma, which is based on innovation and internationalization, together with our focus on strategic products for the treatment of gastrointestinal and respiratory diseases, are having a sustained positive impact on sales and profits. This has brought ALTANA Pharma another record year. The sales revenue of ALTANA Pharma in 2005 was increased by 12 percent to million (2004: million). Operating sales showed an increase of 10 percent. ALTANA PHARMA ANNUAL REPORT 13

16 MANAGEMENT REPORT 2005 STRONG POSITION REINFORCED IN EUROPE *1 In addition to further enhancing the traditionally strong position of ALTANA Pharma in important European pharmaceutical markets, the management strategy envisages a medium-term expansion and development of the company s presence in the important and high-value pharmaceutical markets of North America and Japan. This is closely linked to the introduction of innovative therapeutic agents for respiratory diseases in these markets. The dynamic European business of the ALTANA Pharma Group added substantially to sales growth, with the domestic German market making a sizeable contribution. Sales in Germany grew by 18 percent. The proportion of sales achieved abroad amounted to around 81 percent. In North America, we achieved sales of 770 million in the last twelve months (2004: 749 million), up 3 percent on the previous year. We thus generated 33 percent of our business volume in the USA and Canada. The regional net sales here refer to the domicile of customers. The business of our subsidiary ALTANA Inc., which focuses on topical dosage forms and specialty products, was considerably strengthened by the acquisition of dermatological products from GlaxoSmithKline, USA. Latin America reported a 19 percent growth in sales. Its performance was influenced by the increasing sales of pantoprazole and the growth of Neosaldina, an established analgesic which is very popular in the Brazilian OTC market. The region accounted for 12 percent of all ALTANA Pharma sales, slightly up on the previous year (2004: 11 percent). Since January 2004 ALTANA Pharma has its own company in Japan, the world s second-largest pharmaceutical market. In its first phase, the company is organizing its cooperation with Japanese partners and is engaged in the clinical development of Daxas (roflumilast) together with its Japanese partner Tanabe. Alvesco (ciclesonide) is being developed by Teijin, another Japanese partner, and will later also be marketed by them. INNOVATIVE THERAPEUTICS ARE SECURING THE FUTURE WITH A GROWING PROPORTION OF SALES *2 ALTANA Pharma focuses on the development and marketing of prescription medicines. In 2005, the company achieved 13 percent sales growth with this strategic core business. Therapeutics account for 87 percent or million of the total sales of ALTANA Pharma (2004: million). GASTROINTESTINAL THERAPEUTICS ARE THE STRONGEST-SELLING BUSINESS AREA *3 The acid inhibitor market in 2005 was worth more than 17 billion in the 20 most important markets, including the USA, Japan and Europe. Of this, the proton pump inhibitors (PPIs) represent by far the largest segment at more than 14 billion. The mean growth of PPIs in these countries amounted to around 5 percent. With sales of million, gastrointestinal therapeutic agents are by far the strongestselling product group of ALTANA Pharma and are the backbone of the therapeutics business. The leading product, the proton pump inhibitor (PPI) pantoprazole, accounts for 66 percent of therapeutics sales. SALES BY REGION *1 SALES BY BUSINESS AREA *2 SALES OF THERAPEUTICS BY INDICATION AREA * Change in million sales sales in % Europe thereof Germany North America thereof USA Latin America Other regions Total Change in million sales sales in % Therapeutics thereof pantoprazole Imaging OTC Other products Total Change in million sales sales in % Gastrointestinal Respiratory Other products Total OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

17 PANTOPRAZOLE WITH SUSTAINED DYNAMIC GROWTH Pantoprazole (Pantozol, Protonix etc.) is available in almost 100 countries worldwide. It is used for the treatment of acid-induced gastrointestinal diseases, such as gastroesophageal reflux disease (GERD). The aim of therapy is to heal the lesions, achieve sustained freedom from symptoms and improve the quality of life for patients. Pantoprazole is available in both intravenous and oral forms. Since its market launch 11 years ago, more than 300 million patients have been treated with pantoprazole. The high global demand makes pantoprazole currently the most successful patent-protected medicine from German research laboratories. Thanks to its impressive product profile, pantoprazole is now market leader in 13 countries. The sales of pantoprazole by ALTANA Pharma itself increased in the last 12 months by a clear 12 percent to million. Together with our marketing partners, global market sales of million were achieved in 2005, a growth of 12 percent. *4 The USA accounts for 49 percent of global market sales with pantoprazole. US market sales in 2005 amounted to million. In the USA, our American partner Wyeth markets pantoprazole under the name of Protonix. Despite strong competitive pressure, Wyeth achieved 6 percent sales growth, both in US dollars and in euros. The proportion of prescriptions for Protonix in the PPI market is about 20 percent. *5 As of 2005, GERD patients can also receive treatment on demand in the first European countries. This will enable even broader use to be made of the therapeutic potential of pantoprazole. In Mexico, a new medicine containing pantoprazole magnesium was launched in April 2005 for treating the nocturnal symptoms of GERD. RESPIRATORY THERAPEUTICS: INNOVA- TIVE PRODUCTS REACH THE MARKET The market for respiratory products is growing strongly. Products for the treatment of asthma, COPD and rhinitis in 2005 reached a value of more than 23 billion in the 20 most important countries, with a growth rate of around 9 percent. The treatment of asthma and COPD accounted for more than 14 billion and rhinitis products for around 9 billion. Almost 300 million people worldwide suffer from bronchial asthma, five million in Germany alone, and the incidence is rising. According to the WHO, about 600 million people are suffering from chronic obstructive pulmonary disease (COPD), a chronic inflammatory disease that is often a result of smoking. If the trend continues, COPD will be the third-most common cause of death in Europe by There is an urgent need for innovative therapeutic agents for the treatment of this major widespread disease. 78 percent of the rhinitis market is in the USA. Here, medicines for the treatment of rhinitis achieved sales worth more than 6.5 billion. The sub-market of nasal corticosteroids is growing at 8 percent in the USA. PANTOPRAZOLE MARKET SALES IN THE YEARS SINCE LAUNCH *4 PANTOPRAZOLE MARKET SALES BY REGION WITH *5 GROWTH RATES in million in million % +11% +6% +19% +11% +18% % change vs. previous year Germany Europe excl. Germany USA Canada Latin America 136 Other countries ALTANA PHARMA ANNUAL REPORT 15

18 MANAGEMENT REPORT 2005 In 2005, ALTANA Pharma achieved total sales of 69 million in the therapeutic area respiratory. In the coming years, this product area will gain considerably in importance with the innovative products Alvesco, ciclesonide nasal and ciclesonide fixed combination, as well as Daxas. Alvesco was introduced at the beginning of 2005 first in Great Britain and Germany. Further launches followed during the year in Ireland, Poland, Chile, Columbia, Brazil, Australia, the Netherlands, the Czech Republic, Slovakia, Peru, Ecuador, Hungary, Slovenia and Hong Kong. By the end of 2005 Alvesco had been granted regulatory approval in 34 countries and was marketed in 16 countries. Alvesco is part of the sub-market of monotherapy products with an inhaled corticosteroid (mono-ics). This market segment is worth around 2 billion and is stagnating, unlike the sub-market of ICS combination products, which has already reached a market value of more than 4.5 billion and is growing at 20 percent. With ciclesonide we have an outstanding platform for promising medicines beyond Alvesco. From left: Ghassan Andraos Senior International Product Manager Ciclesonide, George Mammen Medical Director Asthma Alvesco is a new-generation inhaled corticosteroid (metered-dose spray), which is regarded as highly effective and particularly well tolerated because of the novel properties of its active ingredients and an innovative formulation. Inhaled corticosteroids suppress the inflammatory processes in the airways and are therefore used as standard therapy in asthma. 16 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

19 In its first year, total sales of 8 million were achieved with Alvesco. In Germany, its share of the mono-ics market is already at more than 6 percent. In all countries, sales and market share of Alvesco are steadily growing. Alvesco is the first product in a whole product family based on ciclesonide. In addition to the metered-dose aerosol Alvesco for the treatment of asthma, other ciclesonide products under development are a nasal dosage form for the treatment of allergic rhinitis and a combination product containing ciclesonide and formoterol, a long-acting bronchodilator. Alvesco and the fixed combination are being developed and will later be marketed in the USA together with our partner Sanofi-Aventis. In Japan, Alvesco and ciclesonide nasal is being developed and, after approval, will be marketed by our partner Teijin. Daxas (roflumilast) is an anti-inflammatory phosphodiesterase (PDE4) inhibitor which is being tested in clinical phase III studies for the treatment of COPD and asthma. INNOVATIVE CONTRAST MEDIA AS A STABLE PORTFOLIO COMPONENT The modern non-ionic x-ray contrast media Imeron and Solutrast and the innovative magnetic resonance imaging contrast media ProHance and MultiHance are firm components in the product portfolio of some European countries. The Imaging business sector achieved stable sales of 108 million in STRENGTHENING OF OTC PORTFOLIO Through the acquisition of Neosaldina from Abbott at the end of 2003, we vitally strengthened our OTC business in Brazil. The analgesic Neosaldina is showing steady growth thanks to its successful promotion and is responsible for the sales growth in this business area. Further important OTC products are Buerlecithin, Faktu, Riopan and Sanostol. In 2005, sales amounting to 131 million were achieved with OTC products, a growth of 13 percent. 1.4 RESEARCH AND DEVELOPMENT INVESTMENTS Adding value to patients lives by enabling them to lead longer, more active and healthier lives through innovative medicines is the goal of ALTANA Pharma. Financial resources create the conditions for research. Research creates innovation. And innovation in turn improves patients quality of life. For years, around one-fifth of sales revenue achieved with therapeutics has been invested in research for new therapeutic principles and the development of medicines. The research budget steadily increased as a result and, in 2005, stood at 418 million (+ 2 percent). R&D STRATEGY: CONCENTRATION ON SELECTED, HIGH-VALUE RESEARCH AREAS Our Research and Development are focused on gastrointestinal and respiratory disorders, two indication areas in which the therapeutic needs are as great as ever. In the third area of oncology, our first projects are in the stage of preclinical development. Clinical candidates could be available in about one year. This focus on a few indication areas allows ALTANA Pharma to work intensively on these areas and in this way to compete successfully with the major players in the market, as is convincingly demonstrated by pantoprazole, currently the most successful patentprotected medicine from German research laboratories, as well as our new introduction Alvesco. INTERNATIONALIZATION OF RESEARCH AND DEVELOPMENT Research and development at ALTANA Pharma are located primarily at our research centre in Konstanz. Specific functions are also performed at other research sites in Hamburg (Institute for Preclinical Drug Safety), Waltham, USA (ALTANA Research Institute for Genomics, Proteomics, Inflammation) and Mumbai, India (Institute for Medicinal Chemistry, Clinical Development). Some of the most important and successful research centers in the world are located in the USA. ALTANA Pharma therefore has established a Research Institute for Genomics and Proteomics in Waltham, near Boston. This institute operates as an integrated unit within the Discovery Research department of ALTANA Pharma and is engaged in the discovery of new biological structures, which can be considered as an approach to new treatments for inflammatory disorders and cancer. The functions of the research institute will be expanded into preclinical research in the field of respiratory diseases. In 2004, ALTANA Pharma started to build up a further research institute in India. ALTANA Pharma is using the skills available in India in the field of synthetic chemistry and clinical development, thereby stepping up the drive towards internationalization in Asia as well. The research institute in India is part of Medicinal Chemistry and thus extends our synthesis capacity in this area, which is responsible for the discovery and synthesis of new active ingredients. A department of Clinical Development is also attached to this institute, where it supervises studies and forms part of the global networks of data input and analysis for clinical studies. ALTANA PHARMA ANNUAL REPORT 17

20 MANAGEMENT REPORT 2005 PROMISING PROJECTS IN THE R&D PIPELINE The research pipeline of ALTANA Pharma includes some highly innovative and forward-looking projects, which could enter preclinical and then clinical development in the next few years. The research projects are focused on the search for new substances in the classes of phosphodiesterase (PDE) inhibitors, P-CABs (potassium competitive acid blockers), histone diacetylase (HDAC) inhibitors, kinase inhibitors and other enzyme inhibitors that have the potential for efficacy in cancers, inflammatory processes and respiratory or gastrointestinal diseases. Respiratory diseases Ciclesonide platform for a whole product family By the end of 2005 Alvesco, a novel inhaled corticosteroid for the treatment of asthma, was approved in 34 countries and launched in 16. Ciclesonide is an outstanding substance platform for the development of further medicines. The nasal dosage form of ciclesonide for the treatment of allergic rhinitis is at the advanced clinical phase III stage in the USA and Canada. Submissions for the approval of this product candidate were prepared in the USA and Canada in The registration dossier was submitted to the US Food and Drug Administration (FDA) in December. The development of a product combining ciclesonide and formoterol, a long-acting bronchodilator, is currently in clinical phase II. Daxas and other PDE4 inhibitors Scientists from ALTANA Pharma research laboratories have many years experience with so-called phosphodiesterase (PDE) inhibitors. Much of our own research work and successful cooperation with universities and other research laboratories facilitated the selection of effective and well-tolerated PDE inhibitors for the treatment of airway diseases. Specific PDE4 inhibitors are especially suitable for the treatment of inflammatory airway diseases such as COPD and asthma. Apart from Daxas, which is currently in phase III in Europe and the USA, our large-scale research program and the new technologies that have been introduced in research have led to a number of interesting PDE4 inhibitors entering preclinical and later clinical development. The European submission for approval of Daxas was withdrawn in November 2005 because of a revised overall assessment of the project. It was decided to broaden the development program of Daxas. A new submission to the European authorities is intended as soon as the dataset for Daxas allows this. Likewise, the US submission to the FDA is being prepared. Since July 2005, ALTANA Pharma has been developing Daxas in the USA without a partner after the cooperation with Pfizer was terminated. On the basis of existing structures and resources, ALTANA Pharma is able to complete the program of US studies and the registration process in the USA on its own. In the meantime, the US studies by Pfizer have been transferred to ALTANA Pharma and are being continued on schedule. For Japan, a co-development and distribution agreement is in place with Tanabe. A very extensive program of studies is carried out for Daxas to establish the detailed therapeutic profile of the active substance roflumilast. However, the development of such a novel substance is costlier and riskier than the development of a product in a substance class that is already well-known and introduced to the market. Venticute Venticute is a surfactant preparation that consists of the protein SP-C and phospholipids. This product is intended to help patients who are suffering from acute lung failure as a result of pneumonia or the aspiration of stomach contents and who therefore require intubation and mechanical ventilation. In these cases, Venticute is instilled in the lungs. A large clinical phase III study is currently under way to test the efficacy of this therapeutic approach. Gastrointestinal diseases ALTANA Pharma has been researching acidinhibiting active principles for decades and has acquired a broad knowledge and developed methods and substance libraries that provide a basis for the development of new product candidates. In addition to life-cycle management projects for pantoprazole, ALTANA Pharma Research is also focusing its attention on novel acid inhibitors, such as potassium competitive acid blockers (P-CABs). Soraprazan, an interesting and novel acid inhibitor, is one such substance, which is currently in clinical phase II. Soraprazan shows a very rapid onset of action, which suggests that it can offer rapid freedom from symptoms in acid-induced gastrointestinal diseases. This is to be demonstrated in clinical studies. A further project candidate from P-CAB research has been in clinical phase I since Oncology In the field of oncology, we are collaborating with various research partners. In 2004, we made considerable progress in the disovery and validation of medically relevant targets for drug development so that lead structures could be identified for further study. On the basis of these lead structures, project candidates were defined that were included in our program for preclinical 18 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

