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As filed with the Securities and Exchange Commission on September 27, 2000
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F
[X]REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[_]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-
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SCHERING AKTIENGESELLSCHAFT
(Exact name of Registrant as specified in its charter)
Not Applicable Federal Republic of Germany
(Translation of Registrant's name (Jurisdiction of incorporation or
into English) organization)
Muellerstrasse 178
13353 Berlin
Federal Republic of Germany
(Telephone: (49-30) 468-1111)
(Address and telephone number of principal executive offices)
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Securities registered or to be registered pursuant to Section 12(b) of the
Act.
Title of each class Name of each exchange on which
American Depositary Shares, registered
evidenced by American Depositary New York Stock Exchange
Receipts, each representing
one Ordinary Share
Ordinary Shares, no par value*
Securities registered or to be registered pursuant to Section 12(g) of the
Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of
September 26, 2000:
198,000,000 Ordinary Shares
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [_] NO [_] NOT APPLICABLE [X]
Indicate by check mark which financial statements item the registrant has
elected to follow.
ITEM 17 [_] ITEM 18 [X]
* Not for trading but only in connection with the registration of the
American Depositary Shares, pursuant to the requirements of the Securities
and Exchange Commission.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Our Use of Terms and Conventions.................................... (ii)
Accounting Periods and Principles................................... (ii)
Currency of Presentation and Exchange Rates......................... (ii)
The Schering Name................................................... (iii)
Forward-Looking Statements.......................................... (iii)
PART I
Item 1.Identity of Directors, Senior Management and Advisers............ 1
Item 2.Offer Statistics and Expected Timetable.......................... 3
Item 3.Key Information.................................................. 4
Item 4.Information on the Company....................................... 14
Item 5.Operating and Financial Review and Prospects..................... 66
Item 6.Directors, Senior Management and Employees....................... 110
Item 7.Major Shareholders and Related Party Transactions................ 119
Item 8.Financial Information............................................ 121
Item 9.The Listing...................................................... 123
Item 10.Additional Information.......................................... 125
Item 11.Quantitative and Qualitative Disclosures about Market Risk...... 139
Item 12.Description of Securities Other than Equity Securities.......... 143
PART II
Item 13.Defaults, Dividend Arrearages and Delinquencies................. 150
Item 14.Material Modifications to the Rights of Security Holders and Use
of Proceeds............................................................ 150
Item 15.[Reserved]...................................................... 150
Item 16.[Reserved]...................................................... 150
PART III
Item 17.Financial Statements............................................ 151
Item 18.Financial Statements............................................ 151
Item 19.Exhibits........................................................ 151
</TABLE>
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OUR USE OF TERMS AND CONVENTIONS
Schering Aktiengesellschaft is incorporated as a stock corporation under the
laws of the Federal Republic of Germany. Unless otherwise specified or the
context requires otherwise:
. references to "Schering AG" are to Schering Aktiengesellschaft, the
ultimate parent company of the Schering AG Group;
. references to the "Schering AG Group", "the Group", "we", "us" and "our"
are to Schering Aktiengesellschaft together with its consolidated
subsidiaries;
. references to "Deutsche Mark", "DM" and "Pfennig" are to German Deutsche
Mark and Pfennig, the former currency of Germany;
. references to "euro", "E" and "cents" are to the currency introduced at the
start of the third stage of the European Economic and Monetary Union
pursuant to the Treaty establishing the European Economic Community, as
amended by the Treaty on the European Union; and
. references to "US dollars", "USD", "$" and "US cents" are to the United
States dollar and cents, the legal currency of the United States of
America.
ACCOUNTING PERIODS AND PRINCIPLES
Unless otherwise specified, all references in this registration statement to
a "fiscal year" or "year" of Schering AG refer to a twelve month financial
period ended December 31.
We prepared our consolidated financial statements in accordance with the
International Accounting Standards (IAS) of the International Accounting
Standards Committee. For periods ending on or prior to December 31, 1998, the
consolidated financial statements also were in accordance with the German
Commercial Code (Handelsgesetzbuch). Differences between IAS and the German
Commercial Code were not material for periods ending on or prior to December
31, 1998. Following a revision to the German Commercial Code in 1998 to
facilitate capital raising by German companies in the international capital
markets (Kapitalaufnahme-Erleichterungsgesetz), we were permitted to prepare
our consolidated financial statements solely in accordance with IAS, and no
longer required to follow the German Commercial Code. We elected to do so
commencing in fiscal 1999. IAS differ in certain material respects from United
States Generally Accepted Accounting Principles. You can read about some of
the principal differences in note 37 to our consolidated financial statements.
Note 37 to our consolidated financial statements also provides a
reconciliation of our consolidated financial statements to United States
Generally Accepted Accounting Principles.
Unless otherwise specified, all shares and share related information (such
as per share information and share price information) have been adjusted to
give effect, retroactively, to:
. the conversion during 1998 of Schering AG's ordinary shares with par
values of DM 1,000, DM 100 and DM 50 into ordinary shares with no par
value. As a result of this conversion, Schering AG's share capital was
divided from 21,825,981 shares into 68,342,023 shares. See note 21 to
our consolidated financial statements.
. Schering AG's three-for-one stock split effective on June 1, 2000.
CURRENCY OF PRESENTATION AND EXCHANGE RATES
Effective January 1, 1999, Germany and 10 other member states of the
European Union (participating member states) introduced the euro as their
common currency. The euro replaced the currencies of the participating member
states. The national currencies are only denominations of the euro with fixed
exchange rates to the euro. The euro--as its national denominations such as
the Deutsche Mark--is a fully convertible currency.
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Our consolidated financial statements for periods ending on or prior to
December 31, 1998 have been prepared in Deutsche Mark and were restated from
Deutsche Mark to euro using the official fixed conversion rate at January 1,
1999 of DM 1.95583 per E 1.00. We do not represent that these restated euro
amounts for periods ending prior to January 1, 1999, actually represent the
Deutsche Mark amounts in our consolidated financial statements as prepared or
could be converted into Deutsche Mark at the rate indicated. For periods ending
after December 31, 1998, our consolidated financial statements have been
prepared in euro directly instead of being restated from Deutsche Mark into
euro. US dollar amounts are unaudited and have been translated solely for your
convenience at and for the year ended December 31, 1999, and at and for the six
months ended June 30, 2000, from euro into US dollars at an exchange rate of
$0.9545 per E 1.00, the noon buying rate in The City of New York for cable
transfers as certified by the Federal Reserve Bank of New York on June 30, 2000.
For information regarding recent rates of exchange between euro and US dollars,
see "Item 3--Key Information--Exchange Rate Information". We do not represent
that the US dollar amounts presented in the US dollar convenience translation or
any amounts translated from euro into other currencies could have been converted
from euro at the rates indicated.
On September 22, 2000, the noon buying rate for the euro was $ 0.8793 per
E 1.00.
THE SCHERING NAME
Schering AG and Schering-Plough Corporation are unaffiliated companies that
have been totally independent of each other for over 50 years. For a brief
description of the historical relationship between the two companies, see
"Item 4--Information on the Company--The Schering AG Group--History". Schering
AG and Schering-Plough Corporation have entered into an agreement relating to
their respective use of the word "Schering". Subject to certain limited
exceptions, Schering AG may not use the Schering name for commercial purposes
relating to its healthcare business in the United States and Canada. Schering
AG operates its pharmaceutical business in the United States and Canada under
the Berlex trade name. See "Item 4--Information on the Company--Patents and
Other Intellectual Property" for a description of this agreement between
Schering AG and Schering-Plough Corporation.
FORWARD-LOOKING STATEMENTS
Except for historical information, statements contained in this registration
statement may constitute forward-looking statements. The words "believe",
"anticipate", "expect", "intend", "estimate", "plan", "assume", "will", "may",
"should", "risk" and other similar expressions which are predictions of or
indicate future events and future trends which do not relate to historical
matters identify forward-looking statements. In addition, this registration
statement includes forward-looking statements relating to our potential
exposure to various types of market risks, such as foreign exchange rate risk,
interest rate and other risks related to financial assets and liabilities and
equity price risk. You should not rely on forward-looking statements because
they involve known and unknown risks, uncertainties and other factors which
are, in many cases, beyond our control and may cause our actual results,
performance or achievements to differ materially from anticipated future
results, performance or achievements expressed or implied by the forward-
looking statements and from past results, performance or achievements. Certain
factors that may cause such differences include but are not limited to the
following:
. governmental factors, including legislative and regulatory changes;
. difficulties and uncertainties related to new product development;
. delays and uncertainties in the product approval process;
. factors affecting our ability to obtain or maintain patent or trademark
protection for our key products and processes;
. factors adversely affecting the sale of our key products, including
safety or efficacy concerns, increased competition from other products
or manufacturing or supply disruptions;
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. competitive factors, including pricing and product initiatives of our
competitors;
. legal factors, including product liability or other liability claims;
. factors adversely affecting the value of our minority investment in
Aventis CropScience S.A., including the failure of Aventis CropScience
to obtain regulatory approval or market acceptance for its products or
disagreements between us and its majority shareholder;
. human resources factors, including our ability to attract and retain
qualified personnel;
. economic factors over which we have no control, including changes in
inflation, interest rates and foreign currency exchange rates, and
overall economic conditions in areas such as Asia, Eastern Europe and
Latin America;
. adverse developments in our relationships with our development,
manufacturing and marketing partners;
. the impact of future investments, acquisitions and dispositions, and any
delays, unexpected costs or other problems experienced in connection
with such transactions;
. changes in environmental laws and regulations, which could cause us to
incur significant costs in connection with ongoing compliance or
liability for remediation; and
. other risks, uncertainties and factors inherent in our business.
For further discussion of these factors, see "Item 3--Key Information--
Selected Financial Data" and "--Risk Factors", "Item 4--Information on the
Company", "Item 5--Operating and Financial Review and Prospects", and "Item
11--Quantitative and Qualitative Disclosures about Market Risk".
You are cautioned not to place undue reliance on these forward-looking
statements. These forward-looking statements are made as of the date of this
registration statement and are not intended to give any assurance as to future
results.
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PART I
Item 1. Identity of Directors, Senior Management and Advisers
The following tables set forth the name, business address and position of
each of the members of the Supervisory Board and the Executive Board and the
other senior management of Schering AG. Unless otherwise indicated, the
business address of each individual listed below is Schering AG, Muellerstrasse
178, 13353 Berlin, Germany, and the position listed is with Schering AG. For
additional information regarding Schering AG's directors and senior
management, see "Item 6--Directors, Senior Management and Employees".
Supervisory Board Members
<TABLE>
<CAPTION>
Name and Business Address Position
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<S> <C>
Klaus Subjetzki........................ Chairman of the Supervisory Board
BHF-BANK
Bockenheimer Landstr. 10
60323 Frankfurt / Main
Juergen Wingefeld...................... Vice Chairman of the Supervisory Board
Lausitzer und Mitteldeutsche
Bergbauverwaltungsgesellschaft mbH
Karl-Liebknecht-Str. 33
10100 Berlin
Dr. rer. oec. Karl-Hermann Baumann..... Member of the Supervisory Board
Siemens AG
Wittelsbacherplatz 2
80333 Munchen
Prof. Dr. med. Piet Borst.............. Member of the Supervisory Board
The Netherlands Cancer Institute
Plesmanlaan 121
NL-1066 CX Amsterdam
Norbert Deutschmann.................... Member of the Supervisory Board
Professor John A. Dormandy............. Member of the Supervisory Board
St. George's Hospital
Blackshaw Road
GB--London SW17 OQT
Dr. rer. pol. Reiner Hagemann.......... Member of the Supervisory Board
Allianz Versicherungs-AG
Koeniginstrasse 28
80802 Muenchen
Johannes Heitbaum...................... Member of the Supervisory Board
Schering AG
Werk Bergkamen
Ernst-Schering-Str. 14
59192 Bergkamen
Dr. h.c. Martin Kohlhaussen............ Member of the Supervisory Board
Commerzbank AG
Kaiserplatz
60261 Frankfurt / Main
</TABLE>
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<TABLE>
<CAPTION>
Name and Business Address Position
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<S> <C>
Dr. rer. pol. Juergen Krumnow................... Member of the Supervisory Board
Deutsche Bank AG
Taunusanlage 12
60325 Frankfurt / Main
Dr. med. Hans-Peter Niendorf.................... Member of the Supervisory Board
Hans-Juergen Scheel............................. Member of the Supervisory Board
Guenter Schmitt................................. Member of the Supervisory Board
Dr. rer. oec. Ulrich Sommer..................... Member of the Supervisory Board
Heinz-Georg Webers.............................. Member of the Supervisory Board
Schering AG
Werk Bergkamen
Ernst-Schering-Str. 14
59192 Bergkamen
Professor Dr. rer. nat.
Meinhart H. Zenk............................... Member of the Supervisory Board
Biozentrum Universitaat Halle
Weinbergweg 22
06120 Halle / Saale
</TABLE>
Executive Board Members
<TABLE>
<CAPTION>
Name and Business Address Position
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<S> <C>
Dr. Giuseppe Vita................. Chairman of the Executive Board
Professor Dr. Klaus Pohle......... Vice Chairman of the Executive Board with
responsibilities for finance and
administration, Asia, Australia
Dr. Hubertus Erlen................ Member of the Executive Board with
responsibilities for personnel, production
and environmental protection, North America
Dr. Ulrich Koestlin............... Member of the Executive Board with
responsibilities for marketing and sales,
Europe, Africa
Professor Dr. Dr. h.c. Guenter Member of the Executive Board with
Stock............................ responsibilities for research and
development, Latin America
</TABLE>
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Senior Management
<TABLE>
<CAPTION>
Name and Business Address Position
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<S> <C>
Joerg Graumann.................... President and CEO of Nihon Schering KK
6-64, Nishimiyahara 2-chome
Yodogawa-ku, Osaka 532
Dr. Joachim-Friedrich Kapp........ Head of Therapeutics
Lutz Lingnau...................... President and CEO of Schering Berlin Inc.
P.O. Box 1000
340 Changebridge Road
Montville, NJ 07045-1000
Christian Nowak................... Head of Europe Region
Prof. Dr. Werner-Karl Raff........ Head of Fertility Control and Hormone Therapy
Hans-Michael Rook................. Head of Diagnostics and Radiopharmaceuticals
</TABLE>
Schering AG's Auditors
Schering AG's auditors are BDO Deutsche Warentreuhand Aktiengesellschaft,
Wirtschaftspruefungsgesellschaft, located at Kurfuerestendamm 182-183, 10707
Berlin, Germany, and BDO International GmbH Wirtschaftspruefungsgesellschaft
(for financial periods before 1999 named BDO Binder GmbH,
Wirtschaftspruefungsgesellschaft), located at Ferdinandstrasse 59, 20095
Hamburg, Germany.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
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Item 3. Key Information
RISK FACTORS
You should carefully consider the risks described below before deciding
whether to invest in the American Depositary Receipts (ADRs). Additional risks
not currently known to us or that we now consider immaterial may also harm our
business, financial condition or results of operations and the value of your
investment.
If any of these risks actually occur, our business, financial condition or
results of operations could be negatively affected. In that case, the trading
price of our ADRs could decline and you may lose all or a part of your
investment in the ADRs.
Our Business Is Subject To Extensive Governmental Regulation Including Price
Controls
The research, development, testing, manufacturing and marketing of our
products are subject to extensive governmental regulation. Governmental
regulation includes inspection of and controls over testing, manufacturing,
safety and environmental controls, efficacy, labeling, record keeping, sale
and distribution of pharmaceutical products. Governmental regulation
substantially increases the cost of developing, manufacturing and selling our
products.
The approval process for new products is generally lengthy, expensive and
subject to unanticipated delays. Currently, we are actively pursuing marketing
approval for a number of our products from regulatory authorities in a number
of countries, including the European Union, the United States and Japan.
Continued growth in our revenues and profits will depend, in part, on the
timely and successful introduction and marketing of some or all of such
products. We cannot give you any assurance as to when or whether such
approvals from regulatory authorities will be received. Failure to obtain, or
delays in obtaining, regulatory clearance to market new products or existing
products for new indications, as well as other regulatory actions, could
adversely affect our results of operations. Even after a product is approved,
it may be subject to regulatory action based on newly discovered facts about
the safety or effectiveness of the product, on any activities which regulatory
authorities consider to be improper or on changes in regulatory policy.
Regulatory action may adversely affect the marketing of the product, require
changes in the product's labeling or even lead to withdrawal of regulatory
approval.
In addition, price controls for pharmaceutical products may arise both from
formal government interventions or because governments or major health care
providers in a particular market are able to exert substantial pressure on
prices. Some governments in Europe, for instance, are exerting strong downward
pressure on prices through incentives and sanctions to encourage doctors to
prescribe cost-effectively. Efforts by the European Commission to harmonize
the disparate national systems have met with little immediate success, leaving
the industry exposed to ad hoc national cost containment measures on prices
and the consequent parallel trading of products from markets with prices
artificially depressed by government into those operating on a competitive
basis. There also is formal central government control of prices in Japan.
Price controls can limit the financial benefits of growth in these markets and
the introduction of new products.
Exchange Rate Fluctuations Could Affect Our Operating Result And Our Ability
To Price Our Products Competitively
Our operations are conducted by entities in many countries, and accordingly,
a substantial portion of our sales and production costs are denominated in
currencies other than the euro. As a result, fluctuations between the value of
the euro and other major currencies, in particular the US dollar, the Japanese
yen and the Brazilian real, may affect our operating results. For example, the
depreciation of the US dollar against the euro would have a negative impact on
the reported sales of our US subsidiaries for inclusion in the Schering AG
Group's financial statements, whereas a strengthening of the US dollar against
the euro would favorably affect the reported sales of these subsidiaries.
Moreover, certain of our subsidiaries import and export goods and services in
currencies other than their own functional currencies. The results of such
subsidiaries could therefore be affected by currency fluctuations arising
between the transaction dates and the settlement dates for these transactions.
We currently hedge these exposures through financial instruments in the form
of forward contracts
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and currency swaps. We cannot assure you that exchange rate fluctuations will
not adversely affect our business, financial condition or results of
operations in the future.
In addition, many of our competitors are based in Japan, the United States
and other countries whose currencies fluctuate against the euro. Our business
will suffer if we are unable to compensate for any competitive advantage
others may derive from having a substantial portion of their costs based in a
weaker currency. If our competitors benefit from weaker currencies by offering
their products at prices that are lower than ours, we may need to reduce our
prices to make our products competitive, lowering our profit margins.
A Decline In The Value Of The Euro Could Reduce The Value Of Your Investment
And Any Dividends You Receive
Fluctuations in the exchange rate between the US dollar and the euro will
affect the US dollar equivalent of the euro price per ADR and the US dollar
value of any cash dividends. If the value of the euro relative to the US
dollar declines, the market price of the ADRs is likely to be adversely
affected. Any decline in the value of the euro would also adversely affect the
US dollar amounts received by shareholders on the conversion of any cash
dividends paid in euro on the ADRs. Since the beginning of January 1999
through September 20, 2000, the value of the euro relative to the US dollar
declined by 28%.
Resources Devoted To Research And Development May Not Yield New Products That
Achieve Commercial Success
Like other pharmaceutical companies, we devote substantial resources to
research and development. In the pharmaceutical industry, research and
development is both expensive and prolonged and entails considerable
uncertainty. The process of developing a new pharmaceutical product from
discovery through testing and registration to initial product launch typically
takes between eight and twelve years, but this period varies considerably from
product to product and country to country. Because of the complexities and
uncertainties associated with pharmaceutical research, we cannot ensure that
products currently under development by us will survive the development
process and ultimately obtain the regulatory approvals needed to market such
products successfully. There can be no assurances regarding the development of
and commercial success of any of the products in our current pipeline.
Moreover, even after a product has received regulatory approval and has been
launched, the profile of the product may exhibit unanticipated side effects
which could lead to its withdrawal from the market or a significant decrease
in the product's sales.
We Depend On Our Patents And Proprietary Rights; Several Of Our Patents Will
Expire
Our success depends, in large part, on our ability to protect our current
and future products and to defend our intellectual property rights. We have
been issued numerous patents covering our active ingredients, pharmaceutical
formulations and combinations, manufacturing processes, technologies and
products, and have filed, and expect to continue to file, patent applications
seeking to protect such newly developed technologies and products. Since many
of the products that we sell are licensed to us by third parties, we also rely
on the patents held by such third parties. We cannot be sure that patents will
be issued with respect to any of our patent applications or that any existing
or future patents issued to or licensed by us will provide us with competitive
advantages or will not be challenged, invalidated or circumvented by
competitors.
We also rely on trade secrets, unpatented proprietary know-how and
continuing technological innovation that we seek to protect, in part by
confidentiality agreements with licensees, suppliers, employees and
consultants. We cannot assure that these agreements will not be breached. We
also cannot be certain that we will have adequate remedies for any breach.
Furthermore, we cannot be sure that our trade secrets and proprietary
technology will not otherwise become known or be independently developed by
our competitors or, if patents are not issued with respect to products arising
from research, that we will be able to maintain the confidentiality of
information relating to such products.
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We may be required to defend against charges of infringement of patent or
proprietary rights of third parties. Such defense could require us to incur
substantial expense and to divert significant effort of our technical and
management personnel, and could result in our loss of rights to develop or
make certain products or require us to pay monetary damages or royalties to
license proprietary rights from third parties. Although patent and
intellectual property disputes in the pharmaceutical product area have often
been settled through licensing or similar arrangements, costs associated with
such arrangements may be substantial and could include ongoing royalties.
Furthermore, we cannot be certain that the necessary licenses would be
available to us on terms we believe to be acceptable. We cannot assure you
that an adverse outcome of any dispute with respect to patents or other
proprietary rights will not adversely affect our competitive position,
financial condition or results of operations.
During the period of patent protection, a product is normally only subject
to competition from alternative products. Following patent expiration, the
manufacturer of the patented product is likely to face increased competition
through the entry into the market of generic products and a subsequent decline
in market share and sales revenues. Certain of our key products are no longer
protected by patents (or other regulatory exclusivity measures) in our major
markets, or protection for these products will expire in the near future. Many
of our fertility control products have no patent protection remaining. In
addition, the X-ray contrast medium Iopamiron(R), which we sell under license
from Bracco S.p.A., has no patent protection remaining. The expiration of
certain patents could adversely affect the pricing and sales with respect to
these products and, consequently, could adversely affect our business,
financial condition or results of operations.
Our Industry Is Competitive And Experiences Rapid Technological Change
We compete in the pharmaceutical industry, which is characterized by intense
competition and rapid technological change. We compete with companies around
the world, including large, well-established pharmaceutical and chemical
companies, research and development firms, universities and other research
institutions. Many of our competitors have significant financial, marketing,
sales, development and technical resources. Our competitors may succeed in
developing technologies and products that are more effective or cheaper than
any which we may develop. In addition, the continuing consolidation of
companies in the pharmaceutical industry will increase competitive pressures
as larger suppliers are able to offer a broader product line. We cannot assure
you that these developments will not render our technologies and products
obsolete and uncompetitive. Delays or unanticipated increases in the costs of
development or our failure to obtain regulatory approval or market acceptance
for new products and technologies could further adversely affect our
competitive position and results of operations.
We Depend On Sales Of Key Products
While we believe that we are less dependent on sales of key products than
many other pharmaceutical companies, we derived approximately 32% of our net
sales in 1999 from sales of four key products--Betaferon(R)(which is sold in
the United States and Canada under the Betaseron(R) trademark) (12% of net
sales), Iopamiron(R) (8%), Magnevist(R) (6%) and Ultravist(R) (6%). During the
first half of 2000, these four products accounted for 33% of our net sales. We
believe that the sales of these key products will constitute a significant
portion of net sales for the foreseeable future. Accordingly, any factor
adversely affecting the sale of these key products individually or
collectively could have a material adverse effect on our results of
operations. The sale of these key products could be adversely affected by a
number of factors, including manufacturing or supply interruptions, the
development of new competitive pharmaceuticals to treat the conditions
addressed by the key products, technological advances, factors affecting the
cost of production, marketing or pricing actions by one or more of our
competitors, changes in prescribing practices, changes in the reimbursement
policies of third-party payors, product liability claims or other factors.
We Have Only Limited Influence Over Aventis CropScience And The Value Of Our
Stake In Aventis CropScience Could Decrease
We hold a 24% stake in the crop protection and crop production company
Aventis CropScience S.A. Although we have entered into an agreement with our
partner, Aventis S.A., and we exercise significant influence
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with respect to certain of the affairs of Aventis CropScience, our minority
voting position has and may continue to have several important consequences
for us, including precluding us from controlling Aventis CropScience, limiting
our ability to implement strategies we favor and allowing Aventis CropScience
to adopt strategies and take actions which may in some cases be contrary to
our preferred strategies and actions. As with any minority investment,
differences in views among the principal shareholders may result in delayed
decisions or in failures to agree on major matters, potentially adversely
affecting the business and operations of the joint venture and in turn our
business and operations.
Aventis CropScience recorded significant restructuring charges in connection
with its formation. Further significant restructuring charges by Aventis
CropScience could adversely affect our results of operations.
The market for crop science products is cyclical and is influenced by
seasonal and weather factors and fluctuations in global farm commodity prices.
In addition, Aventis CropScience is subject to various laws and regulations
concerning product safety in many of the countries in which it manufactures
and sells its products. Public concerns in parts of Europe about genetically
modified agricultural products have delayed and may continue to delay or
prevent regulatory approval of certain of Aventis CropScience's current and
future products and may also have a negative impact on the market acceptance
of such products. In the past, import restrictions on genetically modified
products in parts of Europe delayed the launch of certain products. The value
of our stake in Aventis CropScience could decrease significantly and our
results of operations could be adversely affected if Aventis CropScience fails
to obtain regulatory approval or market acceptance for new products and
technologies, or if the demand for crop science products decreases.
Our Industry Is Susceptible To Product Related Liabilities
Like all pharmaceutical companies, we face the risk of loss related to the
use of products we market from such actions as lawsuits. We cannot assure you
that we can avoid such claims. We cannot be sure that our product liability
insurance will be adequate to cover such claims or that we will be able to get
adequate insurance coverage in the future at acceptable costs. A successful
product liability claim in excess of our coverage could require us to pay
substantial sums. Even unsuccessful product liability claims could result in
the expenditure of funds in litigation and the diversion of management time
and resources and could damage our reputation and impair the marketability of
our products. We are currently involved in a number of product liability cases
claiming damages as a result of the use of our products. We do not believe,
however, that the potential costs and liabilities associated with such matters
are likely to have a material adverse effect on our results of operations or
liquidity.
We Depend On The Services Of Our Key Managerial And Scientific Personnel
Our success depends upon the continued contributions of our key managerial
and scientific personnel, many of whom have many years of experience at the
Schering AG Group and would be difficult to replace. Competition for qualified
personnel is intense in our industry, and we may not be successful in hiring
and retaining people. If we lose the services of any key managerial or
scientific personnel or cannot attract and retain other qualified personnel,
our business could suffer.
ADR Holders May Not Be Able To Vote Or To Participate In Offerings Of New
Shares
If you hold our ordinary shares in the form of ADRs, you generally can
exercise your voting rights for the shares which underlie your ADRs only by
instructing the depositary how to exercise these voting rights. You may not
receive voting materials in time to instruct the depositary how to vote your
ADRs, and as a result you may not have the opportunity to exercise a right to
vote.
U.S. holders of ADRs also may not be able to participate in any offer of new
shares to existing shareholders on the basis of their subscription rights
because of restrictions on the offer and sale of securities in the United
States under U.S. securities laws and regulations.
7
<PAGE>
SELECTED FINANCIAL DATA
The selected consolidated financial data for each of the years in the three-
year period ended December 31, 1999, has been derived from our consolidated
financial statements and the related notes, appearing elsewhere in this
registration statement. The selected consolidated financial data at year end
and for each of the years in the two-year period ended December 31, 1996 has
been derived from our consolidated financial statements not included in this
registration statement. The selected consolidated financial data at period end
and for the six months ended June 30, 2000 and 1999 has been derived from our
unaudited condensed consolidated financial statements included elsewhere in
this registration statement.
We prepared our consolidated financial statements in accordance with the
International Accounting Standards (IAS) of the International Accounting
Standards Committee. For periods ending on or prior to December 31, 1998, the
consolidated financial statements also were in accordance with the German
Commercial Code (Handelsgesetzbuch). Differences between IAS and the German
Commercial Code were not material for periods ending on or prior to December
31, 1998. Following a revision to the German Commercial Code in 1998 to
facilitate capital raising by German companies in the international capital
markets (Kapitalaufnahme-Erleichterungsgesetz), we were permitted to prepare
our consolidated financial statements solely in accordance with IAS, and no
longer required to follow the German Commercial Code. We elected to do so
commencing in fiscal 1999. IAS differ in certain material respects from United
States Generally Accepted Accounting Principles. You can read about some of
the principal differences in note 37 to our consolidated financial statements.
Note 37 to our consolidated financial statements also provides a
reconciliation of our financial statements to United States Generally Accepted
Accounting Principles.
We prepared our consolidated financial statements for periods ending on or
prior to December 31, 1998, in Deutsche Mark. We restated these financial
statements from Deutsche Mark to euro using the official fixed conversion rate
for January 1, 1999, of DM 1.95583 per E1.00. See Note 1 to our consolidated
financial statements. For periods ending after December 31, 1998, our
consolidated financial statements have been prepared in euro directly instead of
being restated from Deutsche Mark to euro. Amounts shown in US dollars have been
translated from euro amounts to US dollars at the rate of $0.9545 per E1.00, the
noon buying rate on June 30, 2000.
You should read this selected consolidated financial data together with
"Item 5--Operating and Financial Review and Prospects" and our consolidated
financial statements appearing elsewhere in this registration statement.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
--------------------- ----------------------------------------------
2000 2000 1999 1999 1999 1998 1997 1996 1995
----- ------ ------ ------ ------ ------ ------ ------ ------
$ E E $ E E E E E
(in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Income
Statement Data:
IAS:
Net sales............. 2,116 2,217 1,754 3,507 3,674 3,285 3,193 2,696 2,376
Operating profit...... 345 361 281 512 536 410 422 301 281
Financial result...... 28 29 16 (74) (77) 14 (18) 13 18
Profit on ordinary
activities........... 372 390 297 438 459 424 404 314 299
Taxes on profit....... (170) (178) (123) (173) (181) (175) (168) (126) (107)
Income before minority
interests............ 202 212 174 265 278 249 236 188 127
Minority interests.... (3) (3) (5) (6) (6) (4) (8) (3) (0)
Net income............ 199 209 169 260 272 245 228 185 127
Average number of
shares in issue(1)... 201.06 201.06 204.81 205.02 205.02 205.02
Basic and diluted net
income per share(1).. 1.00 1.05 0.83 1.29 1.35 1.19 1.11 0.90 0.62
Dividends per
share(1)(2).......... 0.79 0.83 0.45 0.43 0.34 0.26
United States GAAP:
Net income............ 237 248 254
Basic and diluted net
income per share(1).. 1.17 1.23 1.24
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
As of June
30, As of December 31,
------------ ----------------------------------------
2000 2000 1999 1999 1998 1997 1996 1995
----- ------ ----- ------ ------ ------ ------ ------
$ E $ E E E E E
(in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data (at
period end date):
IAS:
Total assets........... 4,778 5,006 4,418 4,629 4,569 4,393 4,098 3,664
Cash, cash equivalents
and marketable
securities............ 540 566 556 583 999 1,004 901 1,206
Total long term bank
debt.................. 33 35 55 58 57 56 56 58
Pension provisions..... 1,212 1,270 1,146 1,201 1,134 1,071 988 914
Minority interests..... 77 81 52 55 48 45 37 3
Total shareholders'
equity................ 2,069 2,168 2,003 2,098 2,010 1,955 1,787 1,641
United States GAAP:
Total shareholders'
equity................ 1,967 2,061 1,979
</TABLE>
--------
(1) All share and per share data have been adjusted to give effect,
retroactively, to (i) the conversion during 1998 of Schering AG's ordinary
shares with par values of DM 1,000, DM 100 and DM 50 into ordinary shares
with no par value and (ii) Schering AG's three-for-one stock split
effective on June 1, 2000.
(2) Includes a bonus dividend of E0.33 per share paid with respect to 1999.
9
<PAGE>
EXCHANGE RATES
On January 1, 1999, Germany and 10 other member states of the European Union
(participating member states) introduced the euro as their common currency.
The euro replaced the currencies of the participating member states. The
national currencies are only denominations of the euro with fixed exchange
rates to the euro. The euro--as its national denominations such as the
Deutsche Mark--is a fully convertible currency. Currency exchanges traded the
euro beginning on January 4, 1999. The affected national currencies are
scheduled to remain legal tender until January 1, 2002, when they will be
withdrawn. Beginning January 1, 2002, new euro denominated bills and coins
will be issued.
Schering AG began using the euro as its reporting currency on January 1,
1999, and pays any dividends on its shares in euro. Furthermore, prices for
Schering AG's shares on the Frankfurt Stock Exchange are quoted in euro.
Fluctuations in the exchange rate between the euro and the US dollar will
affect:
. the US dollar equivalent of the euro price of our shares listed on the
Frankfurt Stock Exchange and, as a result, the market price of the ADRs
in the United States;
. the US dollar equivalent of cash dividends on the shares paid in euro;
and
. our earnings.
The noon buying rate for the euro in The City of New York for cable transfers
as certified for customs purposes by the Federal Reserve Bank of New York on
September 22, 2000, was $ 0.8793 per E1.00.
The following tables set forth the noon buying rates for the Deutsche Mark,
restated in euro for all periods prior to January 1, 1999, and, for all
subsequent periods, set forth the noon buying rates for the euro. For the
calculation of the euro amounts for all periods prior to December 31, 1998, we
have restated the applicable noon buying rate for the Deutsche Mark into euro at
the official fixed conversion rate of DM 1.95583 per E1.00. This restatement
matches the restatement into euro of our consolidated financial statements,
which, for all periods prior to January 1, 1999, were prepared in Deutsche Mark
and the Deutsche Mark amounts were restated into euro amounts.
The following table sets forth the average noon buying rate for the euro for
each of the previous five years:
<TABLE>
<CAPTION>
Year Average(1)
---- ------------------------
(Dollar per E1.00)
<S> <C>
1994................................................ 1.2134
1995................................................ 1.3715
1996................................................ 1.2978
1997................................................ 1.1244
1998................................................ 1.1115
1999................................................ 1.0587
</TABLE>
--------
(1) Average of the noon buying rates on the last day of each month during the
year.
10
<PAGE>
The following table sets forth the high and low noon buying rate for the
euro for each of the previous eight months and the current month:
<TABLE>
<CAPTION>
High Low
------ ------
(Dollar per
E1.00)
<S> <C> <C>
2000
January........................................................ 1.0335 0.9757
February....................................................... 1.0133 0.9643
March.......................................................... 0.9724 0.9524
April.......................................................... 0.9647 0.9083
May............................................................ 0.9328 0.8891
June........................................................... 0.9648 0.9307
July........................................................... 0.9548 0.9237
August......................................................... 0.9228 0.8878
September (through September 22)............................... 0.8993 0.8462
</TABLE>
For a more complete discussion of exchange rate fluctuations and the hedging
techniques we use to manage our exposure to these fluctuations, please see "--
Risk Factors" and "Item 5--Operating and Financial Review and Prospects".
11
<PAGE>
CAPITALIZATION AND INDEBTEDNESS
The following table sets forth the short-term debt and total capitalization
of the Group as of June 30, 2000. You should read this table together with
"Item 5--Operating and Financial Review and Prospects" and our consolidated
financial statements appearing elsewhere in this registration statement.
<TABLE>
<CAPTION>
As of June
30, 2000
------------
E $
(in
millions)
<S> <C> <C>
Short-term debt(1)................................................. 1,322 1,262
Long-term bank debt(2)............................................. 35 33
Other long-term debt(3)............................................ 130 124
Pension provisions................................................. 1,270 1,212
Minority interests................................................. 81 77
Shareholders' equity:
Paid-up capital.................................................. 528 504
Retained earnings................................................ 1,640 1,565
Total shareholders' equity..................................... 2,168 2,069
----- -----
Total Capitalization......................................... 5,006 4,778
===== =====
</TABLE>
--------
(1) Of the E1,322 million of short-term debt, E15 million was secured debt and
E1,307 million was unsecured debt.
(2) Of the E35 million of long-term bank debt, E26 million was secured debt
and E9 million was unsecured debt.
(3) All of the E130 million of other long-term debt was unsecured.
12
<PAGE>
DIVIDENDS
Schering AG has paid the following cash dividends in respect of its ordinary
shares during the periods indicated. Dollar amounts in respect of dividends are
translated at the noon buying rate for the Deutsche Mark (restated into euro) or
the euro, as the case may be, on the date of payment (May 2, 1996 ($1.278 per
E1.00); May 2, 1997 ($1.133 per E1.00); April 30, 1998 ($1.090 per E1.00); April
28, 1999 ($1.0616 per E1.00); April 28, 2000 ($0.9089 per E1.00)).
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1999(2) 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
E $ E $ E $ E $ E $
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total dividend(1).. 0.83 0.75 0.45 0.48 0.43 0.47 0.34 0.39 0.26 0.33
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
--------
(1) Adjusted to give effect, retroactively, to (i) the conversion during 1998
of Schering AG's ordinary shares with par values of DM 1,000, DM 100 and
DM 50 into ordinary shares with no par value and (ii) Schering AG's
three-for-one stock split effective on June 1, 2000.
(2) The dividend in respect of 1999 consists of a regular dividend of E0.50 per
share and a bonus dividend of E0.33 per share.
Holders of ADRs on the relevant record date will be entitled to receive any
dividends payable in respect of the ordinary shares underlying the ADRs,
subject to the terms of the deposit agreement under which the ADRs are issued.
Subject to exceptions provided in the deposit agreement, cash dividends paid
in euro will be converted by the depositary to US dollars and paid by the
depositary to holders of ADRs, net of conversion expenses of the depositary,
and in accordance with the deposit agreement. The rights of holders of ADRs
with respect to any dividends or other distributions on the ordinary shares
underlying the ADRs will be governed by the deposit agreement and may be
different from the rights of holders of ordinary shares. See "Item 12--
Description of Securities Other than Equity Securities--Description of
American Depositary Receipts--Share dividends and other distributions" and "--
Fees and expenses".
For a discussion of the material German and U.S. Federal income tax
provisions regarding the taxation of dividends on the ordinary shares and the
ADRs, see "Item 10--Additional Information--Taxation".
13
<PAGE>
Item 4. Information on the Company
THE SCHERING AG GROUP
Introduction
We are a global research-based company engaged in the discovery,
development, manufacture, marketing and sale of pharmaceutical products. We
presently operate nine research and development centers in Europe, the United
States and Japan, produce products in over 20 facilities located in Europe,
the United States, Latin America and Asia, and market and sell our products in
over 100 countries worldwide. Our focused product portfolio is comprised of
products from our four core business areas:
. fertility control and hormone therapy, including hormonal contraception,
hormone replacement therapy and gynecological therapy.
. therapeutics for selected disabling and life-threatening conditions,
including multiple sclerosis and other diseases of the central nervous
system and the cardiovascular system, and in the field of oncology.
. in vivo diagnostics, including contrast media for X-ray, magnetic
resonance imaging (MRI) and ultrasound, innovative application
technologies for contrast media, and radiopharmaceuticals for use in
nuclear medicine.
. dermatology for the treatment of severe skin disorders such as eczema,
mycoses, hemorrhoids, acne and psoriasis.
Our research and development efforts are primarily concentrated on the
exploitation of novel technologies for unmet medical needs in our four core
business areas. During 1999 and the first six months of 2000, our research and
development expenditures totalled E684 million (19% of our total net sales) and
E402 million (18%), respectively.
Through our 24% ownership interest in the recently formed Aventis
CropScience S.A. (a subsidiary of Aventis S.A., itself created through the
December 1999 merger of Hoechst AG and Rhone-Poulenc S.A.), we participate in
the crop protection and crop production business. Aventis CropScience is one
of the world's leading crop science businesses, with pro forma net sales for
1999 of E4,061 million and net sales for the first six months of 2000 of E2,212
million.
As a global pharmaceutical company with extensive worldwide operations, we
manage our businesses on a geographic basis. Our pharmaceutical business
consists of five geographic reporting segments: Europe, the United States,
Latin America/Canada, Japan and Asia. Other activities (mainly our
pharmaceutical chemicals business) are managed on a worldwide basis and are
therefore presented as a separate segment.
For the year ended December 31, 1999, we had net sales of E3,674 million,
operating profit of E536 million, and net income of E272 million. For the first
six months of 2000, we had net sales of E2,217 million, operating profit of E361
million, and net income of E209 million.
The Group is comprised of over 120 subsidiaries worldwide and had a
workforce of over 24,000 employees at the end of June 2000.
Schering Aktiengesellschaft is incorporated as a stock corporation under the
laws of the Federal Republic of Germany. Schering AG was incorporated in 1871.
Schering AG's principal executive office is at Muellerstrasse 178, 13353 Berlin,
Federal Republic of Germany, and its telephone number is (49 30) 468-1111.
Strategy
Commitment to Profitable Growth and Enhancing Shareholder Value
We are committed to growing our pharmaceuticals business by seeking market
leadership with innovative products in specialized areas. Our core mission is
to make a recognized contribution to medical progress and to
14
<PAGE>
improve the quality of life of those who use or benefit from our products. We
have established a leading market position in fertility control, multiple
sclerosis, and in vivo diagnostics and aim at leadership in hormone
replacement therapy (HRT) and hematological oncology. Our top-selling products
in the areas of therapeutics (Betaferon(R)/Betaseron(R), Androcur(R) and
Fludara(R)), fertility control and gynecology (Diane(R)35, Triquilar(R),
Femovan(R), Microgynon(R), Mirena(R) and Meliane(R)), hormone therapy
(Climara(R)) and diagnostics (Iopamiron(R), Magnevist(R) and Ultravist(R))
enjoy high brand recognition and loyalty. We have achieved global scale for
many products in our core business areas with strong franchises in Europe, the
United States and Japan. Sales growth over the next several years will largely
be driven by our successful existing products, life cycle management and
products expected to be launched, such as the oral contraceptive Yasmin(R) and
new indications for Betaseron(R)/Betaferon(R), Fludara(R) and Betapace(R). We
are also active in the rapidly developing field of radiopharmaceuticals, where
we strive to be leaders in bridging diagnostics and therapeutics in the field
of oncology, and we currently market products such as Quadramet(R), Neotect(R)
and Acutect(R). In the longer term, we intend to defend and build upon our
market position in our core business areas by commercializing and marketing
novel products that benefit from advances in biotechnology and molecular
science discovered and developed through our internal efforts and our network
of collaboration partners or obtained through in-licensing or acquisitions.
We are committed to the creation of shareholder value. We believe that the
keys to building shareholder value are demonstrable profitable growth over the
next several years and the longer term, measures such as share repurchases and
dividend growth, and, where appropriate, value creation through strategic
acquisitions and spin- offs and equity carve-outs of non-core businesses.
Through 2005, we expect to achieve the growth targets outlined in our
accelerated growth strategy we first announced in May 1999 and revised upwards
in September 2000. We have capitalized on our cash position with a E253 million
share repurchase program in 1998 and 1999. We were the first DAX--quoted company
to establish such a program. Dividend growth, management's focus on constant
earnings growth, and the expanding use of stock-based compensation programs to
align the interests of our employees and shareholders underscore our commitment.
Our listing on the New York Stock Exchange is a key milestone in our efforts to
broaden our shareholder base in the United States, the world's largest
individual pharmaceutical market, and to enhance the quality and frequency of
our dialog with the international investment community. The NYSE listing will
permit us to broaden our stock-based compensation programs in the United States,
enabling us to attract and retain high caliber talent, and provides us with
acquisition currency for external growth.
Near Term Growth through Accelerated Growth Strategy
In May 1999, we announced our accelerated growth strategy, which is our
roadmap to accelerated profitable growth over the next five years. The goal of
this strategy is to achieve net sales of E5.5 billion and operating profit of
E800 million by 2005. In recognition of our recent successes and the speed with
which we have been able to push ahead with implementing our strategy of
accelerated growth, in September 2000 we raised our net sales target to over
E6.0 billion for 2005, and we plan to reach net sales of E7.0 billion in 2007.
Our accelerated growth strategy is based on achieving the following objectives:
Achieve substantial growth in the fertility control and hormone therapy area
Fertility control and hormone therapy has historically been the largest of our
four core business areas, accounting for E1,173 million of net sales in 1999
(32% of total net sales) and E653 million of net sales in the first six months
of 2000 (30%). Currently, we are generating 72% of net sales in this business
area from fertility control products and 28% from hormone therapy and gynecology
products. Four of our top ten selling products are from this business area. We
are the world market leader in oral contraceptives in volume terms and number
two in value terms. Growth within this business area should come from existing
products, many of which have been recently launched, plus those in the pipeline.
We expect significant growth momentum from broader penetration of the Japanese
market with our product range, new product launches in both fertility control as
well as hormone therapy and further penetration of the existing portfolio in the
United States as well as Europe. We believe that we have the broadest pipeline
in fertility control and hormone therapy with a number of exciting late-stage
development products and recently launched products. The most prominent of these
are the oral contraceptives Yasmin(R) and Valette(R), the hormonal contraception
intrauterine delivery system Mirena(R), and the HRT products Climodien(R) and
Avaden(R).
15
<PAGE>
Achieve substantial growth in therapeutics
Therapeutics has increased in importance to us in recent years, and during
this year has been the largest of our four core business areas in terms of net
sales to date. In therapeutics we are a world market leader in the field of
multiple sclerosis (MS) with our product Betaseron(R)/Betaferon(R) and we are
aiming to further develop this indication area via new ways of treatment.
Betaseron(R) is currently approved in the United States for the treatment of
relapsing-remitting multiple sclerosis. We treat 27,000 patients in the United
States and 24,000 patients in Europe. In 1993, Betaseron(R)/Betaferon(R) was
the first, not only symptomatic therapy, which suppresses disease activity in
patients with relapsing-remitting MS. It reduces the relapse rate by one
third, and severe and moderate relapses are reduced by 50%. In 1999 it was the
first therapy to have shown delay of disability progression in patients with
secondary progressive MS. In 1999, net sales amounted to E454 million, and
during the first six months of 2000, net sales grew to E289 million.
We also aim to achieve growth with our products in specialized fields for
cardiovascular diseases and in the field of oncology. We recently received
approval for Betapace(R) AF, an indication for atrial fibrillation, which we
believe should support continued sales of Betapace(R), which recently lost its
market exclusivity as an orphan drug in the United States. In addition to line
extensions for Fludara(R), we have two promising biotechnology products in the
field of hematological oncology, Campath(R) and Zevalin(R), in late stage
development.
Develop our radiopharmaceuticals business
In our diagnostics and radiopharmaceuticals business, we are a global leader
in the X-ray contrast media and MRI contrast media fields. Products from the
diagnostics and radiopharmaceuticals business area accounted for E1,040 million
of net sales in 1999 (28% of total net sales) and E651 million of net sales
during the first six months of 2000 (29%), and the X-ray contrast medium
products Iopamiron(R) and Ultravist(R) and the MRI contrast medium product
Magnevist(R) were three of the Group's four top-selling products. In the X-ray
contrast media market we believe that we are the leading company worldwide in
terms of distributor sales with a market share of approximately 30%. Despite the
decline in X-ray contrast media prices over the past several years, we have
maintained a positive sales growth in this business, and we have improved
profitability through cost-cutting measures. In the MRI contrast media market,
we have a global market share of approximately 60%, and we aim to sustain this
leadership and continue growth through pipeline products for new applications of
MRI contrast media.
In the medium to long term, we believe that a high growth opportunity exists
in the area of innovative radiopharmaceuticals for nuclear medicine. In 1999,
we entered this business by acquiring the U.S. research and development-
oriented company Diatide. In April 2000, we acquired a majority share of the
French company CIS bio international, which has a global distribution network
and a leading position in the European radiopharmaceutical market. We plan to
continue to develop this business through in-house research and development
and in-licensing, and we intend to become a substantial player in the global
radiopharmaceutical market. The area of oncological radiopharmaceuticals
presents a particularly attractive opportunity given our existing expertise in
oncology and the potential for synergies between our diagnostics and
therapeutics businesses.
Expand sales in the United States
The United States is the world's largest individual pharmaceutical market, and
this market constituted E775 million of our net sales in 1999 and E495 million
of our net sales during the first six months of 2000. We have targeted the
United States market to account for 30% of our net sales by 2005, up from 21% in
1999. We expect that this growth will be achieved through increasing our
presence in the areas of fertility control, hormone therapy, contrast media,
radiopharmaceuticals, oncology, and dermatology. The expected launch of the oral
contraceptive Yasmin(R) and the hormonal contraception intrauterine delivery
system Mirena(R) should drive sales growth in the United States. We are
expanding our sales force in the United States in anticipation of the broadening
of our product lines.
Broaden our product lines sold in Japan
Our future business expansion plans in Japan, the second largest individual
pharmaceutical market in the world, primarily center on therapeutics. Our net
sales in Japan in 1999 were E454 million (12% of total net sales) and during the
first six months of 2000 were E307 million (14%). Up through 1999, we have
generated
16
<PAGE>
close to 84% of our Japanese net sales with diagnostic products. The remaining
16% relate to dermatology and some other smaller products. We have gained an
additional marketing platform and research and development capacities through
the acquisition of Mitsui Pharmaceuticals, Inc. in March 2000. Following the
approval of oral contraceptives by the Japanese Ministry of Health and Welfare
in June 1999, we entered the highly promising Japanese oral contraceptive
market in September 1999 by launching Triquilar(R). We are currently assessing
how to further expand our therapeutics business with additional in-licenses
and the globalization of selected products being developed by Mitsui
Pharmaceuticals.
Build a global dermatology business
We are committed to building a global dermatology business by entering the
United States market and by strengthening our position in Europe. During 1999,
net sales of dermatology products amounted to E199 million (5% of total net
sales). During the first six months of 2000, net sales were E111 million. We
intend to achieve a substantial improvement in our share of the world market,
with products both from our internal research and development efforts and from
the innovative technologies we acquire. We made our first step to globalize this
business and establish ourselves in the United States dermatology market by
entering into a licensing agreement with DUSA Pharmaceuticals, Inc. to obtain
exclusive development and marketing rights to Levulan(R), an innovative
preparation used in photodynamic therapy to treat actinic keratosis, a
precancerous skin condition caused by chronic exposure to the sun.
Long Term Growth through Internal Discovery and Collaboration Efforts
The foundation of our long term growth is to continue our strong emphasis on
research and development, with a special emphasis on reducing the time from
discovery to product launch. We intend to defend and build upon our market
position in our core business areas by commercializing and marketing novel
products that benefit from advances in biotechnology and molecular science
discovered and developed through our internal efforts and our network of
collaboration partners or obtained though in-licensing or acquisitions. A
number of the key drugs in our existing product portfolio and product pipeline
are biotechnology-based, including Betaferon(R) (Betaseron(R)), Campath(R),
Zevalin(R) and a number of other earlier anti-cancer products. We continue to
invest approximately 19% of our net sales in research and development
activities. We complement our internal research and development efforts
presently being carried out by almost 4,000 employees at nine research and
development centers with a network of collaboration arrangements.
One of our strategic objectives in research and development is to build a
strong and competitive global position in oncology, where we are focusing both
on hematological oncology and on novel technologies for the treatment of solid
tumors. Our research and development and collaboration efforts in this field
are concentrated in the area of biotechnology, including anti-angiogenesis,
gene discovery and new tumor markers.
There can be no assurance that we will be successful in implementing our
strategy or achieving some or all of our strategic objectives.
Competitive Strengths
We believe that our competitive strengths include the following:
. Focused Product Portfolio and Research and Development Efforts. Our
product portfolio and research and development efforts are focused on
specialized areas. We have established a leading market position in
fertility control, multiple sclerosis, and in vivo diagnostics and aim
at leadership in hormone replacement therapy and hematological oncology.
We believe that this specialization results in a more efficient
utilization of our resources dedicated to research and development. Our
technological expertise and reputation for high quality products and
customer service in these areas assist us in our efforts to establish
and defend leading market positions around the world.
. Strong Franchise in Female Healthcare. A commitment to female healthcare
is one of our traditional strengths. Our female healthcare business,
which is concentrated in the areas of hormonal contraception, hormone
replacement therapy and gynecological therapy, is designed to meet the
lifetime needs of women. We are presently one of the remaining major
global participants in this area. We introduced the first oral
contraceptive outside of the United States in Europe in 1961 and have
been at the forefront in advances in female healthcare products,
including the Climara(R) patch for HRT and the Mirena(R) hormonal
contraception intrauterine delivery system.
17
<PAGE>
. Competence in Commercializing and Marketing New Technologies and
Products. We have a demonstrated competence in identifying,
commercializing and marketing new technologies and products first
developed by niche companies in the pharmaceutical and biotechnology
industries. This ability will become increasingly important as the cost
of developing new drugs continues to increase and a premium is placed on
the speed of bringing new products to market. A number of our top-
selling products, including Betaferon(R)/Betaseron(R), Iopamiron(R),
Fludara(R) and Betapace(R), and some of the most promising drugs in our
pipeline, such as Campath(R) and Zevalin(R), have been obtained through
in-licensing arrangements.
. Leadership in Diagnostics. We continue to be a global leader in the
discovery, development and marketing of in vivo diagnostic products. We
believe that we are the leading company worldwide in terms of
distributor sales and market share in X-ray and MRI contrast medium
products. Our discovery efforts in diagnostics also distinguish us from
our competitors. Our entry into radiopharmaceuticals will both benefit
from and contribute to our competence in diagnostics.
. High Quality Sales Force and Proprietary Distribution Network. We have a
worldwide sales force of over 7,300 representatives. We appreciate that
a commitment to the initial and continuing training and retention of our
sales force is an important competitive factor. Our representatives are
dedicated exclusively to the marketing of our products and we believe
enjoy an excellent reputation for their specialized knowledge of our
products and therapies and their dedication to customer service. We
believe this contributes to our objective of providing a superior level
of customer service.
History
We have been engaged in the pharmaceuticals business for nearly 130 years.
Our founder, Ernst Schering, established a pharmacy in Berlin, Germany, in
1851, and on October 23, 1871, formed our predecessor company under the name
"Chemische Fabrik auf Actien (vorm. E. Schering)". During the course of, and
in the aftermath of, the Second World War, all of Schering AG's subsidiaries,
patents, trademarks and other properties located outside of Germany were
liquidated, confiscated or expropriated. Following the entry of the United
States in the Second World War, the United States government confiscated the
assets of German companies in the United States, including Schering AG's
subsidiary Schering Corporation. This subsidiary was operated by a guardian
appointed by the United States government for the next decade and, in 1952,
was divested by the United States government to an investment group. Following
a merger, the company became known as Schering-Plough Corporation in 1971.
Schering AG and Schering-Plough Corporation have been totally independent of
each other for over 50 years, and have an agreement relating to the use of the
word "Schering". See "--Patents and Other Intellectual Property" for a
description of this agreement. Schering AG operates its pharmaceutical
business in the United States and Canada under the Berlex trade name.
The Schering AG Group significantly restructured its operations over the
past decade to concentrate on its pharmaceutical business. During the last
five years, we have expanded our pharmaceutical product portfolio and obtained
promising new technologies through a number of small-sized to mid-sized
acquisitions and licensing and research and development collaboration
relationships. Significant acquisitions during this period include:
. in the area of fertility control and hormone therapy, our 1996
acquisitions of Leiras Oy and a majority share of Jenapharm GmbH & Co.
KG.
. in the area of therapeutics, our acquisition in March 2000 of the
Japanese company Mitsui Pharmaceuticals, Inc.
. in the area of diagnostics, our acquisition in 1995 of Medrad, Inc.
. in the area of radiopharmaceuticals, our acquisitions in 1999 of
Diatide, Inc. and in April 2000 of a majority share of CIS bio
international S.A.
For a description of certain of our more significant licensing and
collaboration relationships, see
""--Products" and "--Research and Development--Collaboration Efforts".
18
<PAGE>
PRODUCTS
Our product portfolio is comprised of products from our core business areas
of fertility control and hormone therapy, therapeutics, diagnostics and
radiopharmaceuticals and dermatology. For a discussion of certain of the
products and processes which we are currently developing, see "--Research and
Development".
