INTERACTIVE ANNUAL REPORT 2016
Our mission: treat more patients with groundbreaking medicines Actelion Ltd. is a leading biopharmaceutical company focused on the discovery, development and commercialization of innovative drugs for diseases with significant unmet medical needs. Actelion is a leader in the field of pulmonary arterial hypertension (PAH). Our portfolio of PAH treatments covers the spectrum of disease, from WHO Functional Class (FC) II through to FC IV, with oral, inhaled and intravenous medications. Although not available in all countries, Actelion also has treatments approved by health authorities for a number of specialist diseases including type 1 Gaucher disease, Niemann-Pick type C disease, digital ulcers in patients suffering from systemic sclerosis, and mycosis fungoides type cutaneous T-cell lymphoma. 03 07 23 77 2
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PROFIT AND LOSS Twelve Months variance Fourth Quarter variance (in CHF millions, except % variance and EPS) 2016 2015 CHF CER 2016 2015 CHF CER Sales Product sales 2,412 2,042 18% 15% 627 519 21% 19% Opsumit 831 516 61% 57% 235 162 45% 43% Tracleer 1,020 1,212-16% -18% 229 278-17% -19% Uptravi 245 - nm nm 85 - nm nm Other 317 314 1% -2% 78 80-2% -4% Core results Operating income 992 814 22% 17% 211 163 30% 27% Net income 881 693 27% 22% 190 133 43% 40% Diluted EPS 8.18 6.16 33% 27% 1.79 1.22 47% 44% US GAAP results Operating income 789 656 20% 14% 129 122 5% 1% Net income 696 552 26% 19% 115 100 15% 11% Diluted EPS 6.46 4.91 32% 25% 1.08 0.91 19% 15% CASH FLOW Twelve Months Fourth Quarter (in CHF millions) 2016 2015 2016 2015 Cash flow Operating cash flow 920 658 225 125 Capital expenditure (57) (44) (16) (29) Cash returned to shareholders (428) (927) (58) (119) Free cash flow 90 (800) 85 (294) CASH POSITION AND SHARES December 31, September 30, June 30, March 31, December 31, (in CHF millions) 2016 2016 2016 2016 2015 Cash position Net cash 495 411 418 472 405 Share count (million shares) Issued common shares 107.8 107.8 114.1 114.1 114.1 Treasury shares held 4.7 4.1 8.9 9.5 9.1 Outstanding equity instruments 4.2 4.6 4.7 5.6 5.9 Disclaimer and notes to this financial report: Actelion continues to measure and report its core operating performance, which management believes more accurately reflects the underlying business performance. The Group believes that these non-gaap financial measurements provide useful supplementary information to investors. These non-gaap measures are reported in addition to, not as a substitute for, US GAAP financial performance. Constant Exchange Rates (CER) percentage changes are calculated by reconsolidating both the December 2015 year to date and December 2016 year to date results at constant currencies (the average monthly exchange rates for December 2015 year to date). Rounding differences may occur nm = not meaningful Europe = EU28 and Switzerland 5
6 Actelion in 2016 Product sales Operating results Building on the solid foundations of the previous years resulted in yet another exceptional year for Actelion. This success was driven by the company s leading portfolio of PAH products, which saw continued overall growth in 2016 with the introduction of Uptravi in the US and other markets around the globe. Product sales for 2016 rose to 2,412 million Swiss francs, an increase of 15% at constant exchange rates (CER). This excellent commercial performance was driven by the outstanding Uptravi launch in the US and Opsumit s sustained strong growth trajectory. During the fourth quarter of 2016, combined sales of the company s outcome-based PAH portfolio, Opsumit, Uptravi and Veletri, reached 55% of total sales, demonstrating the significant progress made in the fundamental transformation of the PAH business. Core operating income rose to 992 million Swiss francs, an increase of 17% at CER. Core marketing, selling and distribution expenses amounted to 501 million Swiss francs, an increase of 7% at CER. This increase was driven mostly by costs relating to launch activities of Uptravi in the United States, Germany and other geographies. Core R&D expenses amounted to 509 million Swiss francs, an increase of 25% at CER as the company advanced its early- and late-stage compounds through the pipeline. US GAAP operating income increased by 14% at CER to 789 million Swiss francs. Net results and EPS Core net income rose by 22% at CER to 881 million Swiss francs, and core diluted earnings per share (EPS) rose by 27% at CER to 8.18 Swiss francs. US GAAP net income amounted to 696 million Swiss francs, and US GAAP diluted earnings per share amounted to 6.46 Swiss francs. Cash flows Operating cash flow amounted to 920 million Swiss francs, driven by the strong operating performance. In keeping with its commitment to maximizing shareholder value, Actelion returned 428 million Swiss francs to shareholders through the second line share buyback as well as the increased dividend of 1.50 Swiss franc paid in May 2016. Balance sheet and cash position Total shareholder return Shareholders equity was basically unchanged as the Company continued to return substantial cash to shareholders. Actelion s cash position amounted to 495 million Swiss francs at December 31, 2016. On 26 January 2017, Actelion and Johnson and Johnson jointly announced that they have entered into a definitive transaction agreement under which Johnson & Johnson will launch an all-cash tender offer in Switzerland to acquire all of the outstanding shares of Actelion for 280 US dollars per share. The Offer Price implies a premium of 46% to the volume-weighted average price during the sixty SIX trading days prior to the publication of the pre-announcement published on 26 January 2017. Additionally Actelion shareholders will receive one share of the newly created R&D company for each Actelion share they own as a stock dividend 6