21 development in These interesting project candidates act as HDAC inhibitors and could pass into clinical development in about a year. 1.5 IMPORTANT FIXED-ASSET INVESTMENTS The fixed-asset investments of ALTANA Pharma in 2005 amounted to a total of 113 million, 19 percent less than in the previous year, because some projects were brought to a successful conclusion. At a ceremony in June attended by Germany s chancellor at the time, Gerhard Schröder, and Brandenburg s minister president Matthias Platzeck, a facility extension was opened in Oranienburg for the start of production. The building of a new production facility was also largely completed in Ireland. With this facility in Cork, ALTANA Pharma will have a second state-of-the-art, highquality centre of international standards at its disposal for the manufacture of solids, in addition to the Oranienburg facility. This increases flexibility and reliability in our capacity for supplying the market with our strategically important products, especially pantoprazole. In 2005, ALTANA Pharma also expanded its research and development, which was associated with investments in Germany and other countries. Investments were made in extending the research centre in Konstanz and establishing the new research institute in India. These investments support the attainment of our strategic objectives in research, development and production. 1.6 OPERATIONS AND SUPPLY CHAIN MANAGEMENT Supply chain management at ALTANA Pharma underwent further systematic development in 2005, with the main focus on maintaining a reliable delivery service, guarantee of high-quality products and continuous optimization of manufacturing costs. Outstanding results were achieved in ensuring delivery capability for all ALTANA Pharma products, especially for the strategic products pantoprazole and Alvesco. The delivery capability for our most important and biggest product pantoprazole is guaranteed by an extensive multi-sourcing concept that was able to avoid bottlenecks in the case of increases in demand. It is also worth noting how smoothly market supply operations went in the launch phase of Alvesco, which as an inhalation spray is technologically very complex and poses a challenge in terms of supply logistics. Our supply of the market is subject to strict observance of the highest quality standards. Most production facilities not only undergo regular inspections by the local regulatory authorities, but are also regularly inspected also by the US health authorities. The last inspection by the American authorities (FDA) at our tabletting facility in Oranienburg at the beginning of 2005 was a success. In addition to routine quality controls and quality assurance measures, additional process and risk analyses were implemented to help ensure that all processes were resilient to stress. A global system was also introduced for continuous product improvement. Continuous efforts are being made to optimize manufacturing costs. Last year, for example, the ratio of manufacturing costs to sales was reduced to 22 percent, associated with a welcome decrease in unit costs. *6 Apart from the manufacture of ALTANA Pharma products, Operations (Production, Quality Control, Quality Assurance, Purchasing and Logistics) also has growing experience with the production of products for other pharmaceutical companies. These contract-manufacturing operations further optimize the capacity utilization of ALTANA Pharma s global production network. They provide greater flexibility, cost advantages and increased know-how. COST OF SALES RATIO (COS) *6 Ratio of manufacturing costs to sales ,6% ,5% ,0% ALTANA PHARMA ANNUAL REPORT 19

22 MANAGEMENT REPORT EMPLOYEES POSITIVE EMPLOYMENT TREND CONTINUED On 31 December 2005, people were employed by ALTANA Pharma. The number of employees thus increased by 8 percent over the previous year, with 632 new jobs being created both at home and abroad. In Germany, the number of employees at the end of the year stood at 3 770, an increase of 2 percent. Almost employees were employed in companies abroad. Increases were reported especially from the USA and from countries such as Ireland, India and Australia, where we started new activities or expanded existing operations. ATTRACTING, RETAINING AND DEVELOPING EMPLOYEES In this regard, we directed the focus of our human resources policy to the following themes from our international HR strategy. Performance management Only transparent objectives and the clarification of each individual s contribution to performance ensure that all resources are optimally focused on common goals. In this context, we have introduced a standardized performance review system and global review process for our 250 most senior managers worldwide based on our corporate values and agreements on individual objectives. Closely linked with this performance management scheme is the introduction of a new variable compensation system called ALLEGRO for the same group of participants. This system takes into account our global business performance, the local company s success and the achievement of individual objectives. In this way, we created a further monetary incentive to attain our corporate objectives. To strengthen the ties of our top talents to the company in the region North America, we introduced a new cash-based long-term incentive plan (ALTANA Pharma Performance Plan, AP 3 ) in accordance with our overall compensation strategy based on market and industry needs. In addition to the existing stock option plan of ALTANA, we now have a further instrument for enabling a broader group of employees to share the mediumterm success of the company. Talent management and development At our newly established School of Leadership which is part of our ALTANA Pharmacademy both newly appointed and wellestablished managers have an opportunity to brush up once a year on important management and leadership skills. They can also update their knowledge of our corporate strategy. Apart from an opportunity to exchanging experience in an interdisciplinary and international way, these events also offer participants a suitable setting in which to develop and expand their own internal network within the company. International potentials that we have identified in our systematic International Talent Reviews and Strategic Leadership Reviews are fostered for example in three management development (MD) groups. We started one international MD group in 2005 and are at the same time preparing a further MD group for Region America for These management development measures supplement our traditional measures for promoting talent, such as the provision of attractive training programs, career development through individual high-quality management courses at respected institutes and international assignments etc. The success of our efforts to fill more management positions in the future internationally with internal people is reflected in the increase in the number of our expatriates in 2005 to 50 compared with 20 in VOCATIONAL TRAINING The dual vocational training system in Germany is rated highly at ALTANA Pharma. Taking into account demographic developments and our future need for personnel, we have further extended our training capacity, especially in the scientific and industrial/technical fields. Important conditions have thus been created for significantly increasing the level of vocational training further in the next few years. At the end of 2005, we were educating a total of 158 apprentices in 13 different job categories in Germany. STOCK OPTION PLAN FOR MANAGERS ALTANA has been offering its managers a stock option plan (SOP) since The aim of this plan is to provide key players with an added incentive to commit themselves to increasing the value of the company. According to Germany s Stock Corporation Act, options may be exercised and do not 20 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

23 forfeit only if a so-called hurdle is outperformed. Up to the SOP 2003, the principle applied that profit growth within the first two years of a plan must be at least 20 percent. This internal hurdle was superseded in SOP 2004 by an external one: The ALTANA share price must perform better than two benchmark indices within a certain period of time. On the basis of the corporate structure, the two benchmarks selected were a European pharmaceuticals and a European chemicals index, both developed by Dow Jones. This benchmarkoriented model, which is used by most DAX-listed companies with option plans, conforms to the recommendations of the German Code of Corporate Governance. External studies confirm the challenging character of this concept. Training at ALTANA Pharma gives us knowledge in state-of-the-art fields and offers exciting prospects for the future. From left: Mario Kober Mechatronics 2 nd year, Sebastian Franz Mechatronics 2 nd year, Markus Brzank Energy Electronics 1 st year, Alexander Scherer Industrial Mechanics 1 st year ALTANA PHARMA ANNUAL REPORT 21

24 MANAGEMENT REPORT 2005 EMPLOYEE SHARE OWNERSHIP PLAN WITH HIGH LEVEL OF PARTICIPATION Since 2000, ALTANA AG has been offering its employees an employee share ownership plan associated with options, both in Germany and to a large extent also abroad (ALTANA Investment Plan, AIP). Every eligible employee can invest up to 10 percent of his/her annual salary in ALTANA shares and in return receives a performance-related company subsidy of up to 450 every year. For every share invested in the company, a free option is granted, which can be exercised for a period of two years once a blocking period of two years has elapsed, provided the ALTANA share price has risen above the option price. The employee s investment cannot be sold on for a period of two years. This offer of shares and options at preferential terms underlines the confidence which ALTANA AG has in the value-enhancing contribution of every employee to the success of the company and thus of the Group as a whole. In 2005, 25 percent of all eligible employees of the ALTANA Pharma Group subscribed to 46 percent of the share volume granted to them in the context of the AIP. The assets saved are paid out in several installments to the employee once the age limit has been reached and the employee enters retirement. The advantages of the model lie partly in tax benefits; the tax rate for seniors is usually lower and there are virtually no deductions for social security. At the same time, the money is invested in funds especially created for ALTANA by the UBS according to the so-called life-cycle concept in a share fund, a pension fund and a money market fund. ALTANA also offers comparable models abroad. In its US American companies, for example, parts of an employee s gross income can be invested in appropriate funds for retirement pension purposes, so-called 401k plans. 1.8 ENVIRONMENTAL PROTECTION, HEALTH AND SAFETY SUSTAINABILITY THROUGH CONTINU- OUS IMPROVEMENT ALTANA Pharma is committed to environment-friendly production and research at all its sites. In parallel with the substantial increase in production, recent years have seen not only continuous improvement in environmental protection and safety standards, as well as in the use of renewable resources, but also a balance between ecology and economics. RETIREMENT PLAN WELL RECEIVED BY EMPLOYEES Since October 2002, ALTANA has been offering its employees in Germany a conceptually intelligent and innovative model for a private pension plan. Employees who opt for the so-called Triple A plan (Altersvorsorge-Aktiv mit ALTANA) can save parts of their gross income, i.e. without deduction of income tax and in some cases also social security contributions ( deferred compensation ). 22 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

25 In these efforts, ALTANA Pharma is guided by the latest international standards. An integrated management system for safety, health and environmental protection, ensures that these standards are observed. We have certified and validated the effectiveness of our systems at our German production sites by external accredited environmental auditors successfully again in In spite of a substantial increase in production we were able to achieve a continuous improvement in our environmental protection and safety standards. Gabriel Agostini Head of Safety, Health, Environment & Security OCCUPATIONAL SAFETY AND ENVIRON- MENTAL PROTECTION FROM THE OUTSET *7 One of our aims is to integrate environmental protection and safety into our operational processes. This is how we can achieve our greatest economic and ecological success. For this reason, internal specialists in safety, environment and health were involved at an early stage in the planning and construction phase for our new international production facility for tablets in Cork, Ireland. They ensured that the defined criteria and standards were applied. Parallel with the construction of the buildings and plant, a safety and environment management system was also developed. SAFETY TRAINING HALVES ACCIDENTS Safety training for line management at our largest production site in Singen last year increased and consolidated the safety consciousness of all employees. The number of accidents subject to reporting requirements was halved in 2005 compared with the previous year. This success is based on 343 safety audits that were conducted at regular intervals in operational areas. We thus succeeded in achieving a sustainable improvement in occupational safety. We are also planning to establish this system at other sites as from We shall also focus more strongly on the issue of occupational safety with our field force. CONSERVATION OF RESOURCES At the Singen production site, the economical use of water has a long tradition. Despite the increase in production over the years, water consumption was kept almost constant. Thanks to further intelligent solutions, a saving of 10,560 m 3 water was achieved in one plant last year. This corresponds to 6 percent of consumption in Our energy consumption has increased in recent years. This is a result of the growing requirements with regard to ventilation engineering and air treatment in pharmaceutical production facilities and in our new research laboratories. In addition to the usual measures for energy recovery in ventilation and airconditioning systems, we are also using regenerative energy. For example, we are now already cooling/heating the third building at our research site in Konstanz with geothermal support. These measures are helping us to conserve energy and to improve our CO 2 emissions. LOST TIME ACCIDENT RATE * WORK-RELATED ACCIDENTS SUBJECT TO RE- PORTING AT THE KONSTANZ AND SINGEN SITES Lost time accidents rate per 1000 occupants ALTANA PHARMA ANNUAL REPORT 23