In addition to net sales of products from our four core business areas, we
derive net sales from certain other sources comprised of third party
businesses (sales cooperations and toll manufacturing (principally
pharmaceutical chemicals) for third parties) and curtailments of sales
(granted bonuses, sales discounts and cash discounts). These net sales are
referred to as net sales from "Other sources" in this registration statement.
The following table sets forth the net sales, net sales expressed as a
percentage of total net sales, and percentage change in net sales from the
prior period for the Group's business areas for the first six months of 2000
and the three years ended December 31, 1999. During the first half of 2000,
due to our recent significant acquisitions in the field of
radiopharmaceuticals, including Diatide and CIS bio international, we formed a
new business area, Diagnostics and radiopharmaceuticals (formerly the
Diagnostics business area). This business area has responsibility for the
development of diagnostic and radiopharmaceutical products. In the table below
and elsewhere in this registration statement, we have not restated net sales
for periods prior to 2000 to give effect to the formation of this new business
area because there have not been any material net sales of
radiopharmaceuticals prior to 2000.
<TABLE>
<CAPTION>
Six months ended June 30, Year ended December 31,
------------------------------ ----------------------------------------------------------------------------------
2000 1999 1998 1997
------------------------------ ------------------------------ ------------------------------- -------------------
Percentage Percentage Percentage
Percentage Change Percentage Change Percentage Change from Percentage
E of Net Sales from 1999 E of Net Sales from 1998 E of Net Sales 1997 E of Net Sales
------ ------------ ---------- ------ ------------ ---------- ------ ------------ ----------- ------ ------------
(in millions, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales by Business
Area:
Fertility control
and hormone
therapy......... 653 30 15 1,173 32 6 1,109 34 8 1,023 32
Therapeutics..... 714 32 36 1,128 31 14 991 30 4 950 30
Diagnostics and
radiopharma-
ceuticals(1).... 651 29 32 1,040 28 18 882 27 (3) 914 28
Dermatology...... 111 5 9 199 5 5 189 6 (2) 192 6
Other sources.... 88 4 35 134 4 18 114 3 2 114 4
----- --- --- ----- --- --- ----- --- --- ----- ------------
Total........... 2,217 100 26 3,674 100 12 3,285 100 3 3,193 100
===== === === ===== === === ===== === === ===== ============
</TABLE>
--------
(1) Net sales of our radiopharmaceutical products have been included in the
recently formed Diagnostics and radiopharmaceuticals business area with
effect from January 1, 2000.
19
<PAGE>
The following table sets forth our top-selling products during the first six
months of 2000 and during 1999. These products represented 62% and 63% of the
total net sales for the Group in the first six months of 2000 and in 1999,
respectively.
<TABLE>
<CAPTION>
Year ended December
Six months ended June 30, 31,
---------------------------- --------------------
2000 1999
---------------------------- --------------------
Percentage Percentage
change change
Net sales from 1999 Net sales from 1998
----------------- ---------- --------- ----------
(E millions) (E millions)
<S> <C> <C> <C> <C>
1. Betaferon(R)
(Betaseron(R))
(Therapeutics)......... 289 35 454 23
2. Iopamiron(R)
(Diagnostics).......... 177 26 307 31
3. Magnevist(R)
(Diagnostics).......... 143 30 233 18
4. Ultravist(R)
(Diagnostics).......... 126 15 219 5
5. Betapace(R)
(Therapeutics)......... 118 90 157 23
6. Diane(R)-35
(Gynecology)........... 100 19 171 10
7. Microgynon(R)
(Levlen(R)) (Fertility
Control)............... 59 9 108 7
8. Femovan(R)
(Fertility Control).... 55 9 103 (5)
9. Androcur(R)
(Therapeutics,
Gynecology)............ 53 8 99 (2)
10. Climara(R) (HRT).... 51 35 93 8
11. Fludara(R)
(Therapeutics)......... 51 31 86 14
12. Meliane(R)
(Fertility Control).... 48 24 81 63
13. Triquilar(R) (Tri-
Levlen(R)) (Fertility
Control)............... 44 (7) 95 (16)
14. Mirena(R) (Fertility
Control)............... 34 19 60 45
15. Noctamid(R)
(Therapeutics)......... 21 11 39 7
----- --- ----- ---
Total................. 1,369 26 2,305 15
===== === ===== ===
</TABLE>
Fertility Control and Hormone Therapy
The following table sets forth selected fertility control and hormone
therapy products presently marketed (or expected to be launched in 2000) by
the Group.
<TABLE>
<CAPTION>
Net
Sales
------------
First
six
months
Product Active Ingredient(s) Indication of 2000 1999
------- -------------------- ---------- ------- ----
(E
millions)
<S> <C> <C> <C> <C>
Microgynon(R) 30/Levlen(R) Levonorgestrel/ethinyl estradiol Combined oral contraceptive 59 108
Femovan(R) Gestodene/ethinyl estradiol Combined oral contraceptive 55 103
Triquilar(R)/Tri- Low dose levonorgestrel/ Combined oral contraceptive 44 95
Levlen(R) ethinyl estradiol (triphasic)
Meliane(R) Gestodene/Low dose ethinyl Combined oral contraceptive 48 81
estradiol
Mirena(R) Levonorgestrel Intrauterine hormonal 34 60
contraceptive
Valette(R) Dienogest/ethinyl estradiol Combined oral contraceptive 16 30
Miranova(R)/Levlite(R) Low dose levonorgestrel/Low Combined oral contraceptive 16 19
dose ethinyl estradiol
Yasmin(R) Drospirenone/ethinyl estradiol Combined oral contraceptive (*) (*)
Diane(R)-35 Cyproterone acetate/ethinyl Androgen dependent disorders 100 171
estradiol in women (including acne,
seborrhea, hirsutism)
Climara(R) Estradiol Hormone replacement therapy 51 93
(patch)
Androcur(R) Cyproterone acetate Androgen dependent disorders (**) (**)
in women (including
hirsutism)
</TABLE>
--------
(*) Expected to be launched in late 2000 in Europe.
(**) Less than E5 million.
20
<PAGE>
The Group's long tradition in the field of hormone research began in the
1920s. We played a key role in the establishment of a completely new field of
endocrinology, the study of sex hormones. Since that time, we have maintained
and expanded our scientific competence in this area and have employed our
knowledge by developing innovative products.
Our comprehensive female health care program develops preparations in the
areas of hormonal contraception, hormonal replacement therapy and
gynecological therapy. In our male health care program, we are engaging in the
research and development of products for male contraception, age-related
diseases and sexual disorders.
We have further built upon the Group's long tradition and expertise in the
field of hormone research through our 1996 acquisitions of a majority share of
Jenapharm GmbH & Co. KG and the Finnish company Leiras Oy and our
collaboration with the Institut fur Hormon- und Fortpflanzungsforschung
(Institute for Hormone and Reproduction Research) at the University of
Hamburg.
Fertility Control
We introduced Anovlar(R), the first oral contraceptive outside of the United
States, in Europe in 1961. Over the past four decades, we have continually
improved the tolerability and safety of oral contraceptives by reducing the
hormone dosage and developing new progestogens and treatment regimens. Today,
we are marketing a variety of hormonal contraceptives in order to meet the
diverse needs of women. The Group's fertility control products are comprised
of oral contraceptives and a number of alternatives to oral contraception,
including hormonal intrauterine delivery systems, hormonal injections and
contraceptive implants.
Oral Contraceptives
Combined oral contraceptives contain an estrogen component, usually ethinyl
estradiol, and a progestogen component. Over the years, the estrogen content
has been reduced to levels in the range of, or even below, 0.02 mg ethinyl
estradiol per unit in modern contraceptives. The so-called mini-pill is a
progestin-only pill to be taken continuously as an alternative to combined
oral contraceptives for some women.
The dose of individual progestins in oral contraceptives, which may be the
reason for some minor side effects, such as nausea, has also been reduced over
time. More importantly, new progestins with higher potency and more favorable
pharmacological properties have been discovered and developed. In the 1970s,
we introduced the oral contraceptives Neogynon(R) and Microgynon(R) using
levonorgestrel as the progestin. In 1987, we launched Femovan(R), which uses
gestodene as the progestin. During 1995, we launched Valette(R) with dienogest
as the progestogen component. We have recently completed the development of
Yasmin(R), which contains the new progestin drospirenone.
Combined oral contraceptives generally can be subdivided into monophasic,
biphasic and triphasic preparations. Monophasic preparations contain a
constant dosage of an estrogen and a progestogen. In biphasic preparations,
the daily dose of progestogen is increased in the second half of the cycle of
use, while the estrogen dose remains constant over the entire cycle of use.
Triphasics contain graduated daily dose levels of hormones in order to mimic
the variable hormone production of the physiological cycle while keeping the
total dosage of exogenous steroids as low as possible.
Our product portfolio of oral contraceptives includes the following:
. Microgynon(R) 30 (marketed in the United States as Levlen(R)).
Microgynon(R) 30 is a monophasic oral contraceptive containing
levonorgestrel and is available in the United States, Europe, Latin
America and Asia.
. Femovan(R). Femovan(R) is a monophasic oral contraceptive containing
gestodene. The product shows an excellent tolerability, reliability and
cycle control. Femovan(R) was first launched in 1987 and is available in
Europe, Latin America and Asia.
21
<PAGE>
. Triquilar(R) (marketed in the United States as Tri-Levlen(R)).
Triquilar(R) is an oral contraceptive containing levonorgestrel in a
triphasic dosage regime, thus mimicking the variable hormone production
of the menstrual cycle while keeping the total dose of exogenous
steroids as low as possible. Triquilar(R) was first launched in 1979 and
is available in Europe, Latin America, Asia, the United States and,
since 1999, in Japan.
. Meliane(R). Meliane(R) is a low-dose monophasic oral contraceptive
containing gestodene. The product exhibits high reliability, cycle
control and tolerability. Meliane(R) was launched in France in 1995.
. Valette(R). Valette(R) is a low-dose monophasic oral contraceptive with
additional therapeutic benefits containing dienogest. Valette(R)
demonstrates high contraceptive reliability, excellent tolerability and
a stabilizing effect on irregular menstrual periods. The antiandrogenic
activity of dienogest has shown in clinical studies in Europe beneficial
effects on acne. Valette(R) was launched in Germany in 1995 and an
application for regulatory approval has been submitted in Europe and
certain markets in Latin America.
. Miranova(R) (marketed in the United States as Levlite(R)). Miranova(R)
is a low-dose monophasic oral contraceptive containing levonorgestrel.
In addition to high contraceptive reliability, Miranova(R) provides good
cycle control with a low frequency of inter-menstrual bleedings and a
low incidence of side effects. Miranova(R) was launched in Germany in
1996 while Levlite(R) was launched in the United States during 1998.
. Yasmin(R). Yasmin(R) is a new oral contraceptive with the innovative
progestogen drospirenone. High contraceptive reliability and excellent
cycle control are basic clinical features of this new preparation. The
anti-mineralocorticoid activity of drospirenone counterbalances
potential estrogen-induced fluid retention. Yasmin(R) could be
particularly suitable for women susceptible to estrogen-related water
retention causing weight gain. Clinical studies have shown that
Yasmin(R) can improve the general well-being of women. In addition,
positive effects on mild to moderate acne and seborrhea were also
observed. Yasmin(R) has been shown to be well-tolerated, with a low
incidence of adverse events. Regulatory approval for Yasmin(R) was
granted by the Netherlands in March 2000. In addition, all European
Union member states as well as Iceland and Norway have in a mutual
recognition process recently agreed to approve Yasmin(R). An application
for regulatory approval for Yasmin(R) has been submitted in the United
States and a regulatory approvable letter has been issued by the FDA. In
the regulatory approvable letter, the FDA requested additional
information. We are presently in the process of preparing a response to
the FDA's request.
Non-Oral Contraceptives
Mirena(R), a progestogen-containing intrauterine delivery system, is an
alternative in family planning, and one of our fastest growing products as
measured by net sales. Mirena(R) combines the advantages of local hormonal and
intrauterine contraception, particularly in the areas of reliability and ease
of use. Mirena(R) is inserted into the uterus, where it releases low doses of
a progestogen (currently levonorgestrel) for a period of five years. Mirena(R)
was first launched in Europe in 1990 and is also available in Asia and
Colombia, and soon will be marketed in a number of other markets in Latin
America. A New Drug Application (NDA) for Mirena(R) has recently been
submitted in the United States.
Hormonal contraception can also be achieved as intra-muscular injections,
which ensure a long-lasting effect. Our injectable contraceptive Norigynon(R)
(Mesigyna(R)) contains an estrogen and progestin derivative and is injected
once a month, while Noristerate(R) relies on a progestin-only effect and is
administered once every three months.
We also offer levonorgestrel-containing contraceptive implants. These
implants are placed under the skin where they release low doses of hormone
over several years.
22
<PAGE>
Hormone Replacement Therapy
Approximately 50% of climacteric (menopausal) women suffer from menopausal
symptoms which require treatment and can be attributed to the cessation of sex
hormone production by the ovaries during perimenopause. This deficiency
syndrome includes not only climacteric complaints such as hot flushes, but
also a higher risk of cardiovascular disease and osteoporosis (loss of bone
mass). These disorders can be prevented by replacing the hormones that the
body has ceased to produce in sufficient amounts.
Hormone replacement therapy (HRT) can be achieved by supporting an estrogen
or an estrogen/progestin combination. The hormone combination can be used as a
sequential or a continuous method. In sequential HRT, which is the method
mainly used during menopause, the progestogen is added to the estrogen only in
the second half of the cycle. The advantage of the sequential method is that
the progestogen counteracts excessive growth of the uterine lining that may
result from estrogen use and stabilizes the unwanted irregular cycles in pre-
menopause and post-menopause. The cyclical use of a progestogen leads to
withdrawal bleeding.
In continuous combined HRT, which is used for postmenopausal women, both the
estrogen component and the progestogen are administered simultaneously over
the entire period of use. The advantage of this regimen is that no cyclical
bleeding is induced and amenorrhea can be achieved. The goal of continuous HRT
for postmenopausal women shifts from relieving climacteric symptoms, such as
hot flushes, to addressing other age- and hormone-related disorders, such as
osteoporosis, incontinence, decrease of sexual function, loss of memory and
prevention of cardiovascular diseases.
Our portfolio of hormone replacement therapy products includes Climara(R),
which releases estradiol via a transdermal patch that is replaced once a week.
Climara(R) was first launched in the United States in 1995. In 1999,
Climara(R) received FDA approval for the prevention of osteoporosis.
Authorization of this indication is expected soon in Europe and Latin America.
Our hormone replacement therapy product range is complemented by an
injectable, Gynodian Depot(R).
Gynecological Therapy
We offer a range of products for the treatment of certain hormone-related
gynecological disorders, including Diane(R)-35, Androcur(R) and Progynon(R) C.
Diane(R)-35 is used for the treatment of acne but exerts the same
contraceptive reliability as combined oral contraceptives. Androcur(R) is an
antiandrogen used, in certain cases in combination with Diane(R)-35, for the
treatment of hirsutism (symptoms of masculine hair growth in women), acne and
seborrhea caused by increased androgen levels. Progynon(R) C is an estrogen
for the treatment of primary and secondary amenorrhea.
Therapeutics
The following table sets forth selected therapeutic products presently
marketed by the Group.
<TABLE>
<CAPTION>
Net Sales
---------------------
First six months
Product Active Ingredient(s) Indication of 2000 1999
------- -------------------- ---------- ---------------- ----
(E millions)
<S> <C> <C> <C> <C>
Betaferon(R)/Betaseron(R) Interferon -1b Multiple sclerosis (for relapsing 289 454
remitting form and, in Europe
and Canada only, secondary
progressive form)
Betapace(R)/Betapace(R)
AF Sotalol HCl Arrhythmias; atrial fibrillation 118 157
Androcur(R) Cyproterone acetate Prostate cancer 53 99
Fludara(R) Fludarabine phosphate Chronic lymphocytic leukemia 51 86
Noctamid(R) Lormetazepam Sleep disturbances 21 39
Bonefos(R) Clodronate Hypercalcaemia and osteolysis 15 28
Ilomedin(R) Iloprost Peripheral Arterial Occlusive 15 21
Disease (PAOD) stages III/IV
</TABLE>
23
<PAGE>
We develop novel therapeutics and offer innovative products for the
treatment of selected disabling and life threatening conditions, including
multiple sclerosis and other diseases of the central nervous system and
cardiovascular system, and in the field of oncology.
Central Nervous System
Our portfolio of therapeutic products for the treatment of diseases of the
central nervous system includes Betaferon(R) and Noctamid(R).
. Betaferon(R) (interferon beta-1b). Betaferon(R) (which is marketed in the
United States and Canada under the trademark Betaseron(R)) has been the
Group's leading product in terms of net sales for the past four years.
Betaferon(R) was the first beta interferon developed for the treatment
of multiple sclerosis (MS). The product was approved for relapsing
remitting MS in the United States in 1993, in Europe in 1996 and is
expected to be approved in Japan in 2000. Betaferon(R) was approved for
the treatment of secondary progressive MS in Europe, Australia and
Canada in 1999 and we have filed an NDA for secondary progressive MS in
the United States. Betaferon(R) is manufactured for the United States
and Japan markets by Chiron Corporation. Chiron also receives royalties
from our sales in Europe of Betaferon(R) manufactured by Boehringer
Ingelheim.
. Noctamid(R) (lormetazepam). Noctamid(R) is a short acting benzodiazepine
which has been developed and marketed for the treatment of sleep
disorders.
Oncology
We presently market three therapeutic products in the area of oncology:
Androcur(R), Fludara(R) and Bonefos(R). In addition, we have recently obtained
rights to a number of promising products and processes in the area of
oncology, as discussed under "--Research and Development--Therapeutics".
. Androcur(R) (cyproterone acetate). Androcur(R) is an anti-androgen used
for the palliative treatment of advanced prostate cancer. Androcur(R)
reduces testosterone serum levels and blocks androgen receptors
mediating cancer growth. Androcur(R) was introduced to the market in the
1970s in Europe but is not available in the United States. The active
ingredient of Androcur(R), cyproterone acetate, is also used in
gynecology. The drug combines progestogenic and antiandrogenic
activities.
. Fludara(R) (fludarabine phosphate). Fludara(R) is the only product that
we currently market in the field of hematological oncology. Fludara(R),
which was launched in the United States in 1991 and in Europe in 1994,
is a purine analogue acting as an antimetabolite and has been approved
for the treatment of patients with relapsed or refractory chronic
lymphocytic leukemia (CLL). Due to high response rates and a significant
proportion of complete remissions, Fludara(R) has been established as a
standard treatment for this group of patients. The drug is approved as
second and third line monotherapy for CLL and is currently undergoing
clinical trials for first line monotherapy. An oral formulation of
Fludara(R) is under regulatory review. As a line extension, clinical
phase II studies are under way for the second and third line therapy for
low-grade non-Hodgkin's lymphoma (NHL).
. Bonefos(R) (clodronate). Bonefos(R) is a second generation
bisphosphonate for the treatment of hypercalcaemia and osteolysis due to
malignancies. Bonefos(R) was developed by Leiras and was launched in
Europe in 1990 and 1991. The product is available as an intravenous or
an oral formulation. We market Bonefos(R) in several countries in
Europe, the Middle East and Asia.
Cardiovascular System
Our portfolio of therapeutic products for the treatment of diseases of the
cardiovascular system includes: Betapace(R) and Ilomedin(R)
. Betapace(R)/Betapace(R) AF (sotalol). Betapace(R) is used in the
treatment of ventricular arrhythmias (abnormal heart rhythm), such as
sustained ventricular tachycardia. Betapace(R) is an anti-arrhythmic
drug with Class II (beta adrenoceptor) properties and Class III (cardiac
action potential duration
24
<PAGE>
prolongation) properties. Betapace(R) has been marketed since the 1970s
for the treatment of hypertension, angina and arrhythmias. We market
Betapace(R) only in the United States under a license granted by
Bristol-Myers Squibb Company in 1991. We received regulatory approval
for Betapace(R) AF, an indication for treatment of atrial fibrillation,
in early 2000 and have three years exclusivity in the United States.
. Ilomedin(R) (iloprost). Ilomedin(R) is a stable prostacyclin analogue
used for the intravenous treatment of severe forms of peripheral
arterial disease (Peripheral Arterial Occlusive Disease (PAOD) stages
III and IV) and thrombangiitis obliterans. The product increases the
microcirculatory perfusion and has been shown to reduce rest pain,
improve ulcer healing and reduce the need for amputation. Ilomedin(R),
which was first launched in 1992, is marketed in Europe and New Zealand.
Diagnostics and radiopharmaceuticals
The following table sets forth selected diagnostic and radiopharmaceutical
products presently marketed by the Group.
<TABLE>
<CAPTION>
Net Sales
---------------------
First six months
Product Active Ingredient(s) Indication of 2000 1999
------- -------------------- ---------- ---------------- ----
(E millions)
<S> <C> <C> <C> <C>
Iopamiron(R) Iopamidol X-ray contrast medium 177 307
Magnevist(R) Gadopentate dimeglumine MRI contrast medium 143 233
Ultravist(R) Iopromide X-ray contrast medium 126 219
Gadovist(R) Gadobutrol MRI contrast medium (**) (*)
Levovist(R) D-Galactose/palmitic acid Ultrasound contrast medium 6 (**)
Quadramet(R) Samarium-153 Metastatic bone lesions 5 (*)
Acutect(R) Peptide/technetium Imaging of acute venous thrombosis (**) (**)
Neotect(R) Peptide/technetium Imaging of lung tumors (**) (*)
</TABLE>
--------
(*) Launched in 1999.
(**) Less than E5 million.
We are focused on the research, development and commercialization of imaging
agents for the diagnosis of diseases and disorders. The Group's principal
products in the diagnostics and radiopharmaceuticals business area include
contrast media for use in X-ray, magnetic resonance imaging (MRI) and
ultrasound procedures, radiopharmaceuticals for use in nuclear medicine and
contrast medium application technologies.
We have engaged in the research and development of contrast agents for over
70 years. Contrast media are used by radiologists, cardiologists and other
physicians to improve the outcomes of diagnostic imaging procedures. The
contrast agent is generally administered to the patient by injection.
In the field of nuclear medicine, we recently expanded our activities beyond
research. In order to strengthen the Group's basis for radiopharmaceuticals,
during 1999 we acquired Diatide, Inc., which is specialized in the research and
development of radiopharmaceuticals. During April 2000, we also acquired a 60%
interest in the French company, CIS bio international, which has a global
distribution network and a leading position in the European radiopharmaceutical
market.
In addition to imaging agents, we develop, manufacture and market injection
systems and disposable products through our wholly owned subsidiary Medrad. We
acquired Medrad in 1995 to enhance and strengthen the Group's expertise and
capabilities with regard to contrast media application and other imaging
related technologies. We believe that Medrad is a worldwide market leader in
vascular injection systems for the application of contrast media in computed
axial tomography (CT), angiography and MRI.
25
<PAGE>
X-Ray Contrast Media
. Iopamiron(R) (iopamidol). Iopamiron(R) is an extracellular non-ionic
monomeric X-ray contrast agent primarily for intravascular use. The
product was among the Group's top five products in terms of net sales in
1999 and one of the top two selling X-ray contrast agents in Japan. We
distribute Iopamiron(R) in Japan, France and Latin America under a
license from Bracco S.p.A. We first launched Iopamiron(R) in Europe in
1984 and in Japan in 1986.
. Ultravist(R) (iopromide). Ultravist(R) is an extracellular non-ionic
monomeric X-ray contrast agent for intravascular use and the
visualization of body cavities. The product was among the Group's top
five products in terms of net sales in 1999, and we believe Ultravist(R)
is the leading X-ray contrast agent in Europe in terms of market share.
Ultravist(R), which was developed by us, was launched in Europe in 1985
and is currently marketed in 71 countries worldwide.
MRI Contrast Media
. Magnevist(R) (gadopentate dimeglumine). Magnevist(R) is an extracellular
MRI contrast agent for cranial, spinal and whole body applications for
patients of all age groups. The product was the first MRI contrast agent
developed and was among the Group's top five products in terms of net
sales in 1999. We believe Magnevist(R) is the leading MRI contrast agent
in the world in terms of market share. Magnevist(R), which was developed
by us, was launched in Europe, the United States and Japan in 1988 and
is currently marketed in 75 countries worldwide.
. Gadovist(R) (gadobutrol). Gadovist(R) is an extracellular MRI contrast
medium. The product was launched in Switzerland in March 1999 for
central nervous system indications. Gadovist(R) is being further
developed for whole body indications, magnetic resonance angiography and
brain perfusion and is currently in phase III clinical studies.
Gadovist(R) is particularly suited for such applications as perfusion
imaging and high-dose studies.
Ultrasound Contrast Media
. Levovist(R) (palmitic acid-stabilized galactose-based air
microbubbles). Levovist(R) is an ultrasound contrast agent for blood
pool imaging. Levovist(R) was first launched in Germany and Sweden in
1996 and is currently marketed in over 35 countries in Europe, Asia,
Canada and Latin America. In September 1999, Levovist(R) was launched in
Japan, where it is co-promoted with Tanabe.
Radiopharmaceuticals for Nuclear Medicine
. Quadramet(R). Quadramet(R) is a therapeutic agent for the relief of pain
in patients with metastatic bone lesions that image on conventional bone
scan. Quadramet(R) consists of a radioactive isotope, Samarium-153,
which emits beta radiation, and a chelating agent, EBTMP, which targets
the drug to sites of new bone formation. We market the product in the
United States under an exclusive license from Cytogen Corporation. As a
result of the acquisition of a majority share of CIS bio international
in April 2000, we obtained European and Japanese rights to Quadramet(R).
As a result of our acquisition of Diatide, Inc. in 1999, we obtained two
radiopharmaceutical products for use in nuclear medicine imaging, Acutect(R)
and Neotect(R). Under an agreement between Diatide and Nycomed Amersham plc,
Nycomed Amersham has exclusive co-promotion rights to Neotect(R) and
Acutect(C) in the United States until September and October 2003,
respectively, and exclusive distribution and license rights to the products in
Europe, South Africa and certain countries in the Middle East.
. Acutect(R). Acutect(R) is a radiopharmaceutical for imaging of deep vein
thrombosis in the lower extremities. The product was launched in the
United States in 1998.
. Neotect(R). Neotect(R) is a radiopharmaceutical for imaging of lung
cancer. The product was launched in the United States in 1999. During
July 2000, the Committee for Proprietary Medical Products (CPMP) adopted
a positive opinion to recommend the granting of a marketing
authorization for the product in Europe. It will be marketed as
NeoSpect(TM) in Europe.
26
<PAGE>
We strengthened our portfolio of radiopharmaceutical products with the April
2000 acquisition of a majority share of CIS bio international, which
specializes in the development, production and distribution of
radiopharmaceuticals and capsulated radioactive sources, and in vitro
diagnostics, in particular radioimmunoassays.
Dermatology
The following table sets forth selected dermatology products presently
marketed by the Group.
<TABLE>
<CAPTION>
Net Sales
---------
First
six
months
of
Product Active Ingredient(s) Indication 2000 1999
------- -------------------- ---------- ------ ----
(E millions)
<S> <C> <C> <C> <C>
Nerisona(R)/Nerisona(R)
C/Tri-Nerisona(R)....... Diflucortolone valerate/ Corticoid responsive 20 35
Diflucortolone valerate, dermatoses
Chlorquinaldol/Diflucortolone
valerate, Isoconazole
nitrate, Neomycin sulfate
Travogen(R)/Travocort(R).. Isoconazole nitrate Superficial dermatomycoses 16 29
Advantan(R)............. Methylprednisolone aceponate Eczema 13 21
Neriproct(R)............ Diflucortolone valerate, Hemorrhoids 11 17
Lidocain
Psorcutan(R)............ Calcipotriol Psoriasis 9 16
Skinoren(R)/Azelex(R)... Azelaic acid Acne (mild to moderate) 6 15
</TABLE>
The Group has been engaged in the area of dermatology since we pioneered
modern dermatological therapies with topical corticoids in the early 1950s. We
are currently active in several of the most important dermatological
indication fields, including eczema, mycoses, acne, psoriasis and hemorrhoids.
During 1999, we entered into an exclusive licensing agreement for Levulan(R),
a photodynamic therapy technology from DUSA Pharmaceuticals, Inc., and we
expect to launch the product in the United States in 2000. The product was
developed for the treatment of sun-damaged skin, including actinic keratosis,
a common sun-induced, pre-cancerous skin condition.
Our principal products in the dermatology area are:
. Nerisona(R) (diflucortolone valerate). Nerisona(R) is a corticosteroid
of medium potency used for the treatment of eczema and psoriasis. The
product is available as cream, ointment, fatty ointment and solution.
Principal sales from the product, which was first launched in 1975, are
from Japan and Europe. Nerisona(R) is also distributed in Latin America
and Asia.
. Travogen(R) (isoconazole nitrate), Travocort(R) (isoconazole nitrate,
difluocortolone valerate). Travogen(R) and Travocort(R) are our prime
anti-fungal products for the treatment of dermatomycoses. Travocort(R)
is also indicated in super-infected dermatomycoses. The products were
introduced in 1979. Most of the sales of the products occur in Europe
and Latin America.
. Advantan(R) (methylprednisolone aceponate). Advantan(R) is a topical
corticosteroid for the treatment of eczema. Advantan(R) was first
launched in 1992. We presently distribute Advantan(R) in Europe, Latin
America and Asia. In Australia and New Zealand, Advantan(R) is co-
marketed with Commonwealth Serum Laboratories Ltd. The arrangement
terminates in 2004.
. Neriproct(R) (diflucortolone valerate, lidocain). Neriproct(R) is used
to treat hemorrhoids and is distributed in Japan.
. Psorcutan(R) (calcipotriol). Psorcutan(R) is a vitamin D3 based topical
product for the treatment of mild to moderate psoriasis. The product is
available as ointment, cream or solution. Psorcutan(R) was developed by
Leo Pharmaceuticals and first launched in Germany in 1992. We have semi-
exclusive rights to distribute Psorcutan(R) in Germany, Italy, Austria,
Turkey and Eastern Europe under a licensing agreement which terminates
in 2006.
27
<PAGE>
. Skinoren(R) (marketed in the United States as Azelex(R)) (azelaic
acid). Skinoren(R) is used to treat mild to moderate inflammatory acne
vulgaris both as a stand-alone therapy and in combination with other
topical agents such as benzoyl peroxide. Skinoren(R) was launched in
Europe in 1989 and in the United States in 1995. We distribute the
product in Europe and Latin America. In the United States, Azelex(R) is
distributed by Allergan Inc. under a co-marketing arrangement. A gel
preparation is under regulatory review in Europe and a NDA is expected
to be submitted in the United States in 2003.
28
<PAGE>
RESEARCH AND DEVELOPMENT
Overview
Our research and development activities are focused primarily on four
selected fields with a high degree of unmet medical needs. We are
concentrating on the exploitation of novel technologies resulting in the
development of:
. causal therapy of selected disabling and life threatening diseases.
. sensitive and highly specific diagnostics.
. gender specific health care products.
. treatments of severe skin disorders.
In our drug and target discovery and profiling efforts, we are committed to
the application of cutting edge technologies, including gene therapy, gene
discovery, functional genetics and pharmacogenomics, proteomics, state-of-the-
art combinational chemistry and high throughput screening methods. We have
instituted several programs designed to optimize the research and development
process in order to shorten the period of time from the start of early
compound finding until the time that the product reaches the market.
Collaboration Efforts
Besides our internal research and development efforts, we have made a
strategic decision to engage in efficient collaboration. Thus, we continuously
monitor drug and target discovery and new therapeutic principles in our four
core business areas and beyond for opportunities to enrich our product
portfolio and to broaden our technology platform. We enter into licensing
arrangements or otherwise acquire synergistic or value-added drugs and
technologies. We have established a number of research and development
cooperation networks with leading international academic and industrial
partners, including biotechnology companies and major pharmaceutical
companies.
The following table describes certain of our principal collaboration
partners and collaboration objectives:
<TABLE>
<CAPTION>
Partner Objective
------- ---------
<S> <C>
Warner-Lambert Company.............. Anti-thrombotics, R&D in factors of the clotting cascade
Novartis International AG........... Joint development of angiogenesis inhibitors (therapy of solid tumors)
IDEC Pharmaceuticals Corp. ......... Radioimmunotherapy in hematological oncology (radiolabeled mAB)
ILEX Oncology, Inc./ LeukoSite, Inc.
(Millennium Pharmaceuticals, Inc.).. Immunotherapy in hematological oncology (mAB)
Techniclone Corporation............. Radioimmunotherapy in hematological oncology (radiolabeled mAB)
Alliance Pharmaceuticals Corp. ..... Ultrasound contrast medium
Collateral Therapeutics, Inc. ...... Angiogenic gene therapy
DUSA Pharmaceuticals, Inc. ......... Photodynamic therapy in dermatological indications
INCYTE Pharmaceuticals, Inc. ....... Genomics--access to EST/gene database
Ribozyme Pharmaceuticals, Inc. ..... Genomics--antisense technology for target validation
MediGene AG......................... Vaccination for treatment of precancerous lesions of the cervix
Phoenix Pharmacologics Inc. ........ Enzymatic technology in cancer therapy
Pharmacopeia, Inc. ................. Drug discovery--access to large compound libraries
Myriad Genetics, Inc. .............. Access to genomic database for proteins
</TABLE>
29
<PAGE>
We have also founded or co-founded several institutions that perform basic
research of special interest to the Group. These basic research institutions
maintain a close relationship with our research and development organization.
The following table sets forth these institutions, our ownership interest, and
their field of research:
<TABLE>
<CAPTION>
Ownership
Institution Interest Research Field
----------- --------- --------------
<S> <C> <C>
Institute for Hormone and 70% . Basic research in reproduction
Fertility Research............. physiology and endocrinology.
metaGen GmbH (Genome Research 100% . Identification of genes
Corp.)......................... responsible for certain diseases.
Current focus is breast and
prostate cancer genes.
</TABLE>
Research and Development Efforts
Fertility Control and Hormone Therapy
We are a pioneer in the area of female health care and our fertility
control, hormone replacement therapy and gynecological therapy products seek
to meet the highest standards of efficacy, reliability and safety. In
fertility control, our research and development efforts are aimed to identify
new modes of contraception (hormonal and nonhormonal), to reduce hormone
dosages further, to improve tolerability, to develop new devices for
application and to offer additional therapeutic benefits. In hormone
replacement therapy, we are developing products for the treatment of
climacteric complaints and for the prevention and treatment of osteoporosis
with a panel of treatment regimes and a variety of choices regarding the
active ingredients and the form of application (such as oral form,
intrauterine systems and patches). In gynecological therapy (hormone therapy),
we are developing a new treatment for endometriosis. We are also pursuing an
andrological research program to identify approaches for male fertility
control and to address age-related hormonal imbalances and corresponding
disease processes in males.
The following table lists the principal products from the fertility control
and hormone therapy business area currently under development by the Group,
their composition and current development status:
<TABLE>
<CAPTION>
Product/Project Composition Status
--------------- ----------- ------
<S> <C> <C>
Oral Contraceptives:
Oral Contraceptive, Estradiol valerate/Dienogest Phase III
containing estradiol
Yasmin(R) 20 Ethinyl estradiol/Drospirenone Phase II
Hormone Replacement
Therapy:
Avaden(R) Gestodene/Estradiol (Oral) France: Submitted
(Sequential Combined)
Climodien(R) Dienogest/Estradiol valerate Netherlands: Submitted
(Continuous Combined) (Oral)
Climara(R) PRO Levonorgestrel/Estradiol Phase III
(Continuous Combined) Transdermal System (Patch)
Continuous Combined HRT Drospirenone/Estradiol (Oral) Phase III
Hormone Therapy:
Endometrial Levonorgestrel Intrauterine Phase II
protection under system (IUS)
estrogen replacement
therapy
Endometrion(R) therapy Dienogest (Oral) Phase III
of endometriosis
</TABLE>
30
<PAGE>
Oral Contraceptives
. Oral Contraceptive containing estradiol. The aim of this project is to
broaden the contraceptive choice for women in their later reproductive
life and to introduce natural estrogen (estradiol) in oral
contraception. Premenopausal women are still at risk of pregnancy, so
that they need a reliable contraceptive. At the same time, pre- and
perimenopause is characterized by the development of symptoms of hormone
deficiency due to declining ovarian function. Such symptoms include
irregular bleeding, hot flushes, night sweats, mood swings, vaginal
dryness and fatigue. The process leading to osteoporosis in
postmenopausal women starts by age 35-40, when bone resorption gradually
exceeds bone formation. Thus, the premenopausal years are an important
period during which to optimize bone mass preservation to reduce the
risk of hip fractures during the postmenopause. With a pill containing
estradiol and dienogest, we aim to provide an effective and safe
contraceptive for the 35-50 year age group, with additional benefits
regarding bone protection and alleviation of vasomotor symptoms. This
product is currently undergoing phase III studies.
. Yasmin(R) 20. Yasmin(R) 20, a lower dose variation of Yasmin(R)
containing the same dose of drospirenone but only 0.02 mg of ethinyl
estradiol, is currently undergoing phase II clinical studies.
Hormone Replacement Therapy
. Avaden(R). Avaden(R) 1 and Avaden(R) 2 are new gestodene-containing HRT
products with the option of dose selection. Avaden(R) 1 and Avaden(R) 2
are sequential combined products. Both products are highly effective in
the control of climacteric symptoms. Moreover, bone mineral density was
shown to increase during treatment, so that both preparations
effectively prevent postmenopausal bone loss. Avaden(R) 1 and Avaden(R)
2 induce a favorable bleeding pattern with predictable and regular
cyclical withdrawal bleeding and a low incidence of intermenstrual
bleeding. Clinical studies reported excellent tolerance and a low
incidence of adverse events. Avaden(R) 1 and Avaden(R) 2 have been
submitted for registration in Europe. An application for regulatory
approval has been submitted in Europe, Latin America and Asia.
. Climodien(R). Climodien(R) contains either a regular or lower dose of
estradiol valerate combined with dienogest in a continuous combined
regimen for treatment of climacteric symptoms. No cyclical bleeding is
induced in the majority of users. Treatment with Climodien(R) results in
a high incidence of amenorrhea, thus providing a therapeutic option for
women not wishing to return to regular menstrual bleeding. The two
preparations provide the prescribers with an option to titrate estrogen
doses according to the women's needs without changing the progestogen
component. The regular-dose Climodien(R) has shown an excellent clinical
profile with regard to relief of menopausal symptoms and bleeding
control and has been submitted for registration. The antiandrogenic
properties of dienogest are an additional benefit for women at this age.
The lower-dose Climodien(R) is in clinical phase III.
. Climara(R) PRO. As an alternative to oral hormone replacement therapy, a
combination patch with estradiol and levonorgestrel is being developed.
This patch will only need to be applied once a week and is intended for
use in osteoporosis prevention and the treatment of climacteric
complaints. The project is currently in clinical phase III.
. Continuous Combined HRT (drospirenone/estradiol). A low-dose preparation
for continuous combined oral hormone replacement in postmenopausal women
is in clinical development. The advantage of this regimen is that no
cyclical bleeding is induced and amenorrhea can be achieved. The product
is developed for the treatment of climacteric symptoms and prevention of
osteoporosis. The preparations contain estradiol and drospirenone (in
different dosages) as the progestogen component to provide endometrial
protection. These combination preparations are expected to offer
clinical
31
<PAGE>
advantages due to drospirenone's complete lack of androgenic effects and
its mild anti-mineralcorticoid activity. This may reduce common side
effects of conventional estrogen therapy, such as fluid retention and
subsequent breast tension and weight increase in susceptible women. The
project is currently in clinical phase III.
Hormone Therapy (Gynaecological Therapy)
. Endometrial protection under estrogen replacement therapy. We are
developing an intrauterine system (IUS) for women in the menopause. The
technology of the IUS has been used successfully for contraception for
some years with the product Mirena(R)--also substituted with estrogen in
women in the perimenopause. Women in the postmenopause no longer require
contraception. For these women, a smaller version of the IUS is being
developed as the uterus shrinks considerably after menopause. The
smaller IUS also releases levonorgestrel. If a woman in the
postmenopause is on estrogen replacement therapy, this IUS prevents
excessive growth of the uterine lining. Since this IUS is a local
application, it also avoids the possible side effects of a progestin.
The project is currently in clinical phase II.
. Endometrion(R). Endometrion(R) is a product specifically targeted for
convenient oral treatment of endometriosis. Each tablet contains 2 mg
dienogest, a progestogen with no estrogenic activity and a track record
of excellent tolerance and acceptability. This new preparation is
expected to be as efficacious as GnRH-agonists but with a lower
incidence of progestogenic and estrogen deficiency-related side effects.
Treatment is recommended for 24 weeks, but long-term use will be
possible. Cost-effectiveness of long-term treatment is an additional
benefit. The project is in clinical phase III.
Therapeutics
Our current research and development efforts in therapeutics are focused on
cardiovascular and central nervous system diseases and in the field of
oncology.
Central Nervous System
. Interferon Beta Oral. In order to offer a more convenient mode of
administration, we are performing a phase II study to investigate
whether the oral administration of interferon beta could be an effective
and safe method of administration in patients with multiple sclerosis.
In addition, we have licensed a product from Nippon Shinyaku for the therapy
of stroke-related brain damage which is currently in phase I clinical
development. The drug's pharmacology is new for this indication. Furthermore,
an immune modulator and a PDE IV inhibitor, both developed from our own
research, have entered Phase I (for oral treatment of multiple sclerosis).
Cardiovascular System
. Iloprost Inhaler. Iloprost, a stable analogue of prostacyclin, is being
investigated in phase III studies for the therapy of pulmonary
hypertension, a disease with an extremely high need for an acute and
effective treatment. Inhalation should provide a rapid response and a
high tolerability. Iloprost is being marketed as Ilomedin(R) for PAOD.
In cooperation with Collateral Therapeutics, Inc., we have initiated a
program using the FGF-4 gene for Angiogenic Gene Therapy (AGT). The program is
currently in phase I/II clinical development for stable angina pectoris.
Another early product development has been commenced in cooperation with
Warner- Lambert Company. The drug is a Factor Xa-inhibitor for the prevention
of thrombosis in acute coronary syndromes.
32
<PAGE>
Oncology
In addition to our Fludara(R) line extensions within the field of
hematological oncology, our primary development efforts in the field of
oncology are Campath(R) and Zevalin(R):
. Campath(R) (alemtuzumab). Campath(R) is a humanized monoclonal anti-
CD52-antibody used for treatment of chronic lymphocytic leukemia (CLL).
It represents the first specific therapy indicated for CLL patients
refractory (not responding) to Fludara(R) treatment. The mechanism of
action of this biologic is the binding to the CD52 antigen of the
surface of B-cells. By binding and the activation of the complement
system, the B-cells are killed. Clinical development has been completed
in patients who previously received alkylating agents and failed
Fludara(R) therapy. A BLA was filed with the FDA in December 1999. The
FDA has given Campath(R) a fast-track designation and also has granted
orphan drug status. We have worldwide marketing rights to Campath(R),
excluding Japan and Asia, under a distribution and development agreement
with LeukoSite, Inc. (which has been acquired by Millennium
Pharmaceuticals, Inc.) and ILEX Oncology, Inc.
. Zevalin(R). Zevalin(R) is an Yttrium-labeled monoclonal antibody
targeting the CD20 antigen and is being developed as radioimmunotherapy
of relapsed, refractory low-grade non-Hodgkin's lymphoma (NHL). The
mechanism of action is beta-radiation by Yttrium-90, which is complexed to
the antibody. The antibody carries the radioactivity to the tumor sites
by binding to the CD20 antigen of B-cells. Prior to Zevalin(R) therapy,
peripheral B-cells need to be cleared by a low dose of rituximab
(produced by Genentech/La Roche). Zevalin(R) shows significantly higher
clinical efficacy compared to non-radioactive anti-CD20 monoclonal
antibodies. Clinical development is in its late stage. The Group has
worldwide rights to Zevalin(R), excluding the United States.
We also currently have three products for the treatment of solid tumors
under phase I development:
<TABLE>
<CAPTION>
Indication Mechanism
---------- ---------
<S> <C>
Various solid tumors............................... Anti-angiogenesis
Hepatoma, melanoma................................. Induction of arginine
deficiency in tumor cells
Breast cancer...................................... Anti-estrogen
</TABLE>
Diagnostics and Radiopharmaceuticals
We believe that we are a world leader in the field of in vivo diagnostic
imaging, providing innovative X-ray, magnetic resonance and ultrasound
contrast media products. Our current research and development projects are
directed towards disease specific and functional imaging products that provide
an even more accurate and earlier detection of tumors, central nervous system
and cardiovascular diseases (sensitive perfusion imaging) and molecular
imaging of inflammatory and proliferative processes. With our recent
acquisitions of the research and development-based companies Diatide, Inc. and
CIS bio international, which specialize in the field of radiopharmaceuticals,
we broadened our technology platform in molecular and functional diagnostics.
33
<PAGE>
The following table lists the principal diagnostic products currently under
development, their indications and current status:
<TABLE>
<CAPTION>
Product Indication/Description Status
------- ---------------------- ------
<S> <C> <C>
Resovist(R) MRI contrast agent/liver imaging US:Submitted
Japan:Submitted
Sweden:Submitted
Eovist(R) MRI contrast agent/liver imaging US:Phase III
EU:Phase III
Japan:Phase III
MS-325 MRI contrast agent/cardiovascular US:Phase III
Imavist(R) Ultrasound contrast agent/echocardiography US:Submitted
</TABLE>
The following description provides further information regarding each of the
pharmaceutical product development candidates listed in the preceding table:
. Resovist(R) (ferucarbotran). Resovist(R) is a MRI contrast agent for
liver-specific imaging being developed for the improved detection of
hepatic tumors.
. Eovist(R) (gadoxetic acid). Eovist(R) is a MRI contrast agent for liver-
specific imaging being developed for the detection and characterization
of hepatic tumors in T1-weighted images.
. MS-325. MS-325 is a MRI contrast agent being developed for diagnosing
diseases of the vasculature. The product is being developed in
cooperation with EPIX Medical Inc.
. Imavist(R). Imavist(R) is a contrast agent for ultrasound being
developed to aid in the assessment of cardiac function and myocardial
blood flow. The product is being developed in cooperation with Alliance
Pharmaceutical Corp. A regulatory approvable letter for Imavist(R) was
issued by the FDA in August 2000.
Dermatology
Our current research and development efforts in the dermatology business
area are focused on eczema, acne, psoriasis and photodynamic therapy.
The following table lists the principal products from the dermatology
business area currently under development by the Group, their indications and
current status:
<TABLE>
<CAPTION>
Product Indication Status
------- ---------- ------
<S> <C> <C>
Levulan(R)/Kerastick(TM) Actinic Keratosis US:Approved
(aminolevulinic acid) EU:Phase III
Aminolevulinic acid Acne, warts, onychomycosis Phase I
Azelaic Acid Acne (mild to moderate) US:Phase III
(gel formulation)
Calcitriol analogue Psoriasis (mild to moderate) Phase I
</TABLE>
The following description provides further information regarding each of the
pharmaceutical product development candidates listed in the preceding table:
. Levulan(R)/Kerastick(TM) (aminolevulinic acid or "5 Ala"). Levulan(R) is
a photosensitization agent for the treatment of actinic keratosis, an
increasingly prevalent pre-cancerous condition. The product is a liquid
formulation that also is available in an easy to use application system
known as Kerastick(TM). Levulan(R) was approved by the FDA in 1999 and
is in the pre-registration phase in Europe.
34
<PAGE>
. Aminolevulinic Acid. Photodynamic therapy of further dermatological
indications such as acne, warts and onychomycosis is being explored in
cooperation with DUSA Pharmaceuticals, Inc.
. Azelaic Acid (gel formulation). Azelaic acid gel is an improved
formulation for the treatment of mild to moderate acne, adapted to oily
acne skin.
. Calcitriol Analogue. The Calcitriol (vitamin D) analogue is a
proprietary Group compound which is being developed as a topical
treatment of mild to moderate psoriasis.
Our research and development projects may not survive the development
process and may not obtain required regulatory approvals. Even if a
development project is approved, it may not be profitable. See "Regulation".
Research and Development Centers
The Group operates nine research and development centers in Europe, the
United States and Japan that employ approximately 4,000 persons. The following
table sets forth the location and principal areas of research for the Group's
research and development centers:
<TABLE>
<CAPTION>
Location Research Areas
-------- --------------
<S> <C>
Berlin, Germany......... . Diagnostics (X-ray, MRI and ultrasound
contrast media and molecular imaging)
. Fertility control and hormone therapy
. Therapeutics (oncology and neuro-degenerative
diseases)
. Dermatology (inflammatory skin disorders,
including eczema and psoriasis)
Jena, Germany........... . Fertility control and hormone therapy
Turku, Finland.......... . Fertility control and hormone therapy (new
modes of application)
Saclay, France.......... . Radiopharmaceuticals
Richmond, California.... . Oncology, CNS/immunology (including MS), and
selected cardiovascular diseases
Indianola, . Medical devices for diagnostic applications
Pennsylvania........... (including vascular injection systems)
Londonderry, New . Radiopharmaceuticals
Hampshire..............
Osaka, Japan............ . Diagnostics (MRI and Near Infrared Imaging),
oncology
Mobara and Tokyo City, . Therapeutics (oncology and cardiovascular and
Japan.................. central nervous system diseases)
</TABLE>
35
<PAGE>
GROUP ORGANIZATION
Business Areas
Our business areas based in Berlin for Fertility Control and Hormone
Therapy, Diagnostics and Radiopharmaceuticals, Therapeutics and Dermatology
coordinate the development of our product portfolio. The business areas
generally have the following objectives:
. establish targets and direction of in-house research.
. sponsor and guide pre-clinical drug development activities.
. actively develop products through clinical phases I, II and III.
. monitor the product approval process in Europe, the United States and
Japan.
. outline the strategy for the introduction of the product in the market.
. stay abreast of new trends in medical research, molecular biology and
biopharmacy in order to identify potential new areas for development or
potential products for acquisition.
. develop an international network of opinion leaders in the medical field
to assist in the development of new products.
Group Segments
The Group's businesses are comprised of five geographic segments and an
other activities (primarily pharmaceutical chemicals) segment, as set forth in
the following chart:
[Chart depicting Schering AG and six segments]
In addition, through our 24% ownership interest in the recently formed
Aventis CropScience S.A., we participate in the crop protection and crop
production business. See note 32 to our consolidated financial statements
included elsewhere in this registration statement setting forth the net sales,
segment performance and segment results, assets and other information for the
Group's segments for 1999, 1998 and 1997. See "Item 5--Operating and Financial
Review and Prospects" for a discussion of the net sales, segment performance
and segment results for the Group's segments for these periods and for the
first six months of 2000 and 1999.
36
<PAGE>
The following table sets forth the net sales for each of the Group's five
geographic segments and the Other Activities segment for the six months ended
June 30, 2000 and 1999 and for the three years ended December 31, 1999:
<TABLE>
<CAPTION>
Six months
ended June
30, Year ended December 31,
----------- -----------------------
2000 1999 1999 1998 1997
----- ----- ------- ------- -------
(in millions of E )
<S> <C> <C> <C> <C> <C>
Net Sales by Segment:
Europe...................................... 1,013 881 1,766 1,649 1,556
United States............................... 495 342 775 678 620
Japan....................................... 307 205 454 343 381
Latin America/Canada........................ 220 177 372 359 371
Asia........................................ 98 79 164 128 150
Other Activities............................ 84 70 143 128 115
----- ----- ------- ------- -------
Total..................................... 2,217 1,754 3,674 3,285 3,193
===== ===== ======= ======= =======
</TABLE>
Europe Region
Overview
The geographic segment Europe, referred to in this registration statement as
the Europe Region, consists of the members of the European Union, all other
countries of continental Europe, Turkey, the members of the Commonwealth of
Independent States (CIS), South Africa, Australia, New Zealand and African
export markets (excluding Egypt, Libya and Sudan). The headquarters of the
Europe Region are located in Berlin, Germany. The Group's operations in Europe
have been enhanced by a number of key acquisitions in recent years, including
Leiras Oy, Jenapharm and CIS bio international. See "--CIS bio international
Acquisition".
The Europe Region accounted for approximately 48% of the Group's net sales
in 1999. As of December 31, 1999, companies in the Europe Region employed
6,145 persons.
The following table sets forth net sales by business area of the Europe
Region for the first six months of 2000 and the years ended December 31, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
Six months ended
June 30, Year ended December 31,
---------------- -----------------------
2000 1999 1998 1997
---------------- ------- ------- -------
(in millions of E)
<S> <C> <C> <C> <C>
Net Sales by Business Area:
Fertility control and hormone therapy.. 387 702 657 578
Therapeutics........................... 355 613 562 551
Diagnostics and
radiopharmaceuticals(1)............... 194 319 310 312
Dermatology............................ 69 122 120 115
Other sources.......................... 8 10 -- --
----- ------- ------- -------
Total................................ 1,013 1,766 1,649 1,556
===== ======= ======= =======
</TABLE>
--------
(1) Net sales of our radiopharmaceutical products have been included in the
recently formed Diagnostics and radiopharmaceuticals business area with
effect from January 1, 2000.
37
<PAGE>
The following table sets forth net sales by country for the Europe Region
for the first six months of 2000 and the years ended December 31, 1999, 1998
and 1997:
<TABLE>
<CAPTION>
Six months ended
June 30, Year ended December 31,
---------------- -----------------------
2000 1999 1998 1997
---------------- ------- ------- -------
(in millions of E )
<S> <C> <C> <C> <C>
Net Sales by Country:
Germany................................ 257 487 476 479
France................................. 114 184 172 156
Great Britain.......................... 68 118 106 94
Italy.................................. 118 201 184 165
Spain.................................. 78 134 117 107
Finland................................ 56 113 127 126
Other.................................. 322 529 467 429
----- ------- ------- -------
Total................................ 1,013 1,766 1,649 1,556
===== ======= ======= =======
</TABLE>
Among the factors that have affected, or may affect, the business of the
Europe Region are:
. Health care cost containment measures effected by governments,
institutions and managed care organizations.
. Intense price competition for products in the diagnostics business area.
. Market entry of generic products, particularly in the diagnostics and
the fertility control and hormone therapy business areas.
. Currency effects in countries outside the euro territory.
We believe that the key competitive strengths of the European business are
our subsidiaries and their sales forces, strong presence and market leadership
in strategic product fields, the excellent reputation of the Schering AG
brand, and good synergies among the countries in the Europe Region through
regional business processes and the exchange of country-specific know-how.
Products
The following table sets forth our top-selling products in the first six
months of 2000 and in 1999 in the Europe Region. These products represented
52% of the total net sales for the Europe Region in 1999 (49% in 1998).
<TABLE>
<CAPTION>
Percentage
change
Net Sales First from first
six months of six months Percentage Change
2000 of 1999 Net Sales 1999 from 1998
----------------- ---------- ----------------- -----------------
(E millions) (E millions)
<S> <C> <C> <C> <C>
1.Betaferon(R)......... 150 38 227 23
2.Ultravist(R)......... 77 (3) 150 (2)
3.Diane(R)............. 76 12 134 9
4.Androcur(R).......... 40 6 77 2
5.Magnevist(R)......... 40 8 74 11
6.Mirena(R)............ 33 16 59 45
7.Femovan(R)........... 32 7 60 1
8.Meliane(R)........... 32 46 48 68
9.Microgynon(R)........ 26 9 47 10
10.Fludara(R)........... 20 21 36 10
--- --- --- ---
Total................. 526 17 912 12
=== === === ===
</TABLE>
38
<PAGE>
Marketing and Distribution
Marketing functions for the Europe Region are centralized at regional
headquarters in Berlin, Germany.
The following table sets forth the main target groups for the marketing of
our products in the Europe Region:
<TABLE>
<S> <C>
Fertility control and
hormone therapy........ Gynecologists, General Practitioners
Therapeutics............ Neurologists, Oncologists, Hospitals
Diagnostics and
radiopharmaceuticals... Radiologists, Urologists, Cardiologists, Hospitals
Dermatology............. Dermatologists, General Practitioners
</TABLE>
Our products are marketed by 2,067 sales representatives located in each of
the countries in the Europe Region. Each country has its own sales force and
marketing organization. However, in some countries, our hormone replacement
therapy products are marketed by agents. Promotion of our products is
supplemented by scientific seminars, advertising in medical and other journals
and innovative marketing tools such as the Internet.
We generally distribute our products through wholesalers, pharmacies or
directly to the target groups.