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2016 was another strong year for Actelion with the company delivering record sales and earnings. Product sales rose 15% at CER to reach 2,412 million Swiss francs, mostly driven by the strong Uptravi launch in the United States and continued strong Opsumit uptake in markets around the globe. This strong commercial performance coupled with tight financial oversight resulted in core operating income growth of 17%, US GAAP operating income growth of 14 % and US GAAP diluted EPS growth of 25%, all at CER. Moreover, 2016 was a busy year with the Company involved in strategic discussions to ensure maximum value creation for shareholders. On 26 January 2017, Actelion and Johnson and Johnson jointly announced that they have entered into a definitive transaction agreement under which Johnson & Johnson will launch an all-cash tender offer in Switzerland to acquire all of the outstanding shares of Actelion for 280 US dollars per share. The Offer Price implies a 100% valuation of 30 billion US dollars which implies a premium of 46% to the volume-weighted average price during the sixty SIX trading days prior to the publication of the pre-announcement. Additionally, Actelion shareholders will receive one share for every Actelion share they own of a newly created R&D company that will be spun out concurrently with the closing of the proposed transaction. The Board of directors of Actelion unanimously recommended the proposed transaction as its innovative structure allows Actelion shareholders to monetize their holdings at a very attractive price whilst retaining upside potential in the earlier stage pipeline. It is worth noting the value creation for loyal shareholders over the last years: since the IPO in 2000, the value increased thirty-fold and during the last 5 years, the increase was more than nine-fold. 8
SALES Sales by product Twelve Months variance Fourth Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Product sales Opsumit 831 516 61% 57% 235 162 45% 43% Tracleer 1,020 1,212-16% -18% 229 278-17% -19% Uptravi 245 - nm nm 85 - nm nm Veletri 97 83 17% 12% 26 23 12% 9% Ventavis 73 105-30% -32% 15 24-37% -38% Valchlor 35 27 30% 27% 10 8 20% 19% Zavesca 104 92 13% 12% 26 24 10% 10% Others 8 7 7% 8% 2 2-6% -7% Total product sales 2,412 2,042 18% 15% 627 519 21% 19% Actelion s excellent commercial performance during 2016 was driven by the outstanding Uptravi launch in the US and Opsumit s sustained strong growth trajectory. During the fourth quarter of 2016, combined sales of the company s outcome-based PAH portfolio, Opsumit, Uptravi and Veletri, reached 55% of total sales, demonstrating the significant progress made in the fundamental transformation of the PAH business. In the US, sales increased by 25% at CER, driven by the strong Uptravi launch, the continued Opsumit momentum due to share gains in an expanding ERA market. European sales were 1% higher compared to 2015. A strong Opsumit performance and solid Tracleer use in the digital ulcer indication were impacted by continued pricing pressure and market erosion from bosentan generics, particularly in Spain. Sales in Japan increased by 19% at CER, driven by very strong sales of Opsumit (launched in June 2015), Tracleer momentum in digital ulcer indication and Zavesca (Japanese trade name Brazaves). Comparing average exchange rates for 2016 to 2015, the Swiss franc weakened, mostly against the US dollar, euro and Japanese yen, resulting in a positive currency variance of 63 million Swiss francs. Sales by region Twelve Months variance Fourth Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Product sales by region United States 1,306 1,026 27% 25% 342 259 32% 30% Europe 646 634 2% 1% 162 159 2% 4% Japan 258 190 36% 19% 77 58 31% 17% Rest of the world 201 192 5% 6% 47 42 10% 9% Total product sales 2,412 2,042 18% 15% 627 519 21% 19% 9
PAH FRANCHISE Opsumit Twelve Months variance Fourth Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Sales by region United States 524 362 45% 41% 143 109 31% 30% Europe 176 111 58% 58% 48 35 36% 41% Japan 72 12 nm nm 30 8 nm nm Rest of the world 59 30 92% 92% 14 10 50% 45% Total 831 516 61% 57% 235 162 45% 43% Sales of Opsumit (macitentan) amounted to 831 million Swiss francs for 2016, an increase of 57% at CER compared to 2015. The strong growth across all regions and all relevant markets (Opsumit is now available in almost 40 markets) was driven by solid quarterly increases in the net number of patients treated in an expanding ERA market due to increased use in combination with PDE-5 inhibitors, and some upgrades from Tracleer, notably in Japan. Tracleer Twelve Months variance Fourth Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Sales by region United States 370 470-21% -23% 79 103-23% -24% Europe 387 460-16% -17% 89 107-17% -15% Japan 156 153 2% -10% 39 43-10% -20% Rest of the world 106 130-18% -17% 22 24-8% -8% Total 1,020 1,212-16% -18% 229 278-17% -19% Sales of Tracleer (bosentan) amounted to 1,020 million Swiss francs for 2016, a decrease of 18% at CER compared to 2015, driven to a large extent by volume erosion resulting from the significant impact of Opsumit uptake on the Tracleer patient base and increased generic competition, notably in Spain where generic bosentan entered the market in January 2016. Tracleer sales were supported by the digital ulcer indication in Europe and Japan. Following the Pediatric Investigation Plan (PIP) compliance statement from the European Committee for Medicinal Products for Human Use (CHMP), applications for extension of the Supplementary Protection Certificate (SPC) were granted in all possible 19 EU countries until the end of August 2017. 10
Uptravi Twelve Months variance Fourth Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Sales by region United States 232 - nm nm 77 - nm nm Europe 11 - nm nm 7 - nm nm Japan - - - - Rest of the world 2 - nm nm 1 - nm nm Total 245 - nm nm 85 - nm nm Sales of Uptravi (selexipag) amounted to 245 million Swiss francs for 2016. Since the US launch at the beginning of January 2016, patient demand has continued to increase with sales of 232 million Swiss francs (which includes 30 million Swiss francs for the build up of inventory in the US). For the fourth quarter, US sales amounted to 77 million Swiss francs compared to 66 million Swiss francs for the third quarter, 45 million Swiss francs in the second quarter and 15 million Swiss francs in the first quarter of 2016. In other geographies, Uptravi sales were driven by the particularly successful launch in Germany. Uptravi is also available in several other markets, most recently launched with full reimbursement in the Netherlands and