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09 roche annual report excellence in science

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key figures 1 2 3 4 5 key figures indexed to 2007 100 before exceptional items proposed by the board of directors development phase i to iv for calculation of the eco-efficiency rate see www.roche.com/environment figures for 2007 as in annual report 2008 for a full index of global reporting initiative gri indicators used in the report see www.roche.com/reporting_and_indices

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the year 2009 in brief group · group sales increase by 10 1 to 49.1 billion swiss francs 8 in swiss francs 7 in us dollars both divisions gain market share · operating profit before exceptional items increases by 14 8 in swiss francs to 15.0 billion · · · · · swiss francs due to strong sales growth and continuing productivity improvements at the same time investments in research and development increase by 12 to 9.9 billion swiss francs effective 26 march 2009 roche obtains full ownership of genentech for a price of 47.0 billion us dollars or 52.7 billion swiss francs genentech integration has been completed net income of 8.5 billion swiss francs down by 22 compared with the previous year due to exceptional items relating to the genentech transaction and integration excluding exceptional items the genentech transaction is already contributing to income income attributable to roche shareholders increases by 9 to 9.8 billion swiss francs core eps at constant exchange rates 20 above 2008 10 in swiss francs board proposes a dividend increase of 20 to 6.00 swiss francs the 23 rd consecutive year of dividend growth this would increase the payout ratio to 53 pharmaceuticals · pharma sales grow by 11 8 in swiss francs 8 in us dollars almost twice the global market · · · · growth rate driven by leading cancer medications and tamiflu influenza medicine as well as lucentis ophthalmology medicine tamiflu sales grow sharply to 3.2 billion swiss francs following substantially increased demand during the pandemic influenza ah1n1 virus swine flu outbreak operating profit margin before exceptional items increases 1.2 percentage points at constant exchange rates 0.2 percentage points in swiss francs strong r&d pipeline with ten new molecular entities in late-stage clinical testing six new compounds entered phase iii clinical trials in 2009 actemra approved in us for treatment of rheumatoid arthritis in january 2010 diagnostics · sales increase by 9 4 in swiss francs and 4 in us dollars to 10.1 billion swiss francs more than · twice the market growth rate operating profit margin at constant exchange rates increases 0.4 percentage points ­0.4 percentage points in swiss francs outlook full-year 2010 sales for pharmaceuticals and the group expected to grow in the mid-single-digit range 2 expected decrease of tamiflu sales from 3.2 to 1.2 billion swiss francs diagnostics sales expected to grow well ahead of market planned research and development expenses will decline slightly in 2010 compared to 2009 roche confirms target of double-digit core earnings per share growth 3 in 2010 based on the strong operating free cash flow roche expects to reduce debt progressively and to return to a net cash position by 2015 while maintaining its attractive dividend policy · · · · · · 1 unless otherwise stated all growth rates are in local currencies 2 without tamiflu sales 3 at constant exchange rates barring unforeseen events.