We actively seek, where appropriate, to supplement the efforts of our sales
force through co-promotion arrangements and co-marketing arrangements. We have
a co-marketing agreement with the Wyeth Ayerst International division of
American Home Products, Inc. for the oral contraceptive substance gestodene
for the Europe Region (other than South Africa, Australia and New Zealand). We
also have several co-promotion agreements for specific countries, including
iloprost in Italy and contrast media products in Spain.
Production
In Europe, we produce active pharmaceutical ingredients and intermediate
products at our primary facility in Bergkamen, Germany and three smaller
facilities in Germany, Finland and Spain. The Bergkamen facility is presently
operating at high capacity. These European production facilities produce much
of the requirements for all of the Group's regions.
In addition to our active pharmaceutical ingredient production operations,
we operate production facilities for the formulation and packaging of
pharmaceutical products. The following table sets forth, as of December 31,
1999, the location of, and dosage form produced at, our production facilities
in the Europe Region.
<TABLE>
<CAPTION>
Dosage Form Location
----------- --------
<S> <C>
Solids.................. Weimar, Berlin, Hamburg, Germany; Lys-Lez-Lannoy, France;
Turku, Finland
Semisolids.............. Vienna, Austria; Milan, Italy; Tammisaari, Finland
Liquids/Parenterals..... Berlin, Jena, Germany; Alcala de Henares, Spain;
Tammisaari, Finland; Milan, Italy
Others(1)............... Turku, Finland
</TABLE>
--------
(1) Implants, intrauterine devices.
For a discussion of certain rationalization measures involving our European
production and packaging facilities, see "Item 5--Operating and Financial
Review and Prospects--Liquidity and Capital Resources--Restructuring Program".
Capital Expenditures
Capital expenditures for the Europe Region were E144 million in 1997, E133
million in 1998 and E108 million in 1999. We made these expenditures mainly in
the areas of production facilities (including the European
39
<PAGE>
Production Initiative) and distribution facilities and to modernize information
technology. Capital expenditures are expected to total E126 million in 2000 and
are being used to upgrade and modernize manufacturing facilities as well as
research and development and administrative functions in order to meet
regulatory, health, safety and environmental requirements and to improve
processes.
CIS bio international Acquisition
We acquired a 60% ownership interest in the French company ORIS Industrie
S.A. and its wholly-owned subsidiary CIS bio international S.A. in April 2000.
As part of this acquisition, we obtained a call option for the remaining 40%
of ORIS Industrie S.A. (which is owned by CEA-Industrie, a holding company of
the French Atomic Energy Commission) that can be exercised after December 31,
2001. CIS specializes in the development, production and distribution of
radiopharmaceuticals and capsulated radioactive sources, or irradiators, which
are implanted in tumors for short periods of special treatment. CIS's Health
Care business also produces medical devices containing capsulated radioactive
sources. In addition, CIS develops, produces and distributes in vitro
diagnostics, in particular radioimmunoassays. CIS generated sales of
approximately E153 million in 1999, with the Health Care business accounting for
64% of sales and in vitro diagnostics accounting for 36% of sales.
CIS's most advanced development project is CISNOET(R). CISNOET(R) is a
preparation for imaging the bloodflow in the cardiac muscle and will be used
in heart scintigraphy, the largest segment in the radiodiagnostics market.
CISNOET(R) is currently in Phase III clinical trials.
CIS markets its products primarily in Europe, with subsidiaries in Germany,
Spain, Italy, Switzerland, Austria, Greece and the United Kingdom, through a
sales force of 196 representatives. CIS also has subsidiaries in Japan and in
the United States.
CIS's production facilities are located in Saclay and Marcoule, France.
United States Region
Overview
The geographic segment United States, referred to in this registration
statement as the United States Region, consists of the United States and
Puerto Rico. We market pharmaceutical products in the United States under the
trade name Berlex Laboratories. As discussed under "-Patents and Other
Intellectual Property", we generally are not permitted to market health care
products in the United States Region under the Schering name.
Schering Berlin Inc. is the management holding company for the United States
interests of Schering AG. Through its operating subsidiaries, Schering Berlin
supports Schering AG's strategic global interests in pharmaceuticals, medical
devices and agrochemicals. Located in Montville, New Jersey, Schering Berlin
provides specialized management expertise and develops long range plans for
its United States subsidiaries. Schering Berlin has four principal
subsidiaries:
Berlex Laboratories, Inc. Located in Wayne and Montville, New Jersey, and
Richmond, California, Berlex Laboratories is committed to bringing products
from the areas of diagnostics, fertility control and hormone therapy and
therapeutics to the United States, and is currently preparing for entry into
the field of dermatology.
Schering Berlin Venture Corporation. This company makes equity investments
in emerging companies with leading-edge technologies.
Medrad, Inc. Medrad focuses on innovative products for diagnostic imaging
and specializes in vascular injection systems for contrast media. Medrad is a
market leader in the development, manufacturing and sale of injectors,
syringes and disposable products in this area. Medrad, with headquarters in
Indianola, Pennsylvania, has developed an international market presence. We
acquired Medrad in 1995.
40
<PAGE>
Diatide, Inc. Diatide specializes in the research and development of
radiopharmaceuticals. Diatide, with headquarters in Londonderry, New
Hampshire, was acquired by the Group in November 1999.
Schering Berlin also indirectly holds a portion of the Group's investment in
Aventis CropScience.
The United States Region accounted for approximately 21% of the Group's net
sales in 1999. As of December 31, 1999, companies in the United States Region
employed 2,613 persons (including 742 sales representatives).
The following table sets forth net sales by business area of the United
States Region for the first six months of 2000 and the years ended December
31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Six months
ended June
30, Year ended December 31,
---------- -------------------------
2000 1999 1998 1997
---------- ------- ------- -------
(in millions of E)
<S> <C> <C> <C> <C>
Net Sales by Business Area:
Fertility control and hormone therapy... 66 129 143 123
Therapeutics............................ 263 403 331 296
Diagnostics and
radiopharmaceuticals(1)................ 166 243 204 201
--- ------- ------- -------
Total................................. 495 775 678 620
=== ======= ======= =======
</TABLE>
--------
(1) Net sales of our radiopharmaceutical products have been included in the
recently formed Diagnostics and radiopharmaceuticals business area with
effect from January 1, 2000.
Among the factors that have affected, or may affect, the business of the
United States Region are:
. Competition from large pharmaceutical companies in the United States
market with substantial resources for research, product development and
promotion.
. Increasingly competitive price pressures as managed care groups,
institutions, government agencies and other purchaser groups seek price
discounts and rebates for pharmaceutical products.
. Intense price competition for products from the diagnostics business
area.
. Impact of market entry of competing generic products, particularly in
the fertility control and hormone therapy business area (including oral
contraceptives and Climara(R)) and in the therapeutics business area
(including Betapace(R)).
We believe that the key competitive strengths of the United States business
are our know-how in building new markets and high-quality customer service.
Products
During 1999, approximately 83% of our net sales in the United States Region
were generated from sales of products from the therapeutics and diagnostics
and radiopharmaceuticals business areas. One of the Group's key strategic
objectives is to broaden the product lines in the United States in the areas
of fertility control, hormone therapy, contrast media, oncology and
dermatology.
41
<PAGE>
The following table sets forth our top-selling pharmaceutical products in
the first six months of 2000 and in 1999 in the United States Region. These
products represented 70% of the total net sales for this segment in 1999 (68%
in 1998).
<TABLE>
<CAPTION>
Percentage
Net sales Change
First six from first Percentage
months of six months Net sales change
2000 of 1999 1999 from 1998
---------- ---------- ----------- ----------
(E (E
millions) millions)
<S> <C> <C> <C> <C>
1. Betapace(R).................. 118 90 157 23
2. Betaseron(R)................. 116 31 189 21
3. Magnevist(R)................. 57 57 79 14
4. Climara(R)................... 38 44 70 5
5. Fludara(R)................... 27 31 48 19
--- --- --- ---
Total......................... 356 52 543 18
=== === === ===
</TABLE>
Medrad's principal product line is vascular injection systems (equipment,
related disposables, and equipment service) for angiography, computed axial
tomography (CT), magnetic resonance imaging and ultrasound. Medrad had net
sales of E149 million in 1999.
Marketing and Distribution
The following table sets forth the main target groups for the marketing of
our products in the United States Region:
<TABLE>
<S> <C>
Therapeutics............ Neurologists, Oncologists, Hospitals
Diagnostics and
radiopharmaceuticals... Radiologists, Urologists, Cardiologists, Hospitals
Fertility control and
hormone therapy........ Gynecologists
Medrad.................. Radiologists, Hospitals
</TABLE>
Our pharmaceutical products are marketed by our 742 trained sales
representatives. Promotion of our products is supplemented by physician
training, scientific seminars, advertising in medical and other journals,
samples and direct-to-the-consumer campaigns to increase awareness in the
market. Due to the broadening of our product line in the United States Region,
including the launch of the oral contraceptive Yasmin(R), we intend to
significantly expand the size of our sales force.
We generally distribute pharmaceutical products through wholesalers and
pharmacies or directly to end-customer groups. We have contract arrangements
with hospital groups and managed care groups that in turn receive our products
at contract prices through wholesalers.
Medrad markets its products to target groups through its own sales force
located in its major markets. Products are also marketed to end-customer
groups indirectly through original equipment manufacturers (OEMs), government
purchasing offices (GPOs) and managed care groups. Third-party distributors
serve Medrad's smaller markets.
Production
The pharmaceutical products we market in the United States Region are
generally manufactured by the Group's European facilities or under various
manufacturing agreements with third parties. We operate one pharmaceutical
production plant in the United States Region. The plant, located in Wayne, New
Jersey, produces and packages solid and special dosage forms.
Medrad develops and manufactures its products at its facility in Indianola,
Pennsylvania.
42
<PAGE>
Capital Expenditures
Capital expenditures for the United States Region were E23 million in 1997,
E23 million in 1998 and E24 million in 1999. Capital expenditures are expected
to total E37 million in 2000.
In addition to information technology and research equipment purchases,
capital projects currently in progress include the expansion of the clinical
production area in Richmond, California, to support upcoming clinical trials.
Expenditures for Medrad include an expansion of its manufacturing facility in
Indianola, Pennsylvania.
Japan Region
Overview
The geographic segment Japan, referred to in this registration statement as
the Japan Region, corresponds to the geographical area of Japan and comprises
the business of Nihon Schering KK in Japan and direct sales by Schering AG to
Tanabe Seiyaku Co., Ltd. of a X-ray contrast medium as well as to Yamanouchi
Pharmaceutical Co., Ltd. of an oral contraceptive. The Japan Region accounted
for approximately 12% of the Group's net sales in 1999. As of December 31,
1999, the Japan Region employed 1,211 persons (including 505 medical
representatives).
Until recently, our Japanese business was primarily concentrated in
diagnostics. During March 2000 we acquired the Japanese pharmaceutical company
Mitsui Pharmaceuticals, Inc. Mitsui Pharmaceuticals is focused on therapeutic
products in the areas of oncology and diseases of the cardiovascular system and
the central nervous system. The acquisition will enable us to grow our
therapeutics business faster than possible through building a competent research
and development and sales capacity in the therapeutics field over time. See "--
Mitsui Pharmaceuticals Acquisition". We established our presence in the Japanese
radiopharmaceutical market through our acquisition of CIS Diagnostics K.K. as
part of the Group's acquisition of a majority share of CIS bio international in
April 2000.
The following table sets forth the net sales by business area of the Japan
Region for the first six months of 2000 and the years ended December 31, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
Six months ended
June 30, Year ended December 31,
---------------- -------------------------
2000 1999 1998 1997
---------------- ------- ------- -------
(in millions of E)
<S> <C> <C> <C> <C>
Net Sales by Business Area:
Fertility control and hormone
therapy............................. 11 16 9 10
Therapeutics......................... 48 25 24 27
Diagnostics and
radiopharmaceuticals(1)............. 227 380 282 312
Dermatology.......................... 21 33 28 32
--- ------- ------- -------
Total.............................. 307 454 343 381
=== ======= ======= =======
</TABLE>
--------
(1) Net sales of our radiopharmaceutical products have been included in the
recently formed Diagnostics and radiopharmaceuticals business area with
effect from January 1, 2000.
Among the factors that have affected, or may affect, the business of the
Japan Region are:
. The regulation of pharmaceutical prices and mandatory price reductions
by the Japanese Ministry of Health and Welfare.
. Extensive periods of time historically required for the development and
the approval of new drug applications by the Japanese Ministry of Health
and Welfare.
We believe that the key competitive strengths of the Japan Region's business
are the flexibility of our sales force to market products from any of our four
business areas, our strong market presence and reputation in diagnostics, and
our proven ability to develop our pipeline of diagnostics and
radiopharmaceuticals, therapeutics and fertility control and hormone therapy
products.
43
<PAGE>
Products
The following table sets forth our top selling products in the first six
months of 2000 and in 1999 in the Japan Region. These products represented 83%
of the total net sales for this segment in 1999 (83% in 1998).
<TABLE>
<CAPTION>
Percentage
Change
Net sales from first
first six months six months Net Sales Percentage Change
of 2000 of 1999 1999 from 1998
---------------- ---------- ----------------- -----------------
(E millions) (E millions)
<S> <C> <C> <C> <C>
1.Iopamiron(R).......... 153 29 266 36
2.Magnevist(R).......... 36 26 63 35
3.Ultravist(R)
(Proscope(R)).......... 15 86 18 24
4.Neriproct(R).......... 11 30 17 16
5.Nerisona(R)........... 9 31 15 17
--- --- --- ---
Total................. 224 32 379 33
=== === === ===
</TABLE>
Marketing and Distribution
The following table sets forth the main target groups for the marketing of
our products in the Japan Region:
Diagnostics and radiopharmaceuticals... Hospital and General Practitioner
Radiologists, Urologists,
Neurosurgeons, Cardiologists
Therapeutics........................... Hospital Internists, Surgeons,
Neurosurgeons, Urologists,
Gynecologists; General Practitioner
Internists and Surgeons
Dermatology............................ Hospital and General Practitioner
Dermatologists, Surgeons
Fertility control and hormone Hospital Gynecologists; General
therapy................................ Practitioner Gynecologists and
Internists
Our products are marketed to their customers by our 505 medical
representatives. Our sales and marketing efforts in the Japan Region are
directed by our head office in Osaka. Promotion of our products is
supplemented by scientific seminars, trade congresses and advertising in
medical journals. We distribute our products through wholesalers.
We have co-marketing agreements with Tanabe Seiyaku Co., Ltd. for the
cardiovascular therapeutic product Novarok(R) and with Yamanouchi
Pharmaceutical Co., Ltd. for the low-dose oral contraceptive Libian(R) (the
trademark under which Triquilar(R) is marketed). Additionally, we have a co-
promotion agreement with Tanabe for our ultrasound contrast agent Levovist(R).
We are also selling Proscope(R), the Japanese brand name for the X-ray
contrast medium Ultravist(R), to Tanabe.
Production
We generally distribute products in Japan that are manufactured by the
Group's European facilities. We operate one production plant in Japan, which
is engaged in packaging of finished dosage forms.
We produce and distribute Iopamiron(R), our top selling product in the Japan
Region, under a license from Bracco S.p.A. Changes in the contractually-
determined price of iopamidol, the active ingredient of Iopamiron(R), have
significantly affected the results of operations of the Japan Region in prior
periods. See "Item 5--Operating and Financial Review and Prospects--Results of
Operations--1999 Compared to 1998--Results of Operations by Segment--Japan
Region" and "--1998 Compared to 1997--Results of Operations by Segment--Japan
Region".
44
<PAGE>
Capital Expenditures
Capital expenditures for the Japan Region were E5 million in 1997, E8 million
in 1998, and E9 million in 1999. Capital expenditures are expected to total E10
million in 2000.
Expenditures were made mainly in the areas of production facilities and the
modernization of information technology.
Mitsui Pharmaceuticals Acquisition
We acquired the Japanese pharmaceutical company Mitsui Pharmaceuticals, Inc.
in March 2000. Mitsui Pharmaceuticals is focused on therapeutic products in
the areas of oncology and diseases of the cardiovascular system and the central
nervous system. Mitsui Pharmaceuticals had net sales of pharmaceutical products
of E108 million during its fiscal year ended March 31, 2000 (excluding sales of
its medical and chemical businesses, which we did not acquire) and employed 616
persons at fiscal year end.
Mitsui Pharmaceuticals' top selling pharmaceutical products in fiscal 1999
were Aspenon(R), Mifurol(R), Barnetil(R), Tasuomin(R) and Miradol(R). These
products represented 76% of the total net sales of Mitsui Pharmaceuticals
(excluding sales of its medical and chemical businesses) in fiscal 1999 (76%
in fiscal 1998).
. Aspenon(R) (aprindine hydrochloride). Aspenon(R) is an anti-arrhythmic
drug for the treatment of tachycardiac arrhythmia. The product was
launched in Japan in 1987.
. Mifurol(R) (carmofur). Mifurol(R) is an anti-metabolite indicated for
remission of cancer of the digestive system (stomach, colon and rectum)
and breast cancer. The product was first sold in Japan in 1981.
. Barnetil(R) (sultopride hydrochloride). Barnetil(R) is an anti-psychotic
drug for the treatment of excitement, hallucinations, delusion in mania
or schizophrenia. The product was launched in Japan in 1989.
. Tasuomin(R) (tamoxifen citrate). Tasuomin(R) is a cytostatic hormonal
anti-agonist indicated for breast cancer. The product was first sold in
Japan in 1990.
. Miradol(R) (sulpride). Miradol(R) is an anti-ulcer drug used for the
treatment of gastric and duodenal ulcers. Miradol(R) is also indicated
for the treatment of schizophrenia and depression. The product was
launched in Japan in 1978.
Mitsui Pharmaceuticals launched several products in 1999, including
Lowmorin(R) (low molecular heparin), a drug with an indication for
disseminated intravascular coagulation.
Mitsui Pharmaceuticals' research and development efforts currently include
projects in the areas of the central nervous system, oncology and the
cardiovascular system. The projects are in the preclinical stage as well as in
phase I, phase II and phase III.
During fiscal 1997, 1998 and 1999, Mitsui Pharmaceuticals invested E20
million, E21 million, and E30 million, respectively, in research and
development.
Mitsui Pharmaceuticals markets its products through approximately 250
medical representatives.
Mitsui Pharmaceuticals manufactures its products at one facility located in
Mobara City, Japan.
Latin America/Canada Region
Overview
The Group's geographic segment for Latin America and Canada, referred to in
this registration statement as the Latin America/Canada Region, consists of
the countries of Central America, South America, the Caribbean
45
<PAGE>
and Canada. Schering AG has had a presence in this region since the 1920s. The
headquarters of the Latin America/Canada Region (known as CECLA-Centro
Estrategico Canada Latinoamerica) are located in Mexico City, Mexico, and
manage the activities of 13 subsidiaries in the major countries of the region.
The Latin America/Canada Region accounted for approximately 10% of the Group's
net sales in 1999. As of December 31, 1999, companies in the Latin
America/Canada Region employed 2,305 persons (including 881 sales
representatives).
The following table sets forth the net sales by business area of the Latin
America/Canada Region for the first six months of 2000 and the years ended
December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Six months
ended June
30, Year ended December 31,
---------- -------------------------
2000 1999 1998 1997
---------- ------- ------- -------
(in millions of E)
<S> <C> <C> <C> <C>
Net Sales by Business Area:
Fertility control and hormone therapy... 139 233 226 230
Therapeutics............................ 38 63 59 66
Diagnostics and
radiopharmaceuticals(1)................ 24 42 40 42
Dermatology............................. 14 25 26 26
Other sources........................... 5 9 8 7
--- ------- ------- -------
Total................................. 220 372 359 371
=== ======= ======= =======
</TABLE>
--------
(1) Net sales of our radiopharmaceutical products have been included in the
recently formed Diagnostics and radiopharmaceuticals business area with
effect from January 1, 2000.
The following table sets forth net sales by country for the Latin
America/Canada Region for the first six months of 2000 and the years ended
December 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
Six months
ended June
30, Year ended December 31,
---------- -------------------------
2000 1999 1998 1997
---------- ------- ------- -------
(in millions of E)
<S> <C> <C> <C> <C>
Net Sales by Country:
Brazil................................... 65 112 139 144
Argentina................................ 33 64 56 60
Mexico................................... 39 57 43 38
Canada................................... 28 44 35 36
Colombia................................. 13 26 26 30
Venezuela................................ 10 16 14 11
Others(1)................................ 32 53 46 52
--- ------- ------- -------
Total.................................. 220 372 359 371
=== ======= ======= =======
</TABLE>
--------
(1) Others includes Uruguay, Peru, Chile, Ecuador, Caribbean countries,
Bolivia and Guatemala.
Among the factors that have affected, or may affect, the business of the
Latin America/Canada Region are:
. Adverse currency effects.
. Impact of market entry of competing generic products, which entry is
encouraged by the governments of the region.
. Direct and indirect price controls imposed by regulatory authorities.
. Factors generally associated with operating in developing countries,
including the risk of political and economic instability.
46
<PAGE>
We believe that the key competitive strengths of our business in the Latin
America/Canada Region are:
. In the area of fertility control, our specialized sales force, franchise
and expertise.
. In Latin America, our leadership position in fertility control and
diagnostics, and our strong market position in hormone replacement
therapy and dermatology.
. In Canada, our strong market position in therapeutics, particularly the
treatment of multiple sclerosis and oncology, and our strong inroads in
the fertility control and hormone replacement therapy business area.
Products
The following table sets forth our top-selling products in the first six
months of 2000 and in 1999 in the Latin America/Canada Region. These products
represented 42% of the total net sales for this segment in 1999 (41% in 1998).
<TABLE>
<CAPTION>
Percentage
Change
Net Sales First from first
six months of six months Percentage Change
2000 of 1999 Net Sales 1999 from 1998
----------------- ---------- ----------------- -----------------
(E millions) (E millions)
<S> <C> <C> <C> <C>
1. Microgynon(R)........ 23 25 39 15
2. Betaferon(R)......... 21 53 31 31
3. Diane(R)............. 19 56 27 9
4. Femovan(R)........... 18 5 34 (16)
5. Iopamiron(R)......... 15 20 24 11
--- --- --- ---
Total................. 96 34 155 7
=== === === ===
</TABLE>
Marketing and Distribution
The following table sets forth the main target groups for the marketing of
our products in the Latin America/Canada Region:
<TABLE>
<S> <C>
Fertility control and Gynecologists, Obstetricians, General
hormone therapy......... practitioners, Family planning institutions,
Endocrinologists, Hospitals.
Therapeutics............. Oncologists, Hematologists, Urologists,
Neurologists, Hospitals.
Diagnostics and
radiopharmaceuticals.... Radiologists, Cardiologists, Selected hospitals.
Dermatology.............. Dermatologists.
</TABLE>
Our products are marketed by 881 sales representatives in almost all of the
countries of the Latin America/Canada Region. Each of our 13 subsidiaries has
its own marketing organization, which is supported by regional headquarters in
the areas of strategy development and the coordination of new product
introductions. Promotion of our products is supplemented by scientific
seminars and advertising in medical and other journals.
We generally distribute our products through wholesalers, pharmacies,
hospitals, clinics and, in some cases, directly to the target groups. We
maintain a distribution center in Colon, Panama, to serve as a regional hub
for the distribution of products among our companies in Latin America.
Production
Certain of the pharmaceutical products we market in the Latin America/Canada
Region are manufactured by the Group's European facilities. At our facility in
Orizaba, Veracruz, Mexico, we produce active pharmaceutical ingredients and
intermediate products for the requirements of all of the Group's regions.
47
<PAGE>
The following table sets forth, as of December 31, 1999, the location of,
and dosage forms produced by, our four production facilities in the Latin
America/Canada Region.
<TABLE>
<CAPTION>
Dosage Form Location
----------- --------
<S> <C>
Solids......................................... Sao Paulo, Brazil
Santafe de Bogota, Colombia
Orizaba, Mexico
Semisolids..................................... Buenos Aires, Argentina
Santafe de Bogota, Colombia
Orizaba, Mexico
Liquids........................................ Sao Paulo, Brazil
Buenos Aires, Argentina
Orizaba, Mexico
</TABLE>
Capital Expenditures
Capital expenditures for the Latin America/Canada Region were E14 million in
1997, E11 million in 1998 and E19 million in 1999. Capital expenditures are
expected to total E20 million in 2000.
Expenditures were made mainly in the areas of production facilities and
distribution facilities and modernization of information technology. We are
currently renovating our production facility in Sao Paulo, Brazil, in order to
modernize our production operations. The estimated cost of the project, which
is expected to be completed in 2001, is E9 million.
Asia Region
Overview
The Group's geographic segment for Asia, referred to in this registration
statement as the Asia Region, is comprised of the countries of the Pacific Rim
of Asia (but excluding Japan, Australia and New Zealand), the Middle East, and
Egypt, Libya and Sudan. Turkey and the countries of Central Asia (including
the Commonwealth of Independent States (CIS) members) are not included in the
Asia Region. The headquarters of the Asia Region are located in Berlin,
Germany, and manage the operations of our subsidiaries in South Korea, China,
Hong Kong, Taiwan, Thailand, Indonesia and the Philippines and our branch
offices and distributors in all the other major countries of the region. The
Asia Region also operates production facilities in South Korea, China and
Indonesia. The Asia Region accounted for approximately 4% of the Group's net
sales in 1999. As of December 31, 1999, the Asia Region (excluding staff
dedicated to the Asia Region located in our Berlin headquarters) employed
1,323 persons (including 610 sales representatives).
The following table sets forth the net sales by business area of the Asia
Region for the first six months of 2000 and the years ended December 31, 1999,
1998 and 1997.
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, December 31,
---------------- --------------
2000 1999 1998 1997
---------------- ---- ---- ----
(in millions of E)
<S> <C> <C> <C> <C>
Net Sales by Business Area:
Fertility control and hormone therapy............ 36 63 52 63
Therapeutics..................................... 10 21 13 11
Diagnostics and radiopharmaceuticals(1).......... 38 56 46 48
Dermatology...................................... 7 16 13 16
Other sources.................................... 7 8 4 12
--- --- --- ---
Total.......................................... 98 164 128 150
=== === === ===
</TABLE>
--------
(1) Net sales of our radiopharmaceutical products have been included in the
recently formed Diagnostics and radiopharmaceuticals business area with
effect from January 1, 2000.
48
<PAGE>
The following table sets forth net sales by country for the Asia Region for
the first six months of 2000 and the years ended December 31, 1999, 1998 and
1997:
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, December 31,
---------------- --------------
2000 1999 1998 1997
---------------- ---- ---- ----
(in millions of E)
<S> <C> <C> <C> <C>
Net Sales by Country:
South Korea..................................... 23 35 26 33
China(1)........................................ 10 17 14 12
Taiwan.......................................... 10 15 12 12
Israel.......................................... 4 14 9 8
Indonesia....................................... 12 14 7 20
Thailand........................................ 7 12 8 18
Other........................................... 32 57 52 47
--- --- --- ---
Total......................................... 98 164 128 150
=== === === ===
</TABLE>
--------
(1) Includes Hong Kong.
Among the factors that have affected, or may affect, the business of the
Asia Region are:
. Currency effects.
. Factors generally associated with operating in developing countries,
including the risk of political and economic instability.
. Certain of our fertility control products are purchased by institutional
clients (including governments and nongovernment organizations) with
unpredictable purchasing patterns, which can result in fluctuations in
net sales and profitability from period to period.
We believe that the key competitive strengths of our business in the Asia
Region are:
. Our specialized product portfolio, particularly in the areas of
diagnostics and radiopharmaceuticals and fertility control and hormone
therapy.
. Our strong market presence and high market share in the areas of
diagnostics and radiopharmaceuticals and fertility control and hormone
therapy.
Products
The following table sets forth our top selling products in the first six
months of 2000 and in 1999 in the Asia Region. These products represented 45%
of the total net sales for this segment in 1999 (44% in 1998).
<TABLE>
<CAPTION>
Percentage
Change
Net Sales From first Percentage
First six months Six months Change
of 2000 of 1999 Net Sales 1999 From 1998
------------------ ---------- ------------------ ----------
(E millions) (E millions)
<S> <C> <C> <C> <C>
1. Ultravist(R).... 24 49 36 27
2. Diane(R)........ 5 20 10 42
3. Magnevist(R).... 7 45 10 23
4. Femovan(R)...... 5 45 9 20
5. Microgynon(R)... 4 16 8 14
--- --- --- ---
Total............ 45 41 73 33
=== === === ===
</TABLE>
In Indonesia, we also manufacture and sell a variety of Boehringer Ingelheim
products under license.
49
<PAGE>
Marketing and Distribution
The following table sets forth the main target groups for the marketing of
our products in the Asia Region:
<TABLE>
<S> <C>
Fertility control and hormone Gynecologists, Family Planning
therapy........................... Institutions, General Practitioners,
Hospitals
Diagnostics and
radiopharmaceuticals.............. Radiologists, Cardiologists, Hospitals
Therapeutics....................... General Practitioners, Oncologists,
Hospitals
</TABLE>
Our products are marketed by 610 exclusive sales representatives located in
all of the major markets of the Asia Region. Our local sales and marketing
organizations receive support from Asia Region headquarters in Berlin.
Promotion of our products is supplemented by scientific seminars, workshops
and advertising in medical journals.
In Taiwan, Thailand, Indonesia, the Philippines, Hong Kong, Malaysia and
Singapore, we distribute our products through an exclusive distributor. In
South Korea and China, we generally distribute our products through various
wholesalers and pharmacies and, in some cases, directly to hospitals. In the
Middle Eastern countries, we are for the most part represented by agents that
import and distribute our products through their organizations.
Production
Certain of the pharmaceutical products we market in the Asia Region are
manufactured by the Group's European facilities.
The following table sets forth, as of December 31, 1999, the location of,
and dosage forms produced by, our three production facilities in the Asia
Region.
<TABLE>
<CAPTION>
Dosage Form Location
----------- --------
<S> <C>
Solids................................................... Jakarta, Indonesia
Semisolids............................................... Jakarta, Indonesia
Ansung, South Korea
Liquids.................................................. Guangzhou, China
Jakarta, Indonesia
Ansung, South Korea
</TABLE>
We also license the production of certain of our products in Pakistan, India
and Egypt for sale in the local markets.
Capital Expenditures
Capital expenditures For the Asia Region were E5 million in 1997, E7 million
in 1998 and E4 million in 1999. Capital expenditures are expected to total E5
million in 2000.
Expenditures of approximately E 9 million were made to increase the capacity
at the Jakarta, Indonesia production facility. This project was completed in
1999.
Other Activities
The Other Activities segment is comprised of activities that are not of
sufficient significance to require independent segment reporting. The Other
Activities segment primarily consists of Pharma Chemicals. The Other
Activities segment accounted for approximately 4% of the Group's net sales in
1999.
50
<PAGE>
The following table sets forth the net sales by business of the Other
Activities segment for the first six months of 2000 and the years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Six months ended June 30, Year ended December 31,
------------------------- -------------------------
2000 1999 1998 1997
------------------------- ------- ------- -------
(in millions of E)
<S> <C> <C> <C> <C>
Net Sales by Sub-Segment:
Pharma Chemicals.......... 64 97 84 73
Other..................... 20 46 44 42
--- ------- ------- -------
84 143 128 115
=== ======= ======= =======
</TABLE>
Pharma Chemicals is a small sales- and profit-oriented business unit with
headquarters in Berlin, Germany. Pharma Chemicals engages in the sale to third
parties of intermediates and active pharmaceutical ingredients produced by the
Group worldwide, particularly the Group's manufacturing facilities in
Bergkamen, Germany, and Orizaba, Mexico. Pharma Chemicals also is active in
tailor-made chemistry. The pharmaceutical chemicals marketed include
estrogens, progestogens, androgens, corticosteroids, intermediates and tailor-
made chemistry compounds. Sales to customers in Europe and the United States
accounted for approximately 60% and 28%, respectively, of Pharma Chemicals'
net sales during 1999.
COMPETITION
We operate in a competitive global market. We encounter competition in all
of our geographical markets from large national and international competitors.
Important competitive factors include:
. product characteristics and dependability (including safety, efficacy,
range of indications, dosage form and convenience).
. product price and demonstrated cost-effectiveness.
. customer service.
. sales force size and expertise.
. advertising and promotion.
. production and manufacturing costs.
. research and development of new products and processes.
Fertility Control and Hormone Therapy
We primarily compete in special markets in the areas of hormonal
contraception and hormone replacement therapy for menopausal women. Our
principal competitors in these markets are the Wyeth Aerst division of
American Home Products, Inc., Johnson & Johnson's Ortho division, Novartis
International AG and the Organon division of Akzo Nobel N.V. The hormonal
contraception market is generally concentrated among the top manufacturers
while the hormone replacement market is generally more diversified,
particularly in Europe.
The key competitive factors include price, product characteristics
(including, with the impending introduction of more advanced oral
contraceptives with additional therapeutic benefits such as acne control, lack
of weight gain and general well being), and safety. In the hormone replacement
therapy area, the availability of a comprehensive product portfolio for the
various therapeutic methods (sequential and continuous) and alternative routes
of application (oral, transdermal and IUS) is also a key competitive factor.
We expect that the hormonal contraception market may experience an extension
into later age groups as the market acceptance of hormonal/intrauterine
systems increases in the future. The potential market for hormone replacement
therapy products will grow as the demographic shift to a higher proportion of
older age groups
51
<PAGE>
continues. Demand for hormone replacement therapy products should increase as
older age groups suffer not only from menopausal symptoms but also from an
accelerated loss of bone mass, which can be prevented with sex hormones such
as estradiol, which is used to treat menopausal symptoms.
Diagnostics and Radiopharmaceuticals
We compete globally in the highly competitive markets for X-ray, MRI and
ultrasound contrast media products, radiopharmaceuticals and contrast medium
application technologies.
The key competitive factors in diagnostics and radiopharmaceuticals include
product price, product efficacy and safety, ease of use, distribution and
marketing, customer service and the availability of patent protection.
Additional competitive factors relating to the development of new contrast
media include technological innovation and the ability to introduce new
products to the market before competitors. We believe that our distribution of
our contrast media products through our own global distribution network
distinguishes us from our competitors.
As in the broader health care industry, the contrast media market continues
to be strongly impacted by cost containment measures. Pricing pressures have
led to decreasing prices in the mature X-ray contrast media market and, to a
lesser extent, in the extracellular MRI contrast media market. Pricing
pressure has been the most severe in the United States, where manufacturers
compete on price in order to obtain contracts with large customer buying
groups. We expect this trend of price reductions to continue in the United
States and Europe and, to a lesser extent, in Japan.
Our principal competitors in the X-ray and MRI contrast media field include
Nycomed Amersham plc, Bracco S.p.A., Mallinckrodt Inc. and, in Japan, Daiichi
Pharmaceutical Co., Ltd. Other significant competitors include Guerbet S.A. in
Europe, Latin America and Asia (other than Japan), Byk Gulden in Europe and
Eisai Co. Ltd. and Yamanouchi Pharmaceutical Co., Ltd. in Japan. Generic X-ray
and MRI contrast agents have not had a significant impact on our contrast
media sales. However, we consider generic X-ray and MRI extracellular agents a
potential risk to sales and market share in the future.
The market for ultrasound contrast media products is in the early stages of
development. We were the first to market with an ultrasound contrast agent for
whole-body use in Europe, Japan, the rest of Asia, Latin America and Canada.
In Europe, we compete with Mallinckrodt Inc. in the ultrasound contrast agent
market.
The radiopharmaceuticals market is dominated by a small number of companies.
As we expand our business in this field, our main competitors are expected to
include Nycomed-Amersham plc, the DuPont Pharmaceuticals Company and
Mallinckrodt Inc. in the United States and Europe and Nihon Medi-Physics Co.,
Ltd. and Daiichi Radioisotope Lab., Ltd. in Japan.
In the market for contrast media application technologies, Medrad's main
competitors are the Liebel-Flarsheim unit of Mallinckrodt Inc., particularly
in the United States and Europe, and Nemoto Kyorindo Co., Ltd., particularly
in Japan.
Therapeutics
The global markets for our therapeutics products are highly competitive and
include large as well as smaller niche competitors. Our major competitors
include Biogen, Inc., Ares-Serono S.A. and Aventis S.A./Teva Pharmaceutical
Industries Limited in the field of multiple sclerosis therapeutics; American
Home Products, Inc. and Pfizer Inc. in the area of cardiovascular products;
and F. Hoffmann-La Roche Ltd. and its subsidiary Genentech, Inc., Bristol-
Myers Squibb Company, AstraZeneca PLC and Schering-Plough Corporation in
oncology.
The key competitive factors in therapeutics include product efficacy and
safety, research and development-driven product and process innovations, price
and cost effectiveness, sales force size and expertise, and product
advertising and promotion. Price has become an increasingly important factor,
particularly in Latin America, Asia and, more recently, Europe.
Our therapeutic product, Betaferon(R), continues to face strong competition
from Biogen, Inc. and Aventis S.A./Teva Pharmaceutical Industries Limited in
the United States and Biogen, Inc., Aventis S.A./Teva
52
<PAGE>
Pharmaceutical Industries Limited and Ares-Serono S.A. in Europe. The
competitive position of Betaferon(R) is enhanced because Betaferon(R) is
currently the only product approved for the treatment of relapsing remitting
MS as well as secondary progressive MS in Europe, Australia and Canada.
We expect that our anti-arrhythmic drug Betapace(R) may encounter increased
competition in the United States from generic substitutes in the future.
Dermatology
We primarily compete with marketers of products for the treatment of eczema,
acne, psoriasis, mycoses and hemorrhoids in Europe and, to a lesser extent,
Japan and Latin America. We have only recently entered the United States
dermatology market. Our principal competitors include Johnson & Johnson, F.
Hoffmann-La Roche Ltd., Novartis International AG, Glaxo Wellcome plc,
Schering-Plough Corporation and American Home Products, Inc.
AVENTIS CROPSCIENCE
Overview
Aventis CropScience S.A. is one of the world's leading crop protection and
crop production businesses. Aventis CropScience was formed in connection with
the December 1999 acquisition of Hoechst AG by Rhone-Poulenc S.A. Rhone-
Poulenc subsequently changed its name to Aventis S.A. In connection with this
transaction, the operations of Hoechst Schering AgrEvo GmbH were consolidated
with the crop protection and crop production operations of Rhone-Poulenc to
form Aventis CropScience S.A., which is presently a 76%-owned consolidated
subsidiary of Aventis. Schering AG holds the remaining 24% ownership interest
in Aventis CropScience. AgrEvo, which was initially formed in 1994, was a
joint venture between Hoechst and Schering in which Hoechst held a 60%
ownership interest and Schering held a 40% ownership interest. During 1999,
Aventis CropScience had pro forma net sales of E 4,061 million and net
sales of E 2,212 million in the first six months of 2000. For a
discussion of AgrEvo's results of operations and Schering AG's funding of the
Aventis CropScience joint venture, see "Item 5--Operating and Financial Review
and Prospects--Aventis CropScience".
Aventis CropScience has its executive offices in Lyon, France, and research,
production and formulation facilities primarily in Germany, the United States,
Canada, France, the Netherlands and the United Kingdom. As of December 31,
1999, Aventis CropScience had approximately 16,000 employees worldwide.
Aventis CropScience's single largest regional market during 1999 was Europe.
North America, Asia/Pacific and Latin America followed Europe in terms of
significance as measured by sales.
Products and Research and Development
Aventis CropScience's business principally involves the production and sale
of crop protection agents, including herbicides, insecticides and fungicides,
genetically improved seeds (including herbicide-tolerant and insect-
resistant), and products for domestic, public and commercial pest control.
Aventis CropScience's primary customers include major crop science product
wholesalers, smaller commercial distributors, and large corporate farms.
Aventis CropScience expects to focus its research and development efforts on
projects in the chemical products and biotechnology products areas. Aventis
CropScience's research and development projects may not survive the
development process and may not obtain required regulatory approvals. Even if
a development project is approved, it may not be profitable. See "--Regulation
of CropScience Products".
Competition
The principal competitors of Aventis CropScience include Novartis
International AG, Monsanto Company, Inc., AstraZeneca PLC, E.I. du Pont de
Nemours and Company, Bayer AG, Dow AgroSciences LLC, American Home Products,
Inc. and BASF AG.
53
<PAGE>
The crop science industry has consolidated substantially in recent years as
competitors seek to strengthen their market position and respond to evolving
market conditions. In December 1999, Novartis S.A. and AstraZeneca PLC agreed
to combine their agro businesses to form Syngenta and in March 2000, BASF AG
agreed to acquire the American Cynamid Co. division of American Home Products,
Inc. Competitive pricing and alternative products offered by Aventis
CropScience's competitors can limit or reduce the market penetration and
profitability of existing or commercially viable new products.
Regulation of Crop Science Products
Aventis CropScience is subject to various laws and regulations concerning
product safety in many of the countries in which it manufactures and sells its
products. In most countries, crop science products (including genetically-
modified plants) must obtain government regulatory approval prior to
marketing. It generally takes five to seven years from discovery of a new crop
science product until the dossier is submitted to the appropriate regulatory
agency for product approval.
Public concerns and debate in Europe, particularly in Germany, France and
the United Kingdom, about genetically modified agricultural products have
delayed and may continue to delay or prevent regulatory approval of certain of
Aventis CropScience's current and future products and may also have a negative
impact on market acceptance of such products. In the past, Aventis CropScience
(or its predecessors) has delayed the launch of certain products due to import
restrictions on genetically modified products in parts of Europe.
Description of Aventis CropScience Partners' Arrangements
We entered into a Partners' Agreement with Hoechst AG, Aventis S.A. and
Rhone-Poulenc S.A. on December 29, 1999, pursuant to which Aventis agreed to
contribute all of its shares in Rhone-Poulenc Agro S.A., Hoechst agreed to
contribute all of its shares in AgrEvo GmbH, and we agreed to contribute all
of our shares in AgrEvo GmbH to Aventis CropScience S.A. We hold a 24%
ownership interest in Aventis CropScience and will be able to participate in
any capital increases of Aventis CropScience to maintain our level of
ownership. We also have a right entitling us to put all of our shares in
Aventis CropScience to Aventis if our shareholdings fall below 15% as a result
of dilution. We are at all times entitled to at least one seat on the
Supervisory Board of Aventis CropScience. We have no right to any
representation on the Management Board of Aventis CropScience, however, a
change in the articles of association of Aventis CropScience or a change of
corporate form requires our consent which we cannot withhold unreasonably.
The agreement provides for the establishment of a research cooperation
between us and Aventis CropScience which is to provide for a mutual exchange
of compounds, libraries and screening possibilities (collectively defined as
Compounds). We grant Aventis CropScience the right to test our Compounds for a
period of fifteen months. After this period expires, Aventis CropScience can
exercise its rights for an exclusive license for our Compounds in the fields
of business of Aventis CropScience. Aventis has the right to test the
Compounds of Aventis CropScience for nine months. After this period expires,
Aventis can exercise its rights for an exclusive license for the Aventis
CropScience Compounds. With regard to Aventis CropScience Compounds for which
Aventis does not exercise this right, Aventis CropScience has to grant us the
right to test these Compounds for fifteen months. After this period expires,
we can exercise our rights for an exclusive license for Aventis CropScience
Compounds.
Until December 31, 2003, no party is entitled to transfer its shares in
Aventis CropScience to a third party or pledge its shares. After December 31,
2003, when a party to the agreement wants to transfer its shares in Aventis
CropScience to a third party, the other party has a preemptive right for all
such shares at the same price and on terms and conditions identical to those
offered to the third party. Indirect transfers of shares of Aventis
CropScience, other than transfers to a wholly owned affiliate of a party,
require prior written consent of the other party. If, absent an agreement by
us, shares in Aventis CropScience become held by an entity which is not a
wholly owned affiliate of Aventis, we have the right to put all of our shares
in Aventis CropScience to Aventis at
54
<PAGE>
a price equal to the fair market value. In case of a change of control of
Aventis that adversely affects our interests or the interests of Aventis
CropScience, we have a right entitling us to put all of our shares in Aventis
CropScience to Aventis at a price equal to the fair market value. In case of a
change of control of the Schering AG Group that adversely affects the
interests of Aventis or Aventis CropScience, Aventis has a call right
entitling it to acquire from us all of our shares in Aventis CropScience at a
price equal to the fair market value.
After December 31, 2003, each party to the agreement is entitled to sell all
of its shares in Aventis CropScience in a public offering. The other parties
have a call right to buy all of the shares held by the party proposing the
offering at a price equal to the fair market value. After January 1, 2007, we
have a right entitling us to put all of our shares in Aventis CropScience to
Aventis and Aventis has a call right entitling it to acquire from us all of
our shares in Aventis CropScience at a price equal to the fair market value.
PATENTS AND OTHER INTELLECTUAL PROPERTY
We strive to protect our investment in research, development, manufacturing
and marketing through the use of patents, trademarks and copyrights.
We believe that our patents are important to our business, but no one patent
(or group of related patents) currently is of material importance in relation
to our business as a whole. Patent protection for new active ingredients of
pharmaceuticals, pharmaceutical formulations and combinations, manufacturing
processes, intermediates useful in the manufacture of products and new uses of
products is available in our major markets. Patents for individual products
extend for varying periods according to the date a patent application is filed
or a patent is granted and the legal term of patents in the jurisdiction where
the patent is obtained. The actual protection provided by a patent, which can
vary significantly from country to country, depends upon:
. the type of granted claim.
. the scope of coverage of the claim.
. the availability of legal remedies in the country for enforcing a
patent.
Our policy is to develop patent portfolios for our research and development
projects in order to obtain market exclusivity for our products in our major
markets. We also attempt to obtain patents on drug targets such as specific
DNA-sequences encoding for proteins and various uses of such subject matter in
drug research.
Although the expiration of a patent for an active ingredient normally
results in the loss of market exclusivity, we may continue to derive
commercial benefits from:
. later-granted patents on processes and intermediates related to the most
economical method of manufacture of the active ingredient of such
product.
. patents relating to the use of such active ingredient.
. patents relating to novel compositions and formulations.
. in certain markets (including the United States), market exclusivity
that may be available under applicable law.
Such commercial benefits strongly depend on the actual scope of protection.
In addition, the effect that the expiration of a patent has on the market
position of a product can depend on many other factors, including:
. the nature of the market and the position of the product covered by the
patent in the market.
. the growth of the market.
. the complexities and economics of the manufacture of the product covered
by the patent.
. the requirements of new drug laws and regulations relating to the
introduction of generic drugs.
55
<PAGE>
The European Union, the United States, Japan and certain other countries
provide for the extension or restoration of patent terms or supplementary
protection certificates to compensate for patent term loss due to the
regulatory review process and the substantial investment made for product
research and development and regulatory approval. Our policy is to obtain
these extensions where possible.
In the United States, new chemical entities approved by the FDA receive a
period of five years exclusivity from the date of approval of the New Drug
Application (NDA), during which time an "abbreviated NDA" or "paper NDA" may
not be submitted to the FDA. Similarly, in the case of non-new chemical
entities, no abbreviated NDA or paper NDA may become effective before three
years from the time of NDA approval if the application included new data of
clinical investigations conducted or sponsored by the applicant. In addition,
a pediatric exclusivity provision that provides for an additional six months
of market exclusivity in the United States for indications of new or currently
marketed drugs may be available if certain agreed upon pediatric studies are
completed by the applicant.
The Orphan Drug Act in the United States is intended to provide incentives
to manufacturers to develop and market drugs for rare diseases or conditions
affecting fewer than 200,000 persons in the United States at the time of
application for orphan drug designation. The first applicant who has obtained
designation of a drug for a particular use as an orphan drug and then obtains
approval of a marketing application for such drug for a particular use is
entitled to marketing exclusivity for a period of seven years, subject to
certain limitations. However, a drug that is considered by the FDA to be
different from a particular orphan drug is not barred from sale in the United
States during such seven-year exclusive marketing period even if it receives
marketing approval for the same product claim.
The European Union also implemented an incentive program for the development
of drugs for rare diseases which became effective in January 2000. Under the
rules, a drug will be designated as an orphan medicinal product if its sponsor
establishes at the time of application that the drug is intended for the
diagnosis, prevention or treatment of a life-threatening or chronically
debilitating condition affecting not more than five in 10,000 persons in the
European Community, or that without incentives, it is unlikely that the
marketing of the drug would generate sufficient return to generate the
necessary investment. The sponsor must also establish that there is no
existing satisfactory method for the diagnosis, prevention or treatment of the
condition in the European Community. A sponsor who receives designation of a
drug as an orphan drug is generally entitled to marketing exclusivity for a
period of ten years (which period may be reduced to six years if the criteria
for orphan drug status are no longer met). A marketing authorization may be
granted for the same therapeutic indication to a similar drug within the
exclusivity period if the holder of the authorization for the original orphan
drug is unable to supply sufficient quantities of the drug or if an applicant
can establish that its drug is safer, more effective or otherwise clinically
superior to the original orphan drug.
Certain of our key products are no longer protected by patents (or other
regulatory exclusivity measures) in our major markets, or protection for these
products will expire in the near future. Many of our fertility control
products have no patent protection remaining. In addition, the X-ray contrast
medium Iopamiron(R), which we sell under license from Bracco S.p.A., has no
patent protection remaining.
56
<PAGE>
The following table sets forth the patent expiration dates of certain of our
top selling products in certain of our major markets:
<TABLE>
<CAPTION>
Expiration Date
------------------------------------------------
Great United
Product Germany France Italy Britain States Japan
------- ------- ------ ----- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Betaferon(R) (Betaseron(R))
Product..................... 2008* 2008* 2008* 2008* 2007* 2003
Magnevist(R)
Product..................... 2003* 2005 2010 2003 2011 2002
Formulation................. 2007 2007 2007 2007 2009 2007
Method of Use............... -- -- -- -- 2013 --
Ultravist(R)
Product..................... -- 2005* 2012* -- 2005* 2005
Diane(R)-35
Process..................... 2004 2004 2004 2004 2004*** 2004
Femovan(R)
Product..................... -- 2003 2007* 2001* -- --
Process..................... 2006 2006 2006 2006 2006*** 2006
Androcur(R)
Process..................... 2004 2004 2004 2004 2004*** 2004
Fludara(R)
Product..................... -- -- -- -- 2003 --
Process..................... 2017** 2017** 2017** 2017** 2018 2017**
Meliane(R)
Product..................... -- -- -- 2001 -- --
Process..................... 2006 2006 2006 2006 2006*** 2006
Mirena(R)
Device...................... -- -- -- -- 2004 --
Process..................... 2001 2001 2001 2001 -- --
Climen(R)
Process..................... 2004 2004 2004 2004 2004*** 2004
Milvane(R)
Product..................... 2004 2004 2004 2004 2004*** 2004
Process..................... 2006 2006 2006 2006 2006*** 2006
</TABLE>
--------
* Patent term extension.
** Patent pending.
*** Product not sold in the United States.
We monitor the patent applications and related activities of our competitors
and other third parties. In cases where we believe that patents granted do not
meet the standards of patentability and such patents may potentially have an
adverse impact on our current or future business, we oppose the grant of such
patents in countries where such opposition is feasible, particularly through
oppositions in the European Patent Office, and nullity proceedings in front of
various national courts. Similarly, third parties may commence proceedings to
oppose or nullify the grant of patents to the Group. These proceedings may
result in the revocation of any of our existing or future patents.
We routinely monitor the activities of our competitors and other third
parties with respect to their use of intellectual property. In cases where we
believe our patents have been infringed, we generally file patent infringement
suits with the appropriate courts. We may not be successful in these patent
infringement suits. Likewise, we may be exposed to litigation by competitors
or other third parties that consider their patents to be
57
<PAGE>
infringed by our activities. Patent litigation is often time-consuming and
expensive. If we do not prevail in patent litigation, we may have to pay
substantial damages or royalties to a competitor or other third party. We may
also be enjoined from selling a product in one or more markets or from
conducting research and development activities in a specific area. For a
discussion of certain patent-related litigation in which we are involved, see
"Item 8--Financial Information--Legal Proceedings".
Worldwide, all of our major products are sold under trademarks that we
consider in the aggregate to be important to the Group. Trademark protection
varies widely throughout the world. In some countries, trademark protection
continues as long as the mark is used. Other countries require registration of
trademarks. Registrations are generally for fixed but renewable terms.
Like other major pharmaceutical companies, we grant licenses under patents
and know-how developed by us and we manufacture and sell products and use
technology and know-how under licenses from others.
Schering AG and Schering-Plough Corporation have entered into an agreement
relating to their respective use of the word "Schering". Under this agreement,
subject to certain limited exceptions, Schering AG may not use the Schering
name for commercial purposes relating to its healthcare business (including
pharmaceutical products) in the United States and Canada and Schering-Plough
Corporation may not use the Schering name for commercial purposes relating to
its healthcare business in Germany, Austria and Switzerland. In the rest of
the world, Schering AG and Schering-Plough Corporation utilize the Schering
name under principles of coexistence. Schering AG operates its pharmaceutical
business in the United States and Canada under the Berlex trade name.
SUPPLIES AND RAW MATERIALS
We purchase raw materials and supplies on a worldwide basis from numerous
suppliers. In those cases where only a single supplier is available, we seek
to accumulate and maintain a strategic reserve inventory of raw materials and
supplies, qualify new suppliers, and develop production processes in our own
facilities. We undertake to secure strategic materials through medium-term and
long-term contracts. We have not experienced difficulties in obtaining
sufficient amounts of raw materials and supplies in recent years and we
anticipate that we will be able to do so in the future. The price of raw
materials and supplies may vary substantially in the future.
The Group's European facilities produce a substantial portion of the active
ingredients used for the production of our products in the Europe, United
States, Latin/America, Canada, Japan and Asia Regions. In addition, a number
of the active pharmaceutical ingredients of our top-selling products,
including Betaferon(R) (Betaseron(R)), Iopamiron(R) and Betapace(R), are
manufactured by third parties.
REGULATION
Like other pharmaceutical companies, we are subject to comprehensive
government controls on the research, clinical and non-clinical development,
manufacture, labeling, advertising, safety reporting, distribution and
marketing of our products in all countries of the world. These controls
include various and detailed government inspections. We are required to obtain
regulatory approval for pharmaceutical products and medical devices before we
can market the products in a particular country, according to the applicable
national regulations. These approvals must be maintained in order to continue
marketing the product. We are in material compliance with applicable
governmental regulations in the jurisdictions in which we operate.
For the registration of a pharmaceutical product, evidence establishing the
quality, safety and efficacy of the product must be submitted together with
information about its identification and the texts for physician and patient
information. The evidence of quality is included in the chemical-
pharmaceutical documentation and the evidence of safety and efficacy in the
pharmacological-toxicological and clinical documentation, all of which is
gathered into a registration dossier. A pharmaceutical product generally must
be registered in each country in which it will be sold.
58
<PAGE>
The submission of an application to a regulatory authority does not
guarantee that approval to market the product will be granted. Although the
above-mentioned criteria for the registration of therapeutic and diagnostic
products are similar in all countries, the formal structure of the necessary
documentation for registration and the attitude of the regulatory authorities
to the review of such documents vary significantly from country to country. It
is possible that a pharmaceutical product can be registered and marketed in
one country and that the registration authority in a neighboring country prior
to registration will request additional documents from the pharmaceutical
company or even reject the product. The registration process takes between six
months and several years depending on the nature of the product, the quality
of the data produced, the country-specific legislation and the registration
authority. Innovative products of particular therapeutic interest (e.g.,
treatment of life threatening or disabling diseases) may be processed on an
accelerated basis in many countries. During the past years, intensive efforts
have been made between the European Union, the United States and Japan to
harmonize registration requirements in order to achieve shorter development
and registration times for pharmaceutical products. The FDA, the Japanese
Ministry of Health and Welfare (Koseisho) and the EU authorities have
successfully shortened review times and adhere to preset timelines thereby
approaching approval times in the range of 12 months. In the countries of the
European Union, product registrations are being obtained through mutual
recognition or central approval processes.