Switzerland. At the end of 2016, just over 2,400 patients were being treated with Uptravi globally, with more than 1,900 patients coming from the US. Veletri Twelve Months variance Fourth Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Sales by region United States 39 39-0% -2% 9 9 0% -0% Europe 24 15 60% 60% 6 5 17% 21% Japan 26 23 16% 2% 7 6 15% 2% Rest of the world 7 6 22% 22% 3 2 54% 52% Total 97 83 17% 12% 26 23 12% 9% Sales of Veletri (epoprostenol for injection) amounted to 97 million Swiss francs for 2016, an increase of 12 % at CER compared to 2015. This increase was mostly driven by France, Italy, Spain and the UK. Demand in Japan, where it is marketed as Epoprostenol ACT, remained strong, however sales growth was mitigated by a 12% price cut effective March 1, 2016. Ventavis Twelve Months variance Fourth Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Sales by region United States 73 105-30% -32% 15 24-37% -38% Europe - - - - Japan - - - - Rest of the world - - - - Total 73 105-30% -32% 15 24-37% -38% Sales of Ventavis (iloprost) amounted to 73 million Swiss francs for 2016, a decrease of 32% at CER compared to 2015 due to competitive environment, including the availability of Uptravi. Underlying units decreased by 37%. 11
SPECIALTY PRODUCTS Valchlor Twelve Months variance Fourth Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Sales by region United States 33 25 33% 30% 9 7 21% 20% Europe 2 2-13% -15% 0 1-17% -17% Japan - - - - Rest of the world 0 - nm nm 0 - nm nm Total 35 27 30% 27% 10 8 20% 19% Sales of Valchlor (mechlorethamine) amounted to 35 million Swiss francs for 2016, an increase of 27% at CER compared to 2015. In the US, the company has made good progress in establishing Valchlor as a valuable option in the treatment algorithm for early-stage mycosis fungoides, a type of Cutaneous T-Cell Lymphoma (MF-CTCL). In December 2016, the Committee for Medicinal Products for Human Use (CHMP), the scientific committee of the European Medicines Agency (EMA), issued a positive opinion for the use of chlormethine gel 160 micrograms/g (Ledaga ) for the treatment of mycosis fungoides-type cutaneous T-cell lymphoma (MF-CTCL) in adult patients and recommended that the European Commission approves the product. The European Commission is expected to issue a final decision by the end of February 2017. Zavesca Twelve Months variance Fourth Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Sales by region United States 34 25 40% 36% 10 7 36% 34% Europe 47 46 0% -0% 11 11 2% 4% Japan 4 3 28% 12% 1 1 16% 3% Rest of the world 20 18 9% 10% 5 5-10% -12% Total 104 92 13% 12% 26 24 10% 10% Sales of Zavesca (miglustat) amounted to 104 million Swiss francs for 2016, an increase of 12% at CER compared to 2015. Sales in the US were strong due to a relatively low prior year base as a consequence of an inventory adjustment. In Europe, sales were flat due to the launch of generic miglustat (for the type 1 Gaucher disease indication only), which mitigated the continued strong, double-digit growth in the Niemann-Pick type C (NP-C) indication. Globally patients receiving Zavesca grew by 6% compared to 2015, driven by a 13% increase in the treatment of patients with NP-C. 12
OPERATING EXPENSES Operating expenses break down as follows: Twelve Months variance Fourth Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Operating expenses Core cost of sales 209 176 19% 17% 64 42 54% 53% Core research and development 509 404 26% 25% 148 120 23% 22% Core SG&A 703 648 9% 6% 204 195 5% 3% Core operating expenses 1,420 1,228 16% 14% 416 357 17% 15% Depreciation of assets 32 36-10% -10% 8 9-5% -6% Amort. of acquired intangible assets 55 53 4% 3% 14 13 5% 4% Stock-based compensation 65 57 15% 15% 17 15 16% 16% Milestone payments 10 11 nm nm 8 0 nm nm Doubtful debt movements 3 4 nm nm 1 (0) nm nm Accretion expenses (benefits) 37 0 nm nm 27 4 nm nm Other expenses 6 0 nm nm 6 0 nm nm Non-core operating expenses 209 162 29% 29% 82 41 nm nm US GAAP operating expenses 1,629 1,389 17% 16% 498 397 25% 24% Cost of sales Twelve Months variance Fourth Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Cost of sales Royalty expenses on sales 108 113-4% -7% 29 25 18% 16% Royalty expenses on profit sharing 20 2 nm nm 10 2 nm nm Cost of goods sold 80 61 31% 31% 25 15 69% 69% Core cost of sales 209 176 19% 17% 64 42 54% 53% Non-core cost of sales 37 0 nm nm 27 4 nm nm US GAAP cost of sales 246 176 40% 38% 91 45 nm nm Core cost of sales for 2016 increased by 17% at CER to 209 million Swiss francs. Royalty expenses on sales for 2016 were 7% lower compared to 2015 at CER. This decrease was mainly due to ceased royalty obligations, following the patent expiry of Tracleer in the US (late November 2015) and Ventavis (mid-march 2015) and a favorable product mix with a low single-digit royalty rate paid on Opsumit sales compared to a high single-digit rate paid on Tracleer sales in markets where Tracleer is still under patent protection. This decrease was partially offset by midteen royalty payments to Nippon Shinyaku related to Uptravi sales outside of Japan. Royalty expenses on profit sharing relate to the collaboration with Nippon Shinyaku for the commercialization of Opsumit in Japan and amounted to 20 million Swiss francs for 2016 as Opsumit sales in Japan increased strongly. Cost of goods sold increased by 31% in 2016. The increase was driven by higher sales along with a different product mix and some one-off Uptravi launch inventory write-offs. Non-core cost of sales relate to the accretion expense for the contingent consideration for Valchlor related to adjusted sales projections as well as the upcoming European launch, subject to EMA approval. 13