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pharmaceuticals pipeline focused on compounds with first-in-class or best-in-class potential phase i project id oncology rg4733 rg7160 rg7167 rg7304 rg7334 rg7347 rg7112 rg3639 rg7420 rg7422 rg7321 rg7414 chu -secretase inh anti-egfr humab cif/mek inh anti-plgf mab anti-nrp1 mab mdm2 antag dulanermin mek inh pi3 kinase inh pi3 kinase inh anti-egfl7 mab anti-glypican mab solid tumours solid tumours solid tumours solid tumours solid tumours solid tumours solid and hematologic tumours cancer solid tumours solid and hematologic tumours solid tumours solid tumours liver cancer inflammation and autoimmune disorders inflammation and autoimmune disorders rg7413 rg7416 bti virology chu chu serine palmitoyltransferase inh nitazoxanide hepatitis c hepatitis c virology rg3484 rg7128 rg7227 cardiovascular and metabolic diseases rg7089 rg1512 rg4929 rg7234 rg7273 rg7376 rg7418 rg7426 y2r peptide agonist anti-p selectin humab 11-hsd inh 11-hsd inh abca1 inducer craf inh anti-oxldl mab bht-3021 type 2 diabetes peripheral vascular disease type 2 diabetes type 2 diabetes dyslipidemia polycystic kidney disease secondary prevention of cardiovascular events type 1 diabetes rg7090 central nervous system rg1450 rg1578 rg1662 rg7010 rg7166 rg7351 rg7412 evo ophthalmology rg7417 anti-factor d mab geographic atrophy gantenerumab mglur2 antag gaba-a agonist igf1 peg triple reuptake inh taar1 partial agonist anti-amyloid -peptide mab nmda receptor antag alzheimer s disease depression alzheimer s disease amyotrophic lateral sclerosis depression depression alzheimer s disease treatment-resistant depression selected abbreviations adj amd adjuvant treatment age-related macular degeneration antag antagonist bc breast cancer combo combined with dmard disease-modifying antirheumatic drug gbm glioblastoma multiforme her2-positive her2 ­ her2 her2-negative hpv human papilloma virus hu humanised inh jia mab maint m met ms nhl nsclc pjd r sc inhibitor juvenile idiopathic arthritis monoclonal antibody maintenance treatment metastatic cancer multiple sclerosis non-hodgkin s lymphoma non-small cell lung cancer prevention of joint destruction recombinant subcutaneous cardiovascular and metabolic diseases rg1583 rg1658 ophthalmology rg3645 rg3645 others rg3625 tnkase catheter clearance phase i phase ii phase iii registration initial studies in healthy volunteers and possibly in patients efficacy tolerability and dose-finding studies in patients large-scale studies in patients for statistical confirmation of safety and efficacy marketing applications filed in eu us and/or japan approved eu lucentis lucentis diabetic macular edema amd high dose rg-no chu bti evo roche and/or genentech managed chugai managed biotie opt-in evotec taspoglutide dalcetrapib type 2 diabetes dyslipidemia blue type black type legend therapeutic protein other biologic small molecule first indication additional indications central nervous system rg1594 rg1678 rg3487 ocrelizumab glyt1 inh nicotinic 7 receptor agonist mglur5 antag relapsing­remitting ms schizophrenia alzheimer s disease treatment-resistant depression inflammation and autoimmune disorders rg105 rg1569 rg1569 rg1594 rg3648 mabthera/rituxan actemra/roactemra actemra/roactemra ocrelizumab xolair anca-associated vasculitis jia systemic onset early rheumatoid arthritis rheumatoid arthritis pjd asthma add-on therapy cardiovascular and metabolic diseases rg1439 rg7201 aleglitazar sglt2 inh cardiovascular risk reduction type 2 diabetes rg1415 rg1415 rg7159 rg7204 rg3502 tarceva tarceva+avastin anti-cd20 humab braf inh trastuzumab-dm1 hpv16 immunotherapy nucleoside inh prodrug protease inh cervical neoplasia hepatitis c hepatitis c anti-beta7 rhumab anti-lt alpha mab vap-1 ulcerative colitis rheumatoid arthritis inflammatory diseases rg667 rg3637 rg4930 rg7415 rg3648 palovarotene lebrikizumab ox40l humab rontalizumab xolair emphysema asthma asthma systemic lupus erythematosus chronic idiopathic urticaria rg435 rg435 rg435 rg597 rg597 rg1273 rg1415 avastin avastin avastin herceptin herceptin pertuzumab tarceva rg435 avastin project/product indication phase ii project id oncology rg435 rg435 rg1273 rg3502 rg3502 rg3616 rg3616 rg3616 rg7159 rg3638 rg7433 chu avastin avastin pertuzumab trastuzumab-dm1 trastuzumab-dm1 hedgehog pathway inh hedgehog pathway inh hedgehog pathway inh anti-cd20 humab anti-met humab abt-263 topoisomerase i inh multiple myeloma metastatic melanoma neoadj breast cancer her2 metastatic bc her2 3rd-line metastatic bc her2 1st-line basal cell carcinoma colocrectal cancer ovarian cancer non-hodgkin s lymphoma metastatic nsclc solid and hematologic tumours gastric cancer project/product indication phase iii project id oncology rg105 rg340 rg340 rg435 rg435 rg435 rg435 rg435 rg435 rg435 rg435 rg435 rg435 rg435 mabthera/rituxan xeloda+avastin xeloda avastin+mabthera avastin avastin avastin avastin avastin+herceptin avastin avastin avastin avastin avastin indolent nhl maint 1st-line adj colon cancer adj breast cancer diffuse large b cell lymphoma adj colon cancer prostate cancer adj breast cancer her2 ovarian cancer 1st-line mbc her2 1st-line adj nsclc met gastric cancer adj breast cancer her2­ adj bc triple negative mbc her2­ combo hormonal therapy ovarian cancer platinumsensitive mbc 2nd-line high-risk carcinoid gbm 1st-line sc formulation bc her2 adj bc her2 2-yr treatment mbc her2 nsclc egfr mutationpositive 1st-line adj nsclc nsclc maint 1st-line chronic lymphocytic leukemia malignant melanoma mbc her2 2nd-line project/product indication registration project id oncology rg105 rg105 rg340 rg435 rg435 rg597 rg1415 mabthera/rituxan mabthera/rituxan xeloda avastin avastin herceptin tarceva chronic lympocytic leukemia 1st-line chronic lympocytic leukemia relapsed adj colon cancer combo oxaliplatin mbc 1st-line combo docetaxel mbc 1st-line combo standard chemotherapies met gastric cancer her2 nsclc 1st-line maintenance project/product indication inflammation and autoimmune disorders rg105 rg3648 chu virology rg127 valcyte cytomegalovirus extension of treatment mabthera/rituxan xolair eldecalcitol ed-71 rheumatoid arthritis dmard inadequate responders pediatric asthma osteoporosis ophthalmology rg3645 others chu epogin epoch chemo-induced anemia lucentis retinal vein occlusion current as of january 2010