The pharmaceutical development and registration process is typically
intensive, lengthy and rigorous. Once a new compound has been identified in
the laboratory as a potential candidate drug through a screening process, it
undergoes broad pre-clinical testing. During pre-clinical testing, test tube
and animal studies are conducted to show biological activity of the compound
against the targeted disease, and on (other) body systems to evaluate the
whole efficacy and safety range. To begin clinical trials (i.e., tests of the
drug in humans), in the United States an investigational new drug application
(IND) is filed with the FDA; the IND becomes effective if the FDA does not
disapprove it within 30 days. In other countries there are varying but similar
requirements before beginning clinical trials. Clinical testing is usually
done in three phases which can be followed by phase IV after approval. The
size and the duration of clinical trials depend very much on the targeted
disease. For rare diseases, exposure of a few hundred or less patients can be
sufficient. The duration of single clinical trials can take up to three or
more years. In Phase I of clinical trials, the drug is tested in a small group
of normal, healthy volunteers. The tests study the drug's safety profile,
including the safe dosage range. Sometimes the studies also determine how a
drug is absorbed, distributed, metabolized and excreted, and the duration of
its action. In Phase II of clinical trials, the drug is tested in controlled
studies of approximately 30 to 300 volunteer patients (i.e., persons with the
targeted disease) to assess the drug's effectiveness and safety, and establish
a proper dose. In Phase III of clinical trials, the drug is further tested on
several hundred to several thousand patients in clinics and hospitals.
Physicians monitor patients closely to determine efficacy and identify adverse
reactions. To avoid false judgments on results, these studies are blinded so
that neither the patient nor the treating physician knows who receives the
study drug or a placebo, whenever possible. Studies are unblinded only after
completion of the trial.
Following the completion of all three phases of clinical trials, all of the
data is analyzed and a new drug application (NDA) for drugs or a biologic
license application (BLA) for biologics is filed with the FDA (or its
equivalent in other countries) if the data successfully demonstrate safety and
efficacy. In the United States, the FDA is required to review and make a
recommendation for approval of new drugs within 12 months. For drugs
designated as "priority" drugs, the review time is six months. The NDA or BLA
(or its equivalent) must contain all the scientific information that has been
gathered, and can run to several hundred volumes.
Once the FDA (or the respective agency in another country) approves the
application, the new pharmaceutical becomes available for physicians to
prescribe. The pharmaceutical company must continue to submit periodic reports
to the agency, including any cases of adverse reactions and appropriate
quality-control records. For some medications, additional studies (Phase IV)
are required to evaluate long-term effects.
The duration of trials and the vast amount of data that must be collected
and evaluated makes clinical testing the most time consuming and expensive
part of new drug development. We have instituted a global system for
coordinating this process in order to increase its speed and reduce costs.
59
<PAGE>
Marketed products are reviewed continuously for quality, safety and
efficacy. For this, we have established an internal review board. From time to
time, we may elect or be required, upon consultation with or at the direction
of governmental regulators, to take certain action (e.g. change of product
information, recall). In the past such action was required only rarely and has
been limited to individual products, and the effect on the Group has not been
material.
In addition to the regulations enforced by the FDA (and the respective
government agencies in other countries), we are subject to laws regarding
environmental protection and hazardous substances that govern our use,
handling and disposal of various biological, chemical and radioactive
substances used in, and wastes generated by, our operations.
Certain of the products that we market and are developing may be considered
biotechnology products. Ethical, social and legal concerns about gene therapy,
genetic testing and genetic research could also result in additional
regulations restricting or prohibiting the processes we or our suppliers may
use. Various governments have expressed interest in further regulating
biotechnology. More restrictive regulations or claims that such products are
unsafe or pose a hazard could prevent or delay the continued sale or
commercialization of such products.
In addition to the normal competitive forces that affect the level of
pharmaceuticals prices, a further constraint exists in the form of
governmental intervention such as price or profit controls, budgets or patient
contribution requirements in most countries in which the Group sells its
products. These controls arise either by law or because the government or
other health care providers in a particular jurisdiction are the principal
purchasers of the product or reimburse purchasers of the product for all or a
portion of the cost of the product. Price control mechanisms operate
differently from jurisdiction to jurisdiction and can result in large price
differentials between markets. These differentials may be increased by
currency fluctuations and the intensity of competition in specific markets,
since not all drugs are authorized in every market.
We cannot predict with certainty what future effects various pharmaceutical
cost control efforts will have on our business. These efforts could have
significant adverse consequences for the pharmaceutical industry as a whole
and consequently also for the Group. Increasing budgeting and price controls,
the inclusion of patent protected drugs in a fixed price system and lists for
the rational use of drugs as well as legislation permitting or requiring a
dispensing pharmacist to substitute another version of the pharmaceutical
product for the one prescribed may occur in the future.
60
<PAGE>
ORGANIZATIONAL STRUCTURE
Schering AG is the parent company of the Schering AG Group. The Group is
comprised of over 120 subsidiaries worldwide.
The following table sets forth, by geographic segment, as of June 30, 2000,
the name, jurisdiction of incorporation, and ownership interest and voting
interest held in, of Schering AG's principal operating subsidiaries.
Europe Region:
<TABLE>
<CAPTION>
Percentage of
Ownership and
Voting
Company Jurisdiction Interest
------- ------------ -------------
<S> <C> <C>
Asche AG............................................. Germany 100.0
Jenapharm GmbH & Co. KG.............................. Germany 74.9
Schering Deutschland GmbH............................ Germany 100.0
N.V. Schering S.A.................................... Belgium 100.0
Leiras Oy............................................ Finland 100.0
CIS bio international S.A............................ France 60.0
Schering S.A......................................... France 99.9
Schering Healthcare Ltd.............................. England 100.0
Schering S.p.A....................................... Italy 100.0
Schering Nederland B.V............................... Netherlands 100.0
Schering Wien Ges. m.b.H............................. Austria 100.0
Schering Lusitana Lda................................ Portugal 100.0
Schering (Schweiz) AG................................ Switzerland 100.0
Schering Espana S.A.................................. Spain 100.0
Schering Alman Ilac ve Ecza Ticaret Ltd.............. Turkey 100.0
Schering (Pty.) Ltd.................................. South Africa 100.0
Schering Pty. Ltd.................................... Australia 100.0
</TABLE>
United States Region:
<TABLE>
<CAPTION>
Percentage of
Ownership and
Company Jurisdiction Voting Interest
------- ------------- ---------------
<S> <C> <C>
Schering Berlin Inc............................... United States 100.0
Berlex Laboratories Inc........................... United States 100.0
Diatide, Inc...................................... United States 100.0
Medrad, Inc....................................... United States 100.0
Japan Region:
<CAPTION>
Percentage of
Ownership and
Company Jurisdiction Voting Interest
------- ------------- ---------------
<S> <C> <C>
Nihon Schering K.K................................ Japan 99.9(/1/)
Mitsui Pharmaceuticals Inc........................ Japan 99.9(/1/)
</TABLE>
--------
(1) Voting interest is 100.0%.
61
<PAGE>
Latin America/Canada Region:
<TABLE>
<CAPTION>
Percentage of
Ownership and
Company Jurisdiction Voting Interest
------- ------------ ---------------
<S> <C> <C>
Berlex Canada Inc.................................. Canada 100.0
Schering Argentina S.A.I.C......................... Argentina 100.0
Schering do Brasil Ltda............................ Brazil 100.0
Schering Colombiana S.A............................ Colombia 100.0
Schering Mexicana S.A.............................. Mexico 100.0
Asia Region:
<CAPTION>
Percentage of
Ownership and
Company Jurisdiction Voting Interest
------- ------------ ---------------
<S> <C> <C>
Schering Pharmaceutical Ltd........................ China 97.0
P.T. Schering Indonesia............................ Indonesia 76.8
Schering Korea Ltd................................. South Korea 100.0
Schering Taiwan Ltd................................ Taiwan 100.0
Schering Bangkok Ltd............................... Thailand 100.0
</TABLE>
62
<PAGE>
PROPERTY, PLANTS AND EQUIPMENT
Schering AG's principal executive offices are located in Berlin, Germany.
We produce active pharmaceutical ingredients and intermediate products at
our primary facility in Bergkamen, Germany, and several smaller facilities in
Germany, Finland, Spain and Mexico. In addition to these production
operations, we operate production facilities for the formulation and packaging
of pharmaceutical products in 17 countries. We also own or lease other
properties used for administration, research and development, marketing and
sales and warehouses.
We believe that our manufacturing and production facilities have capacities
adequate for our current and projected needs.
For information regarding our capital expenditure program, see "Group
Organization--Group Segments--Europe Region--Capital Expenditures", "--United
States Region--Capital Expenditures", "--Latin America/Canada Region--Capital
Expenditures", "--Japan Region--Capital Expenditures" and "--Asia Region--
Capital Expenditures", and "Item 5--Operating and Financial Review and
Prospects--Liquidity and Capital Resources--Capital Expenditures".
63
<PAGE>
The following table sets forth, by segment, the location, size and use of
our principal production, distribution and other facilities. These facilities
are owned unless otherwise indicated. Administration offices comprise
functions such as finance, marketing, sales and medical departments.
<TABLE>
<CAPTION>
Size
(square
Location meters)(1) Principal Uses
-------- ---------- --------------
<S> <C> <C>
Europe Region:
Berlin-Wedding,
Germany(2)............. 184,000 Production, research and development and offices
Berlin-Charlottenburg,
Germany(2)............. 87,000 Production
Bergkamen, Germany...... 958,000 Production
Hamburg, Germany........ 8,000 Production and offices
Jena, Germany........... 16,500 Production, research and development and offices
Weimar, Germany......... 63,800 Production and warehousing
Saclay, France.......... 63,000 Production and research and development
Marcoule, France........ 46,000 Production
Lys-Lez-Lannoy, France
(3).................... 60,000 Production, warehousing and offices
Madrid, Spain........... 13,000 Offices
Alcala de Henares,
Spain.................. 30,000 Production
Milan, Italy............ 39,000 Production and offices
Turku, Finland (4)...... 155,000 Production and research and development
Tammisaari, Finland(5).. 36,000 Production
Vienna, Austria......... 24,000 Production and offices
United States Region:
Montville, New Jersey... 18,500 Development and offices
Wayne, New Jersey....... 23,000 Production, development, warehousing and offices
Richmond, California.... 25,000 Research and development, warehousing and offices
Indianola,
Pennsylvania........... 26,000 Production, research and development, warehousing and offices
Londonderry, New
Hampshire(6)........... 2,000 Research and development and offices
Japan Region:
Osaka City, Japan....... 26,000 Production, research and development and offices
Mobara City, Chiba,
Japan.................. 39,800 Production, research and development, warehousing and offices
Latin America/Canada
Region:
Orizaba, Veracruz,
Mexico................. 152,100 Production, development and offices
Bogota, Colombia........ 14,000 Production, warehousing and offices
Sao Paulo, Brazil....... 10,700 Production, warehousing and offices
Buenos Aires,
Argentina.............. 10,200 Production, warehousing and offices
Asia Region:
Ansung, South Korea..... 17,000 Production
Jakarta, Indonesia...... 19,000 Production, warehousing and offices
Guangzhou, China........ 20,000 Production
</TABLE>
--------
(1) For production facilities, this measure corresponds to the size of the
land, for administrative and research and development facilities to the
size of the office space.
(2) Subject to a mortgage.
(3) A portion of this facility is subject to a lease expiring in 2011.
(4) Subject to a lease expiring in 2006.
(5) Subject to a lease expiring in 2006.
(6) Subject to a lease expiring in 2002.
64
<PAGE>
SOCIAL RELATIONS
We are committed to being a good corporate citizen. An important part of our
commitment is the support we provide to the communities in which we operate.
We have joined the foundation established by German industry,
Responsibility, Remembrance and the Future. The foundation is establishing a
compensation fund for former forced laborers from the World War II era.
ENVIRONMENTAL AND SAFETY MATTERS
We are subject to extensive regulation regarding environmental, health and
safety matters in the countries where we manufacture and sell our products. We
expect that such regulations will become increasingly stringent. Changes in
applicable laws may require us to install additional emissions controls, make
significant alterations in our manufacturing processes or to clean up
contamination at facilities where such remediation is not currently required.
By restricting or prohibiting the distribution of our current products,
environmental regulations could also harm our business by forcing us to
increase research and development expenditures. In the normal course of our
business, we are exposed to risks related to possible releases of hazardous
substances into the environment which could cause property damage or personal
injuries and which could require costly clean-up.
We have obtained all material environmental permits and authorizations
required for the operation of our facilities and the distribution of our
products. We are in material compliance with applicable environmental, health
and safety laws. An integral part of operations is the maintenance of high
standards of safety, health and environmental protection and performance. Our
internal audit systems and our participation in our industry's Responsible
Care program are intended to provide continuous improvements in these areas.
We are responsible for the clean-up of certain sites which have been
contaminated from releases or disposal of hazardous substances from former
operations. In some cases, our clean-up liability is shared with others who
contributed to the contamination. As a result of our long history of
manufacturing operations, there may be other sites for which we may be
responsible for all or a portion of clean-up costs. However, we believe that
we have adequate reserves for our currently known remediation matters and that
such matters will not have a material adverse effect on our results of
operation, liquidity or consolidated financial position.
We have spent and anticipate that we will continue to spend in 2000 and
following years substantial amounts on environmental protection and safety
measures. Our 1998 and 1999 operation and maintenance costs for safety and
environmental protection measures totaled E61 million and E59 million,
respectively. Our 1998 and 1999 capital expenditures for environmental
protection projects and other projects resulting in environmental benefits
totaled E3 million and E4 million, respectively. We estimate that our operation
and maintenance costs for safety and environmental measures will be
approximately E57 million for each of the years 2000 through 2004. We also
estimate that capital expenditures for environment projects and other projects
resulting in environmental benefits will be approximately E5 million for each of
the years 2000 through 2004.
65
<PAGE>
Item 5. Operating and Financial Review and Prospects
You should read the following operating and financial review of our results
of operations and financial condition together with our consolidated financial
statements included elsewhere in this registration statement.
INTRODUCTION
Accounting Policies
We prepared our consolidated financial statements in accordance with the
International Accounting Standards (IAS) of the International Accounting
Standards Committee. For periods ending on or prior to December 31, 1998, the
consolidated financial statements also were in accordance with the German
Commercial Code (Handelsgesetzbuch). Differences between IAS and the German
Commercial Code were not material for periods ending on or prior to December
31, 1998. Following a revision to the German Commercial Code in 1998 to
facilitate capital raising by German companies in the international capital
markets (Kapitalaufnahme-Erleichterungsgesetz), we were permitted to prepare
our consolidated financial statements solely in accordance with IAS, and no
longer required to follow the German Commercial Code. We elected to do so
commencing in fiscal 1999. IAS differ in certain material respects from United
States Generally Accepted Accounting Principles. You can read about some of
the principal differences in note 37 to our consolidated financial statements.
Note 37 to our consolidated financial statements also provides a
reconciliation of our financial statements to United States Generally Accepted
Accounting Principles.
Currency of Presentation
Effective January 1, 1999, Germany and 10 other member states of the
European Union introduced the euro as their common currency. The euro replaced
the currencies of the participating member states. The national currencies are
only denominations of the euro with fixed exchange rates to the euro. The
euro--as its national denomination like the Deutsche Mark--is a fully
convertible currency. We prepared our financial statements for periods ending
on or prior to December 31, 1998, in Deutsche Mark. We restated these
financial statements from Deutsche Mark to euro using the official fixed
conversion rate for January 1, 1999, of DM 1.95583 per E1.00. Accordingly, our
consolidated financial statements for these periods translated into euro depict
the same trends that would have been presented if our consolidated financial
statements were presented in Deutsche Mark. However, our consolidated financial
statements for these periods may not be comparable to the financial statements
of other companies which are presented in euro but translated from a currency
other than the Deutsche Mark. For periods ending after December 31, 1998, we
prepared our financial statements in euro directly, rather than restating them
from Deutsche Mark to euro.
Segment Reporting
The segment information reported in note 32 to our consolidated financial
statements is presented in accordance with IAS 14 (Revised). As required by
IAS 14 (Revised), our primary basis of segment reporting is geographic, which
reflects the management structure of our sales organization, our system of
internal financial reporting and what we believe to be the predominant source
and nature of risks and returns of our business. Our segment reporting is
comprised of five geographic segments. Other activities (mainly our
pharmaceutical chemicals business) are managed on a worldwide basis and are
therefore presented as a separate segment.
Primary Segments
. Europe Region
. United States Region
. Japan Region
. Latin America/Canada Region
. Asia Region
. Other Activities
66
<PAGE>
RESULTS OF OPERATIONS
Introduction
The following table sets forth the net sales, net sales expressed as a
percentage of total net sales, and percentage change in net sales from the
prior year, the segment performance, segment performance expressed as a
percentage of total segment performance and percentage change in segment
performance from the prior year, and the segment result, segment result
expressed as a percentage of total segment result and percentage change in
segment result from the prior year, for each of the Group's segments for the
three years ended December 31, 1999. As discussed in note 32 to our
consolidated financial statements:
. Segment performance is an internal financial reporting measurement
utilized by our management. Transfers from our centralized production
facilities in Europe are charged to segments at standard production
cost. Research and development expenses are not included in segment
performance because research and development activities are managed on a
worldwide basis.
. To determine segment result for a segment, we subtract an allocation of
research and development expenses and central production overhead and
production variances from segment performance.
. To determine total operating profit for the Group, we subtract certain
items (such as costs of corporate functions and other operating income
and expenses) from the total segment result.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- ---------------
% of Percentage % of Percentage % of
Segment Change Segment Change Segment
E Total from 1998 E Total from 1997 E Total
------ ------- ---------- ------ ------- ---------- ------ -------
(in millions, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales:
Europe.................. 1,766 48 7 1,649 50 6 1,556 49
United States........... 775 21 14 678 21 9 620 19
Japan................... 454 12 32 343 10 (10) 381 12
Latin America/Canada.... 372 10 4 359 11 (3) 371 12
Asia.................... 164 5 28 128 4 (15) 150 5
Other Activities........ 143 4 12 128 4 11 115 3
----- --- --- ----- --- --- ----- ---
Total Net Sales........ 3,674 100 12 3,285 100 3 3,193 100
===== === === ===== === === ===== ===
Segment Performance:
Europe.................. 769 53 12 687 55 6 648 51
United States........... 277 19 13 245 20 4 236 19
Japan................... 167 11 40 119 10 (18) 145 11
Latin America/Canada.... 119 8 14 104 8 (27) 143 11
Asia.................... 54 4 38 39 3 (24) 51 4
Other Activities........ 75 5 36 55 4 2 54 4
----- --- --- ----- --- --- ----- ---
Total Segment
Performance........... 1,461 100 17 1,249 100 (2) 1,277 100
=== === ===
Central Production
Overhead/Variances..... (131) (1) (132) (2) (135)
Research and
Development............ (684) 9 (628) 10 (569)
----- --- ----- --- -----
Segment Result.......... 646 32 489 (15) 573
===== === ===== === =====
Segment Result:
Europe.................. 381 59 20 317 65 1 314 55
United States........... 58 9 26 46 10 (19) 57 10
Japan................... 75 12 83 41 8 (39) 67 12
Latin America/Canada.... 67 10 24 54 11 (42) 94 16
Asia.................... 24 4 118 11 2 (48) 21 4
Other Activities........ 41 6 105 20 4 0 20 3
----- --- --- ----- --- --- ----- ---
Total Segment Result... 646 100 32 489 100 (15) 573 100
=== === ===
Other................... (110) 39 (79) (48) (151)
----- --- ----- --- -----
Total Operating Profit.. 536 31 410 (3) 422
===== === ===== === =====
</TABLE>
67
<PAGE>
For a discussion of our results for the first six months of 2000 and 1999,
see "--Six months ended June 30, 2000 compared with six months ended June 30,
1999".
The following table sets forth the net sales, net sales expressed as a
percentage of total net sales, and percentage change in net sales from the
prior period for the Group's business areas for the three years ended December
31, 1999. During the first half of 2000, due to our recent significant
acquisitions in the field of radiopharmaceuticals, including Diatide and CIS
bio international, we formed a new business area, Diagnostics and
radiopharmaceuticals (formerly the Diagnostics business area). This business
area has responsibility for the development of diagnostic and
radiopharmaceutical products. In the table below and elsewhere in this
registration statement, we have not restated net sales for periods prior to
2000 to give effect to the formation of this new business area because there
have not been material net sales of radiopharmaceuticals prior to 2000.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ -------------------
Percentage Percentage
Percentage Change Percentage Change Percentage
E of Net Sales from 1998 E of Net Sales from 1997 E of Net Sales
------ ------------ ---------- ------ ------------ ---------- ------ ------------
(in millions, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales by Business
Area:
Fertility control and
hormone therapy........ 1,173 32 6 1,109 34 8 1,023 32
Therapeutics............ 1,128 31 14 991 30 4 950 30
Diagnostics............. 1,040 28 18 882 27 (4) 914 28
Dermatology............. 199 5 5 189 6 (2) 192 6
Other sources........... 134 4 18 114 3 0 114 4
----- --- --- ----- --- --- ----- ---
Total.................. 3,674 100 12 3,285 100 3 3,193 100
===== === === ===== === === ===== ===
</TABLE>
1999 Compared with 1998
Group
<TABLE>
<CAPTION>
Consolidated Income Statements
-----------------------------------------------
1999 1998
----------------------- -----------------------
E % of Net sales E % of Net sales
------- -------------- ------- --------------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net sales..................... 3,674 100 3,285 100
Cost of sales................. (902) 25 (800) 24
------ --- ------ ---
Gross profit.................. 2,772 75 2,485 76
Marketing and selling costs... (1,165) 32 (1,053) 32
Engineering and administration
costs........................ (367) 10 (365) 11
Research and development
costs........................ (684) 19 (628) 19
Other operating income........ 334 262
Other operating expenses...... (354) (291)
------ --- ------ ---
Operating profit.............. 536 15 410 12
Financial result.............. (77) 14
------ --- ------ ---
Profit on ordinary
activities................... 459 12 424 13
Taxes on profit............... (181) (175)
------ --- ------ ---
Income before minority
interests.................... 278 8 249 8
Minority interests............ (6) (4)
------ --- ------ ---
Net income.................... 272 7 245 7
====== === ====== ===
</TABLE>
68
<PAGE>
The following table sets forth our top-selling products during 1999. These
products represented 63% of the total net sales for the Group in 1999.
<TABLE>
<CAPTION>
Percentage change
Net sales from 1998
------------------ -----------------
(E millions)
<S> <C> <C>
1. Betaferon(R) (Betaseron(R))
(Therapeutics)....................... 454 23
2. Iopamiron(R) (Diagnostics)........... 307 31
3. Magnevist(R) (Diagnostics)........... 233 18
4. Ultravist(R) (Diagnostics)........... 219 5
5. Diane(R)--35 (Gynaecology)........... 171 10
6. Betapace(R) (Therapeutics)........... 157 23
7. Microgynon(R) (Levlen(R)) (Fertility
Control)............................. 108 7
8. Femovan(R) (Fertility Control)....... 103 (5)
9. Androcur(R) (Therapeutics,
Gynaecology)......................... 99 (2)
10. Triquilar(R) (Tri-Levlen(R))
(Fertility Control).................. 95 (16)
11. Climara(R) (HRT)..................... 93 8
12. Fludara(R) (Therapeutics)............ 86 14
13. Meliane(R) (Fertility Control)....... 81 63
14. Mirena(R) (Fertility Control)........ 60 45
15. Noctamid(R) (Therapeutics)........... 39 7
----- ---
Total.................................. 2,305 15
===== ===
</TABLE>
Net Sales
Net sales represents the gross inflow of economic benefits received and
receivable by the Group on its own account from the sales of goods and
services. Sales rebates and discounts as well as amounts collected on behalf
of third parties such as sales taxes, goods and services taxes and value added
taxes are excluded from net sales.
Net sales increased by 12% to E 3,674 million in 1999 compared to E 3,285
million in 1998.
This increase was based primarily on higher sales volumes for our products
(9%). The remainder was due in equal measure to pricing developments and
exchange rate effects. Net sales for products in our therapeutics business area
increased by 14% to E 1,128 million in 1999 compared to E 991 million in 1998,
principally due to the 23% increase in sales of Betaferon(R), our product for
the treatment of multiple sclerosis. In January 1999, Betaferon(R) was approved
for the treatment of the secondary progressive form of multiple sclerosis in the
European Union. Sales of Betaferon(R) increased to E 454 million in 1999
compared to E 368 million in 1998, with sales of Betaferon(R) in the Europe
Region increasing by 23% and in the United States Region increasing by 21%. In
the fertility control and hormone therapy business area, net sales increased by
6% to E 1,173 million in 1999 compared to E 1,109 million in 1998, largely due
to sales growth of Mirena(R), an intra-uterine hormone delivery system for
fertility control, and the low dosage oral contraceptive Meliane(R). Net sales
in our diagnostics business area increased by 18% to E 1,040 million in 1999
compared to E 882 million in 1998. Net sales of X-ray contrast media products
increased 17% to E 646 million in 1999 from E 554 million in 1998, while net
sales of MRI contrast media products increased 18% to E 234 million in 1999
compared to E 199 million in 1998. Net sales of our contrast medium application
technologies increased 21% to E 152 million in 1999 from E 125 million in 1998.
In our dermatology business area, net sales increased 5% to E 199 million in
1999 compared to E 189 million in 1998, primarily due to increased sales of
Advantan(R) and Nerisona(R), both preparations for the treatment of eczema, and
Travocort(R), a product for the treatment of fungal infections.
Gross Profit
Gross profit represents net sales after cost of sales. Cost of sales
includes the production costs of goods sold and the purchased cost of goods
for resale.
Gross profit increased 12% to E 2,772 million in 1999 compared to
E 2,485 million in 1998. Gross profit increased at the same rate as net
sales.
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<PAGE>
Operating Profit
Operating profit represents gross profit after marketing and selling costs,
engineering and administration costs, research and development costs and other
operating income and expense. Engineering and administration costs include
costs of production management and planning, factory safety and
administration, environmental protection, technology cost centers such as
workshops, energy production, services and waste disposal (to the extent that
these costs are not internally reallocated), training, and administration such
as data processing, purchasing and accountancy.
Operating profit increased 31% to E536 million in 1999 from E410 million in
1998. Marketing and selling costs increased 11% to E1,165 million in 1999 from
E1,053 million in 1998, but remained constant as a percentage of net sales at
32% in 1999. Engineering and administration costs slightly increased by E2
million to E367 million in 1999, but as a percentage of net sales decreased to
10% in 1999 from 11% in 1998. Research and development costs increased by 9% to
E684 million in 1999 from E628 million in 1998. As a percentage of net sales,
research and development costs remained constant at 19% in 1999. The increase in
research and development costs was largely attributable to the costs of clinical
studies of Betaferon(R) for the treatment of secondary progressive multiple
sclerosis and the commencement of several cooperation projects. Other operating
income increased to E334 million in 1999 from E262 million in 1998. Other
operating expenses increased to E354 million in 1999 from E291 million in 1998.
The increase of other operating income was largely attributable to higher income
from the reduction of provisions for environmental matters, the removal from the
accounts of warranties related to the divestment of the Group's Electroplating
Division and, to a lesser extent, from changes in foreign exchange rates. The
increase of other operating expenses was nearly all attributable to higher
expenses from changes in foreign exchange rates.
Financial Result
Financial result represents net income from investments, interest result and
other financial result.
Financial result decreased to a loss of E77 million in 1999 from a gain of E14
million in 1998. This decrease is primarily due to results from our investment
in the AgrEvo joint venture. Our income from AgrEvo decreased from a profit of
E25 million in 1998 to a loss of E60 million in 1999. Goodwill amortization of
E6 million relating our investment in AgrEvo has been recognized as well as our
share of the amortization of goodwill, amounting to E22 million, arising from
AgrEvo's purchase of a number of companies. Included in the loss for 1999 are
restructuring costs of E57 million. The decrease in financial result in 1999 is
also attributable to the inclusion in financial result in 1998 of extraordinary
income of E28 million from the disposal of securities held for investment of a
German insurance company.
Taxes on Profit
Taxes on profit increased E6 million or 3% to E181 million in 1999 from E175
million in 1998. The effective tax rate decreased from 41.3% in 1998 to 39.4% in
1999. Profit (loss) contributions from AgrEvo are recorded net after tax.
Adjusting for this effect would reduce the effective tax rate to 34.9%. The
decrease of the (adjusted) tax rate is mainly attributable to the fact that (i)
a larger portion of the profit was distributed as dividends (with a lower tax
rate) and (ii) the corporate tax rate in Germany for retained earnings was
reduced from 45% to 40% in 1999.
Net Income
As a result of the foregoing, net income for 1999 increased by E27 million or
11% to E272 million in 1999 compared to E245 million in 1998.
Results of Operations by Segment
Net sales, segment performance and segment result of each of our geographic
segments and our Other Activities segment are presented in note 32 to our
consolidated financial statements and in accordance with IAS 14 (Revised).
70
<PAGE>
Europe Region
The geographic segment Europe, referred to in this registration statement as
the Europe Region, consists of the members of the European Union, all other
countries of continental Europe, Turkey, the members of the Commonwealth of
Independent States (CIS), South Africa, Australia, New Zealand and African
export markets (excluding Egypt, Libya and Sudan). Net sales for the Europe
Region also includes world-wide sales to third parties of Leiras, Jenapharm
and Justesa Imagen. In the period covered by our consolidated financial
statements included elsewhere in this registration statement, our six largest
markets in the Europe Region in terms of net sales have been Germany, France,
Great Britain, Italy, Spain and Finland, which together constituted
approximately 34% of the Group's net sales and 70% of this segment's net sales
in 1999. In recent years, we have experienced a significant level of sales
growth in Italy, France, Great Britain and Spain. In the Europe Region, the
fertility control and hormone therapy, therapeutics and dermatology business
areas are expected to continue growing, while the prevailing price competition
is expected to affect net sales growth in the diagnostics business area. In
view of considerable price competition in the Europe Region, we believe that
higher market shares over the next three to five years will only be realized
through increased sales volume and through the introduction of new products.
In general, we believe that government-imposed price cuts, parallel imports
(imports of products from countries with lower government-fixed price levels)
and the increased availability of generic substitute products may slow the
achievement of net sales growth.
The following table sets forth the net sales by business area, and net sales
by business area expressed as a percentage of total net sales, of the Europe
Region for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1999 1998
----------------- -----------------
Percentage Percentage
of Net of Net
E Sales E Sales
------ ---------- ------ ----------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales by Business Area:
Fertility control and hormone therapy...... 702 40 657 40
Therapeutics............................... 613 35 562 34
Diagnostics................................ 319 18 310 19
Dermatology................................ 122 7 120 7
Other sources.............................. 10 -- -- --
----- --- ----- ---
Total.................................... 1,766 100 1,649 100
===== === ===== ===
</TABLE>
Net Sales
Net sales increased by 7% to E1,766 million in 1999 compared to
E1,649 million in 1998. Overall, increases in sales volume (6%) and
prices (2%) offset minor negative currency effects (1%). Net sales continued
to be affected by government imposed price cuts, fixed payments, positive and
negative lists for the reimbursement of products as well as the increased use
of generic substitute products.
In Germany, net sales increased 2% to E487 million in 1999 from E476 million
in 1998, despite price sensitivity in the market, especially in the contrast
media field. The increase in net sales was mainly due to a 41% increase in net
sales of Betaferon(R), our treatment for multiple sclerosis, from E39 million in
1998 to E55 million in 1999. Net sales of our oral contraceptive Valette(R)
increased 7% to E30 million in 1999 compared to E28 million in 1998, enabling us
to maintain our leading position in the German oral contraceptive market. Net
sales of our non-ionic X-ray contrast medium Ultravist(R) decreased 14% to E54
million in 1999 from E62 million in 1998, but still made a substantial
contribution to German sales.
In France, net sales increased 7% to E184 million in 1999 compared to E172
million in 1998. The increase was mainly due to higher sales of the Mirena(R)
intra-uterine hormone delivery system for fertility control and the introduction
of a new range of gestodene-based hormonal oral contraceptive products. Higher
net sales of Climara(R), our hormonal patch for the treatment of climacteric
disorders, and Betaferon(R) also contributed to the
71
<PAGE>
increase in France. In Italy, net sales increased 9% to E201 million in 1999
from E184 million in 1998, due to positive volume effects in net sales of the
low-dosage oral contraceptive Meliane(R), the X-ray contrast medium
Ultravist(R), and our therapeutic for the treatment of sleep disorders,
Noctamid(R), and favorable price effects in net sales of our anti-acne product
Diane(R)--35. Net sales in Spain increased 15% to E134 million in 1999 from E117
million in 1998. The increase in net sales was attributable to positive volume
and price effects for the active ingredient of Ultravist(R) (which is
manufactured in Spain for export) and increased sales volume of Betaferon(R). A
decrease in sales volume of Diane(R) was offset by favorable price effects. In
Great Britain, net sales increased 11% to E118 million in 1999 compared to E106
million in 1998. Increased sales volumes of Mirena(R), Betaferon(R) and Diane(R)
drove the increase in net sales. Net sales in Finland (which include worldwide
export sales of Leiras Oy) decreased 11% to E113 million in 1999 from E127
million in 1998. The lower export sales volume of our transdermal hormonal
contraceptive Norplant(R) was partly offset by the increased sales volume of our
therapeutic Bonefos(R). In the markets of Central and Eastern Europe, net sales
increased 12% in 1999 as compared to 1998.
In the fertility control and hormone therapy business area, net sales
increased by 7% to E702 million in 1999 compared to E657 million in 1998, due to
increased prices and higher sales volume. The intrauterine hormone delivery
system Mirena(R) and the low dosage oral contraceptive Meliane(R) both achieved
significant sales volume growth during 1999. Net sales of Mirena(R) increased
45% to E59 million in 1999 from E41 million in 1998, with significant sales
growth reported in France, Germany and the Netherlands. Net sales of Meliane(R)
increased 68% from E28 million in 1998 to E48 million in 1999.
Net sales in the therapeutics business area increased by 9% to E613 million in
1999 compared to E562 million in 1998 principally due to increases in sales
volume. Increased prices also contributed to the growth in net sales. The
increase in net sales was driven by a significant growth in sales volume of
Betaferon(R). Sales of Betaferon(R) increased 23% to E227 million in 1999
compared to E185 million in 1998. In January 1999, Betaferon(R) was approved for
the treatment of the secondary progressive form of multiple sclerosis in the
European Union. Betaferon(R) is the only product approved in Europe for the
treatment of both the more advanced, secondary progressive form of multiple
sclerosis as well as the relapsing-remitting form of the disease.
Net sales in the diagnostics business area increased by 3% to E319 million in
1999 compared to E310 million in 1998. A significant increase in sales volume
was partly offset by a reduction in product prices.
In the dermatology business area, net sales increased by 2% to E122 million in
1999 as compared to E120 million in 1998. The increase was due to favorable
volume and price effects, which offset a negative currency effect. The top
selling dermatology products were Advantan(R), a preparation for the treatment
of eczema, and Travocort(R), a product for the treatment of fungal infections,
which mainly accounted for the volume effect.
Segment Performance/Segment Result
Segment performance increased by 12% to E769 million in 1999 compared to E687
million in 1998. The increase in net sales was partly offset by increased
expenses and adverse exchange rate effects, particularly with respect to Turkey
and the Commonwealth of Independent States. Segment performance was particularly
affected by increased marketing and selling costs during 1999, which resulted
primarily from new product launches (including Betaferon(R) for the treatment of
the secondary progressive form of multiple sclerosis, Meliane(R) in the United
Kingdom and Mirena(R) in several markets) and from the implementation of a new
product distribution structure in Germany.
After allocation of E325 million of research and development costs and E63
million of central production overhead/variances, the segment result in 1999 was
E381 million, representing an increase of 20% from E317 million in 1998.
Compared to 1998, costs of research and development increased by E25 million
mainly due to strategic projects and cooperations launched in 1999.
United States Region
The geographic segment United States, referred to in this registration
statement as the United States Region, consists of the United States and
Puerto Rico, and is comprised of two sub-segments. The first sub-segment,
72
<PAGE>
Berlex, represents all sales of pharmaceutical products to third parties in
the United States. The pharmaceutical business is operated by Berlex
Laboratories, Inc. The other sub-segment is Medrad which, because Medrad is
responsible for the management of the worldwide sales of its products,
includes the world-wide sales to third parties of Medrad, Inc. and its
subsidiaries.
The following table sets forth the net sales by sub-segment, and net sales
by sub-segment expressed as a percentage of total net sales, of the United
States Region for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1999 1998
------------------- -------------------
Percentage Percentage
E of Net Sales E of Net Sales
------ ------------ ------ ------------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales by Sub-Segment:
Berlex............................ 626 81 554 82
Medrad............................ 149 19 124 18
--- --- --- ---
Total........................... 775 100 678 100
=== === === ===
</TABLE>
The following table sets forth the net sales by business area, and net sales
by business area expressed as a percentage of total net sales, of the United
States Region, for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1999 1998
------------------- -------------------
Percentage Percentage
E of Net Sales E of Net Sales
------ ------------ ------ ------------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales by Business
Area:
Fertility control and
hormone therapy.......... 129 17 143 21
Therapeutics.............. 403 52 331 49
Diagnostics............... 243 31 204 30
--- --- --- ---
Total................... 775 100 678 100
=== === === ===
</TABLE>
Net Sales
Net sales increased by 14% to E775 million in 1999 compared to E678 million in
1998. The increase in net sales was driven by a significant increase in sales
volume (12%) which was partly offset by decreased product prices (3%). The
depreciation of the euro against the dollar during 1999 also accounted for a
portion of the increase in net sales (5%).
Net sales of Berlex increased by 13% from E554 million in 1998 to E626 million
in 1999, while net sales of Medrad increased by 20% from E124 million in 1998 to
E149 million in 1999. Of Medrad's sales, 70% or E105 million were achieved in
the United States Region during 1999 compared to 71% or E88 million during 1998.
Medrad's net sales increase was attributable to increased sales volume of MRI
injectors and syringes and the expansion of Medrad's international business.
Prices for Medrad's products generally remained stable.
Net sales in the therapeutics business area increased by 22% to E403 million
in 1999 compared to E331 million in 1998. Increased sales volume for
Betaseron(R) (the trademark for Betaferon(R) in the United States) and increased
sales volume and increased prices for Betapace(R), used for the treatment of
severe cardiac rhythm disorders, were the main factors leading to the increase
in net sales. Net sales of Betapace(R) increased 23% to E157 million in 1999
from E128 million in 1998. Net sales of Betaseron(R) increased 21% to E189
million in 1999 compared to E156 million in 1998, despite lower prices due to
competitive pressure. Net sales of the leukemia therapy Fludara(R) and the
radiopharmaceutical product Quadramet(R) also contributed to the increase in net
sales.
73
<PAGE>
In the diagnostics business area, net sales increased by 19% to E243 million
in 1999 from E204 million in 1998. Excluding the contribution to sales growth by
Medrad's vascular injection systems, net sales increased by 17% to E93 million
in 1999 from E80 million in 1998, due to increases of sales volume for
Magnevist(R) and Ultravist(R), which volume increases were partly offset by a
decline in pricing for the two products. Sales of Magnevist(R), our MRI contrast
medium, increased 14% from E69 million in 1998 to E79 million in 1999, while
sales of Ultravist(R), our X-ray contrast medium, increased 36% from E10 million
in 1998 to E14 million in 1999.
Net sales in the fertility control and hormone therapy business area decreased
10% from E143 million in 1998 to E129 million in 1999. Oral contraceptive sales
decreased 22% from E76 million in 1998 to E59 million in 1999, primarily due to
decreased sales of Levlen(R) (the trademark for Microgynon(R)30 in the United
States) and Tri-Levlen(R) (the trademark for Triquilar(R) in the United States)
as a result of competitive pressures and availability of generic substitutes.
Decreased sales of these products were partly offset by increased sales of
Levlite(R) (the trademark for Miranova(R) in the United States). Sales of
Climara(R), a hormone patch for the treatment of climacteric disorders,
increased slightly to E70 million in 1999 compared to E66 million in 1998.
Climara(R) continues to have a strong leadership position within the transdermal
estrogen-only product segment in the United States Region.
Segment Performance/Segment Result
Segment performance increased by 13% to E277 million in 1999 compared to E245
million in 1998. The increase in net sales was partly offset by increased
marketing and selling costs and higher royalty payments due to higher volume of
sales of Betaseron(R) and Betapace(R). The increase in marketing and selling
costs is primarily attributable to increases in the sales force in the fertility
control and hormone therapy and therapeutics business areas in preparation for
planned product launches in 2000.
We have targeted the United States Region as a key market for achieving
accelerated sales and profit growth rates over the next five years. In order
to reach this strategic goal, we invest substantially in research and
development to expand our product portfolio in the United States market. As a
consequence, research and development expense was higher as a percentage of
external net sales compared to the other segments and significantly reduced
the United States Region segment result.
After allocation of E214 million of research and development costs and E5
million of central production overhead/variances, segment result in 1999 was E58
million, representing an increase of 26% from E46 million in 1998. Compared to
1998, costs of research and development rose E19 million. This increase was
mainly attributable to strategic projects and cooperations launched in 1999.
Japan Region
The Japan geographic segment, referred to in this registration statement as
the Japan Region, corresponds to the geographical area of Japan and comprises
the business of Nihon Schering KK in Japan and direct sales by Schering AG to
Tanabe Seiyaku Co., Ltd. of an X-ray contrast medium as well as to Yamanouchi
Pharmaceutical Co., Ltd. of an oral contraceptive.
74
<PAGE>
The following table sets forth the net sales by business area, and net sales
by business area expressed as a percentage of total net sales, of the Japan
Region for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1999 1998
------------------- -------------------
Percentage Percentage
E of Net Sales E of Net Sales
------ ------------ ------ ------------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales by Business Area:
Fertility control and hormone
therapy........................... 16 3 9 3
Therapeutics....................... 25 6 24 7
Diagnostics........................ 380 84 282 82
Dermatology........................ 33 7 28 8
--- --- --- ---
Total............................ 454 100 343 100
=== === === ===
</TABLE>
Net Sales
Net sales increased by 32% to E454 million in 1999 compared to E343 million in
1998. The extraordinary increase in net sales is primarily attributable to
highly favorable currency effects (23%) and, to a lesser extent, volume
increases (10%). Price reductions expected to be mandated by the Japanese
Ministry of Health and Welfare did not occur in 1999, but did become effective
in April 2000. The price reductions may adversely affect sales growth in 2000.
See "--Six months ended June 30, 2000 compared to six months ended June 30,
1999 -- Results of Operations by Segment -- Japan Region".
In the diagnostics business area, which accounted for 84% of total net sales
during 1999, net sales increased by 35% to E380 million in 1999 compared to E282
million in 1998. This increase was due to favorable currency effects and volume
increases, which were partly offset by decreased prices. Increased net sales of
the MRI contrast medium Magnevist(R) and the X-ray contrast medium Iopamiron(R)
drove the growth in diagnostics. Increased net sales of pre-filled containers of
Iopamiron(R) and Magnevist(R) were a key factor in this sales growth.
Net sales of products from the fertility control and hormone therapy business
area, which represented 3% of net sales in the Japan Region in 1999, increased
78% to E16 million in 1999 compared to E9 million in 1998 due to volume
increases and favorable currency effects. We expect our net sales in the
fertility control and hormone therapy business in 2000 to be strengthened from
increased net sales of the oral contraceptive Triquilar(R), which was launched
in September 1999. We also believe that net sales of therapeutics products will
increase substantially in 2000 due to the acquisition of Mitsui Pharmaceuticals
in March 2000.
Segment Performance/Segment Result
Segment performance increased by 40% to E167 million in 1999 compared to E119
in 1998. Increased net sales and lower cost of sales led to a higher gross
contribution, which was partly offset by increased marketing and selling costs
as well as by higher contractually-determined costs for iopamidol, the active
ingredient of Iopamiron(R), our best-selling product in the Japan Region. The
increase in marketing and selling costs resulted from adverse currency effects.
After allocation of E75 million of research and development costs and E17
million of central production overhead/variances, segment result in 1999 was E75
million, representing an increase of 83% from E41 million in 1998. This increase
was due to a favorable development of segment performance which was only partly
offset by the allocated cost components.
Latin America/Canada Region
The Group's geographic segment for Latin America and Canada, referred to in
this registration statement as the Latin America/Canada Region, consists of
the countries of Latin America, Canada and the Caribbean. In the period
covered by our consolidated financial statements included elsewhere in this
registration statement, our
75
<PAGE>
five largest markets in this segment have been Brazil, Argentina, Mexico,
Canada and Colombia, which together constituted 8% of the Group's net sales
and 81% of the segment's net sales in 1999. Net sales growth in Canada and
Mexico has partly offset negative effects from Brazil and Colombia and
Ecuador. Net sales in Argentina, which has also suffered negative economic
trends, have also developed well.
The following table sets forth the net sales by business area, and net sales
by business area expressed as a percentage of total net sales, of the Latin
America/Canada Region for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1999 1998
------------------- -------------------
Percentage Percentage
E of Net Sales E of Net Sales
------ ------------ ------ ------------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales by Business Area:
Fertility control and hormone
therapy........................... 233 63 226 63
Therapeutics....................... 63 17 59 17
Diagnostics........................ 42 11 40 11
Dermatology........................ 25 7 26 7
Other sources...................... 9 2 8 2
--- --- --- ---
Total............................ 372 100 359 100
=== === === ===
</TABLE>
Net Sales
Net sales increased by 4% to E372 million in 1999 compared to E359 million in
1998, primarily as a result of volume increases (10%) and price increases (12%),
partially offset by highly unfavorable currency effects (18%). The unfavorable
currency effects were caused primarily by the depreciation of the Brazilian
real, which lost 34% of its value against the euro during 1999.
The increase in net sales was driven by increased net sales in Argentina,
Canada and Mexico, which offset significantly decreased net sales in Brazil. In
Argentina, net sales increased by 14% to E64 million in 1999 compared to E56
million in 1998, while net sales in Canada increased 25% from E35 million in
1998 to E44 million in 1999. Net sales in Mexico increased 32% to E57 million in
1999 compared to E43 million in 1998. The increase in net sales in Argentina and
Mexico is attributable to higher volumes and prices, while the increase in
Canada is mainly attributable to increased sales volume, particularly
Betaseron(R) and our leukemia therapy Fludara(R). Net sales in Brazil decreased
by 19% from E139 million in 1998 to E112 million in 1999, primarily due to the
depreciation of the Brazilian real.
Net sales in the fertility control and hormone therapy business area increased
3% to E233 million in 1999 compared to E226 million in 1998. The increase is
attributable to the 60% increase in net sales of the low-dosage oral
contraceptive Meliane(R), the 15% increase in net sales of the oral
contraceptive Microgynon(R) and the 9% increase in net sales of the oral
contraceptive Diane(R). These increases were achieved due to increases in sales
volume and price, which offset highly unfavorable currency effects, primarily in
Brazil. The top-selling products in the Latin America/Canada Region during 1999
were Microgynon(R) (net sales of E39 million) and Femovan(R) (E34 million).
In the therapeutics business area, net sales increased 7% to E63 million in
1999 compared to E59 million in 1998. This growth is primarily due to a 31%
increase in net sales of Betaferon(R), primarily in Canada, despite strong
competition, from E24 million in 1998 to E31 million in 1999. Net sales also
increased for Fludara(R) from E4 million in 1998 to E6 million in 1999, mainly
due to increased sales in Canada, Argentina and Brazil. Net sales of
Androcur(R), an antiandrogen used for the treatment of prostate cancer,
decreased to E16 million in 1999 compared to E22 million in 1999 due to
competition from generic products.
76
<PAGE>
Net sales in the diagnostics business area increased 5% to E42 million in 1999
compared to E40 million in 1998. The increase is mainly due to higher net sales
of Iopamiron(R), which increased 11% to E24 million in 1999 compared to E22
million, particularly on account of increased institutional sales in Mexico.
Net sales in the dermatology business area remained at a nearly constant level
of E25 million in 1999 compared to E26 million in 1998. This change is primarily
due to decreases in net sales of two of our best-selling products, Gyno-
Travogen(R) and Travogen(R), which decreases were partly offset by net sales of
the recently launched product Advantan(R).
Segment Performance/Segment Result
Segment performance increased by 14% to E119 million in 1999 compared to E104
million in 1998. The increase is due to the increase in net sales in 1999 and
the improvement in costs (due to currency effects) compared to 1998. During
1998, we incurred significant one-time expenses in our Brazilian operations and
to a lesser extent, our Chilean operations. See "--1998 Compared with 1997--
Latin America/Canada Region--Segment Performance/Segment Result".
After allocation of E44 million of research and development costs and E8
million of central production overhead/variances, segment result in 1999 was E
67 million, representing an increase of 24% from E54 million in 1998.
Asia Region
The Group's geographic segment for Asia, referred to in this registration
statement as the Asia Region, is comprised of the countries of the Pacific Rim
of Asia (but excluding Japan, Australia and New Zealand), the Middle East, and
Egypt, Libya and Sudan. In the period covered by our consolidated financial
statements included elsewhere in this registration statement, our three
largest markets in this segment have been China (including Hong Kong), South
Korea and Indonesia, which together constituted 40% of the segment's net sales
in 1999.
The following table sets forth the net sales by business area, and net sales
by business area expressed as a percentage of total net sales, of the Asia
Region for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1999 1998
------------------- -------------------
Percentage Percentage
E of Net Sales E of Net Sales
------ ------------ ------ ------------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales by Business Area:
Fertility control and hormone
therapy........................... 63 38 52 41
Therapeutics....................... 21 13 13 10
Diagnostics........................ 56 34 46 36
Dermatology........................ 16 10 13 10
Other sources...................... 8 5 4 3
--- --- --- ---
Total............................ 164 100 128 100
=== === === ===
</TABLE>
Net Sales
Net sales increased by 28% to E164 million in 1999 compared to E128 million in
1998. This extraordinary increase is mainly attributable to the higher volume
(28%) and favorable currency effects (9%) due to the recovery of the markets in
the Asia Region during 1999 as compared to 1998. In South Korea, net sales
increased 36% to E35 million from E26 million in 1998, while in China (including
Hong Kong), net sales increased 19% from E14 million in 1998 to E16 million in
1999. Net sales for Indonesia increased steeply from E7 million in 1998 to E14
million in 1999.
77
<PAGE>
Net sales in the fertility control and hormone therapy business area
increased 21% to E63 million in 1999 compared to E52 million in
1998. Net sales of our oral contraceptive Diane(R), which constituted 16% of
net sales from this business area in 1999, increased 42% from E7 million
in 1998 to E10 million in 1999. Higher net sales of the oral
contraceptives Femovan(R), which increased from E8 million in 1998 to
E9 million in 1999, and Microgynon(R)-30, which increased from E7
million in 1998 to E8 million in 1999, resulted from higher volumes.
In the therapeutics business area, net sales increased 62% to E21 million in
1999 from E13 million in 1998. The steep increase in net sales in the
therapeutics business area is primarily attributable to positive volume effects
of our products Betaferon(R), Androcur(R) and Bonefos(R). Net sales of
Betaferon(R) increased 82% from E4 million in 1998 to E7 million in 1999 (67% of
Betaferon(R)'s net sales in the Asia Region were made in Israel). Net sales of
Androcur(R) increased 42% from E3 million in 1998 to E5 million in 1999, while
net sales of Bonefos(R), a tumor therapy, doubled to E4 million in 1999 from E2
million in 1998.
Net sales in the diagnostics business area increased 22% to E56 million in
1999 compared to E46 million in 1998. The growth is primarily attributable to
increased net sales of Ultravist(R) and Magnevist(R). Net sales of our top-
selling X-ray contrast medium Ultravist(R), which constituted 65% of net sales
of the diagnostics business area in 1999, increased 27% from E28 million in 1998
to E36 million in 1999. Net sales of the MRI contrast medium Magnevist(R)
increased to E10 million in 1999 as compared to E8 million in 1998.
Net sales in the dermatology business area increased 23% to E16 million in
1999 from E13 million in 1998. The increase in net sales resulted from positive
volume, price and currency effects over the product range.
Segment Performance/Segment Result
Segment performance increased by 38% from E39 million in 1998 to E54 million
in 1999. The increase resulted from higher net sales offsetting higher,
primarily currency induced, costs.
After allocation of E18 million of research and development costs and E12
million of central production overhead/variances, segment result in 1999 was E24
million, representing an increase of 118% from E11 million in 1998. This
increase was primarily driven by the significant growth in segment performance.
Other Activities
The Group's Other Activities segment is comprised of activities that are not
of sufficient significance to require independent segment reporting, primarily
our pharma chemicals business. See "Item 4--Information on the Company--Group
Organization--Group Segments--Other Activities".
The following table sets forth the net sales by sub-segment, and net sales
as a percentage of total net sales, for the Other Activities segment for the
years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1999 1998
------------------- -------------------
Percentage Percentage
E of Net Sales E of Net Sales
------ ------------ ------ ------------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales:
Pharma Chemicals........................ 97 68 84 66
Other................................... 46 32 44 34
--- --- --- ---
Total................................. 143 100 128 100
=== === === ===
</TABLE>
Net Sales
Net sales increased by 12% to E143 million in 1999 compared to E128 million in
1998.
78
<PAGE>
Net sales for the pharma chemicals sub-segment increased 16% to E97 million in
1999 compared to E84 million in 1998, primarily due to increased volumes of
various intermediates and active ingredients and new projects involving tailor-
made chemistry.
Segment Performance/Segment Result
Segment performance increased by 36% to E75 million in 1999 from E55 million
in 1998. This increase is primarily attributable to increased sales volume of
pharmaceutical chemicals.
After allocation of E8 million of research and development costs and E26
million of central production overhead/variances, segment result in 1999 was E41
million, representing an increase of 105% from E20 million in 1998. This
increase was primarily driven by the significant growth in segment performance.
1998 Compared with 1997
Group
<TABLE>
<CAPTION>
Consolidated Income Statements
-------------------------------------
1998 1997
------------------ ------------------
% of % of
E Net sales E Net sales
------- --------- ------- ---------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net sales................................ 3,285 100 3,193 100
Cost of sales............................ (800) 24 (814) 25
------- --- ------- ---
Gross profit............................. 2,485 76 2,379 75
Marketing and selling costs.............. (1,053) 32 (1,007) 32
Engineering and administration costs..... (365) 11 (356) 11
Research and development costs........... (628) 19 (569) 18
Other operating income................... 262 306
Other operating expenses................. (291) (331)
------- --- ------- ---
Operating profit......................... 410 12 422 13
Financial result......................... 14 (18)
------- --- ------- ---
Profit on ordinary activities............ 424 13 404 13
Taxes on profit.......................... (175) (168)
------- --- ------- ---
Income before minority interests......... 249 8 236 7
Minority interests....................... (4) (8)
------- --- ------- ---
Net income............................... 245 7 228 7
======= === ======= ===
</TABLE>
79
<PAGE>
Net Sales
The following table sets forth our top-selling products during 1998. The
products represented 61% of the total net sales for the Group in 1998.
<TABLE>
<CAPTION>
Percentage change
Net sales from 1997
---------- -----------------
(E
millions)
<S> <C> <C>
1. Betaferon(R) (Betaseron(R)) (Therapeutics)... 368 7
2. Iopamiron(R) (Diagnostics)................... 234 (10)
3. Ultravist(R) (Diagnostics)................... 208 2
4. Magnevist(R) (Diagnostics)................... 198 (9)
5. Diane(R)-35 (Gynecology)..................... 155 2
6. Betapace(R) (Fertility Control).............. 128 44
7. Triquilar(R) (Tri-Levlen(R)) (Fertility
Control)........................................ 112 (6)
8. Femovan(R) (Fertility Control)............... 108 (7)
9. Androcur(R) (Therapeutics, Gynecology)....... 101 (14)
10. Microgynon(R) (Levlen(R)) (Fertility
Control)........................................ 101 (10)
11. Climara(R) (HRT)............................. 86 52
12. Fludara(R) (Therapeutics).................... 75 4
13. Meliane(R) (Fertility Control)............... 50 136
14. Mirena(R) (Fertility Control)................ 41 172
15. Noctamid(R) (Therapeutics)................... 37 5
----- ---
Total.......................................... 2,002 4
===== ===
</TABLE>
Net sales increased by 3% to E3,285 million in 1998 compared to E3,193 million
in 1997.
A combined increase in volume (5%) and prices (2%) was partially offset by
negative exchange rate effects (4%) resulting primarily from the Asian crisis.
Net sales for products in our fertility control and hormone therapy business
area increased by 8% to E1,109 million in 1998 compared to E1,023 million in
1997, particularly due to a 12% increase in net sales of hormone therapy
products, including Climara(R). The increase is also attributable to a 7% net
sales increase of fertility control products, including higher sales of
Mirena(R), an intrauterine hormone delivery system, and the oral contraceptives
Meliane(R) and Miranova(R). Net sales for products in our therapeutics business
area increased by 4% to E991 million in 1998 from E950 million in 1997,
primarily due to a 7% increase in net sales of Betaferon(R), our product for the
treatment of multiple sclerosis, and a 44% increase in net sales of Betapace(R),
a treatment for cardiac rhythm disorder. The increases offset a 5% decrease in
sales of oncology products resulting from increased competition for Androcur(R).