Research and development ( R&D ) expenses Twelve Months variance Fourth Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Core R&D expenses 509 404 26% 25% 148 120 23% 22% Depreciation 23 25-10% -10% 6 6-9% -9% Stock-based compensation 27 24 15% 15% 7 6 17% 17% Milestone payment 10 11 nm nm 8 - nm nm US GAAP R&D expenses 1 569 464 23% 22% 169 133 27% 26% Amort. of acquired intangible assets 6 2 nm nm 1 1 nm nm US GAAP R&D expenses 574 466 23% 22% 170 133 28% 27% 1 As reported in the consolidated income statements, excluding amortization of acquired intangible assets. The excellent commercial performance enabled Actelion to advance both the late and earlier stage pipeline resulting in increased R&D expenditure which translates into a ratio of R&D core operating expenses to sales of 21%, slightly higher than in 2015. Core R&D expenses amounted to 509 million Swiss francs, an increase of 25% at CER. This increase was driven by higher clinical trial expenses, mainly driven by the strong recruitment in the Phase III OPTIMUM study (ponesimod in multiple sclerosis announced in April 2015) and the Phase III IMPACT study (Cadazolid in Clostridium difficile associated diarrhea), as well as costs related to the preparation and initiation for Phase II studies for DORA in insomnia and Actelion s new endothelin receptor antagonist in specialty cardiovascular disorders. US GAAP R&D expenses included depreciation of 23 million Swiss francs (relating to the research building and laboratory equipment) and stock-based compensation expenses of 27 million Swiss francs. The milestone payment of 10 million Swiss francs related to an exclusive option Actelion obtained in November 2016 to in-license vamorolone for the treatment of Duchenne Muscular Dystrophy from ReveraGen. Selling, general and administrative ( SG&A ) expenses Twelve Months variance Fourth Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER SG&A expenses Marketing, selling and distribution 501 459 9% 7% 144 139 4% 2% General and administrative 202 189 7% 6% 60 56 8% 7% Core SG&A expenses 703 648 9% 6% 204 195 5% 3% Depreciation 10 11-9% -10% 3 3 7% 5% Stock-based compensation 38 33 14% 14% 10 9 15% 15% Doubtful debt movements 3 4 nm nm 1 (0) nm nm Other 6 0 nm nm 6 0 nm nm US GAAP SG&A expenses 1 760 697 9% 7% 224 206 9% 7% Amort. of acquired intangible assets 49 51-3% -3% 12 13-2% -2% US GAAP SG&A expenses 810 748 8% 6% 237 219 8% 7% 1 As reported in the consolidated income statements, excluding amortization of acquired intangible assets. Core marketing, selling and distribution expenses amounted to 501 million Swiss francs, an increase of 7% at CER. This increase was driven mostly by costs relating to launch activities of Uptravi in the United States, Germany and other geographies. Additionally, the company continued the roll-out of Opsumit and Veletri in various markets around the globe. G&A expenses increased by 6% to 202 million Swiss francs as the company is expanding its global footprint. US GAAP SG&A expenses included depreciation of 10 million Swiss francs, stock-based compensation expenses of 38 million Swiss francs as well as some legal expenses related to ongoing strategic discussions. 14
OPERATING RESULTS Twelve Months variance Fourth Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Operating results Product sales 2,412 2,042 18% 15% 627 519 21% 19% Core operating expenses (1,420) (1,228) 16% 14% (416) (357) 17% 15% Core operating income 992 814 22% 17% 211 163 30% 27% Contract revenue 6 4 nm nm 0 0 nm nm Non-core operating expenses (209) (162) 29% 29% (82) (41) nm nm US GAAP operating income 789 656 20% 14% 129 122 5% 1% Core operating income amounted to 992 million Swiss francs, an increase of 17% or 135 million Swiss francs at CER. The weakening of the Swiss franc against the major currencies affecting Actelion s performance had a positive impact of 43 million Swiss francs on core operating income. US GAAP operating income amounted to 789 million Swiss francs, an increase of 14% at CER. Contract revenue related to the return of the Xiaflex rights in Canada. Non-core operating expenses (excluding accretion effects and milestone payments) were slightly higher due to stock-based compensation expenses. NET RESULTS Twelve Months variance Fourth Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER Core net results Operating income 992 814 22% 17% 211 163 30% 27% Financial results 4 (20) nm nm (0) (1) nm nm Income tax (114) (100) nm nm (20) (28) nm nm Core net results 881 693 27% 22% 190 133 43% 40% Core net income amounted to 881 million Swiss francs, an increase of 22% at CER. Core financial result amounted to 4 million Swiss francs related to foreign exchange gains. Actelion aims to minimize the volatility of the company s financial results and uses forward contracts to hedge transaction exposures arising from foreign currency cash flows and cash positions held in foreign currencies. Actelion no longer incurs interest expense as the company is debt-free. Core tax expense amounted to 114 million Swiss francs, which translates into an effective core tax rate of 11.5%. Twelve Months variance Fourth Quarter variance (in CHF millions, except % variance) 2016 2015 CHF CER 2016 2015 CHF CER US GAAP net results Operating results 789 656 20% 14% 129 122 5% 1% Financial results 4 (20) nm nm (0) (1) nm nm Income tax (98) (88) nm nm (14) (22) nm nm Net results 695 548 27% 20% 115 99 16% 12% Net loss attr. to the nonctrl. interests 2 4 nm nm 0 1 nm nm US GAAP net results 696 552 26% 19% 115 100 15% 11% Below the operating line, US GAAP financial result and income tax do not materially differ from the core results. 15
EARNINGS PER SHARE (EPS) Twelve Months variance Fourth Quarter variance (in CHF millions, unless otherwise indicated) 2016 2015 CHF CER 2016 2015 CHF CER Net results Core net results 881 693 27% 22% 190 133 43% 40% US GAAP net results 696 552 26% 19% 115 100 15% 11% Basic earnings per share Weighted avg no. of shares (in mm) 104.6 108.3 nm nm 103.3 105.7 nm nm Core basic EPS (in CHF) 8.42 6.40 32% 26% 1.84 1.26 46% 43% US GAAP basic EPS (in CHF) 6.66 5.09 31% 24% 1.11 0.94 18% 14% Diluted earnings per share Weighted avg no. of shares (in mm) 107.8 112.5 nm nm 106.2 109.7 nm nm Core diluted EPS (in CHF) 8.18 6.16 33% 27% 1.79 1.22 47% 44% US GAAP diluted EPS (in CHF) 6.46 4.91 32% 25% 1.08 0.91 19% 15% The increase in core and US GAAP EPS was driven by higher net income and the decrease in number of common shares. The average share count for basic EPS decreased by 3.7 million shares, reflecting the share purchases related to the second-line share repurchase program. The average share count for diluted EPS decreased by 4.7 million shares as the average number of dilutive instruments decreased by 1.0 million shares despite an increase in the average share price (158.02 Swiss francs per share during 2016 compared to 126.96 Swiss francs during 2015). 16