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our business innovation is our answer to medical challenges our daily work is saving patients lives and helping millions of people around the world through excellence in science focus on unsolved medical problems for more than 110 years roche has played a pioneering role in healthcare today as the world leader in in vitro diagnostics we supply a wide range of diagnostic instruments and tests for rapid and reliable disease detection and monitoring by doctors laboratories and patients themselves as the world s largest biotech company roche has brought many highly effective drugs to market and become the world s leading supplier of prescription drugs for cancer treatment our daily work focuses on disease areas where medical needs are great these include cancers viral infections metabolic and central nervous system disorders and inflammatory diseases roche is a pioneer in personalised healthcare we aim to fit treatments as closely as pos sible to patients needs to make healthcare better safer and more cost-effective.

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contents inside cover k ey figures inside cover harmaceuticals pipeline p t he year 2009 in brief l etter to shareholders r oche group 11 group results 12 outlook 14 group strategy p harmaceuticals 21 pharmaceuticals division in brief 22 results 24 sales review 30 development highlights 36 research and development d iagnostics 47 diagnostics division in brief 49 results 52 business area highlights 57 research and development c orporate governance remuneration report 65 corporate governance 75 remuneration report corporate responsibility 89 in brief 90 responsible practices 97 patients 104 people 112 society 114 safety security health and environmental protection independent assurance report 122 gri statement 1 4 10 20 46 64 88 121