26 MANAGEMENT REPORT EARNINGS PROFITS SHOW STRONG, ABOVE- AVERAGE DOUBLE-DIGIT GROWTH Despite the higher expenditure on development and the preparations made for the market launch of the two product candidates Alvesco and Daxas, earnings before tax (EBT) rose by 16 percent. Pre-tax earnings (EBT) amounted to 608 million (2004: 524), which increased the profit-to-sales ratio to 26 percent. The operating performance (EBITDA) stood at 29 percent. The EBIT margin of 26 percent is impressively high by European standards within the pharmaceuticals sector. 3. FINANCIAL AND ASSET SITUATION BALANCE SHEET: FURTHER IMPROVEMENT IN CAPITAL STRUCTURE In 2005, total assets of ALTANA Pharma increased by 27 percent to million. Non-current assets increased by 24 percent to 865 million. This is due to the acquisition of product rights in the USA as well as high investments in property, plant and equipment. The share of non-current assets in total assets was 45 percent on December 31, Current assets, including cash, increased by 29 percent over the same period to million. On the balance sheet date cash and marketable securities amounted to 394 million or 21 percent of the total assets. The capital structure has substantially improved. The shareholders equity of ALTANA Pharma amounted to 908 million at year-end. The equity ratio increased to 47 percent. Non-current liabilities decreased to 19 percent of total liabilities. Current liabilities (including payables to ALTANA AG) remained almost unchanged at 651 million and accounted for 34 percent of total liabilities. *8 3.2 OPERATING CASHFLOW AGAIN WITH DOUBLE-DIGIT GROWTH In 2005, the operating cash flow amounted to 526 million (2004: 401 million), which covered the funds needed for our high investments and financing needs. The cash flow from investing activities reached 179 million and was above the previous year ( 174 million), primarily due to the acquisition of product rights in the USA. The cash flow from financing activities is influenced by the existence of a profit and loss transfer agreement between the domestic subsidiaries and our parent company ALTANA AG. The profit and loss transfer to the parent company ALTANA AG in Bad Homburg amounted to 121 million in 2005 (2004: 191 million). For 2005, payments worth 85 million after tax still have to be paid to ALTANA AG in At year-end, the liquidity of ALTANA Pharma amounted to 359 million (2004: 122 million). Financial obligations both in 2005 and in 2004 amounted to less than one percent of total liabilities. 4. SUPPLEMENTARY REPORT A further approval for Alvesco was granted in January 2006, this time in Serbia. A further launch took place in South Africa. For Alvesco, approval of the indication asthma was extended in February 2006 to adolescents aged between 12 and 18 in those EU countries where Alvesco has already been approved. For ciclesonide nasal, the FDA accepted the submission for approval for review in March In January 2006, an application for approval was submitted to the Canadian authorities. In the enhanced program of studies with Daxas two further large phase III studies in COPD patients were started in February STRUCTURE OF GROUP BALANCE SHEET * in m in % in m in % Non-current assets 864,9 45,0 696,3 45,9 Inventories and receivables 663,1 34,5 666,1 43,9 Cash and marketable securities 394,1 20,5 154,5 10,2 Total Assets 1 922, , in m in % in m in % Shareholders equity 907,7 47,2 700,9 46,2 Non-current liabilities 363,4 18,9 305,3 20,1 Current liabilities 651,0 33,9 510,7 33,7 Total Liabilities 1 922, ,9 24 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

27 5. RISK REPORT The risks and opportunities policy of the ALTANA Group is guided by the corporate strategy of a medium and long-term increase the value of the company. The performance is analyzed both ex post and also, in the context of budget activities, ex ante as part of the value management system employed throughout the Group, so that the impact of strategic corporate decisions in terms of value are already visible at an early stage. The active control of factors relevant to the medium to long-term corporate value is thus implemented early on. 5.1 RISK MANAGEMENT (KONTRAG) For a company with international operations, comprehensive risk management is an essential part of the management and leadership system. It forms the actual and legal regulatory structure for managing and monitoring the company. The function of our risk management systems is to recognize, identify, evaluate and document risks early on, so that appropriate controls, preventive measures and precautions can be taken. The management board of ALTANA Pharma AG is responsible for the organization of risk management. Risk management is an integral part of business, planning and control processes and is integrated into the information and communications system of the ALTANA Group. Based on the structure of the Group, separate risk reports are drawn up for the different sectors of the company and brought together at corporate level to form a single risk report. The various risks are assigned to different groups, such as internal/external or operating/financial risks. The quality of the risk is assessed on the basis of the risk value, which can in turn be determined from the probability of occurrence and potential damage. The approach to dealing with risk is derived from cause-and-effect analyses and can lead to immediate action or can be kept as contingency plans should the risk event occur. The risk management system of ALTANA Pharma, which has been operated in accordance with the German law on control and transparency in business (KonTraG) since 1999, was systematically continued through the quarterly risk reporting of companies at home and abroad. Possible opportunities and risks for the pharmaceuticals business are also discussed every month in the extended group of managers from ALTANA Pharma. The intention of these discussions is to achieve an added benefit for the operating pharmaceuticals business that goes beyond simply meeting the legal obligations set forth in KonTraG. This takes account of the rapidly growing internationalization of the business, also more than ever with regard to the long-term increase in the value of the company. In view of the listing of ALTANA AG on the New York Stock Exchange, the company is directly affected by the legal requirements of the Sarbanes-Oxley Act (SOX). To meet these requirements, the company carried out a relevant SOX project to evaluate, document and test internal controls with reference to financial reporting. This has a positive impact on the internal control system and thus also on the risk management of the company. The risk management system of the ALTANA Group was reviewed by the auditors of the Group annual accounts in accordance with 317 para. 4 of the German Commercial Code (HGB) and was found to be suitable for early identification of any risks to the company as a going concern. 5.2 SPECIFIC RISKS OF RESEARCH-BASED PHARMACEUTICAL INDUSTRY Pharmaceutical companies operate in a business environment where short-term economic stimulus has only a minimal influence on the business development of companies. Research-based drugs manufacturers in most cases achieve high sales and profit contribution with a few innovative products. Patents protect the sales of these medicines. The enforcement of patent laws is thus crucial to the financial success of research-based pharmaceutical companies. These manufacturers usually only operate to a limited extent in markets where the patent laws are not effectively protected. In almost all regions, pharmaceutical markets are regulated by the state. Regulations with which a research-based pharmaceutical company has to comply in order to be allowed to sell its products on a given market relate to registration, production and marketing of the medicine. Especially in countries with state-supervised health insurance systems there is huge intervention in the pricing of medicines, so that the potential of the company to develop is substantially curtailed. In view of the intense competition on pharmaceutical markets associated with the limited periods of patent protection for innovative products, new innovative active substances need to be regularly developed. The development and marketing of new products requires significant preliminary work. If a product founders the strict requirements of the regulatory authorities during development, or if the product cannot establish itself on the market, the high cost of investment will show no earnings potential. The influence of such failures can have a significant impact on the assets and the financial and earnings position of a company. ALTANA PHARMA ANNUAL REPORT 25

28 MANAGEMENT REPORT 2005 Possible side effects that were not recognized during the development and registration of a product or medicines that are altered in their activity as a result of problems in production, storage or other circumstances can cause damage in terms of product liability. ALTANA Pharma focuses on the development, production and marketing of innovative therapeutics in the indication areas of gastrointestinal disorders, respiratory diseases and oncology. The research and development process is essential for the future success of the company. The extensive investments in innovative active substances are monitored and analyzed by a research and development controlling unit, which documents the progress of projects for every substance being studied. The decision on whether to continue a project is essentially taken on the basis of feasibility and market potential in collaboration with partners and experts. The area of research and development carries the usual risks that apply throughout the pharmaceuticals sector right up to the point where new products are ready for the market and approved. The withdrawal of the submission for approval of Daxas in Europe underlines the risk for research-based pharmaceutical companies in successfully launching innovative products onto the market as planned. ALTANA Pharma currently achieves a high proportion of its profit from sales of pantoprazole. Difficulties in the production or distribution of this product could have an impact on our financial and earnings position. ALTANA Pharma plans to reduce the proportion of sales which pantoprazole contributes in the medium term by marketing new innovative products for respiratory indications. In the area of procurement we make sure that we do not become dependent on one or more suppliers. In the case of regularly occurring deliveries, we reduce transaction costs through medium to long-term supply agreements. To guard against product risk, we operate a notification and warning system in line with international standards, so that we can respond even when the signals are weak. In addition, studies on the efficacy, tolerability, dosage forms, dosing and administration of our products are continuously being conducted. Proper and safe production is ensured by numerous regulatory conditions to which our production sites are subject, and compliance with these regulations is continuously reviewed and documented. ALTANA Pharma sells products in almost all regions of the world and handles the distribution independently, or with partners in the context of co-marketing or co-promotion agreements, or with licensees. Through our own field force and in exchange with our distribution partners, we are able to identify changes early on in all markets of relevance for us, so that we can take appropriate action. 5.3 PERSONNEL RISKS ALTANA Pharma is dependent on a workforce of highly qualified and motivated people. The international competition for these employees and managers is intense. To retain our employees in the long-term and to be attractive for new employees, we have attractive compensation systems in place, along with training and continuing education schemes, which are described in detail above. 5.4 FINANCIAL RISKS The financial and earnings position of ALTANA Pharma can be seen without exception as very positive. As part of an international group, ALTANA Pharma achieves 81 percent of sales income abroad. As a result of the international focus of the company, currency fluctuations have a major impact on our profits. The procedure for dealing with these currency exchange risks is regulated in a currency management directive; it follows systematic procedures, which are reviewed and controlled by a special steering committee (Treasury Committee). The Treasury Committee defines amongst other things the use of derivatives, with the aid of which we limit losses from fluctuations in the exchange rate of the euro against other currencies, especially the US dollar, the Mexican peso, the Brazilian real or the Canadian dollar. Only forward exchange deals, currency swaps and simple currency options are used. These are concluded exclusively with banks that have impeccable credit ratings. ALTANA Pharma like all players in the market is subject to financial risks, but not such that there is a danger to the continued existence of the company as a going concern. ALTANA Pharma is largely financed with funds generated internally. The liquid assets of the company are substantially greater than its financial liabilities. At the end of 2005, the net liquidity stood at 351 million. Most of the surplus liquid assets are invested in ALTANA AG at interest. Occasionally, money and term deposits are made with banks or investments in money market securities. 5.5 RISKS FROM ACQUISITIONS AND INVESTMENTS Acquisitions and investments are associated with complex risks. In particular, the integration of acquired companies or parts of companies regularly presents management 26 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

29 with huge challenges. Acquisition and integration projects are handled at ALTANA Pharma according to standardized procedures, which ensure that material risks are identified and monitored. 5.6 OTHER RISKS We limit risks for liability and damages that could arise in the course of business operations by concluding insurance agreements. In particular, potential loss in the areas of liability and disruption of operations are covered by insurance policies. There are currently no third-party claims against ALTANA Pharma from which we expect a material impact on our assets or financial and earnings position. As a result of the risk reporting for 2005 and the currently identified and evaluated future risks (downsides) it can be confirmed that, in terms of the ALTANA Pharma Group, no risks or circumstances which could jeopardize the existence of the company are discernible. 6. OUTLOOK With increasing sales and profits, ALTANA Pharma will also remain on its growth track in This will be supported by the overall economic situation in Europe and the USA, which is rated positively for It can thus be assumed that business growth will improve in the course of the year, especially in Europe. For the global pharmaceuticals market, further substantial growth is forecast, which will likewise have a positive impact on the sales development of ALTANA Pharma. Uncertainties regarding the future development of healthcare systems, especially further government measures in Europe, may pose risks with a potential impact on business trends and profits. Additional priceregulating mechanisms in various European countries, including Germany, could have a negative influence on sales and profit growth at ALTANA Pharma. The sales growth of ALTANA Pharma anticipated in 2006 will come from the sustained upward momentum of pantoprazole sales, as well as further market launches and sales of Alvesco. The forthcoming launches of Alvesco in various markets will have an impact on the profits of ALTANA Pharma. The risk of a decline in the market share of pantoprazole in the global PPI market is estimated as low, because continued growth in the sales of pantoprazole has been reported despite strong competition in the PPI market, despite increasing generic competition with omeprazole generics and despite the introduction of OTC products containing omeprazole. Some manufacturers of generics submitted applications to the FDA in the USA for approval of generic products with pantoprazole back in 2004 under the so-called ANDA Paragraph IV regulation. We have brought action for patent infringement, thus there will be no effective approval for generic pantoprazole products for the time being. It is not yet possible to foresee when proceedings will be heard in these patent infringement cases. But we assume that our US patent relating to pantoprazole will be seen as valid in law and enforceable. In the medium term, the sales of pantoprazole will be affected by generic competition after patent protection expires in Europe in 2009 and in the USA in This is demonstrated by experiences with other block-buster medicines. We are currently working vigorously on strategies that can help to close the expected gap in sales. To this end, the options of licensing or buying in products and acquisitions are being reviewed, as are the opportunities for a strategic partnership to safeguard the longterm future. For the ciclesonide projects and Daxas (roflumilast) further large phase III studies will also be carried out in 2006 in the indication areas of asthma, COPD and rhinitis. The planned increases in investments for the research of new active substances and for the development of new medicines and also for the additional studies needed with Daxas will have an impact on the profits of ALTANA Pharma. Fixed-asset investments will be continued on the scale planned, and the projects described for expansion of research and production will be completed. Through investments in production sites, the quality of delivery capability and flexibility in the global production network of ALTANA Pharma will be increased and the conditions created for the introduction of new medicines. The number of employees will also increase further in line with the business development in Additional personnel is needed in all sectors of the organization as a result of internationalization and market launches, and also of further increasing activities in research and development. ALTANA Pharma will continue systematically to pursue the defined strategic objectives to counter potential risks and take advantage of opportunities. The positive profit trend of ALTANA Pharma AG will further continue in ALTANA PHARMA ANNUAL REPORT 27

30 FINANCIALS In 2005, for the tenth time in succession, ALTANA Pharma achieved a record profit. The capital structure has improved substantially, with the capital ratio now standing at 47 percent and long-term liabilities at only 19 percent. The operating cash flow showed double-digit growth. ALTANA PHARMA 2005 The consolidated financial statements of ALTANA Pharma cover the global business of the pharmaceutical division of ALTANA AG. CONSOLIDATED FINANCIAL STATEMENTS ALTANA PHARMA 30 Management Board Statement 31 Independent Auditor s Report 32 Consolidated Balance Sheet ALTANA Pharma 33 Consolidated Income Statement ALTANA Pharma 34 Consolidated Cash Flow Statement ALTANA Pharma 35 Consolidated Statement of Recognized Income and Expenses ALTANA Pharma 36 Notes 61 Statement of Changes in Consolidated Equity ALTANA Pharma 62 Supervisory Board of ALTANA Pharma 63 Management Board of ALTANA Pharma 64 Report of the Supervisory Board 28 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

31 Our EBIT-margin of 26 percent places us among the top tier pharmaceutical companies in Europe. Andreas Görwitz Member of the Management Board, Finance and Operations ALTANA PHARMA ANNUAL REPORT 29