IMPACT OF FOREIGN EXCHANGE RATES ON SALES AND OPERATING RESULTS Actelion s exposure to foreign currency movements affecting its sales and operating results as expressed in Swiss francs is summarized in the table below. Twelve Months variance variance (in CHF millions, except % variance) 2016 2015 CHF CHF % CER CER % Core operating results Product sales 2,412 2,042 371 18% 307 15% Operating expenses 1,420 1,228 193 16% 172 14% Operating income 992 814 178 22% 135 17% Net income 881 693 188 27% 151 22% US GAAP results Revenues 2,418 2,045 373 18% 310 15% Operating expenses 1,629 1,389 240 17% 219 16% Operating income 789 656 133 20% 91 14% Net income 696 552 145 26% 108 19% As a result of the weakening of the Swiss franc against the main currencies that the company operates, foreign exchange rates had a positive net impact of 63 million Swiss francs on sales (29 million US dollar, 9 million euro and 32 million Japanese yen) and 43 million Swiss francs on core operating income (22 million US dollar, 7 million euro and 17 million Japanese yen) for 2016. The table below shows the currency translation sensitivity for each 1% adverse change in average exchange rates against the Swiss franc. Average rate Net sales Core operating Core operating (in CHF millions, except % and fx rates) 2016 minus 1 % CHF expenses results Exchange rates against Swiss franc US dollar 1 USD 0.975 (13) (4) (9) Euro 1 EUR 1.079 (5) (2) (4) Japanese yen 100 JPY 0.009 (3) (1) (1) All other foreign currencies (2) (2) (1) Total impact (23) (8) (15) -1.0% -0.6% -1.5% 17
CASH FLOW AND CASH POSITION Operating cash flow Twelve Months Fourth Quarter (in CHF millions) 2016 2015 2016 2015 Operating cash flow Net results 695 548 115 99 Depreciation and amortization 88 90 23 22 Stock-based compensation 66 58 18 15 Other non cash items 26 (24) 23 (5) Funds from operations 875 671 178 132 Net change in trade and other receivables (12) (31) 47 (13) Net change in trade and other payables 13 (5) (11) (2) Net change in other operating assets and liabilities 14 (29) 18 7 Decrease (increase) in net working capital 14 (65) 54 (8) Decrease (increase) in deferred taxes 30 52 (7) 1 Operating cash flow 920 658 225 125 Operating cash flow amounted to 920 million Swiss francs for 2016. The strong underlying business performance resulted in funds from operations of 875 million Swiss francs. Working capital decreased by 14 million Swiss francs. Cash collection remained solid with days of sales outstanding (DSO) at 51 days. Deferred tax net positions decreased by 30 million Swiss francs mainly driven by the utilization of net operating losses in the US and Switzerland. Free cash flow Twelve Months Fourth Quarter (in CHF millions) 2016 2015 2016 2015 Free cash flow Operating cash flow 920 658 225 125 Acquisition of tangible, intangible and other assets (57) (44) (16) (29) Acquisition of businesses (4) (8) (1) (6) Operating free cash flow 858 606 208 89 Second-line share repurchase (270) (785) (58) (119) Dividend (159) (142) - 0 First-line share purchase (393) (327) (80) (47) Proceeds from exercise of stock options 39 79 14 12 Debt repayment - (235) - (235) Other items 15 5 1 6 Free cash flow 90 (800) 85 (294) Free cash flow reconciles the net cash position between the opening and closing period. Operating cash flow was mostly dedicated to return cash to shareholders and to manage dilution arising from stock-based compensation. The company paid a dividend of 159 million Swiss francs, purchased 1.7 million second-line shares for a consideration of 270 million Swiss francs (including withholding tax) and also acquired 2.5 million first-line shares for a consideration of 393 million Swiss francs. The Company suspended these activities due to strategic discussions. 18
Net cash position The net cash position amounted to 495 million Swiss francs on December 31, 2016 and breaks down by currency as follows: December 31, Closing rate (CHF millions unless otherwise indicated) 2016 in % against CHF Cash position by currency Swiss franc 212 43% - US dollar 107 22% 1 USD = 1.02 Euro 115 23% 1 EUR = 1.07 Japanese yen 16 3% 100 JPY = 0.87 Other foreign currencies 45 9% - Total net cash position 495 100% - BALANCE SHEET December 31, September 30, June 30, March 31, December 31, (in CHF millions) 2016 2016 2016 2016 2015 Assets Cash position 1 495 411 418 472 405 Trade and other receivables, net 446 496 447 452 427 Other current assets 252 176 185 166 131 Tangible assets 350 344 340 343 348 Intangible assets 383 395 408 401 414 Goodwill 135 134 134 134 134 Other non-current assets 46 44 52 52 56 Total assets 2,106 2,000 1,985 2,021 1,915 Liabilities and shareholders' equity Other current liabilities 569 504 467 427 421 Other non-current liabilities 216 186 175 171 179 Total liabilities 785 690 642 598 600 Share capital and accumulated reserves 2,006 1,907 2,522 2,632 2,455 Treasury shares (680) (594) (1,175) (1,206) (1,137) Total Actelion's shareholders' equity 1,325 1,314 1,347 1,426 1,318 Noncontrolling interests Equity attributable to noncontrolling interests (4) (4) (4) (3) (3) Total equity 1,321 1,310 1,343 1,423 1,315 Total liabilities and equity 2,106 2,000 1,985 2,021 1,915 1 Cash position includes cash, cash equivalents and short-term deposits. There are no significant changes in the balance sheet which continues to be strong with a net cash position of 495 million Swiss francs. 19