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4 roche business report 2009 letter to shareholders letter to shareholders franz b humer dear shareholders despite the sustained global financial and economic crisis 2009 was a very successful year for roche sales in both the pharmaceuticals and the diagnostics division grew twice as fast as the market group sales increased by 10 in local currencies to 49.1 billion swiss francs mainly driven by our leading medicines to treat patients with cancer viral infections age-related blindness and other serious diseases sales of the influenza medicine tamiflu at 3.2 billion swiss francs also contributed significantly to revenue growth operating profit before exceptional items grew even more strongly than sales advancing 14 in local currencies to 15.0 billion swiss francs 2009 will be remembered as one of the most important years in your company s long history following the merger agreement with genentech in march 2009 and the rapid finalisation of the transaction we were able to complete the integration by the end of the year by combining roche and genentech we are not only increasing operational efficiency but also promoting internal knowledge transfer we are committed to strengthening the roche group s innovative power in the long term and to providing patients with innovative medicines through research of the highest quality excellent research is and will remain a basic requirement for the development of therapies that are decisive for patients health and quality of life after concluding the genentech integration we will continue to systematically pursue diverse research approaches for innovative healthcare solutions this creates scope for creativity and increases the chances of devising sustainable medical and therapeutic progress for this reason genentech research and early development will continue to function as an independent unit.

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5 severin schwan in addition combining the activities of the two companies in the areas of product development production and sales has already generated significant increases in productivity our aim is to achieve pre-tax annual savings of approximately 1 billion swiss francs by 2011 the operating free cash flow of the group increased by 27 to 15.7 billion swiss francs despite significant negative currency effects roche s strong operating performance is also clearly reflected in core earnings per share which advanced 20 in local currencies 10 in swiss francs as a result of exceptional costs of 2.7 billion swiss francs which were primarily integration-related the group s operating profit in 2009 declined by 5 in local currencies 12 in swiss francs to 12.3 billion swiss francs exceptional items also impacted net income which declined by 22 compared with the previous-year period to 8.5 billion swiss francs excluding exceptional items net income attributable to roche shareholders increased by 9 in view of roche s strong full-year operating results at the annual general meeting the board of directors will propose an increase of 20 in the dividend for 2009 to 6.00 swiss francs per share and non-voting equity security 2008 5.00 swiss francs subject to your approval this will be the 23 rd consecutive annual dividend increase.

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6 roche business report 2009 letter to shareholders the rapid spread of the pandemic a h1n1 influenza virus swine flu which began in april 2009 presented a major challenge not only for governments worldwide but also for roche during the past year we have been supporting the world health organization who and national governments in global efforts to fight the new virus in may roche announced that an additional 5.65 million treatment courses of tamiflu would be donated to replenish the who s regional and rapid-response stockpiles we had previously granted sublicences to three manufacturers to produce generic oseltamivir for pandemic use in china india and specified developing countries to ensure that local populations in these areas have access to the medication in addition in july we initiated the tamiflu reserves program to further improve tamiflu access in developing countries in response to the increased who pandemic threat level our network of manufacturing partners scaled up production to approximately 33 million treatment courses per month and we are now able to supply up to 400 million packs annually if required the roche group received significant recognition for achievements in several areas during the past year the dow jones sustainability indexes named roche the new `super sector leader in healthcare ranking us as the most sustainable healthcare company worldwide roche and genentech were also again voted `best employer in a number of countries we would like to take this opportunity to thank the more than 80,000 group employees worldwide for the outstanding dedication and professionalism during this eventful and challenging time scientific excellence and innovation in our core pharma and diagnostics businesses will continue to be the foundation of our success aside from oncology we are developing new therapeutics for metabolic and autoimmune diseases viral infections and disorders of the central nervous system as the world s largest biotech company we have one of the most promising r d pipelines in the world from a total of 59 new molecular entities in clinical testing ten are already in late stage development which is remarkable by any standards in our industry in the last year alone six new compounds entered late phase development including potential new therapies for breast cancer and type 2 diabetes during the year we published exciting early phase clinical trial data on a targeted treatment and companion diagnostic in malignant melanoma patients whose cancer cells carry a specific genetic mutation malignant melanoma is the deadliest form of skin cancer the new compound effectively slowed tumor progression and increased patients quality of life this is a beacon of hope in the fight against a cancer that until now has been regarded as virtually untreatable among the key achievements in our diagnostics division are the start of the rollout of the cobas 8000 modular analyser series for large medical laboratories and the launch of new products in the accu-chek line of blood-glucose monitors for people with diabetes at the end of 2009 william m burns ceo of the pharmaceuticals division jürgen schwiezer ceo of the diagnostics division and jonathan k.c knowles head of roche group research left the corporate executive committee as planned each of them has made significant contributions to roche s success and helped write an important chapter in the company s history every generation of managers has the task of ensuring roche s healthy future as an independent company bill burns jonathan knowles and jürgen schwiezer have fulfilled this task in an exemplary manner driven by profound conviction they have