Net sales in our diagnostics business area decreased 4% to E882 million in 1998
from E914 million in 1997 as a result of price reductions and negative exchange
rate effects. The market for diagnostics products continued to contract on a
worldwide basis in 1998. Sales of our X-ray contrast media products were
particularly negatively affected by government-imposed price cuts in Japan and
the weakness of Asian currencies. While sales of Ultravist(R) increased in the
United States Region during 1998, pricing pressure in MRI contrast media
resulted in decreased sales of Magnevist(R). Net sales for products in our
dermatology business area decreased 2% to E189 million in 1998 compared to E192
million in 1997. The decrease was mainly attributable to the weaker Asian
currencies, which was partially offset by increased sales in the Europe Region.
Gross Profit
Gross profit increased 4% to E2,485 million in 1998 compared to E2,379 million
in 1997, slightly faster than the 3% increase in net sales in 1998 from 1997.
Gross profit as a percentage of net sales increased from 75% in 1997 to 76% in
1998.
80
<PAGE>
Operating Profit
Operating profit decreased 3% to E410 million in 1998 from E422 million in
1997, due to marketing and selling costs and research and development costs
increasing at a rate greater than the increase in net sales. Marketing and
selling costs increased by E46 million or 5% to E1,053 million in 1998 from
E1,007 million in 1997, but remained constant as a percentage of net sales at
32% in 1998. An increased number of employees in marketing and sales in the
United States Region contributed to this increase. Research and development
costs increased by E59 million or 10% to E628 million in 1998 from E569 million
in 1997. As a percentage of net sales, research and development costs increased
to 19% in 1998 from 18% in 1997. This increase is primarily attributable to the
costs of clinical studies of Betaferon(R) for the treatment of secondary
progressive multiple sclerosis. In addition, a number of fertility control and
hormone therapy products were at the final and most expensive stage of clinical
development during 1998. Engineering and administration costs increased by E9
million or 3% to E365 million in 1998 from E356 million in 1997, but remained
constant as a percentage of net sales at 11%. Other operating income decreased
to E262 million in 1998 from E306 million in 1997. Other operating expenses
decreased to E291 million in 1998 from E331 million in 1997. Other operating
income was higher in 1997 mainly due to gains from the release of provisions.
Other operating expenses were impacted by impairment charges of E44 million in
1997 related to excess capacity in our production site in Bergkamen and to the
deterioration of the economic environment in Asia and related excess capacity in
certain production sites in the Asia region.
Financial Result
Financial result increased to a gain of E14 million in 1998 from a loss of E18
million in 1997. Income from investments includes our share of the profits from
the AgrEvo joint venture. Our income from AgrEvo increased to E25 million in
1998 from E18 million in 1997. This increase was despite higher goodwill write-
offs by AgrEvo following the acquisition of several seed companies. Financial
result was also positively affected by interest earned from higher average
levels of liquid funds during 1998 and extraordinary income of E28 million from
the disposal of securities held for investment of a German insurance company.
Taxes on Profit
Taxes on profit increased E7 million or 4% to E175 million in 1998 from E168
million in 1997. The effective tax rate remained almost unchanged at 41.3% in
1998 compared to 41.4% in 1997.
Net Income
As a result of the foregoing, net income for 1998 increased by E17 million or
7% to E245 million as compared to E228 million in 1997.
Results of Operations by Segment
Net sales, segment performance and segment result of each of our geographic
segments and our Other Activities segment are presented in note 32 to our
consolidated financial statements and in accordance with IAS 14 (Revised).
81
<PAGE>
Europe Region
The following table sets forth the net sales by business area, and net sales
by business area expressed as a percentage of total net sales, of the Europe
Region for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1998 1997
-------------------- --------------------
Percentage of Percentage of
E Net Sales E Net Sales
------ ------------- ------ -------------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales by Business Area:
Fertility control and hormone
therapy............................ 657 40 578 37
Therapeutics........................ 562 34 551 36
Diagnostics......................... 310 19 312 20
Dermatology......................... 120 7 115 7
----- --- ----- ---
Total............................. 1,649 100 1,556 100
===== === ===== ===
</TABLE>
Net Sales
Net sales increased by 6% to E1,649 million in 1998 compared to E1,556 million
in 1997. Overall, an increase in sales volume (7%) offset negative exchange rate
effects (3%). Net sales continued to be affected by government imposed price
cuts, fixed payments, positive and negative lists, and encouragement of parallel
imports, as well as the increased use of generic substitute products.
Significant adverse exchange rate effects arose mainly from the currencies of
Turkey, Australia and South Africa. In the case of Turkey, these currency
effects were offset by price increases.
In Germany, net sales decreased to E476 million in 1998 from E479 million in
1997 in a difficult pharmacopolitical environment and were negatively affected
by reimports into Germany of products from countries where prices have been
fixed by the government at lower levels. Our top-selling product in Germany in
1998 was Ultravist(R), with net sales of E63 million in 1998 as compared to E69
million 1997. Net sales of Magnevist(R) in Germany increased 10% to E35 million
in 1998 from E32 million in 1997, while net sales of Betaferon(R) increased 7%
from E36 million in 1997 to E39 million in 1998.
In France, net sales increased 10% to E172 million in 1998 compared to E156
million in 1997. We experienced double-digit sales growth in certain of our
other large European markets, such as Italy and the United Kingdom. Net sales
also increased in smaller European markets such as Belgium, the Netherlands,
Denmark, Sweden, Hungary, Poland and the Czech Republic. Sales increases in
other Central and Eastern European countries more than offset reductions in
sales due to economic difficulties in Russia.
In the fertility control and hormone therapy business area, net sales
increased by 14% to E657 million in 1998 compared to E578 million in 1997, due
to increased prices and higher sales volume. Mirena(R), the intrauterine hormone
system for fertility control, Meliane(R), the oral contraceptive, and
Climara(R), a hormone patch for the treatment of climacteric disorders, were the
products primarily responsible for the growth in sales. Net sales of Mirena(R)
almost tripled to E41 million in 1998 from E15 million in 1997, while net sales
of Meliane(R) increased significantly to E28 million in 1998 compared to E11
million in 1997. Net sales of Climara(R) reached E15 million in 1998, a 91%
increase from 1997.
Net sales in the therapeutics business area increased 2% to E562 million in
1998 compared to E551 million in 1997, principally due to increases in sales
volume. The increase in net sales was driven by a significant increase in sales
volume of Betaferon(R), for which net sales increased 13% to E185 million in
1998 from E164 million in 1997. Sales of Betaferon(R) in the United Kingdom were
hindered by government cost containment policies.
Net sales in the diagnostics business area decreased slightly to E310 million
in 1998 compared to E311 million in 1997. Increased sales volume was offset by
competition-driven price reductions, particularly in the X-ray contrast media
area.
82
<PAGE>
In the dermatology business area, net sales increased by 4% to E120 million in
1998 as compared to E115 million in 1997. The increase was due to higher sales
volume, while negative exchange rate effects were offset by favorable price
effects. The higher sales volume resulted from increased sales of Travocort(R)
and Advantan(R) in Turkey, Psorcutan(R) in Germany and Advantan(R) in Spain.
Segment Performance/Segment Result
Segment performance increased by 6% to E687 million in 1998 compared to E648
million in 1997. Gross margin increased, despite a higher cost of sales. Costs
of marketing and sales grew as a result of increased sales volume. In Italy, the
implementation of the European Production Initiative (the Group's program for
coordinating and optimizing its production sites), led temporarily to a lower
production output as well as higher production costs. This resulted due to the
expansion of production and change in basic production processes required to
implement the Initiative in Italy.
After allocation of E300 million of research and development costs and E70
million of central production overhead/variances, segment result in 1998 was
E317 million, representing an increase of 1% from E314 million in 1997. Compared
to 1997, costs of research and development increased by E37 million, mainly due
to a cooperation with Novartis International AG and due to higher expenses for
clinical studies.
United States Region
The following table sets forth the net sales by sub-segment, and net sales
by sub-segment expressed as a percentage of total net sales, of the United
States Region for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1998 1997
----------------- -----------------
Percentage Percentage
of Net of Net
E Sales E Sales
------ ---------- ------ ----------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales by Sub-Segment:
Berlex...................................... 554 82 512 83
Medrad...................................... 124 18 108 17
--- --- --- ---
Total..................................... 678 100 620 100
=== === === ===
</TABLE>
The following table sets forth the net sales by business area, and net sales
by business area expressed as a percentage of total net sales, of the United
States Region for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1998 1997
----------------- -----------------
Percentage Percentage
of Net of Net
E Sales E Sales
------ ---------- ------ ----------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales by Business Area:
Fertility control and hormone therapy...... 143 21 123 20
Therapeutics............................... 331 49 296 48
Diagnostics................................ 204 30 201 32
--- --- --- ---
Total.................................... 678 100 620 100
=== === === ===
</TABLE>
Net Sales
Net sales increased by 9% to E678 million in 1998 compared to E620 million in
1997. The overall increase is due to increased sales volume (7%) and higher
product prices. The depreciation of the euro against the dollar during 1998
accounted for a small portion (1%) of the increase in net sales.
83
<PAGE>
Net sales by Berlex increased by 8% from E512 million in 1997 to E554 million
in 1998, while net sales by Medrad increased by 15% from E108 million in 1997 to
E124 million in 1998. Of Medrad's sales, 71% or E88 million were achieved in the
United States Region during 1998, compared to 71% or E76 million during 1997.
Net sales in the therapeutics business area increased by 12% to E331 million
in 1998 compared to E296 million in 1997. Increased sales of Betapace(R) was the
main factor responsible for the growth. Net sales of Betapace(R) increased 44%
to E128 million in 1998 from E89 million in 1997. Net sales of Betaseron(R)
decreased slightly to E156 million in 1998 from E159 million in 1997 because of
increased competitive pressure. Increased competition also resulted in a slight
decrease in net sales of our leukemia therapy, Fludara(R).
In the diagnostics business area, net sales increased by 2% to E204 million in
1998 from E201 million in 1997. Excluding the contribution to sales growth by
Medrad's products, net sales decreased by 14% from E93 million in 1997 to E80
million in 1998. The deterioration of contrast media prices and inventory
reduction by our distribution partner Abbott Laboratories resulted in a 21%
reduction of net sales of Magnevist(R), a MRI contrast medium, from E88 million
in 1997 to E69 million in 1998. Sales of Ultravist(R), our X-ray contrast
medium, increased 183% from E4 million in 1997 to E10 million in 1998, as a
result of expanded sales volume and market share.
Net sales in the fertility control and hormone therapy business area increased
16% from E123 million in 1997 to E143 million in 1998. The growth in sales is
primarily attributable to the 40% increase in net sales of Climara(R), a hormone
patch for the treatment of climacteric disorders, from E48 million in 1997 to
E66 million in 1998. Oral contraceptive sales increased slightly by 1% to E76
million in 1998, primarily due to slightly decreased sales of Levlen(R) (the
trademark for Microgynon(R)30 in the United States) and Tri-Levlen(R) (the
trademark for Triquilar(R) in the United States) as a result of competitive
pressures and availability of generic substitutes. Decreased sales of Levlen(R)
and Tri-Levlen(R) were partly offset by sales of Levlite(R) (the trademark for
Miranova(R) in the United States), a combined oral contraceptive, which was
launched in the United States in late 1998.
Segment Performance/Segment Result
Segment performance increased 4% to E245 million in 1998 compared to E236
million in 1997. The increase in net sales was partly offset by increased
marketing and sales costs and higher royalty payments due to higher volume of
sales of Betapace(R). The increase in marketing and sales costs is primarily
attributable to increases in the sales force in the fertility control and
hormone therapy and therapeutics business areas in preparation for planned
product launches in 2000.
We have targeted the United States Region as a key market for achieving
accelerated sales and profit growth rates over the next five years. In order
to reach this strategic goal, we invest substantially in research and
development to expand our product portfolio in the United States market. As a
consequence, research and development expense was higher as a percentage of
external net sales compared to the other segments and significantly reduced
segment result.
After allocation of E195 million of research and development costs and E4
million of central production overhead/variances, segment result in 1998 was E46
million, representing a decrease of 19% from E57 million in 1997. Compared to
1997, costs of research and development rose E20 million. The increase was
mainly attributable to additional projects for injectors in our Medrad business
and cooperations with Collateral Therapeutics, Inc. and Phoenix Pharmacologics
Inc.
84
<PAGE>
Japan Region
The following table sets forth the net sales by business area, and net sales
by business area expressed as a percentage of total net sales, of the Japan
Region for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1998 1997
----------------- -----------------
Percentage Percentage
of Net of Net
E Sales E Sales
------ ---------- ------ ----------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales by Business Area:
Fertility control and hormone therapy...... 9 3 10 3
Therapeutics............................... 24 7 27 7
Diagnostics................................ 282 82 312 82
Dermatology................................ 28 8 32 8
--- --- --- ---
Total.................................... 343 100 381 100
=== === === ===
</TABLE>
Net Sales
Net sales decreased by 10% to E343 million in 1998 compared to E381 million in
1997. The decrease is primarily attributable to negative exchange rate effects
(5%) and price reductions (5%) (including a price decrease ordered by the
Japanese Ministry of Health and Welfare in April 1998), partly offset by sales
volume increases (1%).
In the diagnostics business area, which accounted for 82% of total net sales
during 1998, net sales decreased 10% to E282 million in 1998 compared to E312
million in 1997. This decrease is attributable to the weakness of the Japanese
yen and the Japanese Ministry of Health and Welfare imposed price cuts, which
led to contraction of the market for X-ray contrast media. Sales of
Iopamiron(R), our top-selling product (accounting for 69% of net sales in the
diagnostics business area in 1998), decreased to E196 million in 1998 compared
to E223 million in 1997. Introduction of a pre-filled cartridge containing
Iopamiron(R), for use in computer tomography, was well received and enabled us
to increase our share of the market for X-ray contrast media. Net sales of
Magnevist(R), our MRI contrast medium, decreased 11% to E47 million in 1998
compared to E53 million in 1997, mainly due to government-imposed price cuts,
the weakness of the Japanese yen and decreased sales volume. However,
Magnevist(R) prefilled syringes were well received.
In the fertility control and hormone therapy business area, net sales
decreased 5% to E9 million in 1998 from E10 million in 1997. This decrease was
mainly attributable to negative exchange rate effects, which were only partly
offset by higher sales volume. The government approval of the sale of oral
contraceptives was not effective in 1998.
Net sales in the therapeutics business area decreased 14% to E24 million in
1998 compared to E27 million in 1997 due to negative sales volume, price and
currency effects.
In the dermatology business area, net sales decreased 13% to E28 million in
1998 from E32 million in 1997. The decrease is attributable to negative exchange
rate effects and negative volume effects due to lower sales of the hemorrhoidal
product Neriproct(R).
Segment Performance/Segment Result
Segment performance decreased by 18% to E119 million in 1998 compared to E145
million in 1997. The effect on segment performance of decreased net sales was
partly offset by reduced contractually-determined costs for iopamidol, the
active ingredient for Iopamiron(R), our top-selling product in Japan.
85
<PAGE>
After allocation of E66 million of research and development costs and E12
million of central production overhead/variances, segment result in 1998 was E41
million, representing a decrease of 39% from E67 million in 1997.
Latin America/Canada Region
The following table sets forth the net sales by business area, and net sales
by business area expressed as a percentage of total net sales, of the Latin
America/Canada Region for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1998 1997
------------------- -------------------
Percentage Percentage
E of Net Sales E of Net Sales
------ ------------ ------ ------------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales by Business
Area:
Fertility control and
hormone therapy.......... 226 64 230 62
Therapeutics.............. 59 16 66 18
Diagnostics............... 40 11 42 11
Dermatology............... 26 7 26 7
Other sources............. 8 2 7 2
--- --- --- ---
Total................... 359 100 371 100
=== === === ===
</TABLE>
Net Sales
Net sales decreased by 3% to E359 million in 1998 compared to E371 million in
1997, primarily as a result of unfavorable exchange rate movements (10%) and
supply problems in Brazil.
Overall, sales decreased 3% in Brazil, our largest individual market in this
segment, from E144 million in 1997 to E139 million in 1998. In Mexico, however,
despite marked currency depreciation, net sales increased 14% from E38 million
in 1997 to E43 million in 1998. For Venezuela, net sales increased 25% to E14
million in 1998 compared to E11 million in 1997. Net sales in Canada decreased
slightly from E36 million in 1997 to E35 million in 1998, entirely due to
adverse exchange rate effects. Net sales of Betaseron(R) in Canada increased 30%
to E18 million in 1998 compared to E14 million in 1997, despite a difficult
competitive situation.
Net sales in the fertility control and hormone therapy business area decreased
2% to E226 million in 1998 compared to E230 million in 1997. The decrease is
primarily attributable to negative currency effects and supply problems for oral
contraceptives in Brazil due to product recalls. Our top-selling product in this
segment was the oral contraceptive Femovan(R). Net sales of the low-dosage oral
contraceptive Meliane(R), which was launched in 1997, increased nearly threefold
to E 13 million in 1998. Net sales of two hormone therapy products, Cliane(R)
and Climara(R), also increased sharply during 1998 as compared to 1997.
In the therapeutics business area, net sales decreased 9% to E59 million in
1998 compared to E66 million in 1997. Increased net sales of Betaseron(R), which
grew 41% from E17 million in 1997 to E24 million in 1998, were offset by
decreased net sales of our prostate cancer therapy Androcur(R) and overall
unfavorable exchange rate effects in this segment. Net sales of Androcur(R),
which faced intense competition from generic products, decreased from E35
million in 1997 to E22 million in 1998.
Net sales in the diagnostics business area decreased 5% to E40 million in 1998
compared to E42 million in 1997. The main reason for this decrease was
unfavorable exchange rate effects, which were only partly offset by higher sales
volumes and prices. Net sales of our top-selling contrast medium Iopamiron(R),
which constituted 55% of net sales from the diagnostics business area during
1998, remained constant at E22 million in 1998.
Net sales in the dermatology business area remained constant at E26 million.
Increased net sales of Travogen(R), an anti-mycoticum, which constituted 36% of
net sales from the dermatology business area during 1998, only partly offset
negative exchange rate effects.
86
<PAGE>
Segment Performance/Segment Result
Segment performance decreased by 27% to E104 million in 1998 compared to E143
million in 1997. The decrease in segment performance is attributable to negative
effects in both net sales and costs. Net sales declined on the one hand due to a
highly unfavorable currency effect in the Group's most important markets in the
Latin America/Canada Region: Brazil, Mexico and Colombia. On the other hand,
generic competition for Androcur(R) in Argentina and supply problems with oral
contraceptives in Brazil led to substantial sales losses. In Chile, supply
problems resulted in unanticipated costs due to the requirement to repurchase
certain oral contraceptive inventories from wholesalers.
The supply problems in Brazil were caused by a temporary closing of our
Brazilian subsidiary due to the appearance of reports in the media concerning
faulty packs of oral contraceptives. Although the incidence of faulty packs in
Brazil was within worldwide accepted tolerances, we scrutinized our control
procedures and instituted various improvements.
A separate issue was the appearance of stolen placebo pills on the Brazilian
market, which originated from a test run performed with a packing machine from
our Brazilian subsidiary. We received a number of complaints from women who
reported unplanned pregnancies. We have made arrangements for the medical care
of the women and children concerned.
These efforts as well as other unplanned expenses for legal costs and
marketing measures had a negative impact on our segment performance in 1998.
See "Item 8--Financial Information--Legal Proceedings" and Note 38--
"Additional US GAAP Information--Litigation" to our consolidated financial
statements.
After allocation of E43 million of research and development costs and E7
million of central production overhead/variances, segment result in 1998 was E54
million, representing a decrease of 42% from E94 million in 1997.
Asia Region
The following table sets forth the net sales by business area, and net sales
by business area expressed as a percentage of total net sales, of the Asia
Region for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1998 1997
------------------- -------------------
Percentage Percentage
E of Net Sales E of Net Sales
------ ------------ ------ ------------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales by Business
Area:
Fertility control and
hormone therapy.......... 52 41 63 42
Therapeutics.............. 13 10 11 7
Diagnostics............... 46 36 48 32
Dermatology............... 13 10 16 11
Other sources............. 4 3 12 8
--- --- --- ---
Total................... 128 100 150 100
=== === === ===
</TABLE>
Net Sales
Net sales decreased by 15% to E128 million in 1998 compared to E150 million in
1997, mainly as a result of negative currency effects (22%) and, to a lesser
extent, volume reductions (2%), partially offset by increased prices (9%). The
Asian financial crisis led to substantial currency depreciation, and exchange
losses could only be partly offset by increased prices. Sales stabilized at
lower levels during the later part of 1998.
In South Korea, net sales decreased 21% from E33 million in 1997 to E26
million in 1998. Net sales in Indonesia decreased 64% to E7 million in 1998
compared to E20 million in 1997. In China (including Hong Kong), however, net
sales increased 16% to E14 million in 1998 from E12 million in 1997.
87
<PAGE>
Net sales in the fertility control and hormone therapy business area decreased
18% to E52 million in 1998 compared to E63 million in 1997 due to negative
exchange rate effects and decreased sales volumes, which affected the business
area as a whole. Net sales of the oral contraceptive Diane(R)--35, which
constituted 19% of the net sales from this business area in 1997, decreased 42%
from E13 million in 1997 to E7 million in 1998, primarily due to decreased sales
volume and currency effects. Net sales of the oral contraceptive Microgynon(R)-
30 decreased 32% to E7 million in 1998 as compared to E10 million in 1997.
In the therapeutics business area, net sales increased 20% to E13 million in
1998 from E11 million in 1997 due to increased volume which offset negative
exchange rate effects. This growth is mainly attributable to increased net sales
of Bonefos(R) (150%), Androcur(R) (16%) and Betaferon(R) (9%) due to positive
volume effects.
Net sales in the diagnostics business area decreased 4% to E46 million in 1998
compared to E48 million in 1997. Net sales of our top-selling X-ray contrast
medium Ultravist(R), which constituted 64% of the net sales of the diagnostics
business area in 1997, decreased 8% from E31 million in 1997 to E28 million in
1998 due primarily to highly adverse currency effects, which were partly offset
by positive volume and price effects. Net sales of another X-ray contrast
medium, Urografin(R), increased by 48% to E4 million in 1998 compared to E3
million in 1997 due to higher sales volumes. Net sales of our MRI contrast
medium Magnevist(R), which constituted 19% of the net sales of the diagnostics
business area in 1997, declined by 8% from E9 million in 1997 to E8 million in
1998 primarily due to unfavorable exchange rate effects.
Net sales in the dermatology business area decreased 20% to E13 million in
1998 from E16 million in 1997 primarily as a result of overall unfavorable
currency effects.
Segment Performance/Segment Result
Segment performance decreased 24% from E51 million in 1997 to E39 million in
1998. This decrease is mainly attributable to the steep decrease in net sales
which reflects the unstable economic and financial conditions in the Asia Region
during 1998. The decrease in net sales was only partly offset by the overall
currency effects on costs.
After allocation of E15 million of research and development costs and E13
million of central production overhead/variances, segment result in 1998 was E11
million, representing a decrease of 48% from E21 million in 1997.
Other Activities
The following table sets forth the net sales by sub-segment, and net sales
as a percentage of total net sales, for the Other Activities segment for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1998 1997
------------------- -------------------
Percentage Percentage
E of Net Sales E of Net Sales
------ ------------ ------ ------------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales:
Pharma Chemicals..................... 84 66 73 64
Other................................ 44 34 42 36
--- --- --- ---
Total.............................. 128 100 115 100
=== === === ===
</TABLE>
Net Sales
Net sales increased by 11% to E128 million in 1998 compared to
E115 million in 1997.
Net sales in the pharma chemicals sub-segment increased 15% to E84 million in
1998 compared to E73 million in 1997, due to increased volumes in the
traditional pharma chemicals business and new projects involving tailor-made
chemistry.
88
<PAGE>
Segment Performance/Segment Result
Segment performance increased by 2% to E55 million in 1998 from E54 million in
1997. Improved net sales in the pharma chemicals sub-segment were offset by
results from the other sub-segment.
After allocation of E9 million of research and development costs and E26
million of central production overhead/variances, segment result amounted to E20
million in 1998, the same level as in 1997.
Research and Development
Expenditures on research and development increased 9% to E684 million in 1999
(19% of total net sales) compared to E628 million in 1998 (19%). During 1997,
research and development costs were E569 million, or 18% of total net sales.
During 1999 and the first six months of 2000, 32% and 38%, respectively, of
our research and development expenditure could not be allocated to specific
projects as it accrued. These unallocated expenditures primarily relate to
basic research costs, management costs, infrastructure costs, international
project management costs and regulatory compliance overhead costs. The
following table sets forth, by business area, the research and development
expense allocable to projects for the six months ended June 30, 2000, and the
year ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Six months
ended Year ended December 31,
June 30, -------------------------
2000 1999 1998 1997
---------- ------- ------- -------
(in millions of E)
<S> <C> <C> <C> <C>
Research and Development Expense Allocable
to Projects by Business Area:
Therapeutics............................... 113 219 220 155
Fertility control and hormone therapy...... 67 127 112 79
Diagnostics and radiopharmaceuticals(/1/).. 34 67 72 64
Dermatology................................ 8 9 9 11
Other research projects.................... 25 44 30 44
--- ------- ------- -------
Total.................................... 247 466 443 353
=== ======= ======= =======
</TABLE>
--------
(1) Expenditures in the field of radiopharmaceuticals have been included in
the recently formed Diagnostics and radiopharmaceuticals business area
with effect from January 1, 2000.
For additional information regarding the Group's research and development
program, see "Item 4--Information on the Company--Research and Development".
89
<PAGE>
Six months ended June 30, 2000 Compared with six months ended June 30, 1999
The following table sets forth the net sales, net sales expressed as a
percentage of total net sales, and percentage change in net sales from the
prior period, the segment performance, segment performance expressed as a
percentage of total segment performance and percentage change in segment
performance from the prior period, and the segment result, segment result
expressed as a percentage of total segment result and percentage change in
segment result from the prior period, for each of the Group's segments for the
six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Six months ended June 30,
----------------------------------------------------
2000 1999
------------------------------ ---------------------
% Change
% of from % of
E Segment Total 1999 E Segment Total
------ ------------- -------- ------ -------------
(in millions, except percentages)
<S> <C> <C> <C> <C> <C>
Net Sales:
Europe................. 1,013 46 15 881 50
United States.......... 495 22 45 342 19
Japan.................. 307 14 50 205 12
Latin America/Canada... 220 10 24 177 10
Asia................... 98 4 24 79 5
Other Activities....... 84 4 20 70 4
----- --- --- ----- ---
Total Net Sales.......... 2,217 100 26 1,754 100
===== === === ===== ===
Segment Performance:
Europe................. 456 50 16 393 55
United States.......... 173 19 52 114 16
Japan.................. 125 14 45 86 12
Latin America/Canada... 78 9 37 57 8
Asia................... 36 4 29 28 4
Other Activities....... 41 4 8 38 5
----- --- --- ----- ---
Total Segment
Performance........... 909 100 27 716 100
=== === ===
Central Production
Overhead/Variances...... (55) (2) (56)
Research and
Development............. (402) 24 (324)
----- --- -----
Segment Result........... 452 35 336
===== === =====
Segment Result:
Europe................. 267 59 30 205 61
United States.......... 31 7 82 17 5
Japan.................. 63 14 37 46 14
Latin America/Canada... 48 11 45 33 10
Asia................... 21 4 50 14 4
Other Activities....... 22 5 5 21 6
----- --- --- ----- ---
Total Segment Result... 452 100 35 336 100
=== ===
Other.................. (91) 65 (55)
----- --- -----
Total Operating Profit... 361 28 281
===== === =====
</TABLE>
The following table sets forth the net sales, net sales expressed as a
percentage of total net sales, and percentage change in net sales from the
prior period for the Group's business areas for the first six months of 2000
and 1999. During the first half of 2000, due to our recent significant
acquisitions in the field of radiopharmaceuticals, including Diatide and CIS
bio international, we formed a new business area, Diagnostics and
radiopharmaceuticals (formerly the Diagnostics business area). This business
area has responsibility for the development of diagnostic and
radiopharmaceutical products. In the table below and elsewhere in this
registration
90
<PAGE>
statement, we have not restated net sales for periods prior to 2000 to give
effect to the formation of this new business area because there have not been
any material net sales of radiopharmaceuticals prior to 2000.
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------------------------
2000 1999
------------------------- ----------------
% Change
% of from % of
E Net Sales 1999 E Net Sales
------ --------- -------- ------ ---------
(in millions, except percentages)
<S> <C> <C> <C> <C> <C>
Net Sales:
Fertility control and hormone
therapy.......................... 653 30 15 568 32
Therapeutics...................... 714 32 36 526 30
Diagnostics and
radiopharmaceuticals............. 651 29 32 493 28
Dermatology....................... 111 5 9 102 6
Other sources..................... 88 4 35 65 4
----- --- --- ----- ---
Total........................... 2,217 100 26 1,754 100
===== === === ===== ===
</TABLE>
--------
(1) Net sales of our radiopharmaceutical products have been included in the
recently formed Diagnostics and radiopharmaceuticals business area with
effect from January 1, 2000.
Group
<TABLE>
<CAPTION>
Consolidated Income Statements
Six months ended June 30,
---------------------------------
2000 1999
---------------- ----------------
% of Net % of Net
E Sales E Sales
------ -------- ------ --------
(in millions, except
percentages)
<S> <C> <C> <C> <C>
Net sales..................................... 2,217 100 1,754 100
Cost of sales................................. (535) 24 (398) 23
----- --- ----- ---
Gross profit.................................. 1,682 76 1,356 77
Marketing and selling costs................... (689) 31 (548) 31
Engineering and administration costs.......... (214) 10 (183) 10
Research and development costs................ (402) 18 (324) 18
Other operating expenses/income............... (16) (20)
----- --- ----- ---
Operating profit.............................. 361 16 281 16
Financial result.............................. 29 16
----- --- ----- ---
Profit on ordinary activities................. 390 18 297 17
Taxes on profit............................... (178) (123)
----- --- ----- ---
Income before minority interests.............. 212 10 174 10
Minority interests............................ (3) (5)
----- --- ----- ---
Net income.................................... 209 9 169 10
===== === ===== ===
</TABLE>
91
<PAGE>
The following table sets forth our top-selling products during the first six
months of 2000. These products represented 62% of the total net sales for the
Group in the first six months of 2000.
<TABLE>
<CAPTION>
Percentage change from
Net Sales first six months of 1999
----------------- ------------------------
(E millions)
<S> <C> <C>
1. Betaferon(R) (Betaseron(R))
(Therapeutics).................... 289 35
2. Iopamiron(R) (Diagnostics)..... 177 26
3. Magnevist(R) (Diagnostics)..... 143 30
4. Ultravist(R) (Diagnostics)..... 126 15
5. Betapace(R) (Therapeutics)..... 118 90
6. Diane(R)-35 (Gynecology)....... 100 19
7. Microgynon(R) (Levlen(R))
(Fertility Control)............... 59 9
8. Femovan(R) (Fertility
Control).......................... 55 9
9. Androcur(R) (Therapeutics,
Gynecology)....................... 53 8
10. Climara(R) (HRT)............... 51 35
11. Fludara(R) (Therapeutics)...... 51 31
12. Meliane(R) (Fertility
Control).......................... 48 24
13. Triquilar(R) (Tri-Levlen(R))
(Fertility Control)............... 44 (7)
14. Mirena(R) (Fertility Control).. 34 19
15. Noctamid(R) (Therapeutics)..... 21 11
----- ---
Total............................ 1,369 26
===== ===
</TABLE>
Net Sales
Net sales increased by 26% to E2,217 million in the six months ended June 30,
2000 (the "2000 Period") compared to E1,754 million in the six months ended
June 30, 1999 (the "1999 Period").
This growth was due to increased sales volumes (17%) and price increases (2%).
Favorable exchange rate effects (7%) due primarily to the appreciation of the
U.S. dollar and the Japanese yen against the euro also contributed to the
increase in net sales. Excluding the results from recent acquisitions, CIS bio
international and Mitsui Pharmaceuticals, both of which have been consolidated
since April 2000, and Diatide, which has been consolidated since November 1999,
the Group's net sales increased 22%.
Net sales for products in our therapeutics business area increased by 36% to
E714 million in the 2000 Period compared to E526 million in the 1999 Period,
primarily due to the 35% increase in net sales of Betaferon(R), our product for
the treatment of multiple sclerosis. Net sales of Betaferon(R) increased to E
289 million in the 2000 Period compared to E214 million in the 1999 Period,
with net sales in the United States Region increasing 31% to E116 million and
in the Europe Region increasing 38% to E150 million. Net sales of Fludara(R),
which is used in the treatment of chronic lymphocytic leukemia, rose 31% from
E39 million in the 1999 Period to E51 million in the 2000 Period. In April, we
launched Fludara(R) in the Japan Region. Net sales of Betapace(R), a product for
the treatment of severe cardiac disorders which we market solely in the United
States Region, nearly doubled to E118 million in the 2000 Period from E62
million in the 1999 Period. Net sales of products from the recently acquired
Mitsui Pharmaceuticals have been included in the Group's results since April
2000. Mitsui's net sales amount to E36 million between April and June and
accounted for 7% of the 36% sales growth in the therapeutics business area in
the 2000 Period as compared to the 1999 Period.
In the fertility control and hormone therapy business area, net sales
increased by 15% to E653 million in the 2000 Period compared to E568 million
in the 1999 Period. Products still in the first stage of the product life-cycle,
such as Mirena(R), our intra-uterine hormone delivery system for fertility
control, and Meliane(R), a low-dose oral contraceptive, had a major impact on
growth. Net sales of Mirena(R) increased 19% in the 2000 Period compared to the
1999 Period while net sales of Meliane(R), increased 24%. Net sales of Diane(R)-
35, the acne
92
<PAGE>
therapy with additional contraceptive effect, rose by 19% in the 2000 Period
from the 1999 Period. Our hormone replacement therapy products for the treatment
of climacteric disorders also contributed to sales growth. Net sales of
Climara(R), a hormone patch for the treatment of menopausal complaints increased
35% in the 2000 Period as compared to the 1999 Period while net sales of Climen,
an oral preparation for these symptoms, increased by 14%.
Despite continued pricing pressure in diagnostics, net sales in our
diagnostics and radiopharmaceuticals business area increased by 32% to E651
million in the 2000 period from E493 million in the 1999 Period. The increase
was driven by a 30% growth in net sales of our MRI contrast medium Magnevist(R),
primarily because of positive sales trends in the United States Region. The X-
ray contrast media Ultravist(R) recorded a 15% increase in net sales and
Iopamiron(R) had a 26% increase in net sales in the 2000 Period as compared to
the 1999 Period. Net sales of X-ray contrast media products increased 20% to
E371 million in the 2000 Period from E310 million in the 1999 Period, while net
sales of MRI contrast media products increased 30% to E143 million in the 2000
Period compared to E110 million in the 1999 Period. Net sales of Medrad's
contrast media application technologies increased 29% from E69 million in the
1999 Period to E89 million in the 2000 Period. Net sales of
radiopharmaceuticals amounted to E40 million in the 2000 Period, including E35
million from the first-time consolidation of the recently acquired companies CIS
bio international and Diatide.
In our dermatology business area, net sales increased 9% to E111 million in
the 2000 Period from E102 million in the 1999 Period. Approximately half of
this growth was attributable to pricing effects. Increased net sales of
Advantan(R) (28%) and Nerisona(R) (12%), both preparations for the treatment of
eczema, also contributed to the growth of net sales in the dermatology business
area.
Gross Profit
Gross profit increased 24% to E1,682 million in the 2000 Period compared to
E1,356 million in the 1999 Period. This growth rate is slightly below the 26%
growth rate in net sales.
Operating Profit
Operating profit increased 28% to E361 million in the 2000 Period from E281
million in the 1999 Period. Marketing and selling costs increased 26% to E689
million in the 2000 Period from E548 million, but remained constant as a
percentage of net sales. The increase was partly due to increased sales and
marketing activities in fertility control and hormone therapy in the United
States Region. Engineering and administration costs increased 17% to E214
million in the 2000 Period from E183 million in the 1999 Period largely due to
exchange-rate effects and the first-time consolidation of acquired companies.
Research and development costs increased 24% from E324 million in the 1999
Period to E402 million in the 2000 Period, but remained almost constant as a
percentage of net sales. Other operating expenses/income increased to E(16)
million in the 2000 Period from E(20) million in the 1999 Period.
Financial Result
Financial result increased to E29 million in the 2000 Period from E16
million in the 1999 Period. This increase is primarily due to the E23 million
profit contribution from the Aventis CropScience joint venture in the 2000
Period, compared to a E14 million profit contribution from AgrEvo in the 1999
Period. A E5 million share of the one-time costs of integrating the combined
companies, Rhone-Poulenc Agro and AgrEvo, has been deducted from the Aventis
CropScience profit contribution.
Taxes on Profit
Taxes on profit increased E55 million or 45% to E178 million in the 2000
Period from E123 million in the 1999 Period. Tax costs during the 2000 Period
include a one-time expenditure of E15 million due to the reduction of deferred
tax assets by this amount to allow for German tax reform.
93
<PAGE>
Net Income
As a result of the foregoing, net income for the 2000 Period increased by E40
million or 24% to E209 million in the 2000 Period compared to E169 million in
the 1999 Period.
Results of Operations by Segment
Europe Region
The following table sets forth the net sales by business area, and net sales
by business area expressed as a percentage of total net sales, of the Europe
Region for the 2000 Period and the 1999 Period:
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------------
2000 1999
------------------- -------------------
Percentage Percentage
E of Net Sales E of Net Sales
------ ------------ ------ ------------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales by Business Area:
Fertility control and hormone therapy... 387 38 350 39
Therapeutics............................ 355 35 298 34
Diagnostics and
radiopharmaceuticals(1)................ 194 19 165 19
Dermatology............................. 69 7 63 7
Other sources........................... 8 1 5 1
----- --- --- ---
Total................................. 1,013 100 881 100
===== === === ===
</TABLE>
--------
(1) Net sales of our radiopharmaceutical products have been included in the
recently formed Diagnostics and radiopharmaceuticals business area with
effect from January 1, 2000.
Net Sales
Net sales increased by 15% to E1,013 million in the 2000 Period compared to
E881 million in the 1999 Period. Overall, increases in sales volume and prices
offset minor negative currency effects. Net sales continued to be affected by
government imposed price cuts, fixed payments, positive and negative lists for
the reimbursement of products as well as the increased use of generic substitute
products.
In Germany, net sales increased 6% to E257 million in the 2000 Period from
E243 million in the 1999 Period.
In France, net sales increased 34% to E114 million in the 2000 Period compared
to E86 million in the 1999 Period. In Italy, net sales increased 21% to E118
million in the 2000 Period from E97 million in the 1999 Period. Net sales in
Spain increased 16% to E78 million in the 2000 Period from E67 million in the
1999 Period. In Great Britain, net sales increased 17% to E68 million in the
2000 Period compared to E58 million in the 1999 Period. Net sales in Finland
(which include worldwide export sales of Leiras Oy) decreased 2% to E56 million
in the 2000 Period from E57 million in the 1999 Period.
In the fertility control and hormone therapy business area, net sales
increased by 11% to E387 million in the 2000 Period compared to E350 million in
the 1999 Period. Sales growth in the 2000 Period was driven by increased net
sales of our very low-dose oral contraceptive Meliane(R) (46%), the intrauterine
hormone delivery system for fertility control Mirena(R) (16%) and Diane(R)--35
(12%), the acne therapy with additional contraceptive effect.
Net sales in the therapeutics business area increased by 19% to E355 million
in the 2000 Period compared to E298 million in the 1999 Period. Net sales of
Betaferon(R) increased 38% to E150 million in the 2000 Period compared to E108
million in the 1999 Period, confirming our position at the front of the European
market for multiple sclerosis preparations.
94
<PAGE>
Net sales in the diagnostics and radiopharmaceuticals business area increased
by 18% to E194 million in the 2000 Period compared to E165 million in the 1999
Period. The increase is mainly attributable to the first time consolidation of
CIS bio international SA. For further information on CIS bio international, see
"Item 4 -- Information on the Company -- Group Organization -- Europe Region --
CIS bio international Acquisition".
In the dermatology business area, net sales increased by 10% to E69 million in
the 2000 Period as compared to E63 million in the 1999 Period. The growth was
due to increased net sales of Advantan(R) (26%), Psorcutan(R)(9%) and
Travocort(R) (15%).
Segment Performance/Segment Result
Segment performance increased by 16% to E456 million in the 2000 Period
compared to E393 million in the 1999 Period. The increase of segment result
reflects the business expansion in the Europe Region with net sales growing at a
higher rate (15%) than sales and marketing costs (10%).
After allocation of E165 million of research and development costs and E24
million of central production overhead/variances, segment result in the 2000
Period was E267 million, representing an increase of 30% compared to E205
million in the 1999 Period.
United States Region
The following table sets forth the net sales by sub-segment, and net sales
by sub-segment expressed as a percentage of total net sales, of the United
States Region for the 2000 Period and the 1999 Period:
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------------------------
2000 1999
--------------------- ---------------------
Percentage Percentage
E of Net Sales E of Net Sales
-------- ------------ -------- ------------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales by Sub-Segment:
Berlex............................ 407 82 274 80
Medrad............................ 88 18 68 20
--- --- --- ---
Total........................... 495 100 342 100
=== === === ===
</TABLE>
The following table sets forth the net sales by business area, and net sales
by business area expressed as a percentage of total net sales, of the United
States Region, for the 2000 Period and the 1999 Period:
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------------------------
2000 1999
--------------------- ---------------------
Percentage Percentage
E of Net Sales E of Net Sales
-------- ------------ -------- ------------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales by Business Area:
Fertility control and hormone
therapy.............................. 66 13 56 16
Therapeutics.......................... 263 53 174 51
Diagnostics and
radiopharmaceuticals(1).............. 166 34 112 33
--- --- --- ---
Total............................. 495 100 342 100
=== === === ===
</TABLE>
--------
(1) Net sales of our radiopharmaceutical products have been included in the
recently formed Diagnostics and radiopharmaceuticals business area with
effect from January 1, 2000.
Net Sales
Net sales increased by 45% to E495 million in the 2000 Period compared to E342
million in the 1999 Period, primarily due to expanding sales volume (26%) and
favorable currency effects (16%).
95
<PAGE>
Net sales of Berlex increased by 48% from E274 million in the 1999 Period to
E407 million in the 2000 Period, while net sales of Medrad increased by 29% from
E68 million in the 1999 Period to E88 million in the 2000 Period. Of Medrad's
sales, 65% or E59 million were achieved in the United States Region during the
2000 Period compared to 65% or E52 million during the 1999 Period.
Net sales in the therapeutics business area increased by 51% to E263 million
in the 2000 Period compared to E174 million in the 1999 Period. Increased sales
volume and positive currency effects for Betaseron(R) (the trademark for
Betaferon in the United States) and increased sales volume and currency gains
for Betapace(R), used for the treatment of severe cardiac rhythm disorders, were
the main factors leading to the increase in net sales.
In the diagnostics and radiopharmaceuticals business area, net sales increased
by 48% to E166 million in the 2000 Period from E112 million in the 1999 Period.
Excluding the contribution to sales growth by Medrad's vascular injection
systems, net sales increased by 75% to E78 million in the 2000 Period from E45
million in the 1999 Period, mainly due to higher sales volumes for Magnevist(R)
and Ultravist(R).
Net sales in the fertility control and hormone therapy business area increased
19% from E56 million in the 1999 Period to E66 million in the 2000 Period. Lower
net sales of Triquilar(R) (29%) in the 2000 Period were offset by higher net
sales of Climara(R) (44%) and Miranova(R) (301%). Net sales of Climara(R), our
hormonal patch for the treatment of climacteric disorders, increased by E11
million from E27 million in the 1999 Period to E38 million in the 2000 period
primarily due to higher sales volume and positive currency effects. Net sales of
Miranova(R) increased by E7 million to E9 million in the 2000 Period mainly due
to increased sales volume.
Segment Performance/Segment Result
Segment performance increased by 52% to E173 million in the 2000 Period
compared to E114 million in the 1999 Period. The increase is mainly due to
higher net sales partly offset by higher marketing and sales costs and higher
royalty payments due to higher sales volumes of Betaseron(R) and Betapace(R).
Higher marketing and sales costs during the 2000 Period reflect expansion
efforts in the fertility control and hormone therapy and therapeutics business
areas. Additionally, adverse currency effects impacted all cost categories.
After allocation of E139 million of research and development costs and E3
million of central production overhead/variances, segment result in the 2000
Period was E31 million, representing an increase of 82% from E17 million in the
1999 Period. Compared to the 1999 Period, costs of research and development
increased by E44 million. The increase was primarily attributable to newly
launched strategic projects and cooperations as well as research and development
expense arising from the inclusion of Diatide, which results have been
consolidated in Group accounts since its acquisition in November 1999.
Japan Region
The following table sets forth the net sales by business area, and net sales
by business area expressed as a percentage of total net sales, of the Japan
Region for the 2000 Period and the 1999 Period:
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------------
2000 1999
------------------- -------------------
Percentage Percentage
E of Net Sales E of Net Sales
------ ------------ ------ ------------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales by Business Area:
Fertility control and hormone therapy..... 11 4 7 3
Therapeutics.............................. 48 15 13 7
Diagnostics and
radiopharmaceuticals(1).................. 227 74 169 83
Dermatology............................... 21 7 16 7
--- --- --- ---
Total................................. 307 100 205 100
=== === === ===
</TABLE>
--------
(1) Net sales of our radiopharmaceutical products have been included in the
recently formed Diagnostics and radiopharmaceuticals business area with
effect from January 1, 2000.
96
<PAGE>
Net Sales
The results of the Japan Region for the 2000 Period include the results of
operations of Mitsui Pharmaceuticals, Inc. and CIS Diagnostics K.K., which
have been consolidated since April 2000.
Net sales increased by 50% to E307 million in the 2000 Period compared to E205
million in the 1999 Period. Excluding the effects of the acquisitions of Mitsui
Pharmaceuticals and CIS Diagnostics, net sales increased by 31%. The increase in
net sales (excluding gains from Mitsui Pharmaceuticals and CIS Diagnostics) was
primarily attributable to exchange rate movements (25%) and increased sales
volumes (8%). Price reductions mandated by the Japanese Ministry of Health and
Welfare became effective in April 2000. The price cuts, averaging 8%, were
partially offset by reducing our discounts so that, over the entire 2000 Period,
prices were down only 2%.
In the diagnostics and radiopharmaceuticals business area, which accounted for
74% of total net sales during the 2000 Period, net sales increased by 34% to
E227 million in the 2000 Period compared to E169 million in the 1999 Period. Net
sales of Iopamiron(R), our top-selling X-ray contrast media, increased 29% from
E119 million in the 1999 Period to E153 million in the 2000 Period.
Net sales of products from the fertility control and hormone therapy business
area, which represented 4% of net sales in the Japan Region in the 2000 Period,
increased 70% to E11 million in the 2000 Period compared to E7 million in the
1999 Period.
In the therapeutics business area, which accounted for 15% of total net sales
during the 2000 Period, net sales increased by 256% to E48 million in the 2000
Period compared to E13 million in the 1999 Period. This steep increase is mainly
due to the consolidation of Mitsui Pharmaceuticals from April 2000.
Segment Performance/Segment Result
Segment performance increased by 45% to E78 million in the 2000 Period
compared to E57 million in the 1999 Period. Higher net sales were partly offset
by increased marketing and sales costs (mainly due to adverse currency effects)
and higher contractually-determined costs for iopamidol, the active ingredient
for Iopamiron(R).
After allocation of E56 million of research and development costs and E6
million of central production overhead/variances, segment result in the 2000
Period was E63 million, representing an increase of 37% compared to E46 million
in the 1999 Period. Costs of research and development increased by E22 million
in the 2000 Period mainly due to higher research and development overhead costs
and the first-time consolidation of Mitsui Pharmaceuticals.
Latin America/Canada Region
The following table sets forth the net sales by business area, and net sales
by business area expressed as a percentage of total net sales, of the Latin
America/Canada Region for the 2000 Period and the 1999 Period:
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------------
2000 1999
------------------- -------------------
Percentage Percentage
E of Net Sales E of Net Sales
------ ------------ ------ ------------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales by Business Area:
Fertility control and hormone therapy..... 139 64 111 63
Therapeutics.............................. 38 17 29 16
Diagnostics and
radiopharmaceuticals(1).................. 24 11 21 12
Dermatology............................... 14 6 12 7
Other sources............................. 5 2 4 2
--- --- --- ---
Total................................. 220 100 177 100
=== === === ===
</TABLE>
--------
(1) Net sales of our radiopharmaceutical products have been included in the
recently formed Diagnostics and radiopharmaceuticals business area with
effect from January 1, 2000.
97
<PAGE>
Net Sales
Net sales increased by 24% to E220 million in the 2000 Period compared to E177
million in the 1999 Period. The increase was attributable in roughly equal parts
to volume, pricing and exchange rate effects.
The increase in net sales was driven by increased net sales in Canada and
Mexico. Net sales in Canada increased 45% from E19 million in the 1999 Period to
E28 million in the 2000 Period, while net sales in Mexico increased 39% to E39
million in the 2000 Period compared to E28 million in the 1999 Period.
Net sales in the fertility control and hormone therapy business area increased
25% to E139 million in the 2000 Period compared to E111 million in the 1999
Period. This growth was driven by increased net sales of Diane(R)--35 (56%) and
the oral contraceptives Meliane(R) (46%), Microgynon(R)30 (25%) and Femovan(R)
(4%).
In the therapeutics business area, net sales increased 31% to E38 million in
the 2000 Period compared to E29 million in the 1999 Period. This growth was
driven by higher net sales of Betaferon(R), which increased 53% from E14 million
in the 1999 period to E21 million in the 2000 Period.
Net sales in the diagnostics and radiopharmaceuticals business area increased
16% to E24 million in the 2000 Period compared to E21 million in the 1999
Period. Higher net sales of Iopamiron(R) (20%) and Ultravist(R) (53%) were the
main factors for the increase in the diagnostics and radiopharmaceuticals field.
Net sales in the dermatology business area increased to E14 million in the
2000 Period compared to E12 million in the 1999 Period. The increase in net
sales was mainly attributable to higher sales volumes of Scheriproct(R) and
Advantan(R) and due to positive price effects for Travogen(R) and Tri-
Nerisona(R).
Segment Performance/Segment Result
Segment performance increased by 37% to E78 million in the 2000 Period
compared to E57 million in the 1999 Period. Improved net sales were partly
offset by higher marketing and sales costs primarily resulting from adverse
currency effects.
After allocation of E27 million of research and development costs and E3
million of central production overhead/variances, segment result in the 2000
Period was E48 million, representing an increase of 45% compared to E33 million
in the 1999 Period.
Asia Region
The following table sets forth the net sales by business area, and net sales
by business area expressed as a percentage of total net sales, of the Asia
Region for the 2000 Period and the 1999 Period:
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------------
2000 1999
------------------- -------------------
Percentage Percentage
E of Net Sales E of Net Sales
------ ------------ ------ ------------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales by Business Area:
Fertility control and hormone therapy..... 36 37 29 37
Therapeutics.............................. 10 10 12 15
Diagnostics and
radiopharmaceuticals(1).................. 38 39 24 30
Dermatology............................... 7 7 10 13
Other sources............................. 7 7 4 5
--- --- --- ---
Total................................. 98 100 79 100
=== === === ===
</TABLE>
--------
(1) Net sales of our radiopharmaceutical products have been included in the
recently formed Diagnostics and radiopharmaceuticals business area with
effect from January 1, 2000.
98
<PAGE>
Net Sales
Net sales increased by 24% to E98 million in the 2000 Period compared to E79
million in the 1999 Period. Sales volume accounted for 8% of the increase.
Increased sales in the fertility control and hormone therapy and diagnostics
business areas were partially offset by decreased sales of therapeutic and
dermatology products.
Net sales in the fertility control and hormone therapy business area increased
25% to E36 million in the 2000 Period compared to E29 million in the 1999
Period. This growth was driven by increased net sales of Diane(R) (20%) and the
oral contraceptives Femovan(R) (45%) and Microgynon(R) (16%).
In the therapeutics business area, net sales decreased 15% to E10 million in
the 2000 Period from E12 million in the 1999 Period. Decreased net sales of
Betaferon(R) and Dopergin(R) were only partly offset by increased net sales of
Androcur(R).
Net sales in the diagnostics and radiopharmaceuticals business area increased
56% to E38 million in the 2000 Period compared to E24 million in the 1999
Period, primarily due to increased net sales of Ultravist(R) (49%) and
Magnevist(R) (45%).
Net sales in the dermatology business area decreased 35% to E7 million in the
2000 Period from E10 million in the 1999 Period. The decrease was mainly
attributable to lower sales volume of Travocort(R) and Skinoren(R).
Segment Performance/Segment Result
Segment performance increased by 29% from E28 million in the 1999 Period to
E36 million in the 2000 Period. Higher net sales partly offset by slightly
increased marketing and sales costs primarily contributed to the improvement.
After allocation of E10 million of research and development costs and E5
million of central production overhead/variances, segment result in the 2000
Period was E21 million, representing an increase of 50% compared to E14 million
in the 1999 Period.
Other Activities
The following table sets forth the net sales by sub-segment, and net sales
as a percentage of total net sales, for the Other Activities segment for the
2000 Period and the 1999 Period:
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------------
2000 1999
------------------- -------------------
Percentage Percentage
E of Net Sales E of Net Sales
------ ------------ ------ ------------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Net Sales:
Pharma Chemicals...................... 64 76 44 63
Other................................. 20 24 26 37
--- --- --- ---
Total............................... 84 100 70 100
=== === === ===
</TABLE>
99
<PAGE>
Net Sales
Net sales increased by 20% to E84 million in the 2000 Period compared to E70
million in the 1999 Period.
Net sales for the pharma chemicals sub-segment increased 45% to E64 million in
the 2000 Period compared to E44 million in the 1999 Period, primarily due to
increased volumes of various intermediates and active ingredients and new
projects involving tailor-made chemistry.
Segment Performance/Segment Result
Segment performance increased by 8% to E41 million in the 2000 Period from E38
million in the 1999 Period. This increase is primarily attributable to increased
net sales in the pharma chemicals sub-segment offset by results from the other
sub-segment.
After allocation of E5 million of research and development costs and E14
million of central production overhead/variances, segment result in the 2000
Period was E22 million, representing an increase of 5% compared to E21 million
in the 1999 Period.
United States GAAP Reconciliation
For a description of certain differences between IAS and United States
Generally Accepted Accounting Principles with respect to the consolidated
financial statements, see "--Liquidity and Capital Resources--United States
GAAP Reconciliation". For the six month period ended June 30, 2000, IAS and US
GAAP differ in the timing for the recognition of the effects of the German tax
reform discussed under "--Taxes on Profit" as under US GAAP the tax effects
are only recognized upon final enactment of the new tax law.
LIQUIDITY AND CAPITAL RESOURCES
Overview
The Group's cash and cash equivalents as of December 31, 1999, 1998 and 1997
were E102 million, E367 million and E744 million, respectively. The Group's cash
and cash equivalents as of June 30, 2000 were E209 million. As of December 31,
1999, the Group had a positive net cash position (which it defines as cash, cash
equivalents and marketable securities less liabilities to banks) of
approximately E397 million, compared with approximately E821 million at December
31, 1998, and approximately E788 million at December 31, 1997. The Group had a
positive net cash position at June 30, 2000 of approximately E385 million. The
positive net cash position is primarily due to pension liabilities from German
retirement benefit plans, which are financial resources for the Group, and as of
December 31, 1999, 1998 and 1997 amounted to E1,101 million, E1,049 million and
E992 million, respectively. The German pension liabilities amounted to E1,129
million as of June 30, 2000. As the pension obligations in Germany usually
remain unfunded, the Group, like most German companies, considers its unfunded
pension obligations as long-term financing obligations. We believe that cash
flows from operating activities, along with available cash and cash equivalents
and marketable securities, will be sufficient to fund all of our anticipated
operating needs in 2000, including capital expenditures, research cooperation
projects, debt service and dividends.