32 MANAGEMENT BOARD STATEMENT The consolidated financial statements presented here have been prepared by the Management Board of ALTANA Pharma AG as complementary to the Annual Report of ALTANA Pharma AG. The Board is responsible for the completeness and accuracy of the information contained therein. They have been prepared in compliance with the International Financial Reporting Standards. The information contained in these statements has been compiled in accordance with consistent guidelines in force throughout the Group by the companies included in the sub-consolidation. The integrity of the reporting process is safeguarded by effective internal control systems established at these companies under the direction of the Management Board. In this way, a true and fair view of the performance and results of the Group is assured and the Management Board is in a position to recognize potential investment risks and negative developments at an early stage and take appropriate countermeasures. Pricewaterhouse- Coopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, Frankfurt am Main, has been appointed as the independent auditors. The auditors report on the sub-consolidated financial statements is reproduced on the following page. The subconsolidated financial statements, the statutory financial statements and the management report of ALTANA Pharma AG as well as the auditors report have been submitted to the Supervisory Board for detailed examination. The report of the Supervisory Board is set out on page 64 of this report. Konstanz, February 2006 Management Board Dr. Hans-Joachim Lohrisch Andreas Görwitz Alfred Goll Dr. Otto Schwarz Dr. Ulrich Thibaut 30 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

33 INDEPENDENT AUDITORS REPORT We have audited the consolidated financial statements prepared by the ALTANA Pharma Aktiengesellschaft, Konstanz, comprising the balance sheet, the income statement, statement of recognised income and expense, cash flow statement and the notes to the consolidated financial statements, together with the group management report for the business year from January 1 to December 31, The preparation of the consolidated financial statements and the group management report in accordance with the IFRSs, as adopted by the EU, are the responsibility of the parent Company's Board of Managing Directors. Our responsibility is to express an opinion on the consolidated financial statements and on the group management report based on our audit. We conducted our audit of the consolidated financial statements in accordance with 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the consolidated financial statements in accordance with the applicable financial reporting framework and in the group management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial statements and the group management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of those entities included in consolidation, the determination of the entities to be included in consolidation, the accounting and consolidation principles used and significant estimates made by the Company s Board of Managing Directors as well as evaluating the overall presentation of the consolidated financial statements and the group management report. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations. In our opinion based on the findings of our audit the consolidated financial statements comply with the IFRSs as adopted by the EU, and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The group management report is consistent with the consolidated financial statements and and as a whole provides a suitable view of the Group's position and suitably presents the opportunities and risks of future development. Karlsruhe, Germany, February 27, 2006 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Glöckner (Wirtschaftsprüfer) ppa. Striebel (Wirtschaftsprüfer) ALTANA PHARMA ANNUAL REPORT 31

34 CONSOLIDATED BALANCE SHEET ALTANA PHARMA ASSETS At Dec. 31, 2005 At Dec. 31, 2004 Notes in 000 in 000 Intangible assets, net Property, plant and equipment, net Long-term investments Deferred tax assets Other non-current assets TOTAL NON-CURRENT ASSETS Inventories Trade accounts receivable, net Marketable securities Other assets and prepaid expenses Cash and cash equivalents TOTAL CURRENT ASSETS TOTAL ASSETS LIABILITIES, PROVISIONS AND SHAREHOLDERS' EQUITY Share capital Additional paid-in capital Retained earnings Revaluation reserve Translation adjustments SHAREHOLDERS' EQUITY Non-current debt Employee benefit obligations Other non-current provisions Non-current deferred income Deferred tax liabilities Other non-current liabilities TOTAL NON-CURRENT LIABILITIES Current debt Trade accounts payable Payables to affiliated companies Accrued income taxes Other current provisions Current deferred income Other current liabilities TOTAL CURRENT LIABILITIES TOTAL LIABILITIES, PROVISIONS AND SHAREHOLDERS' EQUITY See accompanying notes to consolidated financial statements 32 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

35 CONSOLIDATED INCOME STATEMENT ALTANA PHARMA For the financial years Notes in 000 in 000 Net sales Cost of sales GROSS PROFIT OPERATING EXPENSES Selling and distribution expenses Research and development expenses General administrative expenses Other operating income Other operating expenses OPERATING INCOME Financial income Financial expenses FINANCIAL INCOME INCOME BEFORE TAXES AND PROFIT AND LOSS TRANSFER Income tax expense INCOME BEFORE PROFIT AND LOSS TRANSFER Profit and loss transfer NET INCOME See accompanying notes to consolidated financial statements ALTANA PHARMA ANNUAL REPORT 33

36 CONSOLIDATED CASHFLOW STATEMENT ALTANA PHARMA For the financial years in 000 in 000 Income before profit and loss transfer Depreciation and amortization, impairment and appreciation Net gain from disposals of fixed assets Expense from stock option programs Increase / decrease in other operating assets and liabilities Inventories Trade accounts receivable, other assets and prepaid expenses Income taxes Provisions Accounts payable and other liabilities Deferred income Other -4 2 NET CASH FLOW PROVIDED FROM OPERATING ACTIVITIES Capital expenditures Purchases of financial assets Proceeds from sale of product groups Proceeds from sale of fixed and financial assets Proceeds from sale of marketable securities Purchase of marketable securities NET CASH FLOW USED IN INVESTING ACTIVITIES Profit and loss transfer to ALTANA AG Changes in payables to affiliated companies Proceeds from long-term debt 36 7 Repayment of long-term debt Net increase / decrease in short-term debt NET CASH FLOW USED IN FINANCING ACTIVITIES Effect of exchange rate changes Change in cash and cash equivalents Cash and cash equivalents at January Cash and cash equivalents at December CASH PAID FOR Income taxes Interest CASH RECEIVED FOR Income taxes Interest See accompanying notes to consolidated financial statements 34 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

37 CONSOLIDATED STATEMENT OF RECOGNIZED INCOME AND EXPENSES ALTANA PHARMA For the financial years in 000 in 000 Net income Change in fair value of derivative financial instruments Change in fair value of marketable securities Actuarial gains and losses on defined benefit pension plans Taxes directly reported in equity Translation adjustments Net income recognized directly in equity TOTAL RECOGNIZED INCOME AND EXPENSES FOR THE PERIOD See accompanying notes to consolidated financial statements ALTANA PHARMA ANNUAL REPORT 35

38 NOTES 1. BASIS OF PRESENTATION ALTANA Pharma voluntarily presents consolidated financial statements for ALTANA Pharma AG and its subsidiaries (hereafter referred to as ALTANA Pharma or the Company ). The consolidated financial statements of ALTANA Pharma and its subsidiaries are prepared in accordance with International Financial Reporting Standards ( IFRS ), issued by the International Accounting Standards Board ( IASB ) and the Interpretations of the International Financial Reporting Committee ( IFRIC ). ALTANA Pharma is incorporated as a stock corporation ( Aktiengesellschaft ) under the laws of the Federal Republic of Germany. ALTANA Pharma conducts business in more than 25 countries worldwide. Its business comprises the research and development as well as sales and distribution of pharmaceutical products. All amounts are reported in thousand Euros if not otherwise stated. 2. SIGNIFICANT ACCOUNTING POLICIES Consolidation The consolidated financial statements of the Company include 10 (2004: 11) subsidiaries in Germany and 31 (2004: 30) subsidiaries abroad in which ALTANA Pharma, either directly or indirectly, holds the majority voting rights or has the power to govern the subsidiaries financial and operating policies. Special purpose entities, irrespective of their legal structure, are consolidated when the Company has the power to govern the financial and operating policies of an entity. The change in the scope of consolidated companies did not have a material effect on the Company s consolidated balance sheets, statements of income, changes in shareholders equity or cash flow. ALTANA Technology Projects GmbH, Bad Homburg v.d.h., and its subsidiary Sangtec Molecular Diagnostics AB, Sweden, are included in the consolidated financial statements of ALTANA Pharma AG, as their business activities are controlled by ALTANA Pharma AG. This despite the fact that ALTANA Pharma is not the direct or indirect shareholder. The Company holds a 49% interest in Bracco ALTANA Pharma GmbH, Konstanz, and therefore accounts for these investments using the equity method. As these investments and the equity in earnings of these associated companies are immaterial, the amounts are not disclosed separately in the consolidated balance sheets and income statements but are included in long-term investments and financial income. The Company accounts for its investments in joint ventures using the proportional consolidation method as permitted under IAS 31, Financial Reporting of Interests in Joint Ventures. These joint ventures include ALTANA Madaus, South Africa, and Zydus ALTANA Healthcare, India. All intercompany balances and transactions have been eliminated in consolidation. The main subsidiaries included in the consolidated financial statements are listed in note 31 of the annual report. A complete listing of all subsidiaries of ALTANA Pharma AG is filed with the parent Company s register in Bad Homburg v.d.h., number HRB New accounting pronouncements In December 2003, the IASB issued revised IAS 32, Financial Instruments: Disclosure and Presentation, and IAS 39, Financial Instruments: Recognition and Measurement. These statements replace the existing IAS 32 and supersede IAS 39, and should be applied for annual periods beginning on or after January 1, Several amending drafts were published during 2004 and adopted in 2005 in order to clarify specific issues of revised IAS 39. These amendments are effective for reporting periods beginning on or after January 1, 2006, however, early application for reporting periods beginning on or after January 1, 2005 is allowed. The Company has adopted the revised IAS 32 and IAS 39 and the corresponding amendments as of January 1, 2005 in accordance with the transitional provisions in those standards. Under the revisions of IAS 39, available-for-sale securities which have been impaired, are no longer allowed to be subsequently appreciated, even if the indication that led to the initial impairment has subsequently reversed. In 2002, the Company recorded an impairment loss relating to its long-term investment in GPC Biotech AG and in 2003, ALTANA Pharma reversed the impairment charge taken in 2002, as the impairment indicator subsequently reversed. Therefore, in accordance with the transitional provisions of the amendments to IAS 39, the Company has reclassified 7.7 million from opening retained earnings to the revaluation reserve, which represents the reversal of the appreciation recorded in The reversal of the impairment loss was a non-taxable gain, therefore the effect on net income before and after tax was equal. The revised standards IAS 32 and 39 did not have any other significant impacts on the Company s consolidated financial statements. Since January 1, 2005, the Company has applied the revised versions of the following standards that were released by the IASB as part of the IASB s project to improve International Accounting Standards: IAS 1, Presentation of Financial Statements, IAS 2, Inventory, IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, IAS 10, Events after Balance Sheet Date, IAS 16, Property, Plant and Equipment, IAS 17, Leases, IAS 21, The Effects of Changes in Foreign Exchange Rates, IAS 24, Related Party Disclosures, IAS 27, Consolidation and Separate Financial Statements, IAS 28, Investments in Associates, IAS 31, Interests in Joint Ventures, IAS 33, Earnings per Share and IAS 40, Investment Property. Apart from the new 36 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

39 presentation of assets and liabilities as current and non-current in accordance with IAS 1 and the adjusted presentation of financial income in the income statement, the application of the revised standards did not have a significant impact on the Company s consolidated financial statements. In February 2004, the IASB issued IFRS 2, Share-based Payment on accounting for share-based payment transactions, including granting of shares and share options to employees. The provisions of IFRS 2 are effective for annual periods beginning on or after January 1, Before the application of IFRS 2 the Company measured expenses for share-based payments as the excess of the average cost of treasury shares acquired by the Company over the exercise price of the option. In accordance with IFRS 2, share-based payments are measured at fair market value based on option pricing models and recognized as compensation expense over the relevant service period (see Note 12). Equity-settled sharebased transactions are recorded as an increase in equity. Cash-settled share-based payment transactions are recorded as provisions. In accordance with the transitional provisions of IFRS 2, the Company restated its prior year financial statements to reflect the cost of grants awarded after November 7, 2002 and not yet vested by January 1, Employee incentive plans initiated since 2003 fall within the scope of this standard. In March 2004, IFRS 4, Insurance contracts was issued. IFRS 4 specifies the accounting for insurance contracts by an entity that issues such contracts including reinsurance contracts. The application of IFRS 4 did not have a significant impact on the Company s consolidated financial statements. In March 2004, IFRS 5, Non-current Assets Held for Sale and Discontinued Operations was issued. IFRS 5 provides guidance for the accounting of non-current assets held for sale and the presentation and disclosure of discontinued operations. The Company has adopted IFRS 5 as of January 1, The application of IFRS 5 did not have a significant impact on the Company s consolidated financial statements. In December 2004, an amendment to IAS 19, Employee Benefits, ( Actuarial Gains and Losses, Group Plans and Disclosures to IAS 19, Employee Benefits ) was issued. This amendment will be effective January 1, 2006, and provides the alternative to recognize actuarial gains and losses resulting from the calculation of employee pension benefits directly in shareholders equity. ALTANA Pharma has elected to early adopt this amendment and now presents the fair value of employee pension benefits in the balance sheet. Previously, ALTANA Pharma s policy was the 10% corridor approach. According to this method, actuarial gains and losses were recognized in net income and amortized over the remaining service period of the employees if they exceeded or fell below a corridor of 10%. In accordance with the transitional provisions of the amendment, the Company restated its prior year financial statements, except for the income statement where no material effects on net income were recorded. If ALTANA Pharma had continued to apply the 10% corridor approach, the amount accounted for employee benefit obligations in the balance sheet as of December 31, 2005, would have been decreased by 56,4 million. In August 2005, IFRS 7, Financial Instruments: Disclosures was issued and is effective for annual periods beginning on or after January 1, The standard supersedes IAS 32 Financial Instruments, Disclosure and Presentation and IAS 30, Disclosure in the Financial Statements of Banks and Similar Financial Statements Institutions. The Company is currently evaluating the impact of the standard on its consolidated financial statement disclosures. During 2005, IFRIC 4 Determining whether an Arrangement contains a Lease, IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds, IFRS 6 Liabilities arising from Participation in a specific market waste electrical and electronic equipment and IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflation Economies, were issued and are effective for annual periods beginning on or after January 1, 2006 (IAS 8.30). The Company is currently evaluating the impact of the standards on its consolidated financial statements. ALTANA PHARMA ANNUAL REPORT 37