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7 bringing genentech fully into the roche group is a major step on the road to creating a stronger even more innovative organisation significantly contributed to roche s strong market position and success on behalf of the entire board of directors and the corporate executive committee we would like to thank them for their many years of invaluable service loyalty to roche and for the great working relationship we enjoyed in view of their outstanding industry knowledge the board of directors will propose appointing william m burns and arthur d levinson chairman of genentech board of directors to the board of directors of roche holding ltd at the annual general meeting on 2 march 2010 prof horst teltschik and peter brabeck have decided not to stand for re-election at the 2010 annual general meeting we are very grateful for their valuable contributions to the company over a period of many years barring unforeseen events we expect sales in 2010 for the pharmaceuticals division and for the group to increase in the mid-single-digit range in local currencies 1 in the diagnostics division we expect full-year sales to grow considerably ahead of the market furthermore we are aiming to achieve double-digit core earnings per share growth at constant exchange rates in 2010 we anticipate that we will already have repaid 25 of the debt raised to finance the genentech transaction by the end of 2010 based on the group s strong operating free cash flow roche expects to return to a net cash position by the end of 2015 we will simultaneously maintain our attractive dividend policy franz b humer chairman of the board severin schwan chief executive officer 1 excluding tamiflu sales.

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she s working on a starvation diet for aggressive brain tumours roche is tackling some of modern medicine s greatest challenges in its search for medicines to combat serious illnesses for which no effective treatment exists it s a quest that requires both sophisticated technological capabilities and deep insights into molecular biology to select optimal targets for drug treatment you first need to understand the complex biological mechanisms driving a disease in the case of avastin the targeted blockade of a blood-vessel growth factor an approach first developed by genentech scientists starves tumours of the nutrients and oxygen they need to grow and spread this has fundamentally changed the way we fight cancer avastin is currently approved to treat five types of cancer and is being investigated as a possible treatment in over 30 different tumour types giving hope to thousands of patients avastin is a monoclonal antibody used to treat advanced colorectal breast non-small cell lung and kidney cancer in 2009 it was also approved in the us and eleven other countries for the treatment of relapsed glioblastoma multiforme the most aggressive type of brain tumour.

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roche group very strong operating performance in 2009 group sales ope rating profit before exceptional items and core earnings per share increased by double digits roche anticipates another doubledigit rise in core eps in 2010 the group remains firmly focused on prescription drugs and in vitro diagnostics following the successful integration of genentech roche is better equipped than ever to be a healthcare innovator.