Operations
Cash flows from operating activities were E275 million in 1999, E382 million
in 1998 and E493 million in 1997. The decreases in 1999 and 1998 as compared to
1997 are primarily due to an increase in inventory and accounts receivables
during 1998 and 1999, and a payment made in 1999 to the German tax authorities
following an audit. Inventory and accounts receivable increased during 1998 and
1999 in line with the overall expansion of our business. Cash flows from
operating activities were E310 million in the 2000 Period.
Investing
Cash flows used in investing activities were E261 million in 1999, E561
million in 1998 and E445 million in 1997. The higher amount in 1998 as compared
to 1999 and 1997 is primarily attributable to investments of E393 million in
securities, and the decrease in 1999 to the subsequent expiry and sale of
securities. In 1999, we
100
<PAGE>
made a capital contribution of approximately E159 million to AgrEvo and acquired
Diatide for an acquisition cost of E133 million. Cash flows from investing
activities were E13 million in the 2000 Period. This amount includes a E180
million gain from the sale of marketable securities as well as expenditure on
acquisitions (purchase price net of cash acquired) amounting to E99 million.
Financing
Cash flows used in financing activities were E283 million in 1999, E193
million in 1998 and E56 million in 1997. The increases for 1999 and 1998 are
primarily attributable to Schering AG's share repurchase program during 1998 and
1999, and increased dividend payments during 1998 and 1999. Cash flows used in
financing activities were E216 million in the 2000 Period, primarily reflecting
the payment of dividends and bonus dividends in April 2000.
Borrowings
Borrowings are reflected in our consolidated financial statements as
"liabilities to banks". Our borrowings are generally of a short-term nature
(maturity of less than one year). Our long-term borrowings generally represent
low-interest loans provided by the German government for capital investment. Our
borrowings at December 31, 1999 were E186 million (of which E35 million are due
after 2000), compared to E177 million at December 31, 1998. Borrowings at
December 31, 1997 were E215 million. Our borrowings at June 30, 2000 were E181
million.
Share Repurchase Program
At shareholders' meetings during 1998 and 1999, the shareholders of Schering
AG authorized the repurchase of Schering AG's outstanding shares. During 1998
and 1999, Schering AG acquired approximately 7,026 million shares (representing
approximately 3.4% of its share capital as of May 1998) for an aggregate
purchase price of E253 million. At Schering AG's shareholders' meeting in 2000,
the shareholders authorized the repurchase of up to 8.7% of Schering AG's
outstanding shares.
Recent Acquisitions
We make small-sized to mid-sized acquisitions from time to time in order to
obtain additions to our product portfolio, to acquire promising technological
developments or to increase our presence in an important geographic market.
During November 1999, we acquired Diatide Inc., a pharmaceutical firm that
specializes in research and development of radiopharmaceuticals for diagnostic
imaging and cancer therapy.
During March 2000, we acquired the Japanese pharmaceutical company Mitsui
Pharmaceuticals.
We acquired a 60% membership interest in the French radiopharmaceutical
company ORIS Industrie S.A. and its wholly-owned subsidiary CIS bio
international S.A. during April 2000.
Capital Expenditures
We generally fund our capital expenditures with cash flow from operations and,
if such funds are not sufficient, liquid investments, including cash, cash
equivalents and marketable securities. Capital expenditures amounted to E163
million in 1999 as compared to E180 million in 1998 and E192 million in 1997.
Capital expenditures during 2000 are expected to total E200 million (of which
approximately E88 million was expended in the first six months of 2000). Capital
expenditures are expected to increase slightly over the next several years in
order to maintain existing facilities, to meet changing regulatory, health,
safety and environmental law requirements, to achieve process improvement and to
facilitate the launch and manufacture of new products.
We presently intend to acquire the 25% of Jenapharm that we do not own in 2001
for E144 million through the exercise of a call option granted in connection
with our initial acquisition of Jenapharm in 1996.
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<PAGE>
Dividends
Schering AG paid cash dividends in respect of shares of E92 million (E0.45
per share) in 1999, E87 million (E0.43 per share) in 1998 and E70 million (E0.34
per share) in 1997. Schering AG increased the dividend paid in 2000 with respect
to fiscal 1999 from E0.45 per share to E0.50 per share. In addition, an
additional bonus dividend of E0.33 per share was paid in 2000. The primary
purpose of the bonus dividend is to enable German shareholders to utilize
certain existing tax advantages in Germany prior to the introduction of a
proposed tax law change which is expected to take effect in 2002.
United States GAAP Reconciliation
As discussed elsewhere in this registration statement, we prepared our
consolidated financial statements in accordance with IAS. For periods ending
on or prior to December 31, 1998, the consolidated financial statements also
were in accordance with the German Commercial Code (Handelsgesetzbuch).
Differences between IAS and the German Commercial Code were not material for
periods ending on or prior to December 31, 1998. IAS differ in certain
material respects from United States Generally Accepted Accounting Principles.
A comparison of net income, net income per share and shareholders' equity at,
or for the year ended, December 31, 1998 and 1999 determined under IAS and
after reflecting the material adjustments which would arise if United States
Generally Accepted Accounting Principles were to be applied instead of IAS is
shown below.
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1999 1999 1998
------------ ------------ ------------
$ E E
(in millions, except per share data)
<S> <C> <C> <C>
Net income:
IAS................................... 260 272 245
United States GAAP.................... 237 248 254
Net income per share:
IAS................................... 1.29 1.35 1.19
United States GAAP.................... 1.17 1.23 1.24
Shareholders' equity:
IAS................................... 2,003 2,098 2,010
United States GAAP.................... 1,967 2,061 1,979
</TABLE>
As more fully described and quantified in note 37 to our consolidated
financial statements, the major differences between IAS and United States
Generally Accepted Accounting Principles relate to accounting for business
combinations (research-in-process charges), provisions for pensions,
restructuring and environmental costs, securities and interest costs and cash
flow hedges.
While our consolidated financial statements for 1999 show an increase in net
income of 11% under IAS over 1998, net income decreased slightly by 2% under
US GAAP for the same period. The primary reasons for this change in trend were
the impact of the release of environmental provisions not included in net
income under US GAAP, our policy for deferring profits and losses on hedging
instruments under IAS which does not qualify for hedge accounting under US
GAAP and expenses for acquired research-in-process which are capitalized as
part of goodwill under IAS.
A classification difference also arises in presenting interest relating to
unfunded pension obligations. Under IAS, interest relating to the unfunded
pension obligation is classified in financial result. See note 23 to our
consolidated financial statements. Under US GAAP, interest on pension
obligations is considered a component of compensation expense. Accordingly,
operating profit under US GAAP would be lower and financial result higher by E69
million in 1999, E71 million in 1998 and E64 million in 1997.
Restructuring Program
We have engaged in two major restructuring programs involving our European
production facilities in recent years.
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As part of the implementation of the European Production Initiative, we have
reduced the number of production facilities in Europe. Each of our remaining
facilities now generally specializes in one dosage form. Between 1996 and 1999,
non-capitalized implementation costs for this program totaled E24 million and
capital investment for infrastructure upgrades was E50 million. The program
implementation is completed and final optimization efforts will be completed in
2000.
A second restructuring plan involving the consolidation of the packaging
operations for liquid and solid dosage forms in Berlin was approved in 1998,
implementation started in 1999, and it is scheduled to be completed during 2003.
These operations, which previously were divided over two sites in Berlin, will
be conducted only at the Berlin Wedding facility in order to optimize the
utilization of facilities, permitting a sustained reduction in inventory and
allowing for enhanced flexibility in reacting to market demands. The total costs
of the program are expected to be E75 million, of which E35 million are non-
capitalized implementation costs expensed as occurred and E40 million are
capital expenditures. As a consequence, approximately 270 jobs will become
redundant in the subsequent years. As a result of the restructuring plan in
1998, we recognized a provision of E18 million for employee termination
benefits.
Aventis CropScience
Formation of Aventis CropScience
AgrEvo was formed in 1994 as a joint venture between Hoechst
Aktiengesellschaft, Roussel Uclaf and Schering AG. The Group contributed its
agrochemical assets (which accounted for approximately 22% of Group net sales
in 1992) to the joint venture and obtained a 40% interest in AgrEvo. As a
result of the acquisition by Hoechst AG of all of the shares of Roussel Uclaf
in 1997, Hoechst increased its ownership interest in AgrEvo to 60%.
During December 1999, Rhone-Poulenc S.A. acquired Hoechst. Rhone-Poulenc
subsequently changed its name to Aventis S.A. In connection with this
transaction, we entered into a Partners' Agreement with Aventis and Hoechst on
December 29, 1999. Under this agreement, Aventis contributed all of its shares
in its crop protection and crop science business, Rhone-Poulenc Agro S.A., and
we and Hoechst each contributed all of our interests in AgrEvo GmbH to form a
new company, Aventis CropScience S.A. Following the completion of these
transactions, this combined company, Aventis CropScience, became a 76%-owned
consolidated subsidiary of Aventis and the Schering AG Group holds the
remaining 24% ownership interest in Aventis CropScience. Under the Partners'
Agreement, we were legally obligated to the exchange of our interests in
AgrEvo for interests in Aventis Crop Science on December 29, 1999. The
transaction was consummated on January 1, 2000. For a description of the
Partners' Agreement, see "Item 4-- Information on the Company--Aventis
CropScience--Description of Aventis CropScience Partners' Arrangements".
Since the formation of AgrEvo through December 31, 1999, we have contributed
an aggregate of approximately E500 million to the AgrEvo/Aventis CropScience
joint venture. Of this aggregate amount, approximately E210 million or 42%
(primarily our agrochemical assets and liabilities) was contributed in
connection with the formation of the joint venture in 1994 and approximately
E290 million or 58% was contributed in cash during the years 1997 to 1999 in
connection with proposed acquisitions. We do not expect to make any
contributions to Aventis CropScience in 2000, as the cash contribution of E159
million we made in 1999 in connection with a proposed acquisition which was not
consummated remains available to fund Aventis CropScience's requirements.
We presently hold a 24% ownership interest in Aventis CropScience for
investment purposes. As is described under "Item 4--Information on the
Company--Aventis CropScience--Description of Aventis CropScience Partners'
Arrangements", under the terms of the partners' agreement with Aventis S.A.,
we generally do not participate in the management of Aventis CropScience. The
partners' agreement also restricts our ability to transfer our shares in
Aventis CropScience to a third party or pledge such shares until after
103
<PAGE>
December 31, 2003. Under the agreement, we will have the right to sell our
shares of Aventis CropScience in a public offering after December 31, 2003
(subject to the rights of Aventis S.A. to purchase all of our shares at fair
market value if we exercise this right). After January 1, 2007, we may
exercise an option entitling us to put all of our shares in Aventis
CropScience to Aventis S.A. at fair market value, and Aventis may exercise an
option entitling it to call all of our shares in Aventis CropScience at fair
market value.
As the restructuring of Aventis CropScience continues, we may be requested
by Aventis S.A. to make additional capital contributions to Aventis
CropScience. If we do not make such contributions, our ownership interest in
Aventis CropScience would probably be reduced. In addition, further
significant restructuring charges by Aventis CropScience could also adversely
affect our results of operations.
Our primary goal with respect to Aventis CropScience is to make the company
profitable and to realize synergies.
Aventis CropScience Results of Operations
Six months ended June 30, 2000
Aventis CropScience reported net sales of E2,212 million for the six months
ended June 30, 2000. After a difficult first quarter with net sales slipping 7%
compared to the first quarter of 1999, Aventis CropScience's second-quarter
sales amounted to E1,142 million. Significant rates of growth were achieved in
Brazil and the United States while there was a dip in European sales. Excluding
costs for integration and restructuring, earnings in the first half of 2000
reached the same level as in the first half of 1999.
AgrEvo Results of Operations
1999 Compared to 1998
Net sales for AgrEvo decreased 1% to E2,158 million in 1999 compared to E2,169
million in 1998. Favorable exchange rate effects and the first-time
consolidation of results of acquired companies almost completely offset reduced
sales volumes and price decreases.
Net sales in Europe, AgrEvo's largest market (36% of net sales in 1999),
decreased 3% to E772 million in 1999 from E800 million in 1998, principally due
to lower sales in the Netherlands, the United Kingdom and Poland. The cereal
herbicide market in Europe, particularly in the United Kingdom, came under heavy
pressure due to increased competition and lower demand.
In North America, which represented 19% of AgrEvo's net sales in 1999, net
sales increased 2% to E416 million in 1999 compared to E407 million in 1998, due
mainly to positive currency effects. This increase is against the background of
an overall market decrease of approximately 5% in North America due to extreme
weather conditions and lower commodity prices to farmers, which has resulted in
lower use of crop protection products.
Net sales in the Asia/Pacific region, accounting for 19% of AgrEvo's net sales
in 1999, increased 9% to E419 million in 1999 from E383 million in 1998,
primarily due to positive currency movements and a general recovery from the
region's economic difficulties. Net sales were particularly strong in South
Korea (38% increase) due to price and currency effects, in Japan (20% increase)
due to currency effects and Australia (12% increase) due to favorable weather
conditions. The increases in net sales were partially offset by decreases in net
sales in Pakistan (21%) and Hong Kong/China (17%).
Latin American sales, representing 12% of AgrEvo's net sales in 1999,
decreased 15% from E313 million in 1998 to E266 million in 1999. Particularly
hard hit were Argentina (28% decrease) due to poor weather and general economic
difficulties in the agricultural sector, Colombia (25% decrease), where the
generally difficult economic situation reduced sales, and Brazil, which
sustained a 10% reduction in net sales in 1999 compared to 1998 primarily due to
the currency devaluation having a negative effect on business.
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Operating profit for AgrEvo decreased 86% from E180 million in 1998 to E26
million in 1999. Operating profit for 1999 includes non-recurring costs mostly
related to the formation of Aventis CropScience. Excluding the effects of these
costs, operating profit would have decreased by 24% due mainly to the reduction
in business, particularly in Latin America, and an increase in idle capacity.
Additionally, costs for research and development increased to E276 million (13%
of net sales in 1999) compared to E253 million (12% of net sales in 1998),
reflecting an increase in resources allocated to functional genomics research.
AgrEvo had a loss after tax of E8 million (excluding extraordinary costs for
the integration and restructuring of Aventis CropScience) compared to a profit
after tax of E55 million in 1998.
After deducting an additional E6 million for amortization of goodwill, after
conforming to Schering AG's accounting policies (E6 million) and including E57
million for non-recurring charges, the Group's share of the loss for 1999 was
E60 million. These charges included E15 million of integration costs incurred in
1999, and E42 million relating to restructuring measures to be completed in
2000.
1998 Compared to 1997
Net sales for AgrEvo increased 4% to E2,169 million in 1998 from E2,080 in
1997. The increase is attributable to higher sales volumes which were partially
offset by negative exchange rate effects and price decreases. In addition, net
sales for 1998 included the consolidation of a full year of net sales of
Sunseeds Company which was acquired by AgrEvo in November 1997.
Net sales in Europe, AgrEvo's largest market, increased 5% to E800 million in
1998 compared to E762 million in 1997. Sales in Germany, the Netherlands, Spain
and Poland did particularly well. Net sales in North America decreased slightly
to E407 million in 1998 from E409 million in 1997, due to unseasonably wet
conditions at spraying times and lower commodity prices. In Latin America, net
sales increased 11% to E313 million in 1998, from E281 million in 1997, with
sales increasing in Brazil by 33% with fungicides and insecticides showing good
sales growth. Further growth in the region was hampered by poor weather
conditions and reduced sales in Argentina due to competitive pressures. Sales in
Asia decreased 3% to E383 million in 1998 from E396 million in 1997 due to
negative exchange rate effects and lost volume as a result of the financial
crisis in the region.
Operating profit increased 12% to E180 million in 1998 compared to E160
million in 1997, primarily as a result of higher volumes in Europe and Latin
America, proportionally higher sales of more profitable products and the effects
of continued cost-cutting. This was offset in part by adverse exchange rate
movements and the write-off of certain receivables from the Commonwealth of
Independent States (CIS) countries.
Profit after taxes increased 45% to E55 million in 1998 from E38 million in
1997.
The Group's share of the profit for 1998 was E25 million, as compared to E18
million for 1997.
See note 38 to our consolidated financial statements under the caption
"Summarized financial information for significant associated companies" for
financial information of AgrEvo.
Inflation
During the past three years, the effects of inflation on our operations have
not been material.
Foreign Currency
Prior to January 1, 1999, our reporting currency was the Deutsche Mark.
Effective as of January 1, 1999, we adopted the euro as our reporting
currency.
Sales made, and expenses incurred, by our subsidiaries located outside of
Germany (and the ten other member countries of the European Union that have
adopted the euro as their common currency) are generally denominated in local
currency. As a consequence, a significant amount of our sales have been
generated, and our costs have been incurred, in currencies other than the
euro.
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We made sales in a range of currencies during 1997, 1998 and 1999 as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(percentage of net sales)
<S> <C> <C> <C>
Euro(1)............................................. 43 -- --
Deutsche mark....................................... -- 23 23
US dollar........................................... 22 21 20
UK pound sterling................................... 3 3 3
Italian lira........................................ -- 6 5
French franc........................................ -- 5 5
Japanese yen........................................ 12 10 12
Brazilian real...................................... 3 4 4
Other............................................... 17 28 28
-------- -------- --------
100 100 100
======== ======== ========
</TABLE>
--------
(1) Germany and ten other member states of the European Union adopted the euro
as their common currency effective as of January 1, 1999.
We translate the balance sheets of our subsidiaries that do not use the euro
as their functional currency into euro at the mid-market rate on the balance
sheet date. Income and expenses are translated at the average rate of exchange
for the period. Comparability of our performance between financial periods can
be significantly affected by fluctuations in the value of the euro against
other currencies. Moreover, our financial condition and results of operations
may be materially affected by movements in the exchange rate between foreign
currencies to which the Group is exposed and the euro. In general, due to
translation effects, appreciation of the euro relative to a foreign currency
has a negative effect on our reported consolidated net sales, operating profit
and Group profit. The depreciation of the euro relative to a foreign currency
generally has a positive effect on our reported consolidated net sales,
operating profit and Group profit. The U.S. dollar, Japanese yen, British
pound sterling and Brazilian real are the most significant sources of this
currency translation risk. See note 5 to our consolidated financial
statements.
Net sales in 1999 increased 11% in local currency terms and 12% in euro
terms as compared to 1998. The 34% depreciation of the Brazilian real against
the euro was more than offset by the strengthening of the U.S. dollar and
British pound sterling relative to the euro and the recovery of the Japanese
yen and other Asian currencies during 1999.
During 1998, while the Group's net sales increased 7% in local currency
terms as compared to 1997, due to the depreciation of foreign currencies in
Asia and Latin America resulting from the Asian crisis, net sales increased
only 3% in euro terms.
For a discussion of the significant effects of foreign currency on our
results of operations, see "--Results of Operations--1999 Compared with 1998--
Results of Operations by Segment--Latin America/Canada Region", "--Japan
Region" and "--Asia Region", "--1998 Compared with 1997--Results of Operations
by Segment--Europe Region", "--Latin America/Canada Region", "--Japan Region"
and "--Asia Region" and "--Six months ended June 30, 2000 compared with six
months ended June 30, 1999--Results of Operations by Segment--United States
Region", "--Japan Region", "--Latin America/Canada Region" and "--Asia
Region".
Environmental Matters
Environmental laws and regulations impose stringent limitations on emissions
and discharges to the environment from various manufacturing operations. In
1999, we incurred capital expenditures of approximately E4 million for
environmental protection, and expect capital expenditures for this purpose of
approximately E4 million during 2000. Capital expenditures for environmental
protection are forecasted to be approximately E5 million for each of the years
2000 through 2004. In addition, our operating and maintenance expenditures for
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environmental matters were E59 million in 1999 and are expected to be
approximately E57 million in 2000. Operating and maintenance
expenditures for this purpose for each of the years 2000 through 2004 are
forecasted to be approximately the same as prior years.
We believe that the expenditures required to comply with applicable laws and
regulations concerning environmental protection, including ongoing clean-up
matters, will not have a material adverse effect on the Group's financial
condition, cash flows or results of operations.
Changes in Accounting Policies
IAS
We have applied IAS since 1994. The IASC has issued a number of new
standards as part of its project to develop a core set of International
Accounting Standards. Accordingly, we have adopted or will adopt a number of
new or revised International Accounting Standards as described below. Our
policy is to adopt all new standards at the required adoption date.
As of January 1, 1999, we adopted IAS 19 "Employee Benefits" (revised 1998).
Under the new standard, actuarial assumptions for our defined benefit pension
plans reflect market expectations at the balance sheet date rather than long-
term estimates. The effect of adoption of this standard was not material.
During 1998, we changed our accounting policy to adopt revised International
Accounting Standard IAS 12 "Income Taxes" (revised 1996). IAS 12 (revised)
requires the use of the balance sheet liability method for the calculation of
deferred taxes. The change in accounting policy did not materially affect net
income.
In 1999, we adopted International Accounting Standard IAS 14 "Segment
Reporting" (revised 1997). IAS 14 (revised) requires disclosure of more items
of information for the identified segments, provides more detailed guidance
for the identification of segments and for the allocation of revenues and
expenses to the identified segments, and introduces the concept of a primary
basis and secondary basis of segment reporting. Our financial statements for
1998 have been adjusted to ensure comparability with our financial statements
for 1999.
US GAAP
As of January 1, 1999, we adopted SOP 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". The statement
requires capitalization of certain costs incurred in the development of
internal-use software, including payroll and payroll-related costs. In the
years ending on or prior to December 31, 1998, these costs were expensed as
incurred.
New Accounting Standards
In 1998, the International Accounting Standards Committee issued
International Accounting Standard IAS 39 "Financial Instruments: Recognition
and Measurement". This standard, effective for financial statements for
periods beginning after December 31, 2000, significantly increases the use of
fair values in accounting for financial instruments, particularly with respect
to assets reported in the balance sheet. Securities included in current assets
will be classified as available for sale financial assets and measured at
their fair values. A gain or loss arising from a change in the fair value of
such available-for-sale financial assets will be recognized directly in
equity, through the statement of changes in equity, until the securities are
sold, collected, or otherwise disposed of, or until the financial assets are
determined to be impaired, at which time the cumulative gain or loss
previously recognized in equity should be included in net profit or loss for
the period. The Group is evaluating the impact of IAS 39 on its financial
statements and will adopt IAS 39 in 2001.
In 1998, the International Accounting Standards Committee issued
International Accounting Standard IAS 38 "Intangible Assets". This standard,
effective for financial statements for periods beginning on or after July 1,
1999, provides that intangible assets should only be recognized when it is
probable that future economic benefits
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attributable to the asset will flow to the enterprise and that the cost of the
asset can be reliably measured. Internally generated goodwill, brand names,
publishing titles, customer lists, mastheads and research costs should not be
recognized as intangible assets. The Group adopted IAS 38 in 2000.
In 1998, the International Accounting Standards Committee issued
International Accounting Standard IAS 37 "Provisions, Contingent Liabilities
and Contingent Assets". This Standard, effective for financial statements for
periods beginning on or after July 1, 1999, established for the first time the
conditions that must be fulfilled for a provision reserve to be recognized.
Under IAS 37, a provision may be recognized when:
. an enterprise has a present obligation as a result of a past event;
. it is probable 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.
IAS 37 requires that provisions for restructuring obligations must also meet
the following additional criteria;
. a detailed formal plan identifying certain specifics; and
. announcement of its main features to those affected by the plan.
The Group adopted IAS 37 in 2000.
In 1998 the International Accounting Standards Committee issued
International Accounting Standard IAS 36 "Impairment of Assets". This
standard, effective for fiscal periods beginning on or after July 1, 1999,
establishes the procedures that an enterprise should apply to ensure that its
assets are not overstated in the financial statements. It also prescribes the
method an enterprise should use to assess the amount to be recovered from an
asset and the timing when an enterprise should account for an impairment loss.
The Group adopted IAS 36 in 2000.
Risk Management
The information provided in this section contains forward-looking statements
that involve inherent risks and uncertainties, principally with respect to
unanticipated changes in foreign exchange or interest rates and changes in the
level of our exposure to such market risks. Actual results may differ from
those set forth in these forward-looking statements.
Market risk represents the risk of an adverse price change of a financial
instrument, derivative or nonderivative, caused by fluctuations in interest
rates, currency exchange rates, and equity prices. We have policies for
managing potential exposures related to these risks. See note 18 to our
consolidated financial statements.
We use exchange-traded and over the counter (OTC) derivative financial
instruments to manage currency and interest rate risks resulting from business
transactions and from existing assets as well as to control the impact of
interest rate and price changes on our portfolio. Transactions in derivative
instruments are concluded with high-rated banks within fixed risk limits.
Taking into account the hedged positions, we do not anticipate any material
adverse effect on the Group's financial position, results of operations,
liquidity or cash flows resulting from our use of derivative financial
instruments.
Foreign Exchange Risk Management
Prior to the adoption of the euro by Germany and 10 other member countries
of the European Union as their common currency, our functional currency was
the Deutsche Mark. The euro is now our functional currency. We have
receivables and payables denominated in currencies other than the euro and the
functional currencies of our foreign subsidiaries, which creates foreign
exchange risk. Since the introduction of the euro on January 1, 1999, our
exposure to exchange rate fluctuations is eliminated in relation to all the
countries that have adopted the euro. Our most significant sources of currency
risk are presently the U.S. dollar, Japanese yen, British pound sterling and
Brazilian real. We enter into foreign currency forwards and options to reduce
our exposure to foreign currency fluctuations. Our currency risk includes
balance sheet assets denominated in foreign currencies and expected future net
cash flows in foreign currencies for 12 months on a rolling basis.
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Asset/Liability Risk Management
We are primarily exposed to changes in market prices of assets in our net
liquid funds, primarily denominated in euro. The investments we undertake are
allocated into several asset categories in order to generate a diversified
portfolio and an attractive risk/return ratio.
See "Item 11--Quantitative and Qualitative Disclosure about Market Risk".
Euro Conversion
On December 31, 1998, Germany and ten other member countries (participating
countries) of the fifteen members of the European Union established fixed
conversion rates between their existing sovereign currencies and the euro and
adopted the euro as their common legal currency.
Approximately 43% of the Group's net sales in 1999 were denominated in euro
(48% of the Group's net sales were to customers in the Europe Region). In
addition, a significant portion of our production capacity and research and
development activities are located in the participating countries.
The Group commenced planning for the euro conversion in 1996. The
implementation phase of the euro conversion project for the Group's European
businesses started at the beginning of 1998. The euro conversion project at
Schering AG has been completed, and all of the Group's subsidiaries in
participating countries have likewise completed their euro conversion
projects. Due to uncertainties relating to the German tax and social insurance
systems, the euro conversion changeover for the human resources operations
will occur at a later date (but in any event no later than January 1, 2002).
Beginning on January 1, 1999, Schering AG adopted the euro as its reporting
currency.
We do not expect that the euro conversion will lead to changes in the short-
term in business-specific cost structures or market positions. The euro
conversion may contribute to the convergence of product prices in Europe over
the longer term. However, since most European countries closely regulate the
pricing of pharmaceutical products, pricing convergence may be achieved only
in the long term.
The Group does not have any derivatives or other financial instruments that
have been materially affected by the euro conversion.
We anticipate that transaction costs related to foreign exchange conversions
and hedging costs in Europe will be significantly reduced as a result of the
euro conversion.
We do not anticipate that the euro conversion will have any impact on the
taxation status of our European operations.
Year 2000
We recognized the potential risk to our global business posed by the
millennium computer date ("Year 2000") issues and initiated a comprehensive
Year 2000 program in order to mitigate this risk. Among other things, we
established a central working group to deal with all questions related to Year
2000.
As of June 30, 2000, all the Group's systems, including embedded systems,
identified as potentially having a material impact on our business operations
had been reviewed and were found to be compliant. Moreover, through September
25, 2000, we had experienced no significant interruptions to our business
operations arising from the Year 2000 problem.
Legal Matters
The Group is involved in a number of legal proceedings and claims incidental
to the normal conduct of its business, relating to such matters as product
liability, patent infringement, tax assessments, competition, past waste
disposal practices and release of chemicals into the environment. Although the
outcome of these proceedings and claims cannot be predicted with certainty,
Schering AG believes that any resulting liabilities, net of amounts
recoverable from insurance or otherwise, will not, in the aggregate, have a
material adverse effect on the Group's consolidated results of operations,
financial condition and cash flows. For a discussion of certain legal
proceedings in which we are involved, see "Item 8--Financial Information--
Legal Proceedings."
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Item 6. Directors, Senior Management and Employees
DIRECTORS AND SENIOR MANAGEMENT
General
As required by the German Stock Corporation Act (Aktiengesetz), Schering AG
has a two-tier board system consisting of a Supervisory Board (Aufsichtsrat)
and an Executive Board (Vorstand).
The Executive Board is responsible for managing the day-to-day business of
Schering AG in accordance with the German Stock Corporation Act and the
Articles of Association (Satzung) of Schering AG. The Executive Board is
authorized to represent Schering AG and to enter into binding agreements with
third parties on behalf of Schering AG.
The principal function of the Supervisory Board is to supervise the
Executive Board. The Supervisory Board is also responsible for appointing and
removing the members of the Executive Board. The Supervisory Board may not
make management decisions, but may determine that certain types of
transactions require its prior consent.
In carrying out their duties, the members of the Supervisory Board and the
Executive Board must exercise the standard of care of a diligent and prudent
business person. In complying with this standard of care, the members must
take into account a broad range of considerations, including the interests of
Schering AG and our shareholders, employees and creditors. The members of the
Supervisory Board and the Executive Board are personally liable for certain
violations of the German Stock Corporation Act by Schering AG.
Supervisory Board
Our present Supervisory Board consists of 16 members, 8 of whom are elected
by our shareholders by a simple majority of the votes cast at a shareholder
meeting in accordance with the provisions of the German Stock Corporation Act,
and 8 of whom are elected by our employees in accordance with the German Co-
Determination Act (Mitbestimmungsgesetz).
A member of our Supervisory Board elected by our shareholders may be removed
by our shareholders by a majority of the votes cast at a meeting of
shareholders. A member of the Supervisory Board elected by our employees may
be removed by three-quarters of the votes cast by the relevant class of
employees. The Supervisory Board appoints a Chairman and a Deputy Chairman
from among its members. At least half the total required number of members of
the Supervisory Board must be present or participate in the decision making to
constitute a quorum. Unless otherwise provided for by law, resolutions are
passed by a simple majority of the votes cast. In the event of a tie, another
vote is held and, in the case of a second tie, the Chairman (who is, in
practice, a representative of the shareholders because the representatives of
the shareholders have the right to elect the Chairman if two-thirds of the
total required number of members of the Supervisory Board fail to agree on a
candidate) then has a casting vote.
The members of our Supervisory Board are each elected for the same fixed
term of approximately 5 years. The term expires at the end of the annual
general shareholders' meeting after the fourth fiscal year following the year
in which the Supervisory Board was elected. Re-election is possible. The
remuneration of the members of the Supervisory Board is determined by our
Articles of Association.
Because all members of our Supervisory Board are elected at the same time,
their terms expire simultaneously. The current members of our Supervisory
Board, their respective ages as of September 1, 2000, their principal
occupation and the year in which they were first elected to our Supervisory
Board and by whom they were elected are as follows:
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<TABLE>
<CAPTION>
Year First Elected
by shareholders (S)/
Name Age Principal Occupation employees (E)
---- --- -------------------- --------------------
<S> <C> <C> <C>
Klaus Subjetzki......... 69 Chairman of the Supervisory 1978 (S)
Chairman of the Board of BHF BANK
Supervisory Board
since 1984
Juergen Wingefeld....... 57 Director for General Personnel 1979 (E)
Vice Chairman of the and Social Services of
Supervisory Board since Lausitzer und Mitteldeutsche
1999 Bergbauverwaltungsgesellschaft
mbH
Dr. rer. oec. Karl- 65 Chairman of the Supervisory 1994 (S)
Hermann Baumann........ Board of Siemens AG
Prof. Dr. med. Piet 66 Professor of Clinical 2000 (S)
Borst.................. Biochemistry, University of
Amsterdam
Norbert Deutschmann..... 49 Chairman of the Wedding Works 1999 (E)
Council, Schering AG
Professor John A. 63 Professor of Vascular Sciences, 1996 (S)
Dormandy............... University of London; Head of
Surgical Services, St. George's
Hospital, London
Dr. rer. pol. Reiner 52 Chairman of the Executive Board 1997 (S)
Hagemann............... of Allianz Versicherungs-AG
Johannes Heitbaum....... 37 Vice Chairman of the Bergkamen 1999 (E)
Works Council, Schering AG
Dr. h.c. Martin 64 Spokesman of the Executive 1996 (S)
Kohlhaussen............ Board of Commerzbank AG
Dr. rer. pol. Juergen 56 Member of the Advisory Group, 1989 (S)
Krumnow................ Deutsche Bank AG
Dr. med. Hans Peter 54 Head of Clinical Development 1999 (E)
Niendorf............... Diagnostics, Schering AG
Hans-Juergen Scheel..... 57 Vice Chairman of the Wedding 1994 (E)
Works Council, Schering AG
Guenter Schmitt......... 57 Member of the Wedding Works 1999 (E)
Council, Schering AG
Dr. rer. oec. Ulrich 53 Chairman of the Schering 1999 (E)
Sommer................. Wedding Works Chapter of the
VAA Professional and Management
Union for the Chemical
Industry, Berlin
Heinz Georg Webers...... 40 Chairman of the Central Works 1999 (E)
Council of Schering AG;
Chairman of the Bergkamen Works
Council, Schering AG
Professor Dr. rer. nat. 67 Professor of Pharmaceutical 1984 (S)
Meinhart H. Zenk....... Biology, Martin-Luther
University, Halle-Wittenberg
</TABLE>
The current members of the Supervisory Board are subject to re-election in
2004.
Executive Board
Our Executive Board currently consists of 5 members. Under our Articles of
Association, our Supervisory Board determines the size of the Executive Board,
although it must have at least two members.
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Any two members of the Executive Board or one member of the Executive Board
and the holder of a special power of attorney (Prokura) may legally represent
Schering AG.
The Executive Board reports regularly to the Supervisory Board, including
with respect to proposed business policy or strategy, profitability, the
current business of Schering AG, business transactions that may affect the
profitability or liquidity of Schering AG, and any exceptional matters which
arise from time to time. The Supervisory Board may also request special
reports from the Executive Board.
The Supervisory Board appoints each member of the Executive Board for a
maximum term of five years. Executive Board members may be reappointed or have
their term extended for one or more terms of up to five years each. The
Supervisory Board may remove a member of the Executive Board prior to the
expiration of his term if he commits a serious breach of duty or is incapable
of carrying out his duties or if there is a bona fide vote of no confidence by
a majority of the votes cast at a general shareholders meeting.
A member of the Executive Board may not vote on matters relating to certain
contractual arrangements between the member and the Schering AG Group and may
be liable to Schering AG if the member has a material interest in any
contractual agreement between the Schering AG Group and a third party which
was not disclosed to, and approved by, the Supervisory Board.
The current members of our Executive Board, their respective ages as of
September 1, 2000, their positions, the years in which they were first
appointed to our Executive Board and the years in which their terms expire,
respectively, are as follows:
<TABLE>
<CAPTION>
Year
First Year Term
Name Age Position Appointed Expires
---- --- -------- --------- ---------
<S> <C> <C> <C> <C>
Dr. Giuseppe Vita....... 65 Chairman of the Executive 1987 2001
Board (since 1989)
Professor Dr. Klaus 62 Vice-Chairman of the 1981 2002
Pohle.................. Executive Board with
responsibilities for finance
and administration, Asia,
Australia (since 1989)
Dr. Hubertus Erlen...... 57 Member of the Executive 1985 2005
Board with responsibilities
for personnel, production
and environmental
protection, North America
Dr. Ulrich Koestlin..... 47 Member of the Executive 1994 2004
Board with responsibilities
for marketing and sales,
Europe, Africa
Professor Dr. Dr. h.c. 56 Member of the Executive 1989 2004
Guenter Stock.......... Board with responsibilities
for research and
development, Latin America
</TABLE>
Dr. Giuseppe Vita joined Schering AG in 1964 as a scientific advisor. From
1965 to 1987, Dr. Vita served as general manager of Schering S.p.A., Milan,
and subsequently was appointed as a member of the Executive Board of Schering
AG. Since 1989, Dr. Vita has been Chairman of the Executive Board of Schering
AG.
Prof. Dr. Klaus Pohle joined Schering AG as a member of the Executive Board
in 1981. Prior to joining Schering AG, Prof. Dr. Pohle was with BASF from 1966
to 1980. At BASF he first served as a director of various subsidiaries in
Europe and Brazil, including from 1967 to 1968 as treasurer and controller in
the United States and later as a director of BASF AG. Prof. Dr. Pohle is
currently Vice Chairman of the Executive Board of Schering AG, a position he
has held since 1989.
Dr. Hubertus Erlen began his career with Schering AG in a pharmaceutical
manufacturing function in 1972. In 1978 he joined the central office of the
Executive Board, which he later headed for two years. Prior to his appointment
as a member of the Executive Board of Schering AG in 1985, he served as a
technical director in the Electroplating Division and became a member of the
Electroplating Divisional Board in 1984.
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Dr. Ulrich Koestlin joined Schering AG in 1982 as a management trainee. He
served as general manager of several affiliates of Schering AG in Latin
America from 1983 to 1986, and was subsequently appointed the head of pharma
for Latin America and Canada. Prior to his appointment as a member of the
Executive Board of Schering AG in 1994, he served from 1990 to 1993 as vice
president of Berlex Laboratories, Inc., and as a member of the Pharma
Executive Committee of Schering AG from 1993 to 1994.
Prof. Dr. Guenter Stock joined Schering AG as head of the Cardiovascular
Pharmacology Department in 1983. From 1987 to 1989, he served as head of the
Institute for Pharmacology. Prof. Dr. Stock was appointed as a member of the
Executive Board of Schering AG in 1989.
Other Senior Management
Joerg Graumann joined Schering AG in 1960 as a business trainee. From 1964
to 1973, Mr. Graumann served in various capacities in a number of subsidiaries
including in Pakistan, the Philippines and South Korea. In 1976, Mr. Graumann
was appointed vice president of Nihon Schering K.K. Mr. Graumann is currently
the representative director and president of Nihon Schering K.K., a position
he has held since 1977.
Dr. med. habil. Joachim-Friedrich Kapp joined Schering AG in 1975 as a
scientist. From 1975 to 1983, Dr. Kapp served in various capacities at the
Schering AG Group, including as vice president of research and development of
Berlex Laboratories, Inc. From 1984 to 1991, he was employed by Goedecke AG
where he held several positions, including head of research and development.
In 1991, Dr. Kapp returned to Schering AG where he currently serves as head of
Therapeutics.
Lutz Lingnau joined Schering AG's business trainee program in 1966. From
1968 to 1989, Mr. Lingnau served in various capacities at Schering AG and in a
number of subsidiaries in South America and the United States, including as
president of Berlex Laboratories, Inc., from 1983 to 1985. Mr. Lingnau is
currently the president and chief executive officer of Schering Berlin, Inc.,
a position he has held since 1989.
Christian Nowak began his career at Schering AG in 1968 in the agrochemicals
division. From 1968 to 1989, he held various positions in the area of
agrochemicals, including head of agrochemicals sales and marketing, head of
sales and marketing and member of the agrochemicals management board. From
1989 to 1991, he served as director of sales and marketing and member of the
pharmaceuticals management board. Mr. Nowak is currently the head of the
Europe Region, a position he has held since 1991.
Prof. Dr. Werner Karl Raff served as the director of the medical-scientific
department of Schering AG from 1977 to 1980. From 1980 to 1996, Prof. Dr. Raff
held various positions, including deputy director of FB Medizin and general
manager of Scherax Arzneimittel GmbH, Hamburg. In 1996, Prof. Dr. Raff
returned to Schering AG as head of Fertility Control and Hormone Therapy.
Hans-Michael Rook began his career at Schering AG in 1967 as a business
trainee. He served in numerous capacities within the Schering AG Group,
including from 1979 to 1985 as head of pharma product and marketing planning
of Nihon Schering K.K. and from 1991 to 1997 as head of marketing and business
development for the Europe Region at Schering AG. Mr. Rook currently serves as
head of Diagnostics and Radiopharmaceuticals.
COMPENSATION
The aggregate remuneration of all members of the Supervisory Board for 1999
amounted to E2,096,242. In addition to reimbursement of out-of-pocket expenses,
the members of the Supervisory Board receive an aggregate fixed annual payment
of E60,000 plus an aggregate variable annual payment that depends on the amount
of dividends paid to the shareholders of Schering AG. For each E0.05 dividend
per share paid over and above a base amount of E0.10 dividend per share, the
aggregate variable compensation component amounts to E210,000.
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<PAGE>
The aggregate remuneration (including compensation, benefits in kind and
contingent or deferred compensation accrued) of all members of the Executive
Board for 1999 amounted to E6,553,728.
Employees who are elected as members of the Supervisory Board in accordance
with the German Co-Determination Act maintain their pension, retirement and
similar benefits while serving on the Board. The aggregate amount set aside or
accrued by the Schering AG Group to provide pension, retirement or similar
benefits to the employees who are currently members of the Supervisory Board
amounted to E3,279,584. As of December 31, 1999, the total amount set aside or
accrued by the Schering AG Group to provide pension, retirement or similar
benefits to current and retired members of the Executive Board amounted to
E27,743,941.
Stock-Based Compensation Plans
The Long Term Incentive Plan 2000
In 1999, we established the Long Term Incentive Plan 2000. We offered
approximately 270 eligible key executives worldwide the opportunity to
participate in the plan. Eligibility was based on the position and expected
long term individual performance of the participant and prospective continued
employment with us for the next two years. The plan has a duration of seven
years and expires on December 31, 2006.
Under this plan, participants who make a personal investment in our shares
and hold these shares for a minimum of three years are entitled to receive one
option right for each eighteen shares purchased. A minimum of five option
rights, requiring the purchase of ninety shares, is needed to participate in
the plan. A maximum number of option rights has been determined for each
eligible plan participant.
Option rights cannot be exercised within the first three years of the
effective date of the plan. Option rights can be exercised from the first
trading day in 2003 until the last trading day in 2006. Option rights cannot
be exercised during a three-week period prior to the release of corporate
earnings information. Any option rights that have not been exercised at the
end of the exercise period will be exercised automatically on the last trading
day in 2006. Upon exercise of the option rights, the participant is entitled
to receive award shares. The award shares that the Company provides to the
participants are purchased in the open market.
The number of award shares that a participant receives upon the exercise of
option rights depends on certain performance measures. One option right
entitles the participant to receive three award shares for each 2% increase in
the value of the shares (for this purpose this includes absolute stock price
changes plus dividends paid) over the opening stock price on the effective
date of the plan. Members of the Executive Board can receive award shares due
to this performance measure only if, at the time of exercise, the value of the
shares has increased at least by 30%. In addition, one option right entitles
the participant to receive three award shares for each 1% by which the shares
outperform the STOXX (Pharma) over the relevant period. STOXX (Pharma) is a
European industry stock index which measures the performance of thirteen
pharmaceutical companies, including Schering AG. The maximum number of award
shares that a participant can receive for each option right under either
performance category is ninety shares. Therefore, a participant can receive a
maximum of 180 award shares for one option right or eighteen shares of
personal investment.
In connection with the plan, we have purchased 810,000 call options on
Schering AG's shares at a strike price of E39.64 per share.
The Long Term Incentive Plan 1998
In 1997, we established the Long Term Incentive Plan 1998. We offered
approximately 215 eligible key executives worldwide the opportunity to
participate in the plan. The plan has a duration of five years, expires on
December 31, 2002 and has terms that are otherwise substantially equivalent to
the Long Term Incentive Plan 2000.
However, due to the shorter duration of this incentive plan, option rights can
be exercised only during a two-year window, from the first trading day in 2001
until the last trading day in 2002. In addition, members of
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<PAGE>
the Executive Board can receive award shares due to the value of the shares
only if, at the time of exercise, the value of the shares has increased by at
least 20%. The other difference from the Long Term Incentive Plan 2000 is that
the DAX index is used as the basis for the outperformance component. The DAX
is a stock index which measures the performance of thirty large German
corporations, including Schering AG.
In connection with the plan, we have purchased 600,000 call options on
Schering AG's shares at a strike price of E30.21 per share.
The following table sets forth, as of February 29, 2000, certain information
relating to the Long Term Incentive Plan 1998 and the Long Term Incentive Plan
2000:
<TABLE>
<CAPTION>
Number of
Initial Options Maximum Number
Plan Exercise Date Expiration Date Outstanding of Award Shares
---- --------------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C>
1998 Plan January 1, 2001 December 31, 2002 3,935 708,300
2000 Plan January 1, 2003 December 31, 2006 4,970 894,600
</TABLE>
BOARD PRACTICES
The employment agreements of the members of the Executive Board do not
provide for benefits upon termination of employment.
The Supervisory Board has established a number of committees, including an
executive committee, a research and development committee, an audit committee
and a remuneration committee. The members of the executive committee are Klaus
Subjetzki, Juergen Wingefeld, Dr. Reiner Hagemann and Norbert Deutschmann. The
executive committee acts on urgent matters in between the sessions of the full
Supervisory Board. The members of the research and development committee are
Klaus Subjetzki, Prof. John A. Dormandy, Juergen Wingefeld, Dr. Hans Peter
Niendorf, Dr. Ulrich Sommer and Prof. Meinhart H. Zenk. The research and
development committee regularly reviews the progress of our research and
development portfolio and advises on the long-term policy in this area. The
members of the audit committee are Klaus Subjetzki, Juergen Wingefeld, Dr.
Reiner Hagemann and Norbert Deutschmann. The audit committee recommends areas
of special emphasis of the audit to be performed by the independent auditors,
reviews the financial statements of the Group before they are presented to the
full Executive Board and issues a recommendation as to their adoption. The
members of the remuneration committee are Klaus Subjetzki, Juergen Wingefeld,
Dr. Reiner Hagemann and Heinz Georg Webers. The remuneration committee is
responsible for reviewing and approving the terms and conditions of contracts
between Schering AG and members of the Executive Board and the Supervisory
Board.
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EMPLOYEES
The average number of people employed by the Group during 1997, 1998 and
1999 was 21,302, 21,818 and 22,430, respectively. As of June 30, 2000, we
employed 24,345 persons. The following tables set forth, as of June 30, 2000,
a breakdown of our employees by the main category of activity and by
geographic area:
<TABLE>
<CAPTION>
Number
Category of Activity: ------
<S> <C>
Administration........................................................ 3,643
Research and development.............................................. 4,300
Production............................................................ 8,246
Sales and marketing................................................... 8,156
<CAPTION>
Number
Geographic Areas: ------
<S> <C>
Europe................................................................ 15,114
North America......................................................... 3,011
Latin America......................................................... 2,837
Japan................................................................. 1,825
Asia.................................................................. 1,267
Africa................................................................ 159
Rest of World......................................................... 132
</TABLE>
There has not been a significant change in the number of persons employed by
the Group over the last three years. We do not employ a significant number of
temporary employees.
We believe that the success of the Group's businesses in an increasingly
competitive environment will depend, in significant part, on our ability to
attract, retain and motivate highly qualified personnel. Accordingly, we have
established compensation, employee benefit, equity participation and work
environment policies intended to assist in attracting, retaining and
motivating highly qualified personnel:
. We have expanded the variable remuneration elements of our salary system
in order to enhance rewards for individual performance. This includes
performance oriented pay, long term incentive programs and share option
plans.
. We have implemented a system of management by objectives with annual
performance evaluations for our employees.
. We offer equal opportunities regardless of race, sex, national origin,
religion, marital status, age or disability.
. We encourage our employees to become involved at all levels in order to
contribute to the growth of the Group.
. We endeavor to inform our employees regularly and systematically on
matters affecting them as employees and on the financial and economic
factors affecting the Group's performance.
Labor Relations
Europe Region
We believe that a significant number of our employees in the Europe Region
are presently represented by trade unions. Labor relations in the Europe
Region have been good and we have not experienced any material work stoppages
in recent years.
Wages and general working conditions are generally the subject of centrally
negotiated collective bargaining agreements. Within the limits established by
these agreements, the operating companies of the Group negotiate
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directly with unions and other labor organizations representing our employees.
Collective bargaining agreements relating to remuneration typically have a
term of one year.
In addition to trade unions, we also consult from time to time with various
local, national and European work councils. Employees generally elect the
members of work councils. These work councils primarily serve an advisory
role. However, under certain circumstances, we may be required to consult with
one or more of the work councils before proceeding with a course of action.
Furthermore, we are obligated to apprise the work councils of activities which
affect our workforce in Europe.
Other Regions
Our employees in the United States, Latin America/Canada and Asia Regions
are generally not either represented by trade unions or employed pursuant to
collective bargaining agreements. In the Japan Region, approximately 48% of
the employees are represented by company labor unions. Labor relations in
these Regions have been good and we have not experienced any material work
stoppages in recent years.
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SHARE OWNERSHIP
European Employee Share Program
In 1999, we established a European Employee Share Program. This program
covers employees of Schering AG and its European subsidiaries.
Corporate guidelines outline two alternatives for the implementation of the
program. The gross benefit for each employee is approximately the same, 21
shares or E800. The net benefit depends on the specific legal environment in the
individual country.
. Alternative 1. Issuance of employee shares. This alternative is offered
to employees by the subsidiaries in Germany, France, Great Britain,
Austria, Spain, Belgium and The Netherlands.
. Alternative 2. Issuance of virtual shares. This alternative is offered
to employees in Finland, Denmark, Sweden, Italy, Portugal and Turkey.
Virtual shares are used in those European countries in which the use of
actual shares is hindered by local laws or transaction and depositary
cost considerations. Virtual shares entitle their holders to the same
rights on future payments, including dividends and special
distributions, held by the holders of shares. Certificates will not be
issued for virtual shares and the rights are not negotiable.
Through December 31, 1999, we purchased 216,000 shares without par value at an
average price of E39.33. These shares were issued in 2000 to employees at a
price of E17.33 per share.
Share Ownership by Directors
No member of the Supervisory Board or the Executive Board beneficially owns
1% or more of the outstanding shares.
Dr. Reiner Hagemann, a member of our Supervisory Board, is the Chairman of
the Executive Board of Allianz Versicherungs-AG, which is the corporate parent
of AS Industriebesitz und Beteiligungen Allianz Versicherungs- AG & Co. OHG
(which holds approximately 11.1% of our outstanding shares). Dr. Hagemann
disclaims beneficial ownership of such shares.
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Item 7. Major Shareholders and Related Party Transactions
MAJOR SHAREHOLDERS
As of September 26, 2000, Schering AG had an aggregate of 198,000,000 shares
outstanding.
The shares are issued only in bearer form. Therefore, we are unable to
determine with precision how many shareholders we have and how many shares a
particular shareholder owns. Although we are unable to determine the exact
number of our shares held in the United States, we believe that as of May 15,
2000, approximately 7% of the shares were held in the United States.
Under Section 21 of the German Securities Trading Act
(Wertpapierhandelsgesetz), which became effective on January 1, 1995, holders
of voting securities of a German company (including Schering AG) admitted to
official trading on a stock exchange within the European Union or the European
Economic Area are obligated to notify promptly in writing a company and the
German Federal Supervisory Authority for Securities Trading
(Bundesaufsichtsamt fur den Wertpapierhandel) of the level of their holdings
whenever such holdings reach, exceed or fall below certain thresholds. These
thresholds are set at 5%, 10%, 25%, 50% and 75% of a company's outstanding
voting rights. If a shareholder fails to notify the company as required, the
shareholder will be disqualified from exercising the voting rights attached to
its shares, for so long as such failure continues. The German Securities
Trading Act contains various rules designed to ensure the attribution of
shares to the person who has effective control over the shares.
Schering AG has been informed that as of July 14, 2000, AS Industriebesitz
und Beteiligungen Allianz Versicherungs-AG & Co. OHG had direct or indirect
share holdings representing approximately 11.1% of the outstanding shares.
Major shareholders do not have different voting rights.
To the extent known to us, the Schering AG Group is not owned or controlled
directly or indirectly by any corporation, foreign government or any person,
jointly or severally.
RELATED PARTY TRANSACTIONS
Aventis CropScience
On December 29, 1999, we entered into a Partners' Agreement with Hoechst AG
and Aventis S.A. pursuant to which Aventis agreed to contribute all of its
shares in Rhone-Poulenc Agro S.A., Hoechst agreed to contribute all of its
shares in AgrEvo GmbH and we agreed to contribute all of our shares in AgrEvo
GmbH to Aventis CropScience S.A. The agreement, among other things, provided for
the establishment of a research cooperation between us and Aventis CropScience
to provide for a mutual exchange of compounds and certain other technologies.
Aventis CropScience has the right to an exclusive license for the compounds we
contribute and we have the right to an exclusive license for compounds
contributed by Aventis CropScience, subject to a right of first refusal by
Aventis. Since the formation of AgrEvo through December 31, 1999, we have
contributed an aggregate of approximately E500 million to the AgrEvo/Aventis
CropScience joint venture. We believe that all past transactions with AgrEvo
GmbH have been on an arms' length basis. For a description of certain terms of
the Partners' Agreement, see "Item 4--Information on the Company--Aventis
CropScience--Description of Aventis CropScience Partners' Arrangements" and
"Item 5--Operating and Financial Review and Prospects-Aventis CropScience".
Professor Dr. Klaus Pohle, Vice-Chairman of the Executive Board of Schering AG,
is a member of the Supervisory Board of Aventis CropScience.
Shareholders
Allianz Versicherungs-AG, which is the corporate parent of AS
Industriebesitz und Beteiligungen Allianz Versicherungs-AG & Co. OHG,
currently provides insurance services to the Schering AG Group in a number of
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different areas such as property, business interruption, directors' and
officers' liability, marine, personal accident and automobile insurance. We
believe that these services are provided on an arms'-length basis.
Directors
As of December 31, 1999, loans outstanding to members of the Supervisory Board
totaled E42,639 and loans outstanding to members of the Executive Board totaled
E352,000. Interest on these loans is charged at an annual rate of 5% or 6%. For
the years ended December 31, 1998 and 1997, the principal amount of loans
outstanding to members of the Supervisory and Executive Boards was the same as
for the year ended December 31, 1999.
Professor John A. Dormandy, a member of the Supervisory Board, has provided
consultancy services to Schering AG in connection with research relating to
certain cardiovascular indications pursuant to a consultancy agreement since
June of 1996 for an annual fee of DM 110,000.
Certain members of the Supervisory and Executive Boards are members of
supervisory boards of certain financial institutions with which we engage in
transactions in the ordinary course of business.
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Item 8. Financial Information
LEGAL PROCEEDINGS
The Group is involved in a number of legal proceedings and claims incidental
to the normal conduct of its business, relating to such matters as product
liability, patent infringement, tax assessments, competition, past waste
disposal practices and release of chemicals into the environment. Although the
outcome of these proceedings and claims cannot be predicted with certainty,
Schering AG believes that any resulting liabilities, net of amounts
recoverable from insurance or otherwise, will not, in the aggregate, have a
material adverse effect on the Group's consolidated results of operations,
financial condition and cash flows. What we believe to be the most significant
of these proceedings and claims are described below.
The Group's Brazilian subsidiary is a defendant in approximately 400 civil
actions brought in courts in Brazil by women, suing individually. Many of them
claim that they became unintentionally pregnant after taking placebo pills
packaged by the subsidiary in connection with test runs of a new packaging
machine between January and April 1998. The placebo pills were intended for
destruction and not for sale. However, some packages were stolen and illegally
appeared in the hands of some women. Most of these claims are still pending.
In the majority of the judgments obtained to date, the claims were rejected by
the Brazilian courts. In connection with this incident, in July 2000 two
managers of the Group's Brazilian subsidiary were convicted in a Brazilian
court of the first instance for the failure to label properly the pouches and
blisters for the placebo pills. The Brazilian court imposed community service
activities to be rendered during a 28 month period. Both managers have filed
appeals.