40 The results of the retroactive adoption of IFRS 2 as well as IAS 19 were as follows: 2004 Adjustment Adjustment adjusted as reported IFRS 2 IAS Cost of sales Gross profit Selling and distribution expenses Research and development expenses General administrative expenses Operating income Income before taxes and profit and loss transfer Income tax expense Income before profit and loss transfer Net income Shareholders' equity Other non-current provisions Deferred tax assets Employee benefit obligations Foreign currency The consolidated financial statements of ALTANA Pharma are expressed in Euro. Financial statements of subsidiaries where the functional currency is a currency other than the Euro are translated using the functional currency principle. For these entities, assets and liabilities are translated using the year-end exchange rates, while revenues and expenses are translated using the average exchange rates prevailing during the year. Equity is translated at historical exchange rates. Adjustments for foreign currency translation fluctuations are excluded from net income and are reported as a separate component of shareholders equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are generally included in other operating income or other operating expenses or in financial income or expense if they relate to the translation of financial assets or liabilities. The following table provides the exchange rates for our most important currencies: (a) the intangible asset is identifiable (i.e. it is separable or arises from contractual or other legal rights), (b) it is probable that the expected future economic benefits (e.g. cash or other benefits such as cost savings) that are attributable to the asset will flow to the entity and (c) the cost of the intangible asset can be measured reliably. Intangible assets with a definite life are valued at cost less accumulated amortization. Intangible assets are amortized straight-line over the shorter of their contractual term or their estimated useful lives. Intangible assets with an indefinite life are not amortized but are tested for impairment annually or when there is an indication of impairment. Goodwill is not amortized but tested for impairment annually and whenever there is an indication that the carrying value may be impaired. The Company tests goodwill for impairment by comparing its recoverable amount with its carrying value. Resulting impairment charges are reported in other operating expenses. The following amortization periods are applied: Middle rate Average rate at December 31, years ended December 31, 1 Euro U.S. Dollar 1,18 1,36 1,24 1,24 Pound Sterling 0,69 0,71 0,68 0,68 Japanese Yen 138,91 139,65 136,86 134,35 Brazilian Real 2,75 3,62 3,00 3,61 Mexican Peso 12,60 15,23 13,53 14,02 Intangible assets Intangible assets, including software, are accounted for in accordance with IAS 38 Intangible Assets, and are therefore capitalized, if Years Patents, licenses and similar rights 2 15 Amortization and impairment charges of all intangible assets are recorded based on their function as cost of sales, general administration, research & development or selling and distribution expenses. Property, plant and equipment Property, plant and equipment are valued at cost less accumulated depreciation. Cost includes certain costs that are capitalized during construction, including material, payroll and direct overhead costs. Government grants are deducted from the acquisition or manufacturing costs. Amounts in thousands, unless stated otherwise 38 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

41 Plant and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets: Years Buildings 5 50 Plant and machinery 2 20 Assets under capital lease 2 7 Equipment 1 20 Maintenance and repairs are expensed as incurred while replacements, improvements and asset retirement obligations are capitalized. Gains or losses resulting from the sale or retirement of assets are reflected in other operating income or expense. Borrowing costs are expensed as incurred. Amortization and impairment charges of property, plant and equipment are recorded based on their function as cost of sales, general administration, research & development or selling and distribution expenses. Impairment of intangible and tangible fixed assets Since January 1, 2004, irrespective of whether there is any indication of impairment, the Company tests goodwill acquired in a business combination for impairment annually. For the purpose of impairment test, goodwill is allocated to cashgenerating units that are expected to benefit from the synergies of the business combination. In accordance with IAS 36, Impairment of Assets, an impairment loss is recognized when the carrying amount of goodwill exceeds the higher of its net selling price or its value in use. In the event facts and circumstances indicate that the Company s tangible or intangible long-lived assets with finite useful lives, regardless of whether they are to be held and used or to be disposed of, may be impaired, an evaluation of recoverability is performed. An impairment loss is recognized when a tangible or intangible long-lived asset s carrying amount exceeds the higher of its fair value less costs to sell and its value in use. Value in use is based on the discounted cash flows expected to arise from the continued use of the asset and from its eventual disposal. If there was any indication that the considerations, which led to impairment no longer exist, the Company would consider the need to reverse all or a portion of the impairment charge. Marketable securities and other long-term investments In accordance with IAS 39, the Company classified all marketable securities and certain long-term investments (see Note 6) as available-for-sale and, therefore, carries these securities at fair value with unrealized gains and losses recorded in equity (revaluation reserve), net of tax. Marketable securities and certain long-term investments are recognized on the settlement date. The Company derecognizes the assets when the contractual right to the cash flows expires or the assets are transferred and the Company retains no contractual rights to receive and assumes no obligations to pay cash flows from the assets. Impairments on marketable securities are recognized in the income statement if the decrease in value is material and permanent in nature. The Company evaluates impairments based on individual marketable securities at each financial reporting date. Impairments on marketable securities are reported as other financial expense. Trade accounts receivable Trade accounts receivable are valued at net realizable value. The Company estimates an allowance for doubtful accounts based on a review of individual customer receivables and historical uncollectibility. Inventories Inventory is valued at the lower of acquisition or manufacturing costs or net realizable value at the balance sheet date. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated cost to complete and selling expense. Generally, acquisition and manufacturing costs are determined on the basis of weighted average costs. Manufacturing costs comprise material, payroll and direct overhead, including depreciation. Cash and cash equivalents The Company considers cash in banks and highly liquid investments with original maturities of three months or less to be cash and cash equivalents. Financial instruments In accordance with IAS 39 the Company recognizes all financial assets and liabilities, as well as all derivative instruments, as assets or liabilities in the balance sheet and measures all, apart from some exemptions (e.g. accounts receivable and financial liabilities), at fair value. Changes in the fair value of derivative instruments are recognized in income or shareholders equity (as revaluation reserve) depending on whether the derivative is designated as a fair value or cash flow hedge. For derivatives designated as fair value hedges, changes in fair value of the hedged item and the derivative are recognized in the income statement. For derivatives designated as a cash flow hedge, changes in fair value of the effective portion of the hedging instrument are recognized in equity (revaluation reserve) until the hedged item is recognized in the income statement. The ineffective portion of derivatives designated as cash flow hedges and fair value changes of derivatives which do not qualify for hedge accounting are recognized in the income statement in financial income (expense) immediately. This is also applicable for excluded components from hedging instruments qualifying as cash flow hedges. ALTANA PHARMA ANNUAL REPORT 39

42 Government grants The Company received 0.4 million and 4.3 million for the years ended December 31, 2005 and 2004, respectively, of taxable and non-taxable investment grants for the acquisition of certain long-lived assets. The grants are recorded as a reduction of the cost basis of the acquired and internally constructed assets. In addition, the Company received government grants as non-refundable reimbursement of expenses in the amount of 0.1 million and 0.1 million for the years ended December 31, 2005 and 2004, respectively. These grants are recorded as other income to the extent they are earned. Employee benefit obligations The valuation of pension liabilities is based on the projected unit credit method in accordance with IAS 19. Actuarial gains and losses are recognized in shareholders equity net of tax in the period in which they occur. The provisions therefore equal the fair value of the obligations at the balance sheet date. Accrued liabilities and accrued income taxes In accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and IAS 12, Income taxes, an accrual for taxes and other contingent obligations should be recognized when an enterprise has a present obligation as a result of a past event, it is more likely than not that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Obligations in connection with product warranties are estimated based on the actual expenses of the last two, respectively three years, depending on the segment they relate to. Based on this actual experience, the Company calculates a warranty percentage and applies this to the gross sales and records the estimated obligation under accrued liabilities. The accrued liability is adjusted to reflect actual warranty claims and changes in estimates. Separately identifiable risks relating to damages or product returns are accrued based on management s best estimate. Revenue recognition The analysis of the net sales based on geographic and business areas is presented in the management report. Revenues are mainly resulting from the sale of products and are recognized if the revenue can be reliably measured, it is probable that the economic benefits of the transaction will flow to the Company and all related costs can be reliably measured. As such, the Company records revenue from product sales when goods are shipped and title has passed to the customer. With respect to licensing agreements where revenue in excess of a defined minimum price is contingent on the buyer s ultimate resale price, sales are recognized at the contractual minimum price with the contingent element of the purchase price recognized when realized. Provisions for discounts and rebates to customers and returns are recorded in the same period in which the related sales are recorded and are based on management s best estimate. Consistent with its research & development strategy, the Company enters into co-development and co-promotion agreements to enhance the scope and depth of its research portfolio. These agreements contain multiple elements and varying consideration terms, such as up-front, milestone and other related payments. The Company reviews its arrangements to determine if the multiple elements can be divided into separate units of accounting and how the arrangement consideration should be recognized. When an arrangement can be divided into separate units, the arrangement consideration is recognized amongst those varying units and recognized over the respective performance period. When the arrangement cannot be divided into separate units, the total arrangement consideration is allocated on a straight-line basis over the estimated collaboration period. In regard to agreements the Company has entered into to date, up-front payments and other similar non-refundable payments received which relate to the sale or licensing of products or technology are reported as deferred income and recognized as other income over the related period of collaboration on a straightline basis. Selling expenses Advertising and promotion costs are expensed as incurred and totaled million and million for the years ended December 31, 2005 and 2004, respectively. These costs are recorded as selling and distribution expenses in the consolidated income statements. Shipping and handling costs totaling 17.9 million and 18.9 million for the years ended December 31, 2005 und 2004, respectively, are included in selling and distribution expenses. Research and development expenses In accordance with IAS 38, research costs, defined as costs of original and planned research performed to gain new scientific or technical knowledge and understanding, are expensed as incurred. Development costs are defined as costs incurred to achieve technical and commercial feasibility and are capitalized if certain criteria are met. Regulatory and other uncertainties inherent in the development of the Company s new key products relating to the technical feasibility of completing the intangible asset and to generating probable future benefits preclude the capitalization of development costs under IAS 38. Therefore, these costs are expensed as incurred. Research and development expenses are comprised of the following types of costs incurred in performing research & development activities: salaries and benefits, other directly attributable costs, clinical trial and related clinical manufacturing costs, contract services, payments made in respect to 40 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

43 research & development collaborative arrangements and other outside costs. Employee incentive plans Options granted under employee incentive plans settled in equity instruments (Stock Option Plans) are measured at their fair market value based on a Binominal option pricing model at the date of grant while cash-settled plans (ALTANA Investment Plans) are initially measured at their grant date fair value and are re-measured at fair value at the end of each reporting period. Compensation expense of the Stock Option Plans is recognized ratably over the relevant service period. Compensation expense for the ALTANA Investment Plans is ratably recognized over the relevant service period, while the discounts granted in connection with the plans are expensed as incurred. In the consolidated financial statements the accounting for the employee incentive plans is based on the principles of IFRIC D 17. Issuing company of the options is ALTANA AG.The qualification of each plan in the consolidated financial statements follows the qualification of ALTANA AG. The options are distributed directly from ALTANA AG to the employees of ALTANA Pharma and its subsidiaries. The plans are valued as equity-settled. Deferred income taxes Under IAS 12, Income Taxes, deferred tax assets and liabilities are recognized for all temporary differences between the carrying amount of assets and liabilities in the financial statements and their tax bases, tax credits and operating loss carry-forwards. For purposes of calculating deferred tax assets and liabilities, the Company uses the rates that have been enacted or substantively enacted at the balance sheet date. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period the legislation is substantively adopted. A deferred tax asset is recognized only to the extent that it is probable that future taxable income will be available against which the credits and tax loss carry-forwards can be applied. Concentration of risks The Company s future results of operations are subject to various risks and uncertainties. The Company s sales of certain key products account for a substantial portion of revenues. The most important product is pantoprazole, a therapeutic treatment for ulcers and reflux disease. In both years, 2005 and 2004, pantoprazole accounted for 58% of net sales. The Company expects pantoprazole to continue to be a key revenue driver for the next several years. Use of estimates The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities reported at the end of any given period and the reported amounts of revenues and expenses for that reported period. Actual results could differ from these estimates. Management has made judgements in the process of applying the Company s accounting policies. The Company elected to recognize actuarial gains and losses in shareholders equity in the period in which they incur. If the Company elected another method of recognizing actuarial gains and losses, this could have a material impact on defined benefit obligations and personnel expense. At the balance sheet date management mainly has made the following key assumptions concerning the future and has identified other key sources of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year: Revenue recognition: ALTANA Pharma makes provisions for discounts, allowances, rebates, charge backs and product returns when recognizing the revenue from the sale of products or services. These deductions represent estimates of the related obligations requiring the use of judgements when estimating the impact of these sales deductions on gross sales for a reporting period. As of December 31, 2005 the company has made a provision in the amount of 58.9 million for these deductions. Pension plans: The valuation of the various pension plans is based on the methodology used applying some parameter, including the expected discount rate, rate of compensation and pension increase and return on plan assets. If the relevant parameter developed materially differently than expected this could have a material impact on our defined benefit obligation and subsequently on the net periodic pension cost. Impairments: The impairment analysis for goodwill, other intangible assets and tangible assets is principally based upon discounted estimated future cash flows from the use and eventual disposal of the assets. Factors like lower than anticipated sales and resulting decreases of net cash flows and changes in the discount rates used could lead to impairments. Regarding the carrying value of goodwill, other intangible assets and tangible assets see Note 4 and Note 5. Employee incentive plans: The ALTANA Investment Plan is measured based on the fair value of the options on the grant date and every subsequent reporting date. The estimated fair value of these options is based on parameters such as volatility, interest rate, share price, duration of the option and expected dividend. Compensation expense and liabilities could materially differ from the estimated amount on the balance sheet date if the parameters used changed. The liability recorded for the ALTANA Investment Plan as of December 31, 2005 amounted to 1.1 million. ALTANA PHARMA ANNUAL REPORT 41

44 3. BUSINESS COMBINATIONS AND DISPOSITIONS In accordance with IFRS 3, the Company accounts for all acquisitions using the purchase method, with the excess of the purchase price over the estimated fair value of the net assets acquired accounted for as goodwill. Goodwill is not amortized but is tested for impairment annually. The results of operations of the acquired businesses are included in the consolidated financial statements from their respective dates of acquisition. The results of operations of a sold business are included in the consolidated financial statements until the date of the sale. 4. INTANGIBLE ASSETS Patents, licenses and similar rights Goodwill Advances Total COST Balance at January 1, Additions Disposals Transfers Translation adjustments BALANCE AT JANUARY 1, Additions Disposals Transfers Translation adjustments BALANCE AT DECEMBER 31, ACCUMULATED AMORTIZATION Balance at January 1, Additions Disposals Transfers Translation adjustments BALANCE AT JANUARY 1, Additions Disposals Transfers Translation adjustments BALANCE AT DECEMBER 31, CARRYING AMOUNT AT DECEMBER 31, December 31, OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

45 In accordance with the early adoption provisions of IFRS 3, the Company offset the historical cost basis of goodwill and accumulated amortization as of January 1, 2004 which created a new cost basis of goodwill of 3.8 million. In 2005, ALTANA Pharma acquired product rights of 76.3 million in the United States of America. In 2004, additions of 17.4 million related to the acquisition of trademarks. The intangible assets acquired during 2005 have a weighted average useful life of 11 years. The following table presents expected amortization expense related to patents, licenses, similar rights and software for each of the following periods: Thereafter The actual amortization may differ from the expected amortization. In accordance with the revised IAS 36, the Company performed impairment tests on goodwill. The impairment tests are performed in the fourth quarter of each year and the recently performed tests are based on the financial budgets for the years 2006 to The budgets are based on historical experience and represent management s best estimates about future developments. The weighted average growth rates utilized in the budget can be derived from corresponding industry forecasts. In order to perform impairment tests, the Company estimated cash flow projections beyond the budget by extrapolating the projections using a steady growth rate for subsequent years. The Company then calculated the fair value for each cash-generating unit by applying a discounted cash flow technique. A discount rate before taxes of 8% was applied. The fair value calculated was then compared to the carrying amount of the cash-generating unit. The impairment tests were performed based on fair values. Furthermore, to support the result of these impairment tests, the Company calculated the value in use of each cashgenerating unit. In 2005 and 2004, no impairment of goodwill was recorded. ALTANA PHARMA ANNUAL REPORT 43

46 5. PROPERTY, PLANT AND EQUIPMENT COST Land, Advances/ leasehold & Plant & construction buildings machinery Equipment in progress Total Balance at January 1, Additions Disposals Transfers Translation adjustments Balance at January 1, Additions Disposals Transfers Adjustment IFRS Translation adjustments BALANCE AT DECEMBER 31, ACCUMULATED DEPRECIATION Balance at January 1, Additions Disposals Transfers Reversals Translation adjustments Balance at January 1, Additions Disposals Transfers Adjustment IFRS Reversals Translation adjustments BALANCE AT DECEMBER 31, CARRYING AMOUNT AT DECEMBER 31, December 31, In 2005, the majority of the additions related to the construction of a new production plant in Ireland and the expansion of research facilities in Germany and India. In 2004, additions related to the construction of a new production site in Ireland, the expansion of the production capacities in Oranienburg, Germany, the expansion of research facilities in Germany and India and the expansion of the sales organization in the United States of America. As of December 31, 2005 and 2004, respectively, 0.6 million of the net book value related to property, plant and equipment under capital lease. 44 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

47 6. LONG-TERM INVESTMENTS Other long- Affiliated Other term financial companies investments assets Total COST Balance at January 1, Additions Disposals Reversals Translation adjustments Balance at January 1, Additions Disposals Reversals Translation adjustments BALANCE AT DECEMBER 31, ACCUMULATED WRITE-DOWNS Balance at January 1, Additions Changes in fair value recorded in valuation reserve Disposals Translation adjustments Balance at January 1, Additions Changes in fair value recorded in valuation reserve Disposals Translation adjustments BALANCE AT DECEMBER 31, CARRYING AMOUNT AT DECEMBER 31, December 31, In 2004, ALTANA Pharma increased its participation in GPC Biotech AG by 8.3 million. As of December 31, 2005 and 2004, the carrying amount of the investment in GPC Biotech AG was 24.9 million and 24.4 million, respectively. Amounts totaling 0.4 million of other long-term financial assets as of December 31, 2005 and 2004, respectively, related to long-term employee loans bearing a weighted average 2.8% interest rate. 7. INVENTORIES At December At December 31, , 2004 Raw materials and supplies Work in process Finished products and goods Advance payments In the period ended December 31, 2005, million of inventories were recognized as an expense in cost of sales and 14.6 million were recognized as inventory write-downs deducted from inventory categories. ALTANA PHARMA ANNUAL REPORT 45

48 8. TRADE ACCOUNTS RECEIVABLE At December At December 31, , 2004 Trade accounts receivable Allowance for doubtful accounts Long-term receivables At December 31, 2005 and 2004, respectively, one customer accounted for 4.0% and 11.7% of trade accounts receivable. In 2005 and 2004, respectively, this same customer accounted for 15.9% and 20.0% of net sales. The roll-forward of the allowance for doubtful accounts is shown under other operating expenses and was as follows: Allowance at the beginning of the year Translation adjustments Additions Releases Utilization Allowance at the end of the year MARKETABLE SECURITIES In accordance with IAS 39, available-for-sale marketable securities are recorded at fair value. Amortized cost, fair value and gross unrealized holding gains and losses, which are recorded in the revaluation reserve, net of tax, as of December 31, 2005 and 2004 were as follows: Amortized Unrealized Unrealized cost Fair value gains losses Interest in ALTANA AG Other Total Interest in ALTANA AG Other Total The contractual maturities of debt securities were below one year. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to repay obligations earlier without prepayment penalty. 46 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

49 10. OTHER ASSETS AND PREPAID EXPENSES At December 31, 2005 At December 31,.2004 Other Other Other Other noncurrent non-current current current assets assets assets assets Balances due from employees Cash surrender value of life insurance Balances due from fiscal authorities Prepayments Loans Licenses Prepaid expenses Derivative instruments (see Note 19) Asset held for disposal Other SHAREHOLDERS EQUITY Issued capital The shareholders equity of the company is 70,0 million, split into 70 million bearer shares without a nominal value. Each share is worth 1. With the contribution agreement from October 25, 2005, ALTANA AG has transfered 94% of ALTANA Pharma AG to the ALTANA Beteiligungsgesellschaft mbh. This is equivalent to 65,8 million bearer shares, non-securitized share certificates of ALTANA Pharma AG. Profit and loss transfer agreement ALTANA Pharma AG and ALTANA Technology Projects GmbH have entered into profit and loss transfer agreements with ALTANA AG. According to these agreements, the profits and losses generated in line with the German commercial code are transferred to ALTANA AG. In 2005, ALTANA Pharma transferred profit of million (2004: million) to ALTANA AG. Revaluation reserve In accordance with IAS 39, unrealized gains and losses resulting from changes in fair values of available-for-sale marketable securities are recorded in a revaluation reserve net of tax, a separate section of shareholders equity, unless an impairment is recognized. Additionally, changes in the fair value of financial instruments qualifying as cash flow hedges are recognized, net of tax, in the revaluation reserve if all hedge accounting criteria under IAS 39 are met. 12. EMPLOYEE INCENTIVE PLANS Management stock option plans (equity-settled) Since 1999, the Company has granted stock options to key members of management on July 1 of each year. The exercise price for the Company s Stock Option Plans discussed below is calculated on the basis of the average of the published Xetra closing prices of the Company s shares during the 20 trading days preceding the grant date. For the Stock Option Plans 2001, 2002 and 2003 the exercisability of the options was dependent on the increase of earnings per share. For the Stock Option Plans 2004 and 2005 the exercisability of the options depends on the development of the ALTANA share price compared to the development of a benchmark marketbased index. All options become exercisable two years after the grant date if the exercisability condition is met. The Stock Option Plan 2001 which was open to members of the Company s management board, its senior executives and certain other key employees became exercisable on July 1, 2003 and remained exercisable over a period of three years as earnings per share in 2002 exceeded basic earnings per share in 2000 by 20%. The earnings per share performance condition for the 2001 plan was met. On July 1, 2002, the Company initiated a plan ( Executive Option Plan ) identical to the Stock Option Plan 2001 for executives (management board of ALTANA AG and key subsidiaries) only, with an expiration period of ten years after the grant date. The earnings per share performance condition for the 2002 plan was met. On July 1, 2003, the Company initiated a plan for executive and management members ( Stock Option Plan 2003 ). The duration, performance conditions and ALTANA PHARMA ANNUAL REPORT 47

50 determination of the exercise price were identical to the Stock Option Plan However, the personnel committee of the supervisory board can limit the profit per option for members of the management board if the increase of the share price is caused by exceptional effects. The earnings per share performance condition for the 2003 plan was met. On July 1, 2004, the Company initiated a plan for management members ( Stock Option Plan 2004 ). The exercisability of the options depends on the growth of the ALTANA share price compared to the growth of a market-based index (70% Dow Jones Stoxx Healthcare and 30% Dow Jones Stoxx Chemicals). If, after two years, the growth of the ALTANA share price exceeds the growth of the index, the options will be exercisable. However, if the market condition is not met, the options only become exercisable if the ALTANA share price exceeds the growth of the index in the third or fourth year after the grant date. The options forfeit, if the market condition is not met within the four years after the grant date. The options can be exercised for five years. On July 1, 2005, the Company initiated a plan for management members ( Stock Option Plan 2005 ) which is nearly identical to the Stock Option Plan However, the profit per option is limited to 100% of the exercise price. On July 1, 2002, the Company initiated a stock option plan open to Key Managers. For this plan the exercise price was increased by 10% compared to the other Stock Option Plans as no performance condition exists. The options can be exercised from July 1, 2004 until June 30, Compensation expense for Stock Option Plans 2001 and 2002 has been calculated as the difference between the average acquisition cost of the treasury shares and the exercise price. The Stock Option Plans 2003, 2004 and 2005 are measured at the fair market value as of the grant date in accordance with IFRS 2. Compensation expense is recognized ratably over the relevant service period. Compensation expense of 8.0 million and 7.4 million was recognized in 2005 and 2004, respectively. The fair value of the stock options was estimated at the date of grant using a Binominal option pricing model based on the following assumptions (assumptions for the Stock Option Plans 2002 and 2001 are presented for informational purposes only): Stock Stock Stock Executive Key Stock option option option option Management option plan plan plan plan option plan plan Expected dividend yield 2,40% 1,70% 1,50% 1,30% 1,30% 1,68% Expected volatility 30% 35% 35% 42,41% 42,12% 37,50% Risk-free interest rate 2,5% 3,5% 3,5% 4,5% 4,5% 4,5% Expected term (in years) 4 4 3, Correlation ALTANA share and benchmark index 35% 35% Share price at date of valuation (in ) 39,90 48,87 44,60 52,60 52,60 44,60 FAIR VALUE PER OPTION AT GRANT DATE (IN ) 5,63 11,53 14,84 27,00 25,84 16,72 Exercise price (in ) 47,49 51,01 54,65 51,58 56,74 42,41 Expected volatility is determined based on the corresponding historical amounts for the expected term of these options, which are verified, and if necessary, adjusted by the implicit volatilities regarding the extrapolation to the future. As the durations of traded options are materially less than the options granted under the Stock Options Plans, the implicit volatilities are not a sufficient valuation basis. In determining the exercise patterns of the option holders, it was assumed that a certain percentage of the participants will exercise their options when a critical profit per option is reached (25% of the exercise price). 48 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

51 ALTANA INVESTMENT PLANS (CASH-SETTLED) Since 2000, the Company has initiated a plan (ALTANA Investment Plans) every year in 12 European countries, the United States of America, Canada and India for employees who are not eligible to participate in the Stock Option Plans. Each investment plan consists of two components. The first component entitles eligible employees to purchase a specific number of shares based on their respective incomes at a fixed price per share, which is the lowest quoted price of the Company s shares on the day the management board approves the plans. A discount is granted for a specified number of shares purchased by each participant. The Company sells the shares in December of each year to the employees. For employees unable to receive shares directly from the Company due to statutory reasons, the Company provides the cash equivalent of the benefit received by other employees participating in the plan. Under the second component, employees receive one option for each share purchased. The options become exercisable two years after the grant date and expire two years later. The options entitle holders to receive cash in an amount equal to the difference between the exercise price and the market price of the Company s shares on the date on which the options are exercised. The ALTANA Investment Plans 2000 and 2001 were either exercised or forfeited in 2004 and 2005, respectively. The ALTANA Investment Plans are classified as provisions and are initially measured at the grant date fair value and remeasured at fair value at the end of each reporting period. For the periods ended December 31, 2005 and 2004, compensation expense related to these plans was 1.2 million and 1.1 million, respectively. The provisions at December 31, 2005 and 2004 were 1.1 million each. The discount, on the first component, totaling 1.0 million and 0.8 million in 2005 and 2004, respectively, was expensed as incurred. The fair value of the ALTANA Investment Plans at the balance sheet date was estimated using the Black Scholes model based on the following assumptions: Plan Plan Plan Plan Expected dividend yield 1,7% 1,7% 1,7% 1,7% Expected volatility 27,0% 27,0% 27,0% 27,0% Risk-free interest rate 2,9% 2,9% 2,9% 2,9% Expected term (in years) 2,8 1,8 0,8 0,5 Fair value per option (in ) 10,78 8,02 4,56 3,50 The approach in determining the volatility is identical to the one described above. Based on the simple structure of the ALTANA Investment Plan, the Black Scholes model was used to determine the fair value. Duration of the options was estimated and not implicitly considered in the calculation. ALTANA PHARMA ANNUAL REPORT 49