ACTELION SHARES The movement of Actelion treasury shares is shown in the table below: First-line Second-line Total Average price Treasury shares (numbers in thousands, except where indicated) treasury shares treasury shares treasury shares (in CHF) (in CHF million) Treasury shares - total December 31, 2015 2,988 6,072 9,060 125.6 1,137 Acquisition of treasury shares Q1 264 445 709 136.7 96.9 Outgoing shares Q1 (253) - (253) 125.1 (29) March 31, 2016 2,998 6,517 9,515 126.7 1,206 Acquisition of treasury shares Q2 498 428 926 153.6 142 Outgoing shares Q2 (1,499) - (1,499) 115.3 (173) June 30, 2016 1,998 6,945 8,943 131.4 1,175 Acquisition of treasury shares Q3 1,205 459 1,664 166.5 277 Outgoing shares Q3 (137) - (137) 130.9 (18) Shares cancellation Q3 - (6,367) (6,367) 132.0 (840) September 30, 2016 3,066 1,037 4,103 144.7 594 Acquisition of treasury shares Q4 544 325 869 150.9 131 Outgoing shares Q4 (318) - (318) 141.1 (45) December 31, 2016 3,292 1,362 4,654 146.1 680 The movement in outstanding dilutive shares is shown in the table below: ESOP RSU PSU Total Issued Equity (numbers in thousands, except %) shares overhang Dilutive shares and equity overhang Outstanding dilutive shares Dec. 31, 2015 2,884 1,523 1,454 5,862 114.1 5.1% Grants - 353 314 667 Exercised / vesting (860) (673) (666) (2,200) Forfeited (3) (49) (37) (88) Outstanding dilutive shares Dec. 31, 2016 2,021 1,155 1,064 4,241 107.8 3.9% QUARTERLY RESULTS Q1 2016 Q2 2016 Q3 2016 Q4 2016 (in CHF millions) three months three months three months three months US GAAP Operating results Net revenue 590 590 611 627 Operating expenses (381) (386) (364) (498) Operating income 208 204 248 129 Financial results (1) 4 1 (0) Income tax results (29) (26) (29) (14) Noncontrolling interest 0 1 0 0 Net results 178 182 221 115 Core operating results Product sales 589 590 606 627 Operating expenses (341) (340) (324) (416) Operating income 249 250 282 211 Financial results (1) 4 1 (0) Income tax results (32) (30) (32) (20) Net results 215 224 252 190 20
RECONCILIATION US GAAP TO CORE RESULTS FOR THE FULL YEAR 2016 (in CHF millions, except per share amounts and EPS) US GAAP results Depreciation, amortization, Stock-based impairment compensation Doubtful debt movements Milestones or contract Other one-offs Accretion Core expense results Net revenue Product sales 2,412 - - - - - - 2,412 Contract revenue 6 - - - (6) - - - Total net revenue 2,418 - - - (6) - - 2,412 Operating (expenses) Cost of sales (246) - - - - - 37 (209) Research and development (569) 23 27-10 - - (509) Selling, general and administration (760) 10 38 3-6 - (703) Amortization of acquired intangible assets (55) 55 - - - - - - Total operating (expenses) (1,629) 88 65 3 10 6 37 (1,420) Operating results 789 88 65 3 4 6 37 992 Total financial results 4 - - - - - - 4 Income before income tax benefit (expense) 792 88 65 3 4 6 37 995 Income tax benefit (expense) (98) (8) (5) (0) (0) (0) (3) (114) Noncontrolling interest 2 - - - (2) - - Net results 696 80 61 3 2 5 34 881 Diluted net income (loss) per share 6.46 0.74 0.56 0.03 0.02 0.05 0.32 8.18 Weighted-average number of common shares 107.811 107.811 RECONCILIATION US GAAP TO CORE RESULTS FOR THE FOURTH QUARTER 2016 (in CHF millions, except per share amounts and EPS) US GAAP results Depreciation, amortization, Stock-based impairment compensation Doubtful debt movements Milestones or contract Other one-offs Accretion Core expense results Net revenue Product sales 627 - - - - - - 627 Contract revenue 0 - - - (0) - - (0) Total net revenue 627 - - - (0) - - 627 Operating (expenses) Cost of sales (91) - - - - - 27 (64) Research and development (169) 6 7-8 - - (148) Selling, general and administration (224) 3 10 1-6 - (204) Amortization of acquired intangible assets (14) 14 - - - - - (0) Total operating (expenses) (498) 23 17 1 8 6 27 (416) Operating results 129 23 17 1 8 6 27 211 Total financial results (0) - - - - - - (0) Income before income tax benefit (expense) 128 23 17 1 8 6 27 211 Income tax benefit (expense) (14) (2) (1) (0) (1) (0) (2) (20) Noncontrolling interest 0 - - - (0) - - Net results 115 20 16 1 7 5 25 190 Diluted net income (loss) per share 1.08 0.19 0.15 0.01 0.07 0.05 0.24 1.79 Weighted-average number of common shares 106.236 106.236 21
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INCOME Twelve months ended December 31, (in CHF thousands, except per share amounts) Notes 2016 2015 Net revenue Product sales 23 2,412,198 2,041,515 Contract revenue 4/5/23 5,740 3,547 Total net revenue 2,417,938 2,045,062 Operating (expenses) 1 Cost of sales 2 (245,537) (175,794) Research and development (568,534) (463,842) Selling, general and administration (760,158) (696,650) Amortization of acquired intangible assets 13 (54,997) (53,131) Total operating (expenses) (1,629,226) (1,389,417) Operating income 788,712 655,645 Interest income (expense), net 1,183 (8,186) Other financial income (expense), net 2,539 (11,977) Total financial income (expense) 3,722 (20,163) Income before income tax benefit (expense) 792,434 635,482 Income tax benefit (expense) 6 (97,599) (87,547) Net income 694,835 547,935 Less: Net loss attributable to the noncontrolling interests 1,551 3,924 Net income attributable to Actelion's shareholders 696,386 551,859 Basic net income per share attributable to Actelion's shareholders 7 6.66 5.09 Weighted-average number of common shares (in thousands) 104,626 108,320 Diluted net income per share attributable to Actelion's shareholders 7 6.46 4.91 Weighted-average number of common shares (in thousands) 107,811 112,484 1 Includes stock-based compensation as follows: Research and development (27,199) (23,561) Selling, general and administration (38,025) (33,235) Total stock-based compensation 20 (65,224) (56,796) 2 Excludes amortization of intangible assets as presented separately. The accompanying notes form an integral part of these consolidated financial statements. 24
OF COMPREHENSIVE INCOME Twelve months ended December 31, (in CHF thousands) 2016 2015 Net income 694,835 547,935 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (4,089) (28,485) Change of unrecognized components of net periodic benefit costs 5,231 (3,672) Amortization of components of net periodic benefit costs 1,433 1,875 Other comprehensive income (loss), net of tax 2,575 (30,282) Comprehensive income 697,410 517,653 Less: Comprehensive loss attributable to noncontrolling interests 1,551 3,924 Comprehensive income attributable to Actelion's shareholders 698,961 521,577 The accompanying notes form an integral part of these consolidated financial statements. 25