The Group's subsidiary in the United Kingdom, Schering Health Care Limited,
is one of three manufacturers of so-called "third generation" combined oral
contraceptive pills against whom claims have been made by women who allege
they have suffered injury as a result of taking such pills. As of December 31,
1999, approximately 130 individuals had submitted claims in respect of all of
the manufacturers. Of these claims, 52 concern Schering Health Care. The
claimants have not quantified their claims in terms of damages. The primary
allegations made in the Statements of Claim of the claimants are that the
"third generation" combined oral contraceptive pills should not have been
marketed, or, alternatively, that the manufacturers should have discovered and
warned prescribers and consumers that there was an increased risk of venous
thrombo-embolism (VTE) associated with "third generation" combined oral
contraceptive pills as compared with "second generation" oral contraceptive
pills. The Legal Aid Board in the United Kingdom granted funding to the
claimants to pursue their claims in England and Wales. All of the cases were
transferred to a court in London, England. Two of the cases against each of
the manufacturers are pending as pilot cases, and the remainder of the claims
have been sustained. An initial procedural hearing was held before a court-
appointed Master in July 1997. The firm representing all of the claimants
served a Statement of Claim on each of the three manufacturers (including
Schering Health Care) in 1997 and February 1998. Schering Health Care and the
other manufacturers served Defences in November 1998. The plaintiffs amended
their Statement of Claim in the two pilot cases against Schering Health Care.
The amended Statement of Claim no longer alleges that the "third generation"
combined oral contraceptive pills should not have been marketed, but now
includes a claim under the Consumer Protection Act.The defendants responded to
the amended Statement of Claim on June 30, 2000. Schering Health Care denies
these allegations and intends to continue to contest this litigation
vigorously.
During 1996 Hoffmann-LaRoche Inc. and Genentech, Inc. (collectively "Roche")
filed suit in the United States District Court for New Jersey against Berlex
Laboratories, Inc. alleging that Berlex's product Betaseron(R) infringes a
certain Roche patent. Berlex answered denying infringement and counterclaimed
for declaratory judgment that the Roche patent is invalid and not infringed by
Betaseron(R). The litigation was settled by an agreement during 1998, and was
dismissed with prejudice. Pursuant to the settlement agreement, a private
arbitration was commenced to determine the question of infringement. In March
2000 the panel held that Betaseron(R) does not literally infringe the Roche
patent. A decision on the question of infringement under the doctrine of
equivalents is expected at the end of 2000 or in early 2001. If the panel
finds that Betaseron(R) infringes
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the Roche patent under the doctrine of equivalents, Berlex will pay Roche
certain past and future royalties; if the panel finds Betaseron(R) does not
infringe the Roche patent, then Berlex will not pay anything. The settlement
agreement also provides for other potential royalties or payments in the event
that Roche prevails in an interference proceeding against a third party.
Schering AG has been named as one of several defendants in two cases filed
in United States District Court in New Jersey during May 1999 in which class
certification is sought on behalf of persons alleging that they were the
subject of medical experiments performed in concentration camps during World
War II. The claimants seek unspecified amounts in damages. Schering AG has not
been served with the complaints in these cases and believes that the claims as
directed to Schering AG are without merit. It is expected that these cases
will be dismissed due to the conclusion of an agreement between the United
States and Germany relating to World War II claims by United States persons.
During November 1998, Liebel-Flarsheim, Inc. filed an action against Medrad,
Inc. in the United States District Court for the Southern District of Ohio
alleging that Medrad infringes three of Liebel-Flarsheim's patents through
Medrad's manufacture and sale of front load medical injectors used to inject
contrast medium and certain types of syringes used with these injectors.
Medrad several days later filed an action against Liebel-Flarsheim, Inc., and
several of its affiliates, including Mallinckrodt Inc., in the United States
District Court for the Western District of Pennsylvania alleging that certain
activities undertaken by Mallinckrodt with respect to the manufacture, use and
sale by Mallinckrodt of a certain syringe adapter assembly for use with
injectors manufactured by Medrad constitute as to Medrad unfair competition
and trademark dilution under United States federal law; unfair competition,
misappropriation, damage to business reputation and dilution, tortious
interference with contractual and prospective business relationships and civil
conspiracy under Pennsylvania state and common law; and infringement of a
Medrad patent. Medrad subsequently amended its complaint to add an additional
unfair competition claim and filed a second action against Liebel-Flarsheim in
Pennsylvania to declare Liebel-Flarsheim's three patents both not infringed by
Medrad and invalid. Liebel-Flarsheim filed an amended complaint in Ohio in
March 1999 alleging that Medrad had engaged in certain activities in
connection with the sale of syringes for injectors which violate United States
antitrust laws and constitute tortious interference with contractual relations
and prospective business relations, and subsequently filed a second amended
complaint adding a declaratory judgment count to declare Medrad's patent both
not infringed by Liebel-Flarsheim and invalid. As to the allegations of
infringement of its four patents, Liebel-Flarsheim seeks preliminary and
permanent injunctive relief, damages resulting from the infringement and an
award of three times actual damages because of Medrad's alleged willful
infringement of the patents; as to the allegations of violation of the
antitrust laws, Liebel-Flarsheim seeks a permanent injunction and compensatory
damages to be trebled as permitted under the antitrust laws; and as to
allegations of tortious interference with contractual business relations,
Liebel-Flarsheim seeks permanent injunctive relief, compensatory damages and
punitive damages. The two actions filed in Pennsylvania were transferred to
Ohio in June 1999. Medrad dismissed the second action it had filed in
Pennsylvania during November 1999, and incorporated its request for
declaratory relief as to the four Liebel-Flarsheim patents as counterclaims in
Medrad's answer filed in November 1999 to the initial action in Ohio. Medrad
also denied all of the allegations made by Liebel-Flarsheim in the Ohio
action. Mallinckrodt also filed an answer in November 1999 to the Pennsylvania
action in which it denied all of the allegations made by Medrad and included a
counterclaim that Medrad's patent was invalid and not infringed by
Mallinckrodt's syringe adapter assembly. Liebel-Flarsheim filed a fourth
amended complaint in January 2000 alleging that Medrad's manufacture and sale
of certain medical injectors and syringes further infringes a Liebel-Flarsheim
United States patent related to the Liebel-Flarsheim patent on which Medrad
was originally sued. Medrad filed a second amended complaint in January 2000
to add Couer Laboratories, Inc. as an additional defendant. The two actions
are consolidated for discovery purposes and discovery is now ongoing. The
court has issued a scheduling order by which fact discovery is to close on
August 1, 2000 and which sets the trials of both actions for June 2001. The
two actions have not been consolidated for trial. Medrad will continue to
contest vigorously this litigation against Liebel-Flarsheim, Mallinckrodt and
the other parties.
SIGNIFICANT CHANGES
Except as otherwise disclosed in this registration statement, there has been
no material adverse change in the financial position of Schering AG since June
30, 2000.
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Item 9. The Listing
LISTING DETAILS
Stock Price History
The table below sets forth, for the periods indicated, the high and low
intraday prices for the shares on the Frankfurt Stock Exchange, as reported by
the Frankfurt Stock Exchange, and as adjusted to give effect, retroactively,
to Schering AG's three-for-one stock split effective on June 1, 2000. See the
discussion under "Item 3--Key Information--Exchange Rates" with respect to
rates of exchange between the U.S. dollar and the Deutsche Mark and the euro
applicable during the periods set forth below. While Schering AG's shares are
also listed on the London and Zurich stock exchanges, the trading volume of
the shares outside of Germany is negligible. Therefore, providing stock price
information for these trading markets would not be meaningful.
<TABLE>
<CAPTION>
Frankfurt Stock
Exchange
Price Per Share(1)
-------------------
High Low
--------- ---------
( E )
<S> <C> <C>
1995
Annual..................................................... 19.58 15.71
1996
Annual..................................................... 22.99 16.26
1997
Annual..................................................... 36.46 21.52
1998
First Quarter.............................................. 38.18 28.65
Second Quarter............................................. 37.92 32.55
Third Quarter.............................................. 38.77 28.14
Fourth Quarter............................................. 37.92 26.59
Annual..................................................... 38.77 26.59
1999
First Quarter.............................................. 42.83 34.67
Second Quarter............................................. 37.33 33.17
Third Quarter.............................................. 36.17 31.87
Fourth Quarter............................................. 40.47 33.58
Annual..................................................... 42.83 31.87
2000
First Quarter.............................................. 49.67 37.40
Second Quarter............................................. 61.00 45.87
Third Quarter (through September 21)....................... 68.40 56.50
April...................................................... 52.58 45.87
May........................................................ 57.00 50.03
June....................................................... 61.00 53.00
July....................................................... 65.75 57.10
August..................................................... 68.40 56.50
September (through September 21)........................... 66.00 57.50
</TABLE>
--------
(1) Share prices for periods before January 1999 reported in Deutsche Mark were
converted into euro at the official fixed conversion rate of DM 1.95583 per
E1.00.
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Share Capital
The share capital of Schering AG consists of ordinary shares. All the issued
ordinary share capital of Schering AG is in bearer form and is freely
transferable. On September 26, 2000, there were 198,000,000 issued and
outstanding shares without par value.
MARKETS
General
The principal trading market for the shares is the Frankfurt Stock Exchange.
The shares are also listed on other German stock exchanges, namely Berlin,
Bremen, Dusseldorf, Hamburg, Hannover, Munich and Stuttgart. In addition, the
shares are listed on the London and Zurich stock exchanges. Options on shares
are traded on the German options exchange (Eurex).
ADRs, each representing one share, will be listed on the New York Stock
Exchange (NYSE) and will trade under the symbol "SHR".
Trading on the Frankfurt Stock Exchange
The Frankfurt Stock Exchange is operated by Deutsche Borse AG and is the
most significant of the eight German stock exchanges. Trading on the floor
takes place every business day between 9:00 am and 5:30 pm, Central European
Time. Securities listed on the Frankfurt Stock Exchange are generally traded
in the auction market, but such securities also change hands in interbank
dealer markets.
On behalf of the Frankfurt Stock Exchange, the Association of Members of the
Frankfurt Stock Exchange (Kursmaklerkammer Frankfurt am Main) publishes an
official daily list of quotations (Amtliches Kursblatt) containing the fixed
prices as well as the intraday high and low prices for all traded securities.
A computerized trading system now known as Xetra is operated by Deutsche
Borse. Trading may be conducted only by banks and securities dealers who have
been admitted to trading on at least one German stock exchange. Trading
through the Xetra system takes place from 9:00 a.m. to 5:30 p.m., Central
European Time, on each business day.
Transactions on the Frankfurt Stock Exchange, including transactions through
the Xetra system, are settled on the second business day following the trade.
Transactions off the Frankfurt Stock Exchange, e.g. some large trades or
trades with a non-German party, are generally also settled on the second
business day following the trade, although a different period may be agreed to
by the parties. Under the German banks' standard terms and conditions for
securities transactions, customers' orders for listed securities must be
executed on a stock exchange unless the customer gives specific instructions
to the contrary.
The Frankfurt Stock Exchange can suspend a quotation if orderly stock
exchange trading is temporarily threatened or if a suspension appears
necessary in order to protect the public interest. The Hessian Stock Exchange
Supervisory Authority and the Trading Monitors of the Frankfurt Stock
Exchange, which are under the control of the Stock Exchange Supervisory
Authority for Securities Trading, an independent federal authority, are
responsible for generally supervising securities trading pursuant to the
provisions of the German Securities Trading Act.
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Item 10. Additional Information
DESCRIPTION OF SHARE CAPITAL
At September 26, 2000, the issued and outstanding share capital (Grundkapital)
of Schering AG amounted to E198,000,000. The issued share capital of Schering AG
consists of 198,000,000 ordinary shares without par value. All of the issued
share capital of Schering AG is in bearer form and is freely transferable.
At the annual general meeting held on April 27, 2000, our shareholders
authorized the Executive Board to purchase, effective until September 30,
2001, up to 8.7% of Schering AG's outstanding shares to the extent that the
purchase price does not exceed the average closing price of the shares on the
Frankfurt Stock Exchange on the three days preceding such purchase by more
than 5% or fall below such price by more than 10%. Since the authorization we
have not purchased any shares and do not plan on doing so in the near future.
Schering AG's share capital may be increased by issuing new shares for cash
or non-cash consideration or out of Schering AG's reserves. A resolution
passed by a majority of the share capital represented at the annual general
shareholders' meeting is required to effect such share capital increases. The
creation of authorized capital (Genehmigtes Kapital) or conditional capital
(Bedingtes Kapital) requires a resolution passed by three quarters of the
share capital represented at the annual general shareholders' meeting. The
creation of authorized capital authorizes the Executive Board, with the
approval of the Supervisory Board, to increase the share capital by issuing
new shares for cash or non-cash consideration for a period of up to five
years. The creation of conditional capital authorizes the Executive Board to
increase the share capital for certain purposes to be listed in the
shareholder resolution, including purposes involving employee stock option
plans, mergers and the issuance of shares to holders of option bonds and
convertible bonds.
Schering AG currently has authorized but unissued capital of E85,000,000 which
may be issued at any time through April 26, 2004. Subject to the approval of the
Supervisory Board, the Executive Board may increase our share capital without
offering subscription rights to our shareholders in the following circumstances:
. if the capital increase from cash consideration does not exceed a total
amount of E15,000,000 (less the amount of conditional capital issued under
the exclusion of subscription rights and required to be used for conversion
or option rights) and the issue price of the new shares is not
significantly less than the price of the shares on the Frankfurt Stock
Exchange at the time when the issue price is determined by the Executive
Board; or
. if the capital increase is effected for the issuance of shares to
employees or former employees of Schering AG or affiliated companies; or
. if the capital increase is effected for non-cash consideration (such as
shares issued in connection with the acquisition of another company); or
. to the extent necessary to allow holders of convertible bonds or option
certificates of Schering AG or its wholly owned subsidiaries to
subscribe to the new shares to which they are entitled after exercise of
their conversion or option rights.
Schering AG also has conditional capital of E11,538,462. This conditional
capital is divided into 11,538,462 shares without par value and will become
unconditional if Schering AG's convertible bondholders exercise their conversion
rights or if Schering AG's holders of option debentures exercise their
subscription rights. Schering AG has not issued any convertible bonds or option
debentures in the last three years and none are currently outstanding.
Schering AG has no issued preference shares.
Through December 31, 1999, we purchased 216,000 shares without par value at an
average price of E39.33 for issuance to employees in accordance with the
European Employee Share Program (see "Item 6--Directors,
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Senior Management and Employees--Share Ownership--European Employee Share
Program"). These shares were issued in 2000 to employees at a price of E17.33
per share.
History of Share Capital
At December 31, 1997, our issued and outstanding share capital amounted to
DM 341,710,115. The issued share capital consisted of 21,825,981 ordinary
shares with par values of DM 1000, DM 100 and DM 50. At the annual general
meeting held on May 4, 1994, our shareholders authorized the issuance of
conditional capital for an amount up to DM 60,000,000 until May 3, 1999. This
conditional capital was not issued. At this meeting, our shareholders also
authorized the Executive Board, effective until May 3, 1999, to increase the
share capital by issuing new shares for cash or non-cash consideration up to
an amount of DM 80,000,000; no such new shares were issued.
At the annual general meeting held on April 29, 1998, our shareholders
passed a resolution to convert the share capital from Deutsche Mark into euro
as of January 1, 1999; to convert the shares with par values of DM 1000, DM
100 and DM 50 into shares with par value of DM 5; and, to convert the shares
with par value of DM 5 into shares without par value. As a result, our share
capital was divided into 68,342,023 shares without par value. The conditional
capital was divided accordingly into 12,000,000 shares without par value.
The shareholders' resolution further authorized us, effective until
September 30, 1999, to purchase our own shares for an aggregate nominal amount
not to exceed DM 34,000,000. The purchase price for a share was not to exceed
the average closing price of the shares on the Frankfurt Stock Exchange on the
three days preceding such purchase by more than 5% or to fall below such price
by more than 10%. In 1998 we purchased 684,000 shares for an aggregate
purchase price of DM 137,534,000. As a result, at December 31, 1998 the share
capital amounted to DM 338,290,115 and was divided into 67,658,023 shares. On
January 1, 1999, the share capital was converted into E172,964,989. The
conditional and authorized capital were converted accordingly. Between January
1, 1999 and April 27, 1999 we purchased 198,023 shares for an aggregate purchase
price of E22,660,197.
At the annual general meeting held on April 27, 1999, our shareholders
resolved to increase the share capital from E172,458,753 to E175,396,000 by
converting retained earnings into share capital and to authorize the Executive
Board to increase the share capital by issuing new shares for cash or non-cash
consideration for an aggregate nominal amount not to exceed E85,000,000 without
offering subscription rights to our shareholders. For a description of the
subscription rights, see "--Articles of Association".
The shareholders further resolved to authorize the Executive Board to
purchase, effective until September 30, 2000, our own shares for an aggregate
nominal amount not to exceed E15,000,000 to the extent that the purchase price
does not exceed the average closing price of the shares on the Frankfurt Stock
Exchange on the three days preceding such purchase by more than 5% or does not
fall below such price by more than 10%. During 1999, we purchased a total of
1,658,023 shares for an aggregate purchase price of E183,000,000.
Our shareholders also resolved to authorize the Executive Board to issue
convertible and/or option bonds until April 26, 2004 up to an amount of
E300,000,000 and to create conditional capital for an aggregate nominal amount
not to exceed E10,000,000 for the issuance of convertible and/or option bonds.
At December 31, 1999, the share capital amounted to E171,600,000 and was divided
into 66,000,000 shares.
At the annual general meeting held on April 27, 2000, our shareholders
resolved to increase the share capital from E171,600,000 to E198,000,000 by
converting retained earnings into share capital and to split the shares 1:3. As
a result, the share capital was divided into 198,000,000 ordinary shares without
par value. By law, the conditional capital is increased in proportion to the
increased share capital. The shareholders further resolved to revoke the
authorization given to the Executive Board at the annual general meeting in 1999
to purchase our own shares until September 30, 2000. A new authorization,
effective until September 30, 2001, was given to the Executive Board to purchase
up to 8.7% of Schering AG's outstanding shares. We have not repurchased any
shares since the April 2000 general meeting.
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ARTICLES OF ASSOCIATION
Following is a description of the material provisions of our Articles of
Association pertaining to the rights and restrictions applicable to our
shares. This description is only a summary and does not purport to be
complete. Copies of our Articles of Association are available upon request
from us and an English translation is filed with the Securities and Exchange
Commission in the United States.
General
Our registered name is Schering Aktiengesellschaft and our registered office
is in Berlin. Schering AG's corporate purposes are the manufacture and the
purchase and sale of all types of chemical products. A more detailed
description of Schering AG's purposes can be found in Article 2, paragraph 1
of Schering AG's Articles of Association.
Shareholders' Meetings
The annual general meeting of the shareholders of Schering AG may be called
by the Executive Board or the Supervisory Board. The annual general meeting
must take place within the first eight months of the fiscal year (which for
Schering AG is the calendar year). The Executive Board is required to call the
annual general meeting promptly upon the receipt of the Supervisory Board's
report on the annual financial statements. In addition, under the German Stock
Corporation Act, an extraordinary meeting of the shareholders of Schering AG
may be called by Schering AG's Executive Board or the Supervisory Board or by
shareholders holding in the aggregate at least 5% of the issued share capital.
Under German law and our Articles of Association, we must publish notices of
shareholders' meetings in the German Federal Gazette (Bundesanzeiger) at least
one month before the last day on which shares must be deposited as set forth
below. The day on which notice of the meeting of shareholders is issued and
the last day on which shares can be deposited are not taken into account for
purposes of determining this one-month period.
In order to participate and vote at a shareholders' meeting, shareholders
must deposit their shares with Schering AG, a German notary, a central
depository bank or another place specified in the notice of the meeting at
least seven days before the meeting. This applies even if the seventh day
before the meeting is a Saturday, Sunday or public holiday. The shares must
remain deposited until the end of the shareholders meeting. Shares are also
deemed to have been deposited if, with the prior consent of one of the
aforementioned depositees, they are held on its behalf by another financial
institution until the end of the shareholders meeting. In the case of deposit
with a German notary or a central depository bank, the certificates issued by
them must be submitted to Schering AG no later than the first business day
following the expiration of the period fixed for depositing shares. In all
other cases, shareholders must provide Schering AG at the meeting with
documentation evidencing the deposit of their shares as described above.
Voting Rights
Each ordinary share entitles the holder to one vote at meetings of the
shareholders. Shareholders may appoint proxies to represent them at a
shareholders meeting. Shareholder resolutions are generally passed with a
simple majority of the votes cast, unless statutory law or our Articles of
Association require otherwise.
Holders of ordinary shares in the form of American Depositary Receipts will
generally need to provide the depositary with instructions in order to
exercise their voting rights with respect to their shares. For a description
of the method by which the ordinary shares held by the depositary will be
voted, see "Item 12--Description of Securities Other than Equity Securities--
Description of American Depositary Receipts--Voting Rights".
Our Articles of Association provide that resolutions for which the law
stipulates a majority of the share capital present or represented at the
general meeting in addition to the majority of the votes cast can be adopted
by a simple majority of the share capital represented unless the law
stipulates otherwise. For a number of significant resolutions, the German
Stock Corporation Act requires the vote of at least three-quarters of the
share capital present or represented at the meeting at which the vote is
taken. Among such resolutions are share capital increases exempt from
shareholders' preemptive rights, the creation of authorized or conditional
capital, a
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decrease of capital, a change of our Articles of Association modifying our
corporate purpose, the authorization of domination and profit transfer
agreements, mergers and similar transactions and the dissolution of Schering
AG.
Neither the German Stock Corporation Act nor our Articles of Association
have any minimum quorum requirement applicable to shareholders meetings.
Subscription Rights
Under the German Stock Corporation Act, an existing shareholder in a stock
corporation has a preferential right to subscribe for issues of new shares by
that corporation (as well as bonds convertible into shares, bonds with
warrants to purchase shares, profit participating bonds and profit
participating rights) in proportion to the number of shares he or she holds in
the corporation's existing share capital. The German Stock Corporation Act
only allows companies to not offer this preferential right in limited
circumstances and only if so provided in the same shareholder resolution that
authorizes the accompanying capital increase. At least three-quarters of the
share capital represented at the meeting must vote to authorize subscription
rights not being offered. Prior to approval by the shareholders, not offering
subscription rights requires a justification on which the Executive Board must
report to the shareholders in writing. With regard to the authorized capital,
at the present time our Executive Board may increase our share capital without
offering subscription rights, with the approval of the Supervisory Board, in
the circumstances described under "--Description of Share Capital".
U.S. holders of ADSs may not be able to participate in any offer of new
shares to existing shareholders on the basis of their subscription rights
because of the restrictions on the offer and sale of securities in the United
States under U.S. securities laws and regulations.
Dividend Rights
For each fiscal year, the Executive Board prepares the annual financial
statements and submits them to the auditors. The auditor's report, the annual
financial statements and the Executive Board's proposal as to the disposition
of the annual profit (either payment as dividends, transfer to reserves or
carry forward to the next fiscal year) are submitted to the Supervisory Board.
Upon final approval by the Supervisory Board, the Executive Board submits its
proposal as to the disposition of the annual profits to the shareholders
meeting. Shareholders participate in profit distributions in proportion to the
number of shares they hold. Dividends approved at a shareholders' meeting are
payable promptly after such meeting, unless otherwise decided at the
shareholders meeting.
Liquidation Rights
In accordance with the German Stock Corporation Act, if we are liquidated,
any liquidation proceeds remaining after all of our liabilities have been paid
off would be distributed among our shareholders in proportion to their
holdings.
Purchase of Our Own Shares
We may not acquire our own shares unless authorized by the shareholders or
in other very limited circumstances set out in the German Stock Corporation
Act. Shareholders may not grant a share repurchase authorization lasting for
more than 18 months. The German Stock Corporation Act generally limits the
amount of repurchases authorized at any particular time to 10% of our share
capital and resales must be made either on the stock exchange, in a manner
that treats all shareholders equally or in accordance with the rules that
apply to preemptive rights relating to a capital increase. The annual
shareholders meeting in 2000 authorized share repurchases until September 30,
2001.
Disclosure Requirement
The German Securities Trading Act requires each person whose share holding
reaches, exceeds or, after exceeding, falls below the 5%, 10%, 25%, 50% or 75%
voting right thresholds of a listed company to notify it and the Federal
Supervisory Authority for Securities Trading in writing not later than seven
calendar days after they have reached, exceeded or fallen below such a
threshold. In their notification, they must also state the number of shares
they hold. Holders are not entitled to any rights from those shares (including
voting and dividend rights) until they have satisfied this disclosure
requirement. In addition, the German Securities Trading Act contains various
rules designed to ensure the attribution of shares to the person who has
effective control over the exercise of the voting rights attached to those
shares.
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MATERIAL CONTRACTS
On December 29, 1999, Schering AG entered into a Partners' Agreement with
Hoechst AG and Aventis S.A. For a description of certain terms of this
agreement, see "Item 4--Information on the Company--Aventis CropScience--
Description of Aventis CropScience Partners' Arrangements".
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EXCHANGE CONTROLS
The DM and the euro are fully convertible currencies. There are, except in
limited embargo circumstances, no legal restrictions in Germany on
international capital movements and foreign exchange transactions. For
statistical purposes only, with certain exceptions, every corporation or
individual residing in Germany must report to the German Central Bank
(Deutsche Bundesbank) any payment received from or made to a non-resident
corporation or individual if the payment exceeds DM 5,000 or E 2,500 (or
the equivalent in a foreign currency). Additionally, corporations and
individuals residing in Germany must report to the German Central Bank any
claims of a resident corporation or individual against, or liabilities payable
to, a non-resident corporation or individual exceeding an aggregate of DM 3
million or E 1.5 million (or the equivalent in a foreign currency) at the
end of any calendar month.
Neither German law nor our Articles of Association restrict the right of
non-resident or non-German owners to hold or vote the shares.
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TAXATION
German Taxation
The following discussion describes the material German tax consequences of
owning shares or American Depositary Shares (ADSs). It applies to you if you
are a "Non-German Holder". You are a Non-German Holder if you:
. are not a German resident for German income tax purposes; and
. do not hold shares or ADSs as part of a permanent establishment or a
fixed base you maintain in Germany.
This summary is based on German law and tax and other treaties between
Germany and other countries as they are in effect as of the date hereof, and
is subject to changes in German law or such treaties. In particular, the
corporate income tax imputation system described below and the applicable tax
rates will change as of January 1, 2001 as a result of the reform of the
taxation of enterprises which the German parliament passed on July 14, 2000.
This section is not a comprehensive discussion of all of the German tax
consequences that may be relevant for Non-German Holders. You should consult
your tax adviser regarding the German federal, state and local tax
consequences of the purchase, ownership and disposition of shares or ADSs and
the procedures for the refund of German taxes withheld from dividends.
Dividends
Under German law, German corporations must withhold tax on dividends in an
amount equal to 25% of the gross amount paid to resident and nonresident
holders. An applicable tax treaty may reduce the rate of withholding tax on
dividend distributions paid to Non-German Holders. Most tax treaties to which
Germany is party, including the treaty between Germany and the United States
(the "Treaty"), reduce the withholding tax rate to 15%. You would receive this
reduction by applying for a refund of the difference between the tax withheld
at the statutory rate of 25% (20% for dividends received after 2001) and the
applicable treaty rate to the German tax authorities, located at the Bundesamt
fur Finanzen, Friedhofstrasse 1, D-53225 Bonn, Germany. If you are entitled to
benefits under the Treaty, a special refund procedure may apply, which we
describe below under the heading "--Dividend refund procedure for U.S.
holders".
In addition, as long as the German corporate tax imputation system provides
German resident individual shareholders with a tax credit in respect of
dividends paid by German corporations, the Treaty entitles qualifying U.S.
shareholders to an additional refund from the German government. This
additional refund is equal to 5.88% of the gross amount of the dividend paid
by Schering AG, and is itself subject to a 15% German withholding tax. After
such withholding tax, the additional refund is equal to 5% of the gross amount
of the dividend paid by Schering AG (5.88% less 0.88% (15% x 5.88%) equals
5%). You may obtain this refund together with the general treaty refund
discussed in the preceding paragraph. Because of the German tax reform
measures described above, this refund will not apply to dividends paid after
2001.
A surtax on the German withholding tax is currently levied on dividend
distributions paid by a German resident company at a rate of 5.5% of the basic
25% (20% for dividends received after 2001) withholding tax on dividend
distributions. At this rate, the surtax amounts to 1.375% (5.5% x 25%) (1.100%
(5.5 x 20%) for dividends received after 2001) of the gross amount of the
dividend paid by Schering AG. The Treaty entitles qualifying U.S. shareholders
to a full refund of this surtax.
As a result, a qualifying U.S. shareholder entitled to a gross dividend of E
100 from Schering AG will, after applicable refunds of German withholding tax,
receive a cash payment of E90 (E100 gross dividend from Schering AG plus E5.88
gross refund from the German government (or E105.88), minus E 15 German
withholding tax (E25 basic withholding tax on the gross dividend paid by
Schering AG, minus applicable Treaty refund of E10), minus E0.88 (15% net
withholding tax on E5.88 tax refund from the German government)). For the years
2002 and later, the total cash payment will be E85 ( E100 gross dividend from
Schering AG minus E 15 German witholding tax ( E20 basic withholding tax on the
gross dividend minus applicable Treaty refund of E5)).
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Dividend refund procedure for U.S. holders
For shares and ADSs that are kept in custody with the Depository Trust
Company in New York or one of its participating banks, the German tax
authorities have introduced a collective procedure for the refund of German
withholding tax and surtax, on a trial basis. Under this procedure, the
Depository Trust Company may submit claims for refunds payable to U.S. holders
under the Treaty collectively to the German tax authorities on behalf of these
U.S. holders. The German Federal Tax Office (Bundesamt fur Finanzen) will pay
the refund amounts on a preliminary basis to the Depository Trust Company,
which will redistribute these amounts to you and other U.S. holders according
to the regulations governing the procedure. The Federal Tax Office may review
whether the refund conforms with the law within four years after making the
payment to the Depository Trust Company. Details of this collective refund
procedure are available from the Depository Trust Company.
If you are not eligible for the special refund procedure described in the
preceding paragraph, you must make an individual claim for refund. Individual
claims for refund are made on a special German form, which you must file with
the German authorities at the Bundesamt fur Finanzen, Friedhofstrasse 1, D-
53225 Bonn, Germany. You can obtain copies of the required form from the
German tax authorities at the same address or from the Embassy of the Federal
Republic of Germany, 4645 Reservoir Road, N.W., Washington D.C. 20007-1998.
As part of the individual refund claim, you must submit to the German tax
authorities the original bank voucher (or certified copy thereof) issued by
the paying entity documenting the tax withheld, and an official certification
on IRS Form 6166 of your last United States federal income tax return. You can
obtain IRS Form 6166 by filing a request with the Internal Revenue Service
Center in Philadelphia, Pennsylvania. Foreign Certification Request, P.O. Box
16347, Philadelphia, PA 19114-0447. Requests for certification must include
your name, Social Security Number or Employer Identification Number, tax
return form number, and tax period for which the certification is requested.
You can also request that the Internal Revenue Service send the certification
directly to the German tax authorities. If you do not make such a request, the
Internal Revenue Service will send a certificate on IRS Form 6166 to you, and
you must submit the certification with its claim for refund.
Capital gains
Under German domestic tax law, capital gains you derive from the sale or
other disposition of shares or ADSs are subject to tax in Germany only if you
have held, directly or indirectly, shares or ADSs representing 10% (1% after
2001) or more of the registered share capital of Schering AG at any time
during the 5-year period immediately preceding the disposition. Most German
tax treaties, including the Treaty, provide that Non-German Holders are not
subject to German tax even in that case.
Inheritance and gift tax
Under German law, German gift or inheritance tax will be imposed on
transfers of shares or ADSs by a gift or on the death of a Non-German Holder
only in the following situations:
. if you or another transferor, or your heir, donee or other beneficiary,
was domiciled in Germany at the time of the transfer or, if you are a
German citizen who is not domiciled in Germany, if you, another
transferor or your beneficiary has not been continuously outside of
Germany for a period of more than 5 years; or
. if your shares or ADSs are subject to such a transfer and form part of a
portfolio which represents 10% or more of the registered share capital
of the company and you have held such shares directly or indirectly
yourself or together with a related person.
The few German estate tax treaties currently in force, including the treaty
with the United States, usually provide that German gift or inheritance tax
may only be imposed in situations falling under the first condition above.
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Other taxes
No German transfer, stamp or other similar taxes apply to your purchase,
sale or other disposition of shares or ADSs.
U.S. Taxation
This section describes the material United States Federal income tax
consequences of owning shares or ADSs. It applies to you only if you hold your
shares or ADSs as capital assets for tax purposes. This section does not
address special classes of holders, some of whom may be subject to other
rules, including:
. tax-exempt entities;
. certain insurance companies;
. broker-dealers;
. traders in securities that elect to mark to market;
. investors liable for alternative minimum tax, investors that actually or
constructively own 10% or more of the voting stock of Schering AG,
investors that hold shares or ADSs as part of a straddle or a hedging or
conversion transaction; or
. investors whose functional currency is not the U.S. dollar.
This section is based on the tax laws of the United States, including the
Internal Revenue Code of 1986, as amended, its legislative history, existing
and proposed regulations, and published rulings and court decisions, as
currently in effect, as well as on the Treaty. These laws are subject to
change, possibly on a retroactive basis.
You are a "U.S. holder" if you are a beneficial owner of shares or ADSs and
you are:
. a citizen or resident of the United States;
. a United States corporation or other entity taxable as a corporation in
the United States;
. an estate whose income is subject to United States Federal income tax
regardless of its source, or a trust if a United States court can
exercise primary supervision over the trust's administration and one or
more United States persons are authorized to control all substantial
decisions of the trust.
You are an "eligible U.S. holder" if you are a U.S. holder and you are:
. a resident of the United States for purposes of the Treaty, do not
maintain a permanent establishment or fixed base in Germany to which the
shares or ADSs are attributable and through which you carry on or have
carried on business or, if you are an individual, perform or have
performed independent personal services; and
. otherwise eligible for benefits under the Treaty with respect to income
and gain from the shares or ADSs.
You are a "non-U.S. holder" if you are a beneficial owner of shares or ADSs
that is not a U.S. holder (as described above).
This discussion addresses only United States Federal income taxation. You
should consult your own tax advisor regarding the United States Federal,
state, local and other tax consequences of owning and disposing of shares and
ADSs in your particular circumstances. In particular, you should confirm your
status as an eligible U.S. holder with your advisor and should discuss any
possible consequences of failing to qualify as an eligible U.S. holder.
In general, for United States Federal income tax purposes, if you hold ADRs
evidencing ADSs, you will be treated as the owner of the shares represented by
those ADSs. Exchanges of shares for ADSs, and ADSs for shares, generally will
not be subject to United States Federal income tax.
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Taxation of Dividends
U.S. Holders
If you are a U.S. holder, you must include in your gross income the gross
amount of any dividend paid by Schering AG out of its current or accumulated
earnings and profits, as these amounts are determined for United States
Federal income tax purposes. In addition to this amount, you must also include
the gross amount of the additional Treaty refund from the German government in
respect of dividends paid by Schering AG.
The dividend is ordinary income that you must include in income when you
receive the dividend, actually or constructively. The dividend will not be
eligible for the dividends-received deduction generally allowed to United
States corporations in respect of dividends received from other United States
corporations. The amount of the dividend distribution that you must include in
your income as a U.S. holder will be the U.S. dollar value of the euro
payments made, determined at the spot euro/U.S. dollar rate on the date the
dividend distribution is includable in your income, regardless of whether the
payment is in fact converted into U.S. dollars. Generally, any gain or loss
resulting from currency exchange fluctuations during the period from the date
you include the dividend payment in income to the date you convert the payment
into U.S. dollars will be treated as ordinary income or loss. The gain or loss
generally will be income from sources within the United States for foreign tax
credit limitation purposes. Distributions in excess of current and accumulated
earnings and profits, as determined for United States Federal income tax
purposes, will be treated as a return of capital to the extent of your basis
in the shares or ADSs and thereafter as capital gain.
Dividends will constitute income from sources outside the United States, but
generally will be "passive income" or "financial services income" which are
treated separately from other types of income for purposes of computing the
foreign tax credit allowable to you.
Subject to certain limitations, you may credit against your United States
federal tax liability the net amount (after applicable refunds) of any German
tax withheld in accordance with German law or the Treaty. For United States tax
purposes, you will be treated as paying German withholding taxes of E15.88 on
every E100 of gross dividend paid by Schering AG ( E15 basic German
withholding tax after applicable E10 refund and E0.88 German withholding tax
on E5.88 tax refund from the German government). As a result of the German tax
reform described above, after December 31, 2000, you will be treated as paying
German withholding taxes of E15 on every E100 of gross dividend paid by
Schering AG ( E15 basic German withholding tax after applicable E10 refund).
If you cannot or choose not to use the German withholding tax as a credit, you
may generally treat that tax as an itemized deduction for United States Federal
income tax purposes.
Non-U.S. Holders
If you are a non-U.S. holder, dividends paid to you in respect of shares or
ADSs will not be subject to United States Federal income tax unless
effectively connected with your conduct of a trade or business within the
United States. The dividends must also be attributable to a permanent
establishment that you maintain in the United States, if that is required by
an applicable income tax treaty as a condition for subjecting you to United
States taxation on a net income basis. In such cases you will be taxed in the
same manner as a U.S. holder. If you are a corporate non-U.S. holder,
effectively connected dividends may, under certain circumstances, be subject
to an additional branch profits tax at a 30% rate or at a lower rate if you
are eligible for the benefits of an income tax treaty that provides for a
lower rate.
Taxation of capital gains
U.S. Holders
If you are a U.S. holder and sell or otherwise dispose of your shares or
ADSs, you will recognize capital gain or loss for United States Federal income
tax purposes equal to the difference between the U.S. dollar value of the
amount that you realize and your tax basis, determined in U.S. dollars, in
your shares or ADSs. Capital gain of a noncorporate U.S. holder is generally
taxed at a maximum rate of 20% for property held more than one year.
Additionally, gain or loss will generally be income from sources within the
United States for foreign tax credit limitation purposes.
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Non-U.S. Holders
If you are a non-U.S. holder, you will not be subject to United States
Federal income tax on gain recognized on the sale or other disposition of your
shares or ADSs unless:
. the gain is effectively connected with your conduct of a trade or
business in the United States; the gain must also be attributable to a
permanent establishment that you maintain in the United States, if that
is required by an applicable income tax treaty as a condition for
subjecting you to United States taxation on a net income basis; or
. you are an individual, you are present in the United States for 183 or
more days in the taxable year of the sale and certain other conditions
exist.
If you are a corporate non-U.S. holder, effectively connected gains that you
recognize may also, under certain circumstances, be subject to an additional
branch profits tax at a 30% rate or at a lower rate if you are eligible for
the benefits of an income tax treaty that provides for a lower rate.
Backup withholding and information reporting
In general, dividend payments, or other taxable distributions, made within
the United States to you will be subject to information reporting requirements
and backup withholding tax at the rate of 31% if you are a non-corporate
United States person and, you:
. fail to provide an accurate taxpayer identification number;
. are notified by the Internal Revenue Service that you have failed to
report all interest or dividends required to be shown on your Federal
income tax returns; or
. in certain circumstances, fail to comply with applicable certification
requirements.
Certain corporations and persons that are not United States persons may be
required to establish their exemption from information reporting and backup
withholding by certifying their status on Internal Revenue Service Form W-8 or
W-9.
If you sell your shares or ADSs to or through a United States office of a
broker, the payment of the proceeds is subject to both United States backup
withholding and information reporting unless you certify that you are a non-
U.S. person, under penalties of perjury, or you otherwise establish an
exemption. If you sell your shares or ADSs through a non-U.S. office of a non-
U.S. broker and the sale proceeds are paid to you outside the United States
then information reporting and backup withholding generally will not apply to
that payment. However, United States information reporting requirements, but
not backup withholding, will apply to a payment of sales proceeds, even if
that payment is made to you outside the United States, if you sell your shares
or ADSs through a non-U.S. office of a broker that is a U.S. person or has
certain other contacts with the United States.
You generally may obtain a refund of any amounts withheld under the backup
withholding rules that exceed your income tax liability by filing a refund
claim with the United States Internal Revenue Service.
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DIVIDENDS
The rights of holders of ADRs with respect to any dividends or other
distributions on the shares underlying the ADRs will be governed by the
deposit agreement and may be different from the rights of holders of the
shares. See "Item 12--Description of Securities Other than Equity Securities--
Description of American Depositary Receipts".
Our Executive and Supervisory Boards must jointly propose any distribution
of dividends and obtain approval of the shareholders in a general meeting.
Dividends approved at a shareholders' meeting are payable promptly after that
meeting, unless otherwise decided at the shareholders' meeting. In Germany,
dividends are paid through the banks that act as depositaries for Schering
AG's shares. If you hold shares that are entitled to dividends in a clearing
system, the dividends will be paid according to that clearing system's rules.
We will publish notice of dividends paid in the German Federal Gazette.
For a description of certain tax consequences relating to the payment of
dividends, see "--Taxation".
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STATEMENT BY AUDITORS
The consolidated financial statements of Schering AG included in this
registration statement have been audited by BDO Deutsche Warentreuhand
Aktiengesellschaft Wirtschaftspruefungsgesellschaft and BDO International GmbH
Wirtschaftspruefungsgesellschaft, independent public accountants, to the extent
and for the periods set forth in their report appearing elsewhere herein and
are included in reliance upon such report given upon the authority of said
firms as experts in auditing and accounting.
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DOCUMENTS ON DISPLAY
As a result of registering its ADRs and shares, Schering AG will become
subject to the informational reporting requirements of the Securities Exchange
Act of 1934 and will file reports and other information with the Securities
and Exchange Commission. You may examine the reports and other information
filed by Schering AG, without charge, at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.,
20549, and at the SEC's regional offices located at Suite 1400, Northwest
Atrium Center, 500 West Madison Street (Suite 1400), Chicago, Illinois, 60661-
2551 and Room 1300, Seven World Trade Center, New York, New York, 10048. You
may also receive copies of these materials by mail from the SEC's Public
Reference Branch at 450 Fifth Street, N.W., Washington, D.C., 20549. For more
information on the public reference rooms, call the SEC at 1-800-SEC-0330. Our
reports and other information filed with the SEC are also available to the
public from commercial document retrieval services and the website maintained
by the SEC at http://www.sec.gov. The ADRs will be traded on the New York
Stock Exchange, and the materials will be available for inspection and copying
at their offices at 20 Broad Street, New York, New York, 10005.
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Item 11. Quantitative and Qualitative Disclosures about Market Risk
Due to our global business and existing current assets, we are exposed to
various market risks (i.e., the risk of loss arising from adverse changes in
market rates and prices). Our principal market risks are:
. foreign exchange rates, generating translation and transaction gains and
losses.
. interest rate and other risks related to financial assets and
liabilities.
. equity price risks relating to the equity securities we hold of certain
of our collaboration partners.
Our central treasury function located at Schering AG's headquarters is
responsible for market risk management. The Schering AG central treasury
enters into virtually all derivatives contracts utilized by the Group.
Derivative instruments are used only for non-trading purposes such as hedging.
Subsidiaries are permitted to enter into derivative contracts only in
exceptional situations after obtaining the prior consent of Schering AG
central treasury.
Risk management transactions are executed within the common framework of
limits, segregation of duties, and position and result reporting by an
experienced staff with selected banks with a minimum long-term rating of A.
The positions are valued mark-to-market on a regular (mainly daily) basis.
The risks involved with cash and derivative positions in foreign exchange
and asset-liability risk management are measured and limited with an in-house
risk management system based on historical simulation. The simulation system
calculates the worst case results for given single positions and whole
portfolios within the last ten years. The time bracket to calculate the worst
case adverse market movements can be flexibly determined and is normally set
to one-month and one-year periods.
FOREIGN EXCHANGE RISK MANAGEMENT
Approximately 57% of our net sales in 1999 were made in currencies other
than the euro, including the US dollar, the Japanese yen, the British pound
sterling and the Brazilian real. See "Item 5--Operating and Financial Review
and Prospects--Liquidity and Capital Resources--Foreign Currency" for
information on the range of currencies in which we made sales in 1997, 1998
and 1999. We therefore face considerable foreign exchange risks regarding our
balance sheet exposure (current assets minus current liabilities in foreign
currencies) and our future anticipated exposure (future sales minus future
costs in non-euro currencies). In accordance with our risk management policy,
balance sheet exposure is fully hedged and our future anticipated exposure for
a rolling twelve-month period is in general 50% hedged. The hedge level of our
anticipated exposure may be varied between 0% and 100% of this anticipated
exposure in accordance with our market expectations. As of December 31, 1999,
the maximum term of our foreign exchange contracts was less than three months
and the term of our one option contract was less than six months.
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Hedges for Balance Sheet Exposure
The following table sets forth, as of December 31, 1999, information about
foreign currency forward exchange contracts entered into to hedge our balance
sheet exposure:
Foreign Currency Forward Exchange Agreements
<TABLE>
<CAPTION>
Exchange Contract Amount
Currency Pairs Rate Buy (Sell) Fair Value
-------------- -------- --------------- ----------
(E in millions)
<S> <C> <C> <C> <C>
Australian dollar.......... euro 1.5923 5.4 0.2
British pound.............. euro 0.6281 (24.1) (0.3)
British pound.............. euro 0.6281 11.7 0.1
Canadian dollar............ euro 1.4922 (12.5) (0.3)
Indonesia rupiah........... euro 8,817 (13.2) (2.6)
Indonesia rupiah........... euro 7,555 3.3 0.2
Japanese yen............... euro 103.72 (211.2) (2.0)
South African rand......... euro 6.2307 (9.0) (0.1)
Swedish krona.............. euro 8.5661 (8.8) 0.0
Swiss franc................ euro 1.5960 (9.4) 0.1
Swiss franc................ euro 1.5960 6.5 0.0
U.S. dollar................ euro 1.0185 (377.1) (5.1)
U.S. dollar................ euro 1.0102 19.9 0.1
U.S. dollar................ South Korean won 1,189 7.3 (0.4)
</TABLE>
Hedges for Anticipated Exposure
The following table sets forth, as of December 31, 1999, information about
foreign currency foreign exchange contracts entered into to hedge our
anticipated exposure:
Foreign Currency Forward Exchange Agreements
<TABLE>
<CAPTION>
Exchange Contract Amount
Currency Pairs Rate Buy (Sell) Fair Value
-------------- -------- --------------- ----------
(E in millions)
<S> <C> <C> <C> <C>
Australian dollar............ euro 1.5877 (23.9) (0.7)
British pound................ euro 0.6296 (45.8) (0.6)
British pound................ euro 0.6264 5.0 0.0
Canadian dollar.............. euro 1.4922 (10.3) (0.2)
Japanese yen................. euro 103.25 (95.9) (0.5)
Japanese yen................. euro 103.47 45.3 0.3
South African rand........... euro 6.2307 (15.4) (0.1)
Swedish krona................ euro 8.5661 (33.9) 0.0
Swiss franc.................. euro 1.5960 (18.7) 0.1
Thailand baht................ euro 38.8250 (6.4) (0.2)
U.S. dollar.................. euro 1.0129 (274.1) (2.2)
U.S. dollar.................. euro 1.0165 10.7 0.1
British pound................ Japanese yen 164.9 (1.8) 0.0
U.S. dollar.................. Japanese yen 101.40 (10.5) (0.1)
U.S. dollar.................. Japanese yen 102.36 7.9 0.0
</TABLE>
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Options
As of December 31, 1999, we were also party to one long U.S. dollar put/euro
call option to hedge our anticipated exposure. The option was to sell the
contract amount of $50 million at a strike price of one euro for $1.10. The fair
value of the option as of December 31, 1999 was E0.5 million.
1999 Compared to 1998
The foreign currency hedge for our balance sheet exposure increased from a
total nominal amount of E362 million as of December 31, 1998 to E637 million as
of December 31, 1999. This increase is attributable to higher exchange rates and
increased intercompany financing activity.
The foreign currency hedge for our anticipated exposure increased from E338
million as of December 31, 1998 to E637 million as of December 31, 1999. The
primary reasons for this increase were higher exchange rates, larger anticipated
sales volumes and an increased level of hedging of the respective anticipated
exposures. The level of hedging increased to 76% as of December 31, 1999, from
54% as of December 31, 1998.
ASSET-LIABILITY RISK MANAGEMENT
Asset-Liability Risk Management encompasses the interest rate and other risks
related to financial assets and liabilities. As of December 31, 1999, our cash
and securities classified as current assets amounted to E583 million. Our
short-term cash deposits, which are denominated in the local currencies of our
subsidiaries, are mainly euro denominated. Our total bank liabilities as of
December 31, 1999 amounted to E186 million. These liabilities are mostly
short-term liabilities (maturity of less than one year) and are principally
denominated in the local currencies of our subsidiaries.
As of December 31, 1999, our positive net cash position (which we define as
marketable securities and cash and cash equivalents less liabilities to banks)
was E397 million. These assets are invested in order to achieve a high rate of
return within defined risk limits. The portfolio is diversified in a range of
cash assets which are supplemented by derivative instruments in order to
generate the intended asset profile for the whole portfolio. Apart from risk
limits, the short-term and mid-term liquidity requirements of the Group are also
taken into account in the management of the maturity profile of cash assets. As
is discussed under "--Foreign Exchange Risk Management", currency risk caused by
cash and derivative positions of Asset-Liability Risk Management is hedged as a
balance sheet exposure.
The following tables set forth the nominal and fair values, maturity and
contract terms of the interest rate sensitive financial instruments that were
held by the Group as of December 31, 1999.
Assets and Liabilities
<TABLE>
<CAPTION>
There- Fair
2000 2001 2002 2003 2004 after Total Value
---- ---- ---- ---- ---- ------ ----- -----
(E in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Euro:
Cash/Deposits................... 48 48 48
Average yield (%)............... 3.3 3.3
Fixed income securities......... 264 8 9 26 20 68 395 425
Average yield (%)............... 4.1 5.7 5.6 7.6 6.8 7.2 5.1
Liabilities..................... (63) (26) (89) (90)
Average yield (%)............... 3.5 3.9 3.7
Japanese yen:
Liabilities..................... (24) (24) (24)
Average yield (%)............... 1.4 1.4
Other:
Equity securities (mainly E )... 93
Hedge funds (US$ based)......... 62
</TABLE>
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<PAGE>
Derivative Positions
<TABLE>
<CAPTION>
There- Fair
2000 2001 2002 2003 2004 after Total Value
---- ---- ---- ---- ---- ------ ----- -----
(E in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Euro:
German Bund Futures............. (108) (108) 3
Yield (%)....................... 5.4
German Bobl Futures............. (21) (21) 0
Yield (%)....................... 4.8
Interest rate swap.............. 26 26 (2)
Yield (%) (receive fixed rate).. 5.6
10-year forward starting swap
(starting 2009)................ 25 25 0
Yield (%) (receive fixed rate).. 6.7
Japanese yen:
Japanese government bond
futures........................ 28 0 0
Yield (%)....................... 2.1
British pounds:
10-year forward starting swap
(starting 2009)................ (25) (25) 0
Yield (%) (pay fixed rate)...... 4.9
</TABLE>
1999 Compared to 1998
The total amount of net current financial assets decreased by E425 million
from E822 million at December 31, 1998, to E397 million at December 31, 1999.
The overall decrease was partly offset by the E34 million increase in our equity
investments and the E36 million increase in hedge funds investments due to value
gains and additional investments.
EQUITY PRICE RISK IN RESEARCH COLLABORATION PARTNERS
As part of our research and development activities, we from time to time
enter into research collaboration efforts with various companies in the
pharmaceutical sector. In connection with these research collaboration
efforts, we acquire equity participations in our collaboration partners from
time to time. In most cases, the transfer and sale of these equity
participations are subject to contractual and regulatory restrictions. Equity
participations subject to such restrictions are shown in the balance sheet in
our consolidated financial statements under "Financial assets/ Other
Investments". The book value of these equity investments (of which only some
are publicly traded securities) amounted to approximately E33 million as of
December 31, 1999. The market value of certain of these equity investments has
fluctuated significantly. We do not have any derivative financial instruments to
mitigate the fluctuation in the value of the investments.
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Item 12. Description of Securities Other than Equity Securities
DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS
American depositary shares
Morgan Guaranty Trust Company of New York, as depositary, issues the
American depositary shares (ADSs) as described below. Each ADS represents
ownership interest in one ordinary share deposited with the custodian under
the deposit agreement among ourselves, the depositary and each of the holders
of ADRs from time to time. In the future, each ADS will also represent any
securities, cash or other property deposited with the depositary but not
distributed by it directly to you. Your ADSs will be evidenced by what is
known as American depositary receipts, or ADRs.
The depositary's office is located at 60 Wall Street, New York, NY, 10260.
You may hold ADSs either directly or indirectly through your broker or other
financial institution. If you hold ADSs directly, you are an ADR holder. The
description below assumes you hold your ADSs directly. If you hold the ADSs
through your broker or financial institution's nominee, you must rely on the
procedures of such broker or financial institution to assert the rights of ADR
holders described in this section. You should consult with your broker or
financial institution to find out what those procedures are.
Because the depositary's nominee will actually be the registered owner of
the shares, you must rely on it to exercise the rights of a shareholder on
your behalf. The obligations of the depositary and its agents are set out in
the deposit agreement. The deposit agreement and the ADSs are generally
governed by New York law.
The following is a summary of the material provisions of the deposit
agreement. Because it is a summary, it does not contain all the information
that may be important to you. For more complete information, you should read
the entire agreement and the form of ADR which contains the terms of your
ADSs. You can read a copy of the agreement which is filed as an exhibit to the
Form 20-F. You may also copy the agreement, a copy of which is available at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-732-0330.
Share dividends and other distributions
How will I receive dividends and other distributions on the shares underlying
my ADSs?
The depositary has agreed to pay to you the cash dividends or other
distributions it or the custodian receives on shares or other deposited
securities, after deducting expenses. You will receive these distributions in
proportion to the number of underlying shares your ADSs represent.
We may make various types of distributions with respect to our securities.
Except as stated below, to the extent the depositary is legally permitted, it
will deliver such distributions to ADR holders in proportion to their
interests in the following manner:
Cash. The depositary will convert cash distributions from foreign currency
to U.S. dollars as promptly as practicable if this is permissible and can be
done on a reasonable basis. The depositary will endeavor to distribute such
cash in a practicable manner, and may deduct any taxes required to be
withheld, any expenses of converting foreign currency and transferring funds
to the United States, and certain other expenses and adjustments. In addition,
before making a distribution, the depositary will deduct any taxes withheld.
If the exchange rates fluctuate during a time when the depositary cannot
convert the currency, you may lose some or all of the value of the
distribution.
Shares. In the case of a distribution in shares, the depositary will issue
additional ADRs to evidence the number of ADSs representing such shares. Only
whole ADSs will be issued. Any shares which would result in fractional ADSs
will be sold and the net proceeds will be distributed to the ADR holders
entitled thereto.
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Rights to receive additional shares. In the case of a distribution of rights
to subscribe for additional shares or other rights, if we provide satisfactory
evidence that the depositary may lawfully distribute such rights, the
depositary may arrange for ADR holders to instruct the depositary as to the
exercise of such rights. However, if we do not furnish such evidence, the
depositary may:
. sell such rights if practicable and distribute the net proceeds as cash,
or
. allow such rights to lapse, whereupon ADR holders will receive nothing.
We have no obligation to file a registration statement under the Securities
Act in order to make any rights available to ADR holders. If we do not choose
to file a registration statement, the Securities Act will restrict the sale,
deposit, cancellation and transfer of shares issued upon the exercise of
rights.
Other Distributions. In the case of a distribution of securities other than
those described above, the depositary may either
. distribute such securities in any manner it deems fair and equitable, or
. sell such securities and distribute any net proceeds in the same way it
distributes cash.
Fractional cents will be withheld without liability for interest and added
to future cash distributions.
To the extent the depositary determines, after consultation with us, that
any distribution is not lawful or practicable with respect to any holder, the
depositary may make the distribution in a method that it deems lawful and
practicable, including the distribution of foreign currency or securities. The
depositary may also retain such items, without paying interest on or investing
them, on behalf of the ADR holder as deposited securities.
There can be no assurances that the depositary will be able to convert any
currency at a specified exchange rate or sell any property, rights, or shares
or other securities at a specified price, nor that any such transactions can
be completed within a specified time period.
Deposit, withdrawal and cancellation
How does the depositary issue ADSs?
The depositary will issue ADSs if you or your broker deposit shares or
evidence of rights to receive shares with the custodian, along with any other
documents required by the depositary.
Shares deposited in the future with the custodian must be accompanied by
certain documents, including instruments showing that such shares have been
properly transferred or endorsed to the person on whose behalf the deposit is
being made.