52 13. EMPLOYEE BENEFIT OBLIGATIONS Within the Company, various post-employment benefit plans exist, but most are accounted for as defined benefit plans. Defined contribution plans do exist in non-german subsidiaries, but such plans are not significant. The majority of the Company's employee benefit obligations relate to German employees. Employee benefit obligations are determined based on the years of service, the expected discount rate and estimated compensation increase. Employee benefit obligations are generally measured based on the parameters, salaries and number of employees as of September 30. The applied parameters are reviewed for unexpected fluctuations in December and a remeasurement is performed if material deviations from September 30 are identified. In 2004 the employee benefit obligation for German employees was remeasured on December 31, 2004, due to significant fluctuations in the discount rate. Obligations for other post-retirement benefits mainly entitled German employees to invest part of their earnings for retirement. The contribution determined by the employee is invested in funds set up by the Company, who guarantees the employees a minimum return. Some non-german pension commitments are funded by plan assets maintained by trust funds. Fund assets consist mainly of equity and debt securities. The provisions for the Company s pension benefit and other post-retirement obligations were as follows: At December At December 31, , 2004 Provision for pensions Provision for other post-retirement benefits The provision for pensions was as follows: DEFINED BENEFIT OBLIGATION German Non-German German Non-German plans plans plans plans Balance at January Changes in reporting entities Translation adjustments Service cost Interest cost Actuarial losses Plan amendments Other changes Benefits paid BALANCE AT DECEMBER PLAN ASSETS Balance at January Translation adjustments Actual gain on plan assets Employer contribution Benefits paid Other changes BALANCE AT DECEMBER FUNDED STATUS Funded status at December PROVISION RECOGNIZED AT DECEMBER An amount of 0.4 million of the change in actuarial gains and losses is related to experienced adjustments of the German subsidiaries. 50 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

53 The following table shows the different asset categories into which the plan assets are divided: At December 31, 2005 At December 31, 2004 ASSET CATEGORY Equity securities % % Bonds % % Others % % % % ALTANA Pharma aims to hedge future payments under the pension obligation with long-term returns from the portfolio of the plan assets. Therefore the composition of the plan assets is oriented on the sustainability of the income generated. Income generated consists of increases in market values of the assets and continuing distribution of dividends. For that purpose equity instruments are slightly over-weighted. However in some countries legal restrictions exist and only fixed interest-bearing marketable securities are allowed as plan assets. This results over all to a balanced asset allocation between equity securities and bonds. The expected return on plan assets is determined based on market expectations and historical experience. At December 31, 2005, the employee benefit obligations expected to be paid in the future were as follows: Due in Due in Due in Due in Due in Due between 2011 and The following table provides the underlying actuarial assumptions for the pension plans: WEIGHTED AVERAGE ASSUMPTIONS At December 31, 2005 At December 31, 2004 German Non-German German Non-German plans plans plans plans Discount rate 4,0% 5,5% 5,0% 5,7% Expected return on plan assets - 7,9% - 7,7% Rate of compensation increase 3,5% 4,0% 3,5% 3,9% Rate of pension increase 1,5% 1,3% 1,5% 1,2% The components of net periodic pension costs were as follows: At December 31, 2005 At December 31, 2004 German Non-German German Non-German plans plans plans plans Service cost Interest cost Expected return on plan assets Actuarial losses NET PERIODIC PENSION COSTS Of the total net periodic pension costs of 20.1 million an amount of 4.4 million was recognized in cost of sales, 6.8 million in research & development, 6.5 million in selling and distributions and 2.4 million in general administrative expense. ALTANA PHARMA ANNUAL REPORT 51

54 14. OTHER PROVISIONS Sales and Employees marketing Warranty Other Total Balance at January 1, Additions Utilization Release Translation adjustments BALANCE AT DECEMBER 31, Thereof long-term at December 31, at December 31, The employee-related provisions encompass accruals for special bonuses, as well as anniversary, paid vacation and provisions for employee incentive plans. Provisions for sales and marketing pertain primarily to sales bonuses and commissions. Provisions for warranty cover commitments in connection with goods delivered and services rendered. For further information in regards to the obligations from employee incentive plans see Note 12. The items included in other provisions are primarily related to taxes other than income taxes and similar fees, pending litigation, legal costs, professional fees, clinical trials and research. Additionally, at December 31, 2005 and 2004, respectively, an accrual for environmental cost totaling 6.2 million and 7.1 million was included and for a part of the provisions for environmental risks. A corresponding asset of 4.5 million and 4.9 million was recorded which represents amounts due from the previous land owners. 15. DEBT At December 31, 2005 At December 31, 2004 Non-current Current Non-current Current liabilities liabilities liabilities liabilities Borrowings from banks Lease obligations Other For the years ended December 31, 2005 and 2004, weighted average interest rates for borrowings from banks were 2.0% and 1.9%, respectively. As of December 31, 2005 and 2004, respectively, bank borrowings included 0.1 million and 0.2 million denominated in foreign currencies other than Euro. Of these borrowings, amounts of 0.1 million and 0.2 million were denominated in Argentinian Pesos as of December 31, 2005 and 2004, respectively. At December 31, 2005, the aggregate amounts of indebtedness maturing during the next five years and thereafter were as follows: Due in Due in Due in Due in Due in Due thereafter TOTAL Lease obligations (see Note 26) 138 TOTAL DEBT OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

55 16. PAYABLES TO AFFILIATED COMPANIES Amounts payable to the parent company ALTANA AG and its subsidiaries, which are not part of the consolidated financial statements of ALTANA Pharma, comprise the following: Receivables from ALTANA AG Payables to ALTANA AG OTHER LIABILITIES Other liabilities consisted of the following: At December 31, 2005 At December 31, 2004 Other Other Other Other non-current current non-current current liabilities liabilities liabilities liabilities Payroll taxes Employees and social security contributions Commissions Debit notes to customers Balances due to related parties Other DEFERRED INCOME The major amounts in deferred income relate to the following contracts: Under the terms of the Company s licensing agreement with Wyeth Inc., U.S.A., acting through one of its subsidiaries, Wyeth Pharmaceutical ( Wyeth ), the Company granted Wyeth an exclusive license to carry out certain manufacturing tasks with respect to semi-finished pantoprazole-based products supplied by the Company and to distribute the resulting drugs in the U.S. market. Wyeth agreed to pay the Company a specified percentage of its net sales of the product subject to a minimum price. Due to the direct link between Wyeth s sales price and the amount the Company will ultimately realize, revenue for the products delivered to but not yet sold by Wyeth as of the balance sheet date are recognized at the amount of the minimum price. The difference between the minimum price and the price charged is treated as deferred income. In 2002, the Company and Pharmacia Corporation ( Pharmacia ) signed an agreement under which the pharmaceuticals segment of the Company grants Pharmacia certain rights and licenses to its technology. The acquisition of Pharmacia by Pfizer did not impact the agreement. The purpose of the agreement was to collaborate in the development and commercialization of the Company s product candidate, roflumilast, for the expected treatment of respiratory diseases and conditions, including asthma and chronic obstructive pulmonary disease (COPD). On June 30, 2005 the collaboration agreement was terminated and Pfizer returned all rights and licenses relating to roflumilast. The Company has no remaining obligations or contingencies under the terms of the termination agreement. Accordingly, the up-front and milestone payments previously deferred over the collaboration period were recognized at the date of the termination in other operating income. Similar agreements with another partner exist for the joint development and marketing of roflumilast and ciclesonide in Japan. These agreements were not affected by the termination of the agreement with Pfizer. Up-front payments received are being deferred over the collaboration period. ALTANA PHARMA ANNUAL REPORT 53

56 19. FINANCIAL INSTRUMENTS Risk management and financial instruments The Company conducts business on a global basis in numerous major international currencies and is, therefore, exposed to adverse movements in foreign currency exchange rates. Furthermore, the Company is exposed to risk interest rate fluctuations from their financing activities. Derivative financial instruments are used to reduce various types of market risks like currency or interest rate risks. The Company has established policies and procedures for risk assessment of derivative financial instrument activities. The Company has a decentralized risk management strategy and uses derivative financial instruments, including forward foreign exchange contracts, to hedge foreign currency denominated assets and liabilities, firm commitments and forecasted foreign currency transactions. At December 31, 2005, the existing derivative financial instruments were mainly used to hedge forecasted foreign currency transaction fluctuations. By their nature, all such instruments involve risks, including market risk and credit risk of non-performance by counterparties, and the maximum potential loss may exceed the amount recognized in the balance sheets. Credit risk The Company may be exposed to credit-related losses in the event of non-performance by counterparties to financial instruments. Counterparties to the Company s financial instruments represent, in general, well-established financial institutions. The Company does not have a significant exposure to any individual counterparty and at December 31, 2005 and 2004, in management s opinion the probability of nonperformance of the counterparties was low. Interest rate risk The Company is exposed to interest rate fluctuations. A substantial part of the interest rate sensitive assets and liabilities relate to marketable securities, cash equivalents and debt. Forward foreign exchange contracts and options The Company mainly uses forward foreign exchange contracts to hedge forecasted foreign currency transactions. The amounts recorded on the balance sheets do not always represent amounts exchanged by the parties and, thus, are not necessarily a measure of the exposure of the Company through its use of derivatives. The maturity dates of the forward contracts are linked to the anticipated cash flows of the Company and are currently up to two years. The notional amounts of forward foreign exchange contracts as of December 31, 2005 and 2004 amounted to million and million, respectively. ALTANA Pharma uses option contracts to hedge foreign currency fluctuation from future expected cash flows. Currently these option contracts have residual term of up to two years. As of December 31, 2005 and 2004, the notional amounts of options totaled 81.4 million and million, respectively. Fair value of financial instruments The fair values of financial instruments are equal to the replacement value. These fair values are determined on the basis of market data and valuation methods described below: At December 31, 2005 At December 31, 2004 Carrying value Fair value Carrying value Fair value FINANCIAL INSTRUMENTS Assets Long-term investments Trade accounts receivable Marketable securities Cash and cash equivalents Liabilities Borrowings from banks Trade accounts payable Other DERIVATIVE FINANCIAL INSTRUMENTS Assets currency contracts Liabilities currency contracts OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

57 The fair values of financial assets and marketable securities are determined on the basis of quoted market prices. The carrying amount of cash and cash equivalents as well as accounts receivable approximated their fair value due to the short-term maturities of these instruments. The carrying value of borrowings from banks approximated the fair value. Cash and cash equivalents consisted nearly exclusively of bank deposits. 20. OTHER OPERATING INCOME For the financial years Up-front and milestone payments license agreements Reimbursements Release of accruals Gains on disposal of fixed assets Foreign exchange gains, net (see note 21) Other OTHER OPERATING EXPENSES Foreign exchange gains and losses are shown net as follows: For the financial years Foreign exchange gains Foreign exchange losses Net gain (loss) For the financial years Write-off of receivables Losses on disposal of fixed assets Foreign exchange losses, net Charitable contributions Fees and other charges Other FINANCIAL INCOME For the financial years Interest income Interest income affiliated companies Gain on derivative financial instruments Other financial income 7 0 Income from associated companies FINANCIAL INCOME ALTANA PHARMA ANNUAL REPORT 55

58 23. FINANCIAL EXPENSES For the financial years Interest expense Interest expense affiliated companies Losses on derivative financial instruments Other financial expenses FINANCIAL EXPENSE INCOME TAXES Income before income taxes was attributable to the following geographic regions: For the financial years Germany Foreign Income tax expense for these geographic regions was as follows: For the financial years Germany Foreign TOTAL CURRENT TAXES Germany Foreign TOTAL DEFERRED TAXES TOTAL INCOME TAX EXPENSE Since January 1, 2001, a uniform tax rate of 25% plus a 5.5% solidarity surcharge on corporate tax is applicable in Germany. Additionally, the Company is subject to trade tax. The combined income tax rate was 38.2% for the year 2004 and 37.7% for the year 2005, of which approximately 12% related to trade tax. For the years ended December 31, 2005 and 2004, expenses differed from the amounts computed by applying the effective combined income tax rate of approximately 38% and 38.2%, respectively, as follows: For the financial years INCOME BEFORE TAXES AND PROFIT AND LOSS TRANSFER Computed income tax expense at the effective combined income tax rate Non-deductible expenses Foreign tax rate differential Tax free income Other TOTAL Effective income tax rate 35,6% 37,0% 56 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

59 Deferred income tax assets and liabilities related to the following items: ASSETS At December At December 31, , 2004 Intangibles Property, plant and equipment Financial assets Inventories Receivables and other assets Additional paid-in capital due to employee incentive plans Pension and other post-retirement benefits Other provisions Liabilities Tax loss carry-forwards Deferred income DEFERRED TAX ASSETS LIABILITIES Intangibles Property, plant and equipment Financial assets Inventories Receivables and other assets Additional paid-in capital due to employee incentive plans 4 0 Pension and other post-retirement benefits Other provisions Liabilities Deferred income DEFERRED TAX LIABILITIES DEFERRED TAX ASSETS, NET Net deferred income tax assets and liabilities were as follows: At December At December 31, , 2004 Deferred tax assets Deferred tax liabilities DEFERRED TAX ASSETS, NET At December 31, 2005 the Company had tax loss carry-forwards of 25.0 million (2004: 17.3 million) of which 11.8 million (2004: 6.2 million) have unlimited carry-forward periods, 13.2 million expire before 2010 (2004: 8.5 million expire before 2009) and 0.0 million expire after 2010 (2004: 2.6 million expire after 2009). Deferred tax assets on tax loss carryforwards of 0.2 million and 0.0 million were not recognized as of December 31, 2005 and 2004, respectively, due to the fact that the future realization against taxable income is not probable. At December 31, 2005 and 2004, respectively, a deferred tax liability was not provided for the excess amount of million and million which represents the temporary differences for financial reporting under IFRS over the tax basis of certain investments in subsidiaries as the timing of their reversal can be controlled and it is probable that the difference will not reverse in the foreseeable future. ALTANA PHARMA ANNUAL REPORT 57