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11 roche group strong sales and trading results total sales grew by 10 in local currencies 8 in swiss francs 7 in us dollars to 49.1 billion swiss francs with the pharmaceuticals division accounting for 80 of group sales and the diagnostics division contributing 20 sales growth in both divisions exceeded market growth sales by the pharmaceuticals division increased 11 in local currencies 8 in swiss francs 8 in us dollars to 39.0 billion swiss francs or almost double the global market growth rate demand for the group s cancer medicines avastin herceptin mabthera/rituxan tarceva and xeloda continued to grow strongly additional major growth drivers in the pharmaceuticals division were tamiflu in virology and lucentis in ophthalmology the diagnostics division achieved sales growth of 9 in local currencies 4 in swiss francs 4 in us dol lars to 10.1 billion swiss francs thereby strengthening the divisions leading market share of around 20 the group s operating profit before exceptional items increased by 14 in local currencies 8 in swiss francs to 15.0 billion swiss francs operating profit in local currencies grew 15 to 14.2 billion swiss francs before exceptional items in the pharmaceuticals division and 12 to 1.2 billion swiss francs in the diagnostics division at constant exchange rates the group s operating profit margin before exceptional items increased 1.0 percentage points with the pharmaceuticals divi sion improving 1.2 percentage points and the dia gnostics division 0.4 percentage points due to an unfavourable combination of exchange rate move ments however the group s operating profit margin before exceptional items in swiss francs increased only slightly by 0.1 percentage points to 30.6 with the pharmaceuticals division improving 0.2 percent age points to 36.3 and the diagnostics division decreasing 0.4 percentage points to 11.9 the group s operating free cash flow increased strongly rising 34 in local currencies 27 in swiss francs to 15.7 billion swiss francs the group s free cash flow remained strong in 2009 increasing by 3.9 billion swiss francs to 8.9 billion swiss francs core eps which excludes exceptional items and amortisation and impairment of intangible assets increased 20 in local currencies 10 in swiss francs significant impact of genentech integration and changes in group organisation effective 26 march 2009 the group obtained full ownership of genentech subsequently the group commenced a restructuring of its us pharmaceuticals business as well as a number of global functions during 2009 restructuring and integration costs of 2.4 billion swiss francs were incurred mainly in connection with the discontinuation of a construction project at the manufacturing site at vacaville california termination costs for the closure of manufacturing operations at nutley new jersey the closure of the research and development site at palo alto california and costs associated with the consolidation of the us administrative functions in south san francisco approximately 1.8 billion swiss francs of these excep tional operating expenses are noncash items related mainly to impairments of manufacturing assets the group financed the genentech transaction by a combination of the group s own funds bonds notes and commercial paper the group raised net pro ceeds of 48.2 billion swiss francs through a series of bond and note offerings as a consequence interest expenses increased substantially in 2009 and financing costs exceeded financial income by 1.7 bil lion swiss francs by the end of 2009 the group had already repaid debt of 6.9 billion swiss francs compared to 2008 net income decreased by 22 to 8.5 billion swiss francs primarily due to exceptional items net income attributable to roche shareholders declined 13 to 7.8 billion francs excluding excep tional items net income was down 3 and net income

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12 roche business report 2009 roche group attributable to roche shareholders was 9 higher compared to 2008 the net debt position of the group is 23.9 billion swiss francs a movement of 40.6 billion swiss francs from a net cash position of 16.7 billion swiss francs on 31 december 2008 due to the 52.7 billion swiss francs used in the genentech transaction we expect to repay 25 of the debt raised to finance the genentech transaction by the end of 2010 by 2011 the group aims to achieve pretax annual synergies of approximately 1 billion swiss francs based on the group s strong operating free cash flow we expect to reduce debt progressively and to return to a net cash position by 2015 we will simulta neously maintain our attractive dividend policy outlook barring unforeseen events roche expects sales in 2010 for the pharmaceuticals division and for the group to increase in the midsingledigit range in local currencies excluding tamiflu in the diagnostics division we expect fullyear sales to grow significantly ahead of the market despite an anticipated decrease in tamiflu sales from 3.2 to 1.2 billion swiss francs we are aiming to achieve doubledigit core earnings per share growth at constant exchange rates roche expects research and development expendi tures to decline slightly in 2010 however the group s focus remains firmly on innovation and it will continue to invest to support its rich pharmaceuticals development pipeline which currently includes ten new molecular entities and 30 additional indica tions for existing products in latestage development over the next 12­18 months the pharmaceuticals division expects to file marketing applications for several major line extensions of our key cancer medi cines including avastin mabthera/rituxan and xeloda as well as for taspoglutide for type 2 diabetes.

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