BALANCE SHEETS (in CHF thousands, except number of shares) Notes December 31, 2016 December 31, 2015 ASSETS Current assets Cash and cash equivalents 8/9 495,380 404,892 Trade and other receivables, net 10 445,868 427,223 Inventories 11 135,820 62,107 Other current assets 6/9/12 115,763 68,828 Total current assets 1,192,831 963,050 Noncurrent assets Property, plant and equipment, net 14 350,215 348,277 Intangible assets, net 13 382,705 413,542 Goodwill 13 135,048 134,494 Deferred tax assets 6 20,528 39,159 Other noncurrent assets 25,150 16,415 Total noncurrent assets 913,646 951,887 TOTAL ASSETS 2,106,477 1,914,937 LIABILITIES Current liabilities Trade and other payables 83,009 83,878 Accrued expenses 15 445,730 302,729 Other current liabilities 2/6/9 40,211 34,375 Total current liabilities 568,950 420,982 Noncurrent liabilities Pension liability 18 66,427 67,204 Contingent considerations 2 115,630 83,759 Other noncurrent liabilities 6 34,312 27,979 Total noncurrent liabilities 216,369 178,942 Total liabilities 785,319 599,924 EQUITY Actelion's shareholders' equity 19 Common shares (par value CHF 0.50 per share, authorized 147,753,077 and 154,120,627; issued 107,761,427 and 114,128,427 shares in 2016 and 2015, respectively) 53,881 57,064 Accumulated profit 2,187,889 2,636,931 Treasury shares, at cost (680,053) (1,137,399) Accumulated other comprehensive income (loss) 21 (236,220) (238,795) Total Actelion's shareholders' equity 1,325,497 1,317,801 Equity attributable to noncontrolling interests (4,339) (2,788) Total equity 1,321,158 1,315,013 TOTAL LIABILITIES AND EQUITY 2,106,477 1,914,937 The accompanying notes form an integral part of these consolidated financial statements. 26
OF CASH FLOWS Twelve months ended December 31, (in CHF thousands) 2016 2015 Cash flow from operating activities Net income 694,835 547,935 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 87,879 89,500 Stock-based compensation, incl. treasury shares to members of Board of Directors 66,166 57,753 Excess tax benefits from share-based payment arrangements (15,097) (13,415) Deferred taxes 30,353 52,068 Deferred revenue (354) (527) (Gains) Losses on derivative instruments (10,300) (24,759) Interest expense on bonds - 545 Accretion expense (benefit) on contingent considerations 37,025 387 Changes in operating assets and liabilities: Trade and other receivables (12,433) (31,371) Inventories (73,768) (1,609) Trade and other payables 12,575 (5,190) Accrued expenses 140,163 328 Changes in other operating cash flow items (37,514) (13,967) Net cash flow provided by (used in) operating activities 919,530 657,678 Cash flow from investing activities Purchase of property, plant and equipment (32,804) (18,703) Purchase of intangible assets (24,638) (25,277) Acquisition of a business, incl. contingent consideration payments (4,239) (8,015) Net cash flow provided by (used in) investing activities (61,681) (51,995) Cash flow from financing activities Debt repayment - (235,000) Dividend payment (158,513) (142,390) Payments on capital leases - (3) Proceeds from exercise of stock options, net of expense 39,263 78,936 Purchase of treasury shares (662,967) (1,111,918) Excess tax benefits from share-based payment arrangements 15,097 13,415 Contributions from noncontrolling interests' owners - 1,136 Net cash flow provided by (used in) financing activities (767,120) (1,395,824) Net effect of exchange rates on cash and cash equivalents (241) (9,925) Net change in cash and cash equivalents 90,488 (800,066) Cash and cash equivalents at beginning of period 404,892 1,204,958 Cash and cash equivalents at end of period 495,380 404,892 Supplemental disclosures of cash flow information Cash paid during the year for: Interest 60 11,490 Taxes 13,630 26,876 The accompanying notes form an integral part of these consolidated financial statements. 27
OF CHANGES IN EQUITY Noncontrolling Actelion's shareholders interests Common shares Additional Accum. other Equity attrib. to (in CHF thousands, except number of shares) Shares Amount paid-in capital Accum. profit Treasury shares comprehensive income (loss) noncontrolling interests Total equity At January 1, 2015 111,128,427 57,064-2,359,573 (287,701) (208,513) - 1,920,423 Comprehensive income (loss) 1 : Net income - - - 551,859 - - (3,924) 547,935 Other comprehensive income (loss) - - - - - (30,282) - (30,282) Comprehensive income (loss) 1 - - - 551,859 - (30,282) (3,924) 517,653 Excess tax benefits from share-based payments - - 10,065 - - - - 10,065 Transactions in treasury shares (6,059,510) - 75,989 (274,501) (849,698) - - (1,048,210) Stock-based compensation expense - - 56,336 - - - - 56,336 Dividend payment - - (142,390) - - - - (142,390) Contributions from owners - - - - - - 1,136 1,136 At December 31, 2015 105,068,917 57,064-2,636,931 (1,137,399) (238,795) (2,788) 1,315,013 Comprehensive income (loss) 1 : Net income - - - 696,386 - - (1,551) 694,835 Other comprehensive income (loss) - - - - - 2,575-2,575 Comprehensive income (loss) 1 - - - 696,386-2,575 (1,551) 697,410 Excess tax benefits from share-based payments - - 10,263 - - - - 10,263 Transactions in treasury shares (1,961,715) - 83,927 (308,175) (383,090) - - (607,338) Stock-based compensation expense - - 64,323 - - - - 64,323 Dividend payment - - (158,513) - - - - (158,513) Cancelation treasury shares (share repurchase program) - (3,183) - (837,253) 840,436 - - - At December 31, 2016 103,107,202 53,881-2,187,889 (680,053) (236,220) (4,339) 1,321,158 1 Comprehensive income (loss) is presented net of tax. The accompanying notes form an integral part of these consolidated financial statements. 28
NOTES TO THE (CHF thousands, except share and per share amounts) NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Actelion Ltd ( Actelion or the Group ), a biopharmaceutical company headquartered in Allschwil, Switzerland, discovers, develops and commercializes innovative low molecular weight drugs for high unmet medical needs. Basis of presentation The Group s consolidated financial statements have been prepared under Generally Accepted Accounting Principles in the United States ( US GAAP ). All US GAAP references relate to the Accounting Standards Codification ( ASC or Codification ) established by the Financial Accounting Standards Board ( FASB ) as the single authoritative source of US GAAP to be applied by non-governmental entities. All amounts are presented in Swiss francs ( CHF ), unless otherwise indicated. In addition, certain prior period amounts within the consolidated financial statements and related notes have been reclassified to conform to the current presentation. Scope of consolidation The consolidated financial statements include the accounts of the Group and its affiliated companies in which the Group has a direct or indirect controlling financial interest and exercises control over their operations (generally more than 50% of the voting rights). Investments in common stock of entities other than subsidiaries where the Group has the ability to exercise significant influence over the operations of the investee (generally between 20%-50% of the voting rights) are accounted for under the equity method. Variable interest entities ( VIE ), irrespective of their legal structure, are consolidated if the Group has determined to be the primary beneficiary as defined in the Variable Interest Entities Subsection of FASB ASC ( ASC 810-10-25-20 to 59 ) and thus has the power to direct the activities that most significantly impact the VIE s economic performance and will also absorb the majority of the VIE s expected losses or receive the majority of the VIE s expected residual returns, or both. For determination whether or not an entity is a VIE, the Group considers if the equity at risk for the entity is sufficient to support its operations, if the voting rights of the equity holders are in disproportion to their risk and rewards or if substantially all of the entity s activities are conducted on behalf of the Group. Fees for services provided at customary terms and conditions are not considered variable interests. Fees related to the provision of asset value guarantees, to the obligation to fund losses of the VIE or similar arrangements that protect other variable interests holders from losses in the VIE are included in the primary beneficiary evaluation. Ownership interests not attributable, directly or indirectly, to the Group and related to entities where the Group exercises control through majority of the voting rights or through contract, is allocated to noncontrolling interests holders and presented separately within the consolidated balance sheets and the consolidated statements of shareholders equity. Net income (loss) and other comprehensive income (loss) of such entities are attributed to the Group and to the noncontrolling interests in proportion to their ownership rights even if that attribution results in a deficit noncontrolling interest balance. Principles of consolidation Businesses acquired or disposed of during the year are included in the consolidated financial statements from the date of acquisition or until the date of disposal. The acquisition method of accounting follows the guidance codified in the Business Combinations Topic of the FASB ASC ( ASC 805 ). Intercompany transactions and balances are eliminated. 29
Use of estimates The preparation of financial statements in conformity with US GAAP requires management to make judgments, assumptions and estimates that affect the amounts and disclosures reported in the consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition for contract revenue, allowance for doubtful accounts, stock-based compensation, intangible assets, clinical trial and rebate accruals, impairment of indefinite lived intangibles including goodwill, provisions, contingent considerations arising from acquisitions, loss contingencies and income taxes. The Group bases its estimates on historical experience and on various market-specific and other relevant assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates. Business Combinations The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of the acquisition. The excess of the consideration transferred over the fair value of the Group s share of the identifiable acquired net assets is recorded as goodwill. Acquired in-process research and development projects ( IPR&D ), regardless of whether they have an alternative future use, are recognized as indefinite-lived intangible assets. Contingent liabilities assumed in a business combination are recognized on the basis of information known at the time of the initial purchase price allocation. If the fair value of the contingencies is not determinable at the date of acquisition and till the end of the allocation period, the Group follows the guidance of the Contingencies Topic of FASB ASC ( ASC 450 ) in respect to these liabilities. Adjustments after the expiration of the allocation period are recognized as an element of net income. Adjustments prior to the expiration of the allocation period are recognized in the period of identification of such adjustments but measured at the amounts that would have been determined if the accounting had been completed at the acquisition date. Payments related to settlements of contingent considerations are classified as cash used in investing activities in the consolidated statements of cash flows. Acquisition-related costs, except costs related to the issuance of debt or equity securities, are expensed in the periods in which they are incurred and the services are received. Pro forma disclosures include revenue and earnings of the combined entity as of the beginning of the comparable prior annual reporting period. Revenue recognition Product sales The Group recognizes revenue from product sales when there is persuasive evidence that a sales arrangement exists, delivery has occurred, the price is fixed and determinable, and collectibility is reasonably assured. If collectibility is not reasonably assured, revenue is deferred and only recognized upon cash receipt. Provisions for rebates and discounts granted to government agencies, wholesalers, retail pharmacies, managed care organizations and other customers are recorded as a reduction of revenue at the time the related revenues are recognized or when the incentives are offered. They are calculated on the basis of historical experience and the specific terms in the individual agreements. Cash discounts offered to customers to encourage prompt payment are recorded as revenue deductions based on contractual terms, historical utilization rates and Group s expectation regarding future utilization rates. Accruals for product returns are recorded as deductions from revenue if the products are damaged or defective when received by the customer. Estimates of expected returns primarily are based on an ongoing analysis of historical return patterns. Taxes collected from customers and remitted to governmental authorities such as sales taxes and VAT are deducted directly from gross sales without recording them in revenue. 30