60 25. OTHER INFORMATION ON THE INCOME STATEMENT Personnel expenses consisted of the following items: For the financial years Wages and salaries Social security contributions Expenses for pensions and other post-retirement benefits Total personnel expenses Compensation expenses from employee incentive plans in accordance with IFRS 2 are included in personnel expenses. ALTANA Pharma employed an average of and employees in 2005 and in 2004, respectively. In 2005 and 2004, the pro rata consolidated companies had on average 216 and 210 employees for the years ended, which were included proportionately. The above figures include 144 and 121 apprentices for 2005 and Amortization and depreciation charges are as follows: For the financial years Amortization of intangible assets Depreciation of property, plant and equipment Total COMMITMENTS AND CONTINGENCIES Research and development agreements As part of its research activities, the Company has entered into various long-term research agreements with research & development providers to collaborate on the discovery, development and commercialization of pharmaceutical drugs. Under these agreements, the Company provides research funding over the agreed upon service period. In addition, cost reimbursements, license fees, milestone payments, and royalties may be required to be paid depending on the terms of the respective agreement and the outcome of the research activities. As of December 31, 2005, the estimated payments to these parties, assuming the milestones or other conditions are met, were as follows: Thereafter 0 Total Guarantees and other commitments At December At December 31, , 2004 Commitments for capital expenditures and other purchase obligations Other Total OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

61 Rental and lease arrangements The Company rents and leases property and equipment used in its operations. These leases are classified as either operating or capital leases and amortized over the life of the respective lease. The lease contracts expire on various dates in the future. Future minimum lease payments for non-cancelable operating and capital leases at December 31, 2005 were: Operating Capital leases leases After Total minimum lease payments Less amount representing interest -3 Present value of lease payments 138 Less current portion -138 Non-current lease obligations 0 Total rent expense was 34.5 million and 29.1 million for the years ended December 31, 2005 and 2004, respectively. 27. RELATED PARTY TRANSACTIONS Susanne Klatten is considered a related party, as she owns 50.1% of the shares of ALTANA AG. She is Deputy Chairwoman of the supervisory board. During the years reported there were no transactions between her and the Company except for dividends distributed and the regular compensation for her function on the supervisory board. Additionally, Susanne Klatten is shareholder and member of the supervisory board of Bayerische Motoren Werke AG (BMW AG). In the years reported the Company purchased company cars from the BMW group. These transactions are not disclosed separately as they were insignificant to the Company s financial statements and were carried out at arm's length. Affiliated companies, joint ventures and associated companies that are not included in the consolidated financial statements are considered related parties. Balances due to and due from related parties are recorded in other assets, other liabilities and debt, as they are not material. Balances and transactions with unconsolidated subsidiaries are included in the amounts disclosed below.. At December At December 31, , 2004 Balances due to affiliated companies Balances due to related parties For the financial years Related party transactions Services and goods acquired Interest income 8 13 Interest expense The amount for services and goods acquired and balances due to and due from related parties mainly related to the toll manufacturing of Bracco ALTANA Pharma GmbH. The terms and conditions of the agreements are at arm s length. ALTANA PHARMA ANNUAL REPORT 59

62 28. COMPENSATION OF THE SUPERVISORY BOARD AND MANAGEMENT BOARD The compensation of the supervisory board was 0.4 million (2004: 0.4 million). The total compensation for the management board was 4.2 million and 4.6 million for the years ended December 31, 2005 and 2004, respectively. Total compensation for 2005 of 4.2 million comprises fixed compensation of 1.4 million (2004: 1.5 million) and variable compensation of 2.8 million (2004: 3.1 million). Included in the total compensation for 2005 is an amount of 1.3 million paid by a related company. The compensation expense for employee incentive plans for the members of the management board totaled 1.1 million and 0.9 million for the years ended December 31, 2005 and 2004, respectively. Included in the compensation expense for 2005 is an amount of 0.3 million paid by a related company Accruals for pension obligations for former members of the management board and their dependants amount to a total of 6.3 million (2003: 6.0 million). Compensation of former directors and their dependants was 0.5 million in 2004 (2003: 0.5 million). 29. LITIGATION Litigation and potential exposures From time to time, the Company is party to or may be threatened with other litigation arising in the ordinary course of its business. Management regularly analyses current information including, as applicable, the Company s defenses and insurance coverage and, as necessary, provides accruals for probable liabilities for the eventual disposition of these matters. The ultimate outcome of these matters is not expected to materially impact the Company s consolidated balance sheets, income statements, statement of cash flows or statements of changes in equity. 30. SUBSEQUENT EVENTS The Management Board and the Supervisory Board have authorized the issuance of ALTANA Pharma s consolidated financial statements and their publication as of March 9, MAJOR CONSOLIDATED COMPANIES Share of Net income Average capital Equity Sales for the year number of in % in million 1 in million 1 in million 1 employees HOLDING ALTANA Pharma AG, Konstanz ALTANA Pharma ALTANA Pharma Deutschland GmbH, Konstanz ALTANA Pharma B.V., Hoofddorp (NL) ALTANA Pharma NV/SA, Diegem (BE) ALTANA Pharma S.A.S., Le Mee-sur-Seine (FR) ALTANA Pharma GmbH, Wien (AT) ALTANA Pharma S.p.A., Milan (IT) ALTANA Pharma S.A., Madrid (ES) ALTANA Inc., Melville (US) ALTANA Pharma Inc., Oakville Ontario (CA) ALTANA Pharma S.A. de C.V., Mexico City (MX) ALTANA Pharma Ltda., Sao Paulo (BR) ALTANA Pharma S.A., Buenos Aires (AR) ALTANA Technology Projects GmbH, Bad Homburg v.d.h Figures in accordance with International Financial Reporting Standards (IFRS) 2 Profit and loss transfer agreement with ALTANA AG 3 Profit and loss transfer agreement with ALTANA Pharma AG 60 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

63 STATEMENTS OF CHANGES IN EQUITY OF THE ALTANA PHARMA GROUP Additional paid-in capital paid-in due to by the shareemployee Issued holders of Actuarial Share- Number of Share incentive ALTANA Retained gains Revaluation Translation holders' shares capital plans Pharma AG earnings and losses reserve adjustments equity in 000 in 000 in 000 in 000 in 000 in 000 in 000 in 000 in 000 BALANCE JANUARY 1, Adjustment due to accounting change ADJUSTED BALANCE JANUARY 1, Employee incentive plans Change in fair value of marketable securities, net of tax of m Change in fair value of derivative financial instruments, net of tax of m Change in actuarial gains and losses, net of tax of m Income before profit and loss transfer Profit and loss transfer Change in translation adjustments BALANCE AT DECEMBER 31, Employee incentive plans Change in fair value of marketable securities, net of tax of m Change in fair value of derivative financial instruments, net of tax of m Change in actuarial gains and losses, net of tax of m Income before profit and loss transfer Profit and loss transfer Change in translation adjustments BALANCE AT DECEMBER 31, ALTANA PHARMA ANNUAL REPORT 61

64 SUPERVISORY BOARD ALTANA PHARMA AG SHAREHOLDER REPRESENTATIVES Dr. h.c. Nikolaus Schweickart Chairman Lawyer Member of the Boards: ALTANA Chemie AG 1 (Chair) BYK-Chemie USA Inc. 2 (Chair) DAT Deutsch-Atlantische Telegraphen AG 1 (Chair) MIVERA Vermögensanlagen AG 1 (Chair) Heinz W. Bull Degree in Business Administration Honorary Professor Fachhochschule Dornbirn, Vorarlberg, Austria Member of the Boards: sunways AG 1 Tanox Inc. 2 Recordati Industria Chimica e Farmaceutica S.p.A. 2 EMPLOYEE REPRESENTATIVES Rolf Benz Deputy Chairman Full-time member of the work council Senior chemistry technician Chairman of the work council ALTANA Pharma AG Yvonne D Alpaos-Götz Degree in industrial business Full-time member of work council Chairwoman of ALTANA Pharma group work council Deputy chairwoman of group work council Member of the Board: ALTANA AG 1 Dr. Hildegard Boss Degree in biology, clinical pharmacology Susanne Klatten Master of Business Administration Senator Honorary of the Technische Universität München Member of the Boards: Bayerische Motoren Werke AG 1 ALTANA AG 1 UnternehmerTUM GmbH 2 Technische Universität München 2 Dr. Hermann Küllmer Degree in Business Administration Member of the Board: ALTANA Chemie AG 1 Robert Orzschig Area Manager Mining, Chemical and Energy Industrial Union (IG BCE) until February 28, 2005 Wilfried Penshorn Area Manager Mining, Chemical and Energy Industrial Union (IG BCE) since March 1, 2005 Brigitte Ziegelmüller Chemistry worker until February 28, 2005 Dr. Bernd Seizinger Physician Member of the Boards: BioXell S.p.A. 2 Santera Pharmaceuticals AG 1 Prof. Dr. Frank L. Douglas Professor at the Massachusetts Institute of Technology / Executive Director MIT Center for Biomedical Innovation since March 10, 2005 Andrea Klaus Assistant occupational medicine since March 1, 2005 Dr. Karl Sanders Biologist Member of the Boards: Alantos Pharmaceutical 2 (Chair) Alchemix Biotechnology 2 Nitromed Pharmaceutical 2 Gene Logic Inc. 2 Kurt W. Briner Degree in Business until March 10, Member of other statutory supervisory boards 2 Member of comparable domestic and foreign supervisory bodies 62 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS

65 MANAGEMENT BOARD ALTANA PHARMA AG CHIEF EXECUTIVE OFFICER Dr. Hans-Joachim Lohrisch Member of the Boards: ALTANA Pharma US Inc., Florham Park, NJ, USA 1 (Chairman) ALTANA Inc., Melville NY, USA 1 ALTANA Pharma Inc. Oakville Ont., Kanada 1 (Chairman) ALTANA Pharma Pty. Ltd., North Ryde, NSW, Australien 1 ALTANA Pharma Re Insurance AG, Konstanz 2 (Vorsitzender) Sangtec Molecular Diagnostic AB, Bromma Schweden 1 MEMBER OF MANAGEMENT BOARD Andreas Görwitz Finance & Operations Member of the Boards: Zydus ALTANA Pharma Healthcare Ltd. Vashi Navi Mumbai, Indien 1 (Chairman) ALTANA Pharma Re Insurance AG, Konstanz 2 ALTANA Pharma Ltd., Cork, Irland 1 Alfred Goll Human Resources & Information Technology Member of the Boards: ALTANA Pharma S.A., Brüssel, Belgien 1 ALTANA Pharma Pty. Ltd., North Ryde, NSW, Australien 1 Dr. Otto Schwarz Marketing & Sales Member of the Boards: ALTANA Pharma S.A. de C.V. Naucalpan, Mexico 1 ALTANA Pharma S.A., Buenos Aires, Argentinien 1 ALTANA Pharma Ltda. Sao Paulo, Brasilien 1 ALTANA Pharma Inc. Oakville Ont. Kanada 1 ALTANA Pharma US Inc., Florham Park, NJ, USA 1 Dr. Ulrich Thibaut Research & Development since July 1, 2005 Member of the Board: Sangtec Molecular Diagnostic AB, Bromma Schweden 1 since July 1, 2005 Prof. Dr. Heinz W. Radtke Research & Development until June 30, 2005 Member of the Board: Sangtec Molecular Diagnostics AB, Bromma, Schweden 1 until June 30, Member of comparable domestic and foreign supervisory bodies 2 Member of other statutory supervisory boards ALTANA PHARMA ANNUAL REPORT 63

66 REPORT OF THE SUPERVISORY BOARD Dr. h.c. Nikolaus Schweickart Chairman of the Supervisory Board of ALTANA Pharma AG The Supervisory Board intensively accompanied the work of the Management Board in the year under review and dealt in detail with the situation of the Company and also with special issues on the agenda. Four regular Supervisory Board meetings were held in The meeting in September 2005 took place at the production site of ALTANA Pharma in Oranienburg. Outside the meetings, the Chairman of the Supervisory Board was kept regularly informed by the Management Board about the situation of the Company and the course of business. The Supervisory Board as a whole was informed on a quarterly basis through written reports issued by the Management Board. During its meetings, the Supervisory Board dealt comprehensively with the actual business development, the forecasts for the current year and the Company s long-term planning. The Supervisory Board extensively examined and discussed extraordinary activities and major business transactions. Central issues such as the sales development of pantoprazole, competitive changes in the proton pump inhibitor segment and the effects of health policy measures on European markets were the subject of intense discussion. The Management Board reported regularly on the development progress and the status of regulatory approval procedures for the respiratory substances ciclesonide and roflumilast. Particular emphasis here was on the first market launches of Alvesco, termination of the cooperation with Pfizer on Daxas and the temporary withdrawal of Daxas from the European approval procedure. As part of a core theme, the Supervisory Board discussed in detail the research pipeline of ALTANA Pharma and candidates from the Research and Development portfolio. At its meetings in September and November, the Supervisory Board dealt intensively with the envisaged reorganization of the ALTANA Group and the strategic future prospects of the pharmaceuticals business. The fundamental issues for the future of the Company were addressed with the Management Board by employee and shareholder representatives on the Supervisory Board in an objective and constructive discussion based on mutual trust. The Finance Committee of the Supervisory Board met once and in that meeting it conducted detailed preliminary discussions on the annual financial statements in the presence of the auditors. The Human Resources Committee met two times to review personnel issues refering to the Management Board members. The Mediation Committee, established in accordance with section 27 (3) of the German Codetermination Act (Mitbestimmungsgesetz), did not hold a meeting. The statutory financial statements for the year ended December 31, 2005 and the management report of ALTANA Pharma AG were audited by PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft and issued with an unqualified auditors report. The risk management system of ALTANA Pharma was audited. The examination revealed that the system properly fulfills its function. The financial statement documentation, the annual report and the report of PricewaterhouseCoopers on the audit of the statutory financial statements were made available to all Supervisory Board members in due time before the meeting that was held to grant approval of the financial statements. The Supervisory Board inspected this documentation and is in agreement with the findings of the audit and has no grounds for objection following its final examination. At its meeting on March 9, 2006, the Supervisory Board approved the annual statutory financial statements of ALTANA Pharma AG prepared by the Management Board. These annual financial statements are thereby adopted. Bad Homburg v.d.h., March 9, 2006 Dr. h.c. Nikolaus Schweickart Chairman of the Supervisory Board of ALTANA Pharma AG 64 OVERVIEW PREFACE MANAGEMENT AND STRATEGY LIVING WITH ASTHMA MANAGEMENT REPORT FINANCIALS