The custodian will hold all deposited shares for the account of the
depositary. ADR holders thus have no direct ownership interest in the shares
and only have such rights as are contained in the deposit agreement. The
custodian will also hold any additional securities, property and cash received
on or in substitution for the deposited shares. The deposited shares and such
additional items are referred to as "deposited securities."
Upon each deposit of shares, receipt of related delivery documentation and
compliance with the other provisions of the deposit agreement, including the
payment of the fees and charges of the depositary, the depositary will issue
an ADR or ADRs in the name of the person entitled thereto evidencing the
number of ADSs to which such person is entitled. Certificated ADRs will be
delivered at the depositary's office. At your risk, expense and request, the
depositary may deliver certificated ADRs at such other place as you may
request. If ADRs are in book-entry form, a statement setting forth such
ownership interest will be mailed to holders by the depositary. An ADR holder
can always request that the ADSs not be held through the depositary's direct
registration system and that a certificated ADR be issued.
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<PAGE>
How do ADR holders cancel an ADS and obtain deposited securities?
When you turn in your ADS at the depositary's office and upon (a) surrender
of the ADR, (b) payment of certain applicable fees, charges and taxes, and (c)
in the case of ADRs held through the depositary's direct registration system,
appropriate instructions, the depositary will deliver the underlying shares to
an account with Deutsche Borse Clearing AG that the holder specifies.
The depositary may only restrict the withdrawal of deposited securities in
connection with:
. temporary delays caused by closing our transfer books or those of the
depositary, or the deposit of shares in connection with voting at a
shareholders' meeting, or the payment of dividends,
. the payment of fees, taxes and similar charges, or
. compliance with any U.S. or foreign laws or governmental regulations
relating to the ADRs when requested by us.
Voting Rights
How do I vote?
If you are an ADR holder and the depositary asks you to provide it with
voting instructions, you may instruct the depositary how to exercise the
voting rights for the shares which underlie your ADSs. After receiving voting
materials from us, the depositary will notify all ADR holders of any
shareholders' meeting or solicitation of consents or proxies. This notice will
describe how you may instruct the depositary to exercise the voting rights
which underlie your ADSs. For instructions to be valid, the depositary must
receive them on or before the date specified. The depositary will try, as far
as practical, subject to the provisions of and governing the underlying shares
or other deposited securities, to vote or to have its agents vote the shares
or other deposited securities as you instruct. The depositary will only vote
or attempt to vote as you instruct or as you are deemed to have instructed in
accordance with applicable German law. The depositary will not itself exercise
any voting discretion. Furthermore, neither the depositary nor its agents are
responsible for any failure to carry out any voting instructions, for the
manner in which any vote is cast or for the effect of any vote.
Because there is no guarantee that you will receive voting materials in time
to instruct the depositary to vote, it is possible that you, or persons who
hold the ADSs through brokers, dealers or other third parties, will not have
the opportunity to exercise a right to vote.
Record Dates
The depositary will fix record dates for the determination of the ADR
holders who will be entitled:
. to receive a dividend, distribution or rights, or
. to give instructions for the exercise of voting rights at a meeting of
holders of shares or other deposited securities,
all subject to the provisions of the deposit agreement.
Reports and Other Communications
Will I be able to view reports from Schering AG?
The depositary will make available for inspection by ADR holders any written
communications from us which are both received by the custodian or its nominee
as a holder of deposited securities and made generally available to the
holders of deposited securities. These communications will be furnished by us
in English when so required by any rules or regulations of the Securities and
Exchange Commission.
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Fees and expenses
What fees and expenses will I be responsible for paying?
ADR holders will be charged a fee for issuance of ADSs, including issuances
resulting from distribution of shares, rights, and other property, and for
each surrender of ADSs in exchange for deposited securities. The fee in each
case is $5.00 for each 100 ADSs, or any portion thereof, issued or
surrendered. ADR holders or persons depositing shares may also be charged the
following expenses:
. stock transfer or other taxes and other governmental charges;
. cable, telex, and facsimile transmission and delivery charges;
. transfer or registration fees for the registration or transfer of
deposited securities on any applicable register in connection with the
deposit or withdrawal of deposited securities; and
. expenses of the depositary in connection with the conversion of foreign
currency into U.S. dollars.
We will pay all other charges and expenses of the depositary and any agent
of the depositary (except the custodian) pursuant to agreements from time to
time between us and the depositary. The fees described above may be amended
from time to time.
Payment of taxes
ADR holders must pay any tax or other governmental charge payable by the
custodian or the depositary on any ADS or ADR, deposited security or
distribution. If an ADR holder owes any tax or other governmental charge, the
depositary may (1) deduct the amount thereof from any cash distributions, or
(2) sell deposited securities and deduct the amount owing from the net
proceeds of such sale. In either case the ADR holder remains liable for any
shortfall. Additionally, if any tax or governmental charge is unpaid, the
depositary may also refuse to effect any registration or any withdrawal of
deposited securities, each except under limited circumstances mandated by
securities regulations. If any tax or governmental charge is required to be
withheld on any non-cash distribution, the depositary may sell the distributed
property or securities to pay such tax or charge and distribute any remaining
net proceeds to the ADR holders entitled thereto.
Reclassifications, recapitalizations and mergers
If we take certain actions that affect the deposited securities, including
(a) any change in nominal value, split-up, consolidation or other
reclassification of deposited securities, (b) any dividend or free
distribution on deposited securities consisting of shares or any other
distribution other than of cash or rights to obtain shares, and (c) any
recapitalization, reorganization, merger, liquidation, or similar corporate
event or sale of all or substantially all our assets, then any of the cash or
securities the depositary receives shall constitute part of the deposited
securities and each ADS will then represent a proportionate interest in such
property or, the depositary may, if we so request:
. distribute any part of the cash or securities so received,
. execute and deliver ADSs, or
. call for the surrender of outstanding ADSs to exchange for new ADSs.
Amendment and termination
How may the deposit agreement be amended?
We may agree with the depositary to amend the deposit agreement and the ADSs
without your consent for any reason. ADR holders must be given at least 30
days' notice of any amendment that imposes or increases any fees or charges or
otherwise prejudices any substantial existing right of ADR holders. The
imposition or increase
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of taxes or charges specifically payable by ADR holders under the deposit
agreement does not require 30 days' notice. If an ADR holder continues to hold
ADSs or ADRs after being so notified, such ADR holder is deemed to agree to
such amendment. An amendment can become effective before notice is given if
this is necessary to ensure compliance with a new law, rule or regulation.
No amendment will impair your right to surrender your ADSs and receive the
underlying securities. If a governmental body adopts new laws or rules which
require the deposit agreement or ADS to be amended, we and the depositary may
make the necessary amendments, which could take effect before you receive
notice thereof.
How may the deposit agreement be terminated?
The depositary may terminate the deposit agreement by giving the ADR holder
at least 30 days' prior notice at our request or if the depositary has given
us a written resignation and we have not named a successor depositary under
the deposit agreement within 90 days. After termination, the depositary's only
responsibility will be (a) to deliver deposited securities to ADR holders who
surrender their ADRs, and (b) to receive and hold or sell distributions
received on deposited securities. As soon as practicable after the expiration
of one year from the termination date, the depositary will sell the deposited
securities which remain and hold the net proceeds of such sales, without
liability for interest, in trust for the ADR holders who have not yet
surrendered their ADRs. After making such sale, the depositary shall have no
obligations except to account for such proceeds and other cash.
Limitations on obligations and liability to ADR holders
Limits on Schering AG's obligations and the obligations of the depositary;
limits on liability to ADR holders and holders of ADSs
The deposit agreement expressly limits the obligations and liability of the
depositary, ourselves and our respective agents. Neither we nor the depositary
will be liable:
. if we or they are prevented or delayed by, or subject to any civil or
criminal penalty in performing, any obligation by law, regulation, the
provisions of or governing the deposited securities, or acts of God, war
or other circumstances beyond our or their control;
. for exercising or failing to exercise discretion under the deposit
agreement;
. if we or they perform their obligations without gross negligence or bad
faith; or
. for any action based on advice or information from legal counsel,
accountants, a person presenting shares for deposit, any holder, or
other person believed in good faith to be competent to give such advice.
Neither the depositary nor its agents has any obligation to appear in,
prosecute or defend any action, suit or other proceeding in respect of any
deposited securities or the ADRs.
The depositary will not be responsible for failing to carry out instructions
to vote the ADSs or for the manner in which ADSs are voted or the effect of
the vote.
The depositary may own and deal in our securities and in ADSs.
Requirements for depositary actions
We, the depositary or the custodian may refuse to
. issue, register or transfer an ADR or ADRs,
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<PAGE>
. effect a split-up or combination of ADRs,
. deliver distributions on any such ADRs, or
. permit the withdrawal of deposited securities,
. unless the deposit agreement provides otherwise, until the following
conditions have been met:
. the holder has paid all stock transfer or other taxes, governmental
charges, and registration fees charged by third parties for the transfer
of any deposited securities;
. the holder has provided the depositary with any information it may deem
necessary and consistent with the deposit agreement, including, without
limitation, proof of identity and the genuineness of any signature; and
. the holder has complied with such regulations as the depositary may
establish under the deposit agreement.
The depositary may also suspend the issuance of ADSs, the deposit of shares,
the registration, transfer, split-up or combination of ADRs, or the withdrawal
of deposited securities unless the deposit agreement provides otherwise, if
the register for ADRs or any deposited securities is closed or if the
depositary or we decide any such action is advisable.
By holding an ADR or an interest in an ADS, you will be agreeing to comply
with all applicable provisions of German law and our corporate documents
regarding the notification of changes in your interest in shares, including
Sections 21 and 22 of the German Securities Trading Act. As of the date hereof
the statutory notification obligations of the German Securities Trading Act
apply to anyone who holds, either directly or by way of imputation pursuant to
the provisions of Section 22 of the German Securities Trading Act, voting
rights in Schering AG and reaches or exceeds 5%, 10%, 25%, 50%, 75% of the
voting rights in Schering AG or, after having reached or exceeded any such
threshold, falls below that threshold.
By holding an ADR or an interest in an ADS you:
. will be deemed to acknowledge that failure to provide on a timely basis
any required notification of a change in interest in shares may result
in withholding of certain rights, including voting and dividend rights,
in respect of the shares in which you have an interest, and
. agree to comply with all such disclosure requirements and ownership
limitations and to cooperate with the depositary in compliance with any
instructions from us in respect thereof.
Books of Depositary
The depositary or its agent will maintain a register for the registration,
registration of transfer, combination and split-up of ADRs. You may inspect
such records at such office during regular business hours, but solely for the
purpose of communicating with other holders in the interest of business
matters relating to the deposit agreement.
The depositary will maintain facilities to record and process the issuance,
cancellation, combination, split-up and transfer of ADRs. These facilities may
be closed from time to time, to the extent not prohibited by law.
Pre-release of ADRs
The depositary may also issue ADRs prior to the deposit with the custodian
of shares or rights to receive shares. This is called a pre-release of the
ADR. A pre-release is closed out as soon as the underlying shares are
delivered to the depositary. The depositary may pre-release ADRs only if:
. the depositary has received collateral for the full market value of the
pre-released ADRs; and
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. each recipient of pre-released ADRs agrees in writing that he or she:
. beneficially owns the underlying shares,
. transfers all rights in such shares to the depositary for the benefit of
holders of ADRs,
. holds such shares for the account of the depositary,
. will deliver such shares to the custodian as soon as practicable, and
promptly but in no event more than five business days after a demand
therefor, and
. will not take any action that is inconsistent with the transfer of
beneficial ownership of the shares or ADRs other than in satisfaction of
the pre-release.
In general, the number of pre-released ADRs will not evidence more than 30%
of all ADRs outstanding at any given time excluding those evidenced by pre-
released ADRs.
The depositary
Who is the depositary?
Morgan Guaranty Trust Company of New York, a New York banking corporation,
is a commercial bank offering a wide range of banking and trust services to
its customers in the New York metropolitan area, throughout the United States
and around the world.
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PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not applicable.
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
Not applicable.
Item 15. [Reserved]
Item 16. [Reserved]
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PART III
Item 17. Financial Statements
Schering AG is furnishing financial statements pursuant to the instructions
of Item 18 of Form 20-F.
Item 18. Financial Statements
See our consolidated financial statements beginning at F-1.
Item 19. Exhibits
<TABLE>
<C> <S>
1.1 Articles of Association (Satzung) of Schering Aktiengesellschaft, as
amended to date (English-language translation thereof).
2.1 Form of Deposit Agreement among Schering Aktiengesellschaft, Morgan
Guaranty Trust Company of New York, as depositary, and the holders from
time to time of American Depositary Receipts.
2.2 Form of American Depositary Receipt (included in Exhibit 2.1).
2.3 Long-term debt instruments. Schering Aktiengesellschaft undertakes to
provide the Securities and Exchange Commission with copies upon request.
4.1 Partners' Agreement dated as of December 29, 1999, among Hoechst AG,
Aventis S.A., Rhone-Poulenc S.A. and Schering AG.
8.1 Subsidiaries of Schering Aktiengesellschaft.
</TABLE>
151
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
Schering Aktiengesellschaft
By: /s/ KLAUS POHLE
----------------------------
Name: Klaus Pohle
Title: Vice Chairman of the
Executive Board
Date: September 26, 2000
152
<PAGE>
SCHERING AG
Index to Audited Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Financial Statements:
Consolidated Income Statements for the years ended December 31, 1999,
1998 and 1997........................................................... F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998............. F-4
Consolidated Cash Flow Statements for the years ended December 31, 1999,
1998 and 1997........................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997.................................. F-6
Notes to the Consolidated Financial Statements........................... F-7
</TABLE>
Index to Unaudited Interim Consolidated Financial Statements
<TABLE>
<S> <C>
Consolidated Income Statements for the six months ended June 30, 2000 and
1999.................................................................... F-44
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999.... F-45
Consolidated Cash Flow Statements for the six months ended June 30, 2000
and 1999................................................................ F-46
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
We have audited the consolidated balance sheets of Schering
Aktiengesellschaft (Schering AG) as of December 31, 1999 and 1998, and the
consolidated statements of income, cash flows and changes in shareholders'
equity for each of the years in the three year period ending December 31,
1999. These consolidated financial statements are the responsibility of the
Company's Board of Executive Directors. Our responsibility is, to express an
opinion based on our audit as to whether these consolidated financial
statements comply with International Accounting Standards (IAS).
We conducted our audits in accordance with International Standards on
Auditing (ISA) issued by the International Federation of Accountants and
auditing standards generally accepted in the United States (US GAAS). These
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Schering AG as of December 31, 1999 and 1998 and the consolidated results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1999 in accordance with IAS.
Application of accounting principles generally accepted in the United States
would have affected shareholders' equity as of December 31, 1999 and 1998 and
net income for each of the years in the two-year period ended December 31,
1999 to the extent summarized in Notes 37 and 38 to the consolidated financial
statements.
<TABLE>
<S> <C> <C>
Berlin, Germany BDO Deutsche Warentreuhand
March 2, 2000, except for Aktiengesellschaft
Notes 37 and 38, Wirtschaftspruefungsgesellschaft
which are as of May 9, 2000 Dyckerhoff Schulz
Wirtschaftspruefer Wirtschaftspruefer
BDO International GmbH
Wirtschaftspruefungsgesellschaft
Dyckerhoff Braasch
Wirtschaftspruefer Wirtschaftspruefer
</TABLE>
F-2
<PAGE>
SCHERING AG
CONSOLIDATED INCOME STATEMENTS
for the Years Ended December 31,
(in millions except per share data)
<TABLE>
<CAPTION>
See Notes 1999 1998 1997
--------- ------ --------- ---------
E E(1) E(1)
<S> <C> <C> <C> <C>
Net sales................................ (6) 3,674 3,285 3,193
Cost of sales............................ (902) (800) (814)
------ ------ ------
Gross profit............................. 2,772 2,485 2,379
Marketing and selling costs.............. (1,165) (1,053) (1,007)
Engineering and administration costs..... (7) (367) (365) (356)
Research and development costs........... (684) (628) (569)
Other operating income................... (8) 334 262 306
Other operating expenses................. (9) (354) (291) (331)
------ ------ ------
Operating profit......................... 536 410 422
Financial result......................... (10) (77) 14 (18)
------ ------ ------
Profit on ordinary activities............ 459 424 404
Taxes on profit.......................... (11) (181) (175) (168)
------ ------ ------
Income before minority interests......... 278 249 236
Minority interests....................... (6) (4) (8)
------ ------ ------
Net income............................... 272 245 228
====== ====== ======
EARNINGS PER SHARE (basic and diluted)... (12) 1.35 1.19 1.11
====== ====== ======
</TABLE>
--------
(1) The 1997 and 1998 figures have been restated from the prior reporting
currency (DM) into E at an exchange rate of DM 1.95583 to E1.00,
the official legal rate on January 1, 1999.
The accompanying notes are an integral part of these Consolidated Financial
Statements
F-3
<PAGE>
SCHERING AG
CONSOLIDATED BALANCE SHEETS
as of December 31,
<TABLE>
<CAPTION>
See
Notes 1999 1998
----- -------------- -----------------
E million E million(1)
<S> <C> <C> <C>
ASSETS
Intangible assets...................... (14) 454 381
Property, plant and equipment.......... (15) 1,123 1,081
Financial assets....................... (16) 581 446
----- -----
Fixed assets......................... 2,158 1,908
----- -----
Inventories............................ (17) 682 594
Trade receivables...................... (18) 791 652
Other receivables and other assets..... (19) 415 416
Marketable securities.................. (20) 481 632
Cash and cash equivalents.............. 102 367
----- -----
Other non-current and current
assets.............................. 2,471 2,661
----- -----
TOTAL ASSETS......................... 4,629 4,569
===== =====
SHAREHOLDERS' EQUITY AND LIABILITIES
Issued capital (198,000,000 shares
outstanding in 1999; 202,974,069 in
1998)(2).............................. 172 173
Share premium account.................. 356 352
----- -----
Paid-up capital of Schering AG......... (21) 528 525
Retained earnings...................... (22) 1,570 1,485
----- -----
Shareholders' equity................. 2,098 2,010
----- -----
Minority interests................... 55 48
----- -----
Provisions for pensions and similar
obligations........................... (23) 1,201 1,134
Other provisions....................... (24) 627 806
----- -----
Provisions........................... 1,828 1,940
----- -----
Liabilities to banks................... 186 177
Other liabilities...................... 462 394
----- -----
Liabilities.......................... (25) 648 571
----- -----
TOTAL SHAREHOLDERS' EQUITY AND
LIABILITIES......................... 4,629 4,569
===== =====
</TABLE>
--------
(1) The 1998 figures have been restated from the prior reporting currency (DM)
into E at an exchange rate of DM 1.95583 to E1.00, the official
legal rate on January 1, 1999.
(2) Shares outstanding on December 31, 1999 include 216,000 treasury shares;
these shares will be sold to employees in 2000; employees will be entitled
to receive the dividend for 1999. Conditionally authorized capital:
E10 million.
The accompanying notes are an integral part of these Consolidated Financial
Statements
F-4
<PAGE>
SCHERING AG
CONSOLIDATED CASH FLOW STATEMENTS
for the Years Ended December 31,
<TABLE>
<CAPTION>
See
Notes 1999 1998 1997
----- -------------- ----------------- -----------------
E million E million(1) E million(1)
<S> <C> <C> <C> <C>
Income before minority
interests.............. 278 249 236
Depreciation of fixed
assets................. 216 222 235
Increase in long-term
provisions............. 50 65 78
Other non-cash expenses
and income............. 87 (31) (18)
---- ---- ----
Cash flows before
working capital
changes................ 631 505 531
Change in inventories
and receivables........ (218) (237) (42)
Change in short-term
liabilities............ (138) 114 4
---- ---- ----
Cash flows from
operating activities... (28) 275 382 493
---- ---- ----
Purchase of fixed assets
and goodwill from
acquisition of
businesses............. (448) (243) (348)
Proceeds from sale of
fixed assets........... 80 75 18
Purchase and sale of
marketable securities.. 132 (393) (116)
Acquisition of business
(excluding goodwill)... (25) -- 1
---- ---- ----
Cash flows used in
investing activities... (29) (261) (561) (445)
---- ---- ----
Dividends paid.......... (91) (87) (70)
Purchase of treasury
shares................. (183) (70) --
Change in liabilities to
banks.................. (9) (36) 14
---- ---- ----
Cash flows used in
financing activities... (283) (193) (56)
---- ---- ----
Net change in cash and
cash equivalents....... (269) (372) (8)
Effect of exchange rate
movements on cash and
cash equivalents....... 4 (5) 2
Cash and cash
equivalents at January
1...................... 367 744 750
---- ---- ----
Cash and cash
equivalents at December
31..................... (27) 102 367 744
==== ==== ====
</TABLE>
--------
(1) The 1997 and 1998 figures have been restated from the prior reporting
currency (DM) into E at an exchange rate of DM 1.95583 to E1.00,
the official legal rate on January 1, 1999.
The accompanying notes are an integral part of these Consolidated Financial
Statements
F-5
<PAGE>
SCHERING AG
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the Years Ended December 31,
<TABLE>
<CAPTION>
Paid-up capital
of Schering AG Retained earnings
--------------- --------------------------------
Share Schering AG Currency Other
Issued premium reserve for translation retained Total
capital account own shares adjustment earnings equity
------- ------- ----------- ----------- -------- ------
E million(1)
<S> <C> <C> <C> <C> <C> <C>
January 1, 1997......... 175 350 -- (1) 1,263 1,787
Dividend payments....... -- -- -- -- (70) (70)
Net income.............. -- -- -- -- 228 228
Translation
adjustments............ -- -- -- 9 -- 9
Other changes........... -- -- 1 -- (1) --
--- --- --- --- ----- -----
December 31, 1997....... 175 350 1 8 1,420 1,954
Dividend payments....... -- -- -- -- (87) (87)
Purchase of treasury
shares................. (2) 2 -- -- (70) (70)
Net income.............. -- -- -- -- 245 245
Translation
adjustments............ -- -- -- (32) -- (32)
Other changes........... -- -- (1) -- 1 --
--- --- --- --- ----- -----
December 31, 1998....... 173 352 -- (24) 1,509 2,010
Dividend payments....... -- -- -- -- (91) (91)
Purchase of treasury
shares................. (4) 4 -- -- (183) (183)
Increase of legal
capital................ 3 -- -- -- (3) --
Net income.............. -- -- -- -- 272 272
Translation
adjustments............ -- -- -- 90 -- 90
Other changes........... -- -- 2 -- (2) --
--- --- --- --- ----- -----
December 31, 1999....... 172 356 2 66 1,502 2,098
=== === === === ===== =====
</TABLE>
--------
(1) The 1997 and 1998 figures have been restated from the prior reporting
currency (DM) into E at an exchange rate of DM 1.95583 to E1.00,
the official legal rate on January 1, 1999.
The accompanying notes are an integral part of these Consolidated Financial
Statements
F-6
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
(1) General principles and other matters
The Consolidated Financial Statements of Schering Aktiengesellschaft
(Schering AG) have been prepared in accordance with the International
Accounting Standards (IAS) of the International Accounting Standards Committee
(IASC). New standards established by the IASC are adopted at the required
adoption date. The Consolidated Financial Statements also comply with EEC
directive 83/349/EEC. Following a revision to the German Commercial Code (HGB)
in 1998 (section 292a of the HGB), Schering AG was permitted to elect to no
longer prepare the Consolidated Financial Statements in accordance with German
generally accepted accounting principles (German GAAP). In 1999, Schering AG
made this election and commencing with fiscal year 1999, has prepared the
Consolidated Financial Statements solely in accordance with IAS.
Consolidated Financial Statements for periods ended on or prior to December
31, 1998, were also in accordance with HGB. Differences between IAS and HGB
were not material for periods ended on or prior to December 31, 1998.
As of January 1, 1999, Schering AG adopted the euro as its reporting
currency for the Consolidated Financial Statements. The 1997 and 1998 figures
have been restated from the prior reporting currency (DM) into euro at an
exchange rate of DM1.95583 to E1.00, the official legal rate on January
1, 1999. The comparative Financial Statements depict the same trends as would
have been presented if the Group had continued to present Financial Statements
in DM. Financial Statements for years prior to January 1, 1999 may not be
comparable to the Financial Statements of other companies that report in euro
and that restated amounts from a different currency than DM.
At the Annual General Meeting to be held on April 27, 2000, shareholders are
expected to authorize a three-for-one stock split. The stock split is expected
to be completed in May 2000. All share and per share amounts included in the
Consolidated Financial Statements have been restated to reflect the split.
(2) Companies included in the Consolidated Financial Statements
The Consolidated Financial Statements include, in addition to Schering AG,
all companies in which Schering AG controls a majority of the members' voting
rights (collectively the Schering AG Group or the Group).
There are 27 domestic companies and 93 foreign companies included in the
Consolidated Financial Statements. Four companies were consolidated for the
first time in 1999, including the newly acquired Diatide, Inc. (acquisition
costs of E133m in cash), and three newly formed subsidiaries. One company
is no longer consolidated since it has been merged with Schering AG. On an
overall basis these changes to the companies included in the Consolidated
Financial Statements did not have a material effect on the assets and
liabilities or net income of the Group. Comparability with the previous years
is not affected.
Joint ventures are consolidated proportionately. Associated companies--
investments where we have the ability to exercise significant influence--are
accounted for using the equity method.
The principal companies included in the Consolidated Financial Statements
are listed in note (33). The complete list of Group ownership interests is
filed in the Commercial Register of the Amtsgericht Charlottenburg, Berlin.
(3) Consolidation principles
Investments in subsidiaries are consolidated by offsetting the Group's
acquisition costs against its portion of shareholders' equity at the date of
acquisition or first-time consolidation. Differences between acquisition costs
and
F-7
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
shareholders' equity are allocated to identifiable assets and liabilities. Any
excess of the acquisition costs over the fair value of net assets acquired is
capitalized as goodwill. Differences in respect of investments in joint
ventures and associates are calculated using the same principles; where
appropriate, the financial statements of joint ventures and associates are
conformed to the Group's accounting policies and procedures described in note
(4).
Inter-company profits and losses, sales, income and expenses, receivables
and liabilities between companies included in the Consolidated Financial
Statements have been eliminated. Inter-company profits with joint ventures and
associated companies have been eliminated to the extent of our ownership
interest.
(4) Valuation and accounting policies
Goodwill is capitalized and amortized on a straight-line basis over periods
of up to 15 years. In determining the economic useful life of goodwill, the
Group considers contractual obligations, the period in which synergies are
expected to be realized, and the strategic importance of the acquisition.
Other intangible assets purchased are valued at cost less accumulated
straight-line amortization. Other intangible assets generally have a useful
life of 4 to 6 years unless a different period is indicated (e.g. periods
based on the life of a patent).
Property, plant and equipment are valued at cost less accumulated
depreciation based on normal wear and tear. The production cost of self-
manufactured assets includes, in addition to direct costs, an allocation of
production overhead and depreciation. Grants by third parties reduce the
purchase price or production cost. Interest on third-party borrowings is not
included in production costs. Repair costs are written off immediately as
expenses. Buildings are depreciated on a straight-line basis over a useful
life of no more than 40 years. Machinery and technical equipment are generally
depreciated over a useful life of 3 to 20 years, and factory, office and other
equipment over a useful life of 3 to 10 years using the straight-line method.
Assets used for the production of active ingredients and intermediate products
are depreciated using an accelerated method due to the specialized nature of
equipment and associated business risks. Fully depreciated assets are retained
in tangible fixed assets and depreciation accounts until they are removed from
service. In the case of disposals, assets and related depreciation are removed
from the accounts and the net amount, less proceeds from disposal, is charged
to the income statement.
Investments are shown at cost. Investments in associates are accounted for
using the equity method and therefore are valued at cost plus or minus
amortization of goodwill, profit distributions, and the retained profits or
losses of the company concerned. Interest-free loans and loans at below-market
interest rates are shown at their discounted cash value.
If the carrying amount of a tangible or intangible asset calculated in
accordance with these principles exceeds the recoverable amount, the carrying
amount is reduced to the recoverable amount. The recoverable amount is
measured as the higher of net selling price and value in use determined by the
present value of estimated future cash flows. Impairment reviews are made
every year for assets or groups of assets affected by events and circumstances
which warrant such a review. If reasons for the impairment charge no longer
exist, it is reversed into income.
Inventories are valued at the lower of purchase cost or production cost and
net realizable value. Inventory costs are determined using the weighted
average method. Production costs include direct costs, factory overheads and
depreciation. In addition, cost of sales includes expenses relating to
unutilized capacity. Allowances are provided for slow moving and obsolete
inventory.
Accounts receivable and bills of exchange are reflected net of an allowance
for doubtful accounts.
Marketable securities are valued at the lower of cost or quoted market
value.
Provisions for defined benefit pension plans are calculated using the
projected unit credit method, which considers future increases in salaries and
pensions. The current service cost arises from the change in the
F-8
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
provision for projected benefits. We do not apply the corridor approach
permitted under IAS 19 (revised 1998). All actuarial gains and losses are
deferred and recognized over the expected remaining service period of existing
employees.
The following assumptions were used in calculating the pension liabilities:
<TABLE>
<CAPTION>
German Plans Foreign Plans
-------------- ----------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
discount rate............................... 6.5% 7.0% 7.0% 5.7% 7.0% 7.1%
increase in salaries........................ 3.0% 3.5% 3.5% 4.2% 4.5% 4.6%
increase in pensions........................ 1.5% 1.5% 1.5% 0.7% 0.9% 1.1%
expected return on plan assets.............. 6.5% 6.6% 6.7%
</TABLE>
Mortality rates for German plans are based on Prof Dr. Klaus Heubeck's
biometric calculation tables 1998.
Assumptions for defined benefit pension plans outside Germany are based on
local conditions.
As of January 1, 1999, we adopted IAS 19 (revised 1998). Under the new
standard, actuarial assumptions reflect market expectations at the balance
sheet date rather than long-term estimates. The effect of adoption of this
standard was not material.
"Other provisions" are recognized when it is probable that a liability has
been incurred and a reasonable estimate of the amount can be made.
Derivative financial instruments, which are used to reduce currency risk on
existing assets or liabilities and anticipated transactions as well as to
control the duration of our liquid funds, marketable securities and loans, are
accounted for as hedging instruments.
Commitments and contingencies that have not been recognized in the balance
sheet are described in note (31).
Income and expenses for the year are recognized on an accrual basis. Income
from the sale of products, merchandise and services is recognized when
delivery has taken place, transfer of risk has been completed and the amount
of future returns can be reasonably estimated. Product returns are accepted as
a matter of contract or as a matter of practice. In the reported periods,
product returns were insignificant. Sales rebates and discounts as well as
amounts collected on behalf of third parties such as sales taxes, goods and
service taxes and value added taxes are excluded from net sales. Costs for
research and development are charged to expense as incurred.
Income taxes have been deferred or accrued on temporary differences between
the carrying amount of assets or liabilities in the balance sheet and their
associated tax bases. Deferred taxes related to consolidation adjustments and
tax loss carryforwards have been calculated according to the same principle.
Deferred taxes are based on the tax rates enacted or substantively enacted for
the subsequent periods when the temporary differences are expected to reverse.
Deferred tax assets are recognized only when it is probable that the future
economic benefit will be realized. Deferred tax assets and deferred tax
liabilities are offset only if they relate to income taxes levied by the same
tax authority and the enterprise has a legally enforceable right to offset tax
assets against tax liabilities.
As of January 1, 1998, we adopted IAS 12 (revised 1996). The effect of
adoption was not significant on net income, however, deferred tax assets and
liabilities increased by E24m as assets and liabilities are offset only
under certain circumstances under the revised standard. Prior to 1998,
deferred taxes were recognized based on the concept of timing differences.
Preparation of the Consolidated Financial Statements in accordance with IAS
requires management to make estimates and assumptions affecting the reported
amounts of assets, liabilities, revenues and expenses, as well as
F-9
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
disclosure of contingent assets and liabilities. Actual results could differ
from these estimates. Significant estimates include provisions for inventory
obsolescence, environmental and legal matters, and the probability of deferred
tax assets being recovered against future taxable profits.
(5) Currency translation
Foreign currency balances included in the financial statements of individual
Group companies are translated at the exchange rate on the balance sheet date,
unless hedged by forward transactions, in which case they are valued at the
forward rate.
Translation of the financial statements of Group companies located outside
the European Monetary Union is based on the appropriate functional currency.
The functional currency of such companies is the relevant local currency as
these companies conduct their business independently in financial, economic
and organizational respects. As a result, the assets and liabilities as well
as the Group's share of the equity of foreign associated companies are
translated at the exchange rate on the balance sheet date. Income and expenses
are translated at the average rate of exchange for the year. Exchange
differences are recognized directly in shareholders' equity. Goodwill arising
on the acquisition of an entity located outside the European Monetary Union
and any fair value adjustments to the carrying amounts of assets and
liabilities arising on the acquisition of such entity are treated as assets
and liabilities of that entity and translated at the exchange rate on the
balance sheet date.
As of January 1, 1999, Group companies located in countries participating in
the European Monetary Union adopted the euro as their reporting currency.
Currencies which are of particular importance to the Group have experienced
the exchange-rate fluctuations shown below:
<TABLE>
<CAPTION>
Annual
Balance-sheet average rate
rate (E) (E)
-------------- --------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1 US Dollar....................................... 1.00 0.86 0.92 0.95 0.90 0.89
1 Pound Sterling.................................. 1.61 1.43 1.52 1.53 1.49 1.46
1 Brazilian Real.................................. 0.55 0.71 0.82 0.51 0.77 0.82
100 Japanese Yen.................................. 0.97 0.74 0.71 0.84 0.69 0.73
</TABLE>
F-10
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
B. NOTES TO THE CONSOLIDATED INCOME STATEMENTS
(6) Net sales
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
E m E m E m
<S> <C> <C> <C>
Sales by business area
Fertility Control and Hormone Therapy(1)............ 1,173 1,109 1,023
Therapeutics(1)..................................... 1,128 991 950
Diagnostics(2)...................................... 1,040 882 914
Dermatology(1)...................................... 199 189 192
Other sources(3).................................... 134 114 114
----- ----- -----
3,674 3,285 3,193
===== ===== =====
--------
(1)excluding pharmaceutical chemicals; figures for 1997 and 1998 have been
adjusted
(2)including contrast medium application technologies; figures for 1997 and
1998 have been adjusted
(3)including pharmaceutical chemicals; figures for 1997 and 1998 have been
adjusted
(7) Engineering and administration costs
"Engineering and administration costs" include costs of production
management and planning, factory safety and administration, environmental
protection, technology cost centers such as workshops, energy production,
services and waste disposal (only to the extent that these costs are not
internally reallocated to production costs), training, and administration such
as data processing, purchasing and accountancy.
(8) Other operating income
<CAPTION>
1999 1998 1997
-------- -------- --------
E m E m E m
<S> <C> <C> <C>
Income from changes in foreign exchange rates....... 100 85 97
License and commission income....................... 30 23 23
Income from recharged costs......................... 73 75 85
Income from release of provisions................... 66 20 54
Other............................................... 65 59 47
----- ----- -----
334 262 306
===== ===== =====
</TABLE>
Income from release of provisions in 1999 relates primarily to the reversal
of estimated cleanup costs for asbestos contamination and the expiration of
certain guarantees from the sale of the electroplating division in 1993.
Amounts for 1997 resulted primarily from the release of a number of provisions
for third party claims.
Income from recharged costs relates to contract production fees from third
parties as well as income from certain services provided to third parties. The
related costs are included in other operating expenses (see note (9)).
F-11
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Other operating expenses
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
E m E m E m
<S> <C> <C> <C>
Expenses from changes in foreign exchange rates..... 149 70 92
Impairment charges.................................. -- -- 44
Amortization of goodwill............................ 32 35 31
Restructuring costs................................. -- 21 --
Costs of recharged services......................... 51 51 61
Other............................................... 122 114 103
--- --- ---
354 291 331
=== === ===
</TABLE>
The impairment charges in 1997 related to excess capacity in our production
site in Bergkamen and to the deterioration of the economic environment in Asia
and related excess capacity in certain production sites in this region.
Restructuring costs in 1998 primarily relate to termination benefit costs
relating to the consolidation of the packaging operations for liquid and solid
dosage forms in Berlin.
(10) Financial result
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
E m E m E m
<S> <C> <C> <C>
Net income from investments
Result from investments in associates.............. (59) 25 16
Income from other investments...................... 0 0 1
Income from disposal of investments................ -- 28 2
Impairment of investments.......................... -- (11) (1)
--- --- ---
(59) 42 18
--- --- ---
Interest result
Income from long-term securities and loans......... 2 3 5
Interest receivable and similar income............. 69 72 47
Interest payable and similar charges............... (20) (21) (30)
--- --- ---
Net interest....................................... 51 54 22
Interest costs included in additions to provisions
for pensions...................................... (69) (71) (64)
--- --- ---
(18) (17) (42)
--- --- ---
Other financial result
Amortization of premiums on debt securities........ (21) (20) (7)
Other financial income............................. 28 17 20
Other financial expenses........................... (7) (8) (7)
--- --- ---
0 (11) 6
--- --- ---
Financial result................................... (77) 14 (18)
=== === ===
</TABLE>
The "Result from investments in associates" includes a loss of E60m
relating to the Group's share of the loss of the AgrEvo Group (1998: income of
E25m; 1997: income of E18m). Goodwill amortization of E6m
relating to Schering's investment in AgrEvo has been recognized (same amount
in 1998 and 1997) as well as the Group's share of the amortization of goodwill
arising from AgrEvo's purchase of a number of companies (1999: E22m;
1998: E17m; 1997: E14m). Included in the loss for 1999 are
restructuring costs of E57m.
F-12
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
"Income from disposal of investments" in 1998 principally relates to the
sale of shares in a German public company.
Investments in two US public companies were written down in 1998 by
E11m to reflect a permanent impairment in value.
"Other financial income" and "Other financial expenses" include gains and
losses from the sale of marketable securities and gains and losses from
interest-rate derivative transactions.
(11) Taxes on profit
Income before taxes is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
E m E m E m
<S> <C> <C> <C>
Domestic.......................................... 234 237 241
Foreign........................................... 225 187 163
--- --- ---
Total........................................... 459 424 404
=== === ===
</TABLE>
The respective tax expense is:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
E m E m E m
<S> <C> <C> <C>
Domestic.......................................... (111) (117) (104)
Foreign........................................... (70) (58) (64)
---- ---- ----
Total........................................... (181) (175) (168)
==== ==== ====
</TABLE>
The reconciliation of tax expense based on the statutory tax rate applicable
to Schering AG to tax expense at the effective tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
E m E m E m
<S> <C> <C> <C>
Income before taxes............................. 459 424 404
---- ---- ----
Notional tax expenses (at the statutory rate
applicable to Schering AG)..................... (239) (239) (231)
Tax reduction relating to proposed dividend
payments....................................... 35 20 19
---- ---- ----
(204) (219) (212)
Tax effect of non deductible expenses and tax-
free receipts.................................. (12) (29) (27)
Tax effect of recognizing income from associates
net of tax..................................... (29) 12 10
Effects of lower tax rates abroad............... 64 61 61
---- ---- ----
Tax expenses.................................. (181) (175) (168)
==== ==== ====
Tax rate in %................................... 39.4 41.3 41.4
Current tax expense............................. (199) (204) (164)
Deferred tax income/expenses.................... 18 29 (4)
---- ---- ----
Tax expenses.................................. (181) (175) (168)
==== ==== ====
</TABLE>
Current tax expenses in 1999 were reduced by E1m relating to the use of
tax loss carry forwards (1998: E1m; 1997: E2m). Deferred tax assets
of E9m are recognized at December 31, 1999 relating to tax loss carry
forwards (December 31, 1998: E1m). These principally relate to tax loss
carry forwards acquired in the Diatide acquisition. At December 31, 1999,
unrecognized tax loss carry forwards totaled E18m (December 31, 1998:
E20m; December 31, 1997: E16m). Of these amounts, E7m has no
expiration date, while the remainder expires within 6 years.
F-13
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The deferred tax assets and liabilities relate to the following balance
sheet items (in Emillions); assets relating to tax loss carry forwards
are included in "other":
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------ ------------------
assets liabilities assets liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Property, plant and equipment......... (115) 0 (128) 6
Inventories........................... 111 5 91 7
Provisions for pensions............... 56 (1) 59 (2)
Other provisions...................... 81 0 64 (1)
Other................................. 15 12 31 17
---- --- ---- ---
Total............................... 148 16 117 27
==== === ==== ===
</TABLE>
Deferred taxes on property, plant and equipment principally relate to lower
tax bases resulting from special tax allowances for assets in certain parts of
Germany.
Deferred tax liabilities have not been established for withholding tax on
retained earnings of foreign subsidiaries as management considers such amounts
to be permanently reinvested. Retained earnings of subsidiaries in countries
where a withholding tax would be levied in case of dividend payments totaled
E468m. If such earnings were distributed, withholding tax of E26m
would be due based on tax rates in effect at the balance sheet date.
(12) Earnings per share
Basic earnings per share are calculated by dividing net income by the
weighted average number of shares outstanding (1999: 201,064,245 shares; 1998:
204,821,961 shares; 1997: 205,026,069).
A stock option plan, which was introduced in 1998, grants options for
Schering AG shares to key executives. The exercise of the options depends on
certain performance criteria relating to the Schering AG share price which are
determined in the stock option plan (see note (35)). Due to the small number
of potential dilutive shares diluted earnings per share are the same as basic.
(13) Personnel costs/employees
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Personnel costs (E millions)
Wages and salaries......................................... 923 859 823
Social security and support payments....................... 173 162 157
------ ------ ------
1,096 1,021 980
Pensions................................................... 64 49 76
------ ------ ------
1,160 1,070 1,056
====== ====== ======
Number of employees (average for year)
Production................................................. 7,738 7,612 7,525
Marketing and selling...................................... 7,242 6,954 6,699
Research and development................................... 3,968 3,841 3,751
Engineering and administration............................. 3,482 3,411 3,325
------ ------ ------
22,430 21,818 21,300
====== ====== ======
</TABLE>
F-14
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
C. NOTES TO THE CONSOLIDATED BALANCE SHEETS
(14) Intangible assets
<TABLE>
<CAPTION>
Patents, licences
trademarks and
similar assets Goodwill Total
----------------- -------- -----
E million
<S> <C> <C> <C>
Cost
January 1, 1998................................ 72 419 491
Additions.................................... 17 0 17
Disposals.................................... (1) (1) (2)
Translation adjustments...................... (0) -- (0)
--- --- ---
December 31, 1998.............................. 88 418 506
Change in consolidated companies............. 18 -- 18
Additions.................................... 8 90 98
Disposals.................................... (2) (5) (7)
Translation adjustments...................... 3 3 6
--- --- ---
December 31, 1999.............................. 115 506 621
=== === ===
Accumulated depreciation
January 1, 1998................................ 28 50 78
Additions.................................... 13 35 48
Disposals.................................... (1) (0) (1)
Translation adjustments...................... 0 -- 0
--- --- ---
December 31, 1998.............................. 40 85 125
Additions.................................... 16 32 48
Disposals.................................... (2) (5) (7)
Translation adjustments...................... 1 0 1
--- --- ---
December 31, 1999.............................. 55 112 167
=== === ===
Book values as at December 31, 1998............ 48 333 381
Book values as at December 31, 1999............ 60 394 454
</TABLE>
The amount reported under "Change in consolidated companies" refers to
acquired intangibles arising from the acquisition of Diatide, Inc., USA and is
being amortized over six years. The additions to goodwill also result
primarily from the acquisition of Diatide. This goodwill is being amortized on
a straight-line basis over a period of 15 years.
F-15
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(15) Property, plant and equipment
<TABLE>
<CAPTION>
Construction
Machinery and Other factory in progress
Land and technical and office and advance
buildings equipment equipment payments Total
--------- ------------- ------------- ------------ -----
E million
<S> <C> <C> <C> <C> <C>
Cost
January 1, 1998......... 1,183 1,086 607 79 2,955
Additions............. 19 38 63 60 180
Disposals............. (8) (25) (46) (1) (80)
Transfers............. 28 48 16 (92) --
Translation
adjustments.......... 14 0 (5) (2) 7
----- ----- --- --- -----
December 31, 1998....... 1,236 1,147 635 44 3,062
Change in consolidated
companies............ 0 0 1 -- 1
Additions............. 17 36 63 47 163
Disposals............. (20) (66) (60) (1) (147)
Transfers............. 21 25 11 (57) 0
Translation
adjustments.......... 53 15 26 6 100
----- ----- --- --- -----
December 31, 1999....... 1,307 1,157 676 39 3,179
===== ===== === === =====
Accumulated depreciation
January 1, 1998......... 561 874 460 0 1,895
Additions............. 38 61 60 -- 159
Disposals............. (5) (25) (43) -- (73)
Transfers............. 1 0 (1) -- --
Translation
adjustments.......... 2 2 (4) -- 0
----- ----- --- --- -----
December 31, 1998....... 597 912 472 0 1,981
Additions............. 37 62 63 -- 162
Disposals............. (18) (64) (55) -- (137)
Transfers............. -- 0 -- (0) --
Translation
adjustments.......... 22 10 18 -- 50
----- ----- --- --- -----
December 31, 1999....... 638 920 498 -- 2,056
===== ===== === === =====
Book values as at
December 31, 1998...... 639 235 163 44 1,081
Book values as at
December 31, 1999...... 669 237 178 39 1,123
</TABLE>
Additions to property, plant and equipment were down by 9% to E163m in
1999. 44% of this expenditure related to Germany, 20% to other countries of
the European Union, 15% to the USA, and 5% to Japan.
53% of capital expenditures were related to replacement and expansion of
production facilities, 20% to research and development, and 27% to
infrastructure and other functions.
F-16
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(16) Financial assets
<TABLE>
<CAPTION>
Investments Other Long-term Sundry
in associates investments securities loans Total
------------- ----------- ---------- ------ -----
E million
<S> <C> <C> <C> <C> <C>
Cost
January 1, 1998............. 364 60 2 51 477
Additions................. 65 2 0 6 73
Disposals................. (27) (28) 0 (8) (63)
Translation adjustments... (9) 0 0 (1) (10)
--- --- --- --- ---
December 31, 1998........... 393 34 2 48 477
Additions................. 164 29 0 8 201
Disposals................. (11) (4) 0 (11) (26)
Translation adjustments... 12 7 0 2 21
--- --- --- --- ---
December 31, 1999........... 558 66 2 47 673
=== === === === ===
Accumulated depreciation
January 1, 1998............. 3 3 0 11 17
Additions................. 3 11 -- 1 15
Disposals................. (0) -- (0) (1) (1)
Translation adjustments... -- (0) 0 -- (0)
--- --- --- --- ---
December 31, 1998........... 6 14 0 11 31
Additions................. 61 0 -- 2 63
Disposals................. -- (2) -- (2) (4)
Translation adjustments... -- 2 -- 0 2
--- --- --- --- ---
December 31, 1999........... 67 14 0 11 92
=== === === === ===
Book values as at December
31, 1998................... 387 20 2 37 446
Book values as at December
31, 1999................... 491 52 2 36 581
</TABLE>
Additions to "Investments in associates" for 1999 primarily relate to a
E159m increase in capital at Hoechst Schering AgrEvo GmbH (1998:
E30m).
Additions to depreciation for 1999 reflects Schering's share in the loss at
AgrEvo Group.
Sundry loans includes E32m (December 31, 1998: E32m) loans to
employees.
(17) Inventories
<TABLE>
<CAPTION>
Dec. 31, 1999 Dec. 31, 1998
--------------- ---------------
E millions E millions
<S> <C> <C>
Raw materials and supplies................... 140 130
Work in process.............................. 231 230
Finished goods and goods for resale.......... 310 233
Payments on account.......................... 1 1
--- ---
682 594
=== ===
</TABLE>
F-17
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories at December 31, 1999 include E72m carried at net realizable
values lower than purchase or production costs (December 31, 1998: E54m).
(18) Trade receivables
Trade receivables at December 31, 1999 include E6m with a remaining
term of more than one year (December 31, 1998: E6m). Allowances for
doubtful accounts on trade receivables as of December 31, 1999 were E22m
(December 31, 1998: E25m).
(19) Other receivables and other assets
<TABLE>
<CAPTION>
Dec. 31, 1999 Dec. 31, 1998
--------------- ---------------
E millions E millions
<S> <C> <C>
Loans to companies, in which an equity
interest is held......................... 51 139
Current tax assets........................ 46 36
Deferred tax assets....................... 148 117
Sundry assets............................. 170 124
--- ---
415 416
=== ===
</TABLE>
Sundry assets include E12m with a remaining term of more than one year
(December 31, 1998: E7m).
(20) Marketable securities
<TABLE>
<CAPTION>
Dec. 31, 1999 Dec. 31, 1998
--------------- ---------------
E millions E millions
<S> <C> <C>
Book values.................................. 481 632
Fair values.................................. 578 705
--- ---
Unrealized gains............................. 97 73
=== ===
</TABLE>
During December 1999 Schering AG purchased 216,000 treasury shares at an
average price of E39.34 per share for distribution to employees in April
2000. Participants in the share bonus program (persons employed during the
entire year of 1999) are entitled to purchase six shares at E17.33 each
and receive four additional shares free of charge. The shares are valued at
the average price paid by the employee of E10.40 and are included in
marketable securities. The difference between the price paid by Schering AG
and that paid by the employee (E28.94 per share; total cost of E6m)
was charged to compensation expense in 1999.
(21) Paid-up capital of Schering AG
At December 31, 1999, issued capital totaled E172m (December 31, 1998:
E173m; December 31, 1997: E175m) and was divided into 198,000,000
shares (December 31, 1998: 202,974,069 shares; December 31, 1997: 205,026,069
shares).
In 1999, 4,974,069 treasury shares (1998: 2,052,000 shares; 1997: 0 shares)
were repurchased for a total cost of E183m (1998: E70m). Issued
capital of E4m relating to these shares (1998: E2m) was deducted. In
accordance with (S) 237 section 5 of the German Stock Corporation Act
(Aktiengesetz), the same amount was transferred from retained earnings to the
share premium account. The Executive Board has executed the redemption and the
Supervisory Board has amended the Articles of Association.
F-18
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At the Annual General Meeting held on April 29, 1998, a decision was made to
reclassify the issued capital under which the par value shares were converted
to no par value shares. At April 29, 1998, the issued capital consisted of
205,026,069 shares.
At the Annual General Meeting held on April 27, 1999, the following
resolutions were passed:
1. The total amount of issued capital in euro terms was rounded on a per
share basis. This involved a capital increase of E3m through
conversion of retained earnings into issued capital.
2. The Executive Board was authorized until April 26, 2004 to increase
issued capital with the approval of the Supervisory Board once or on
several occasions by issuing new shares for cash or non-cash
consideration, providing that the overall increase in issued capital
does not exceed a total amount of E85,000,000 and that the
shareholders are given the right to subscribe. With the agreement of the
Supervisory Board, however, the Executive Board is authorized to issue
shares without giving the shareholders the right to subscribe:
. if the capital increase from cash proceeds does not exceed a total
amount of E15,000,000 and the issue price of the new shares is
not substantially below the stock exchange price for the shares at
the time the issue price is determined by the Executive Board; or
. if the capital increase is effected for the issue of employee
shares; or
. if the capital increase is effected for non-cash consideration; or
. to the extent necessary to allow holders of convertible bonds or
option debenture bonds of Schering AG to subscribe to the new
shares.
3. The Executive Board was also authorized, with the agreement of the
Supervisory Board, to issue convertible bond and/or option debenture
bonds once or on several occasions in the period up to April 26, 2004.
The total nominal value of such bond issues is not to exceed
E300,000,000. Convertible or debenture options on Schering AG
shares may be issued up to a total of E10,000,000 issued capital.
Accordingly, the issued capital of Schering AG may be increased by up to
E10,000,000 through the issue of up to 11,538,459 shares. This
conditional increase in issued capital is solely for the redemption of
conversion or option rights.
4. The Executive Board was authorized to purchase treasury shares until
September 30, 2000 for the purpose of redemption. In total, up to
E15,000,000 in issued capital may be acquired under this
authorization (the prior authorization to purchase treasury shares
expired on September 30, 1999). The Executive Board is entitled to
redeem such shares without further resolution of the Annual General
Meeting. The Supervisory Board is authorized to amend the Articles of
Association with respect to the reduction in share capital.
(22) Retained earnings
The difference between the purchase price and issued capital for shares
retired in 1999 totaled E179m (1998: E68m), and was charged to
retained earnings. In accordance with (S) 237 section 5 of the German Stock
Corporation Act, issued capital for the retired shares (1999: E4m; 1998:
E2m) was transferred from retained earnings to the share premium account.
The Executive Board expects to propose to the Annual General Meeting to be
held on April 27, 2000 a dividend of E0.50 per share (totaling E99m)
and a special distribution of E0.33 per share (totaling E66m). The
overall amount of E165m proposed for distribution will be deducted from
retained earnings in 2000.
F-19
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(23) Provisions for pensions and similar obligations
<TABLE>
<CAPTION>
Dec. 31, 1999 Dec. 31, 1998
--------------- ---------------
E millions E millions
<S> <C> <C>
Provisions for retirement benefit plans in
Germany, unfunded......................... 1,101 1,049
Provisions for retirement benefit
obligations outside Germany............... 51 39
Provisions for similar obligations......... 49 46
----- -----
1,201 1,134
===== =====
</TABLE>
Pension benefits in Germany are primarily determined by years of service and
average remuneration in the last five years before retirement.
Defined benefit plans of foreign subsidiaries, which are primarily service
related, are generally funded. In calculating the net periodic pension costs
for these plans we consider planned service costs and expected return on plan
assets.
Changes in the projected benefit obligation (PBO) and the fair value of plan
assets are as follows:
<TABLE>
<CAPTION>
German plans Other plans
----------------- -----------------
1999 1998 1999 1998
-------- -------- -------- --------
E m E m E m E m
<S> <C> <C> <C> <C>
Change in projected benefit obligation
PBO at beginning of the year.............. 1,046 1,005 161 149
Service costs............................. 26 25 14 9
Interest costs............................ 69 71 11 10
Actuarial (gains) and losses.............. 36 (15) 17 2
Benefits paid............................. (43) (40) (7) (3)
Transfer of obligations................... (2) -- -- --
Foreign currency exchange-rate changes.... -- -- 35 (6)
----- ----- --- ---
PBO at end of year........................ 1,132 1,046 231 161
===== ===== === ===
Change in plan assets
Fair value of plan assets at beginning of
the year................................. -- -- 126 117
Actual return on plan assets.............. -- -- 17 7
Employer contribution..................... -- -- 10 10
Benefits paid............................. -- -- (7) (3)
Foreign currency exchange-rate changes.... -- -- 29 (5)
----- ----- --- ---
Fair value of plan assets at end of year.. -- -- 175 126
===== ===== === ===
Funded status............................. 1,132 1,046 56 35
Unrecognized actuarial gains and
(losses)................................. (31) 3 (8) --
Prepaid (unaccrued) pension costs......... -- -- 3 4
----- ----- --- ---
Provisions for pensions................... 1,101 1,049 51 39
===== ===== === ===
</TABLE>
F-20
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pension expense for unfunded plans include both compensation expenses that
are classified in operating expenses and interest, which is classified as a
component of interest expense. Net periodic pension costs of defined benefit
plans and total pension costs are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
E m E m E m
<S> <C> <C> <C>
Service costs................................... 40 34 39
Interest costs.................................. 80 81 75
Expected return on plan assets.................. (10) (8) (8)
Amortization of unrecognized actuarial gains and
losses......................................... 4 1 22
--- --- ---
Net periodic pension costs of defined benefit
plans.......................................... 114 108 128
Costs of defined contribution plans and other
pension costs.................................. 19 12 12
--- --- ---
Total pension costs............................. 133 120 140
=== === ===
</TABLE>
In 1997, assumptions regarding life expectancy and future increases in
pensions were updated. As a result, the projected benefit obligation increased
by (E)40m, of which (E)20m was related to retirees and former employees.
In accordance with IAS applicable at that time that amount was expensed
immediately.
(24) Other provisions
<TABLE>
<CAPTION>
Dec. 31, 1999 Dec. 31, 1998
------------------------------- -------------------------------
E millions E millions E millions E millions
Current Total Current Total
<S> <C> <C> <C> <C>
Provisions for
Current tax........... 99 99 243 243
Deferred tax.......... -- 16 -- 27
Personnel costs....... 158 231 126 179
Third-party claims.... -- 75 16 92
Environmental
matters.............. -- 36 -- 63
Restructuring......... -- 24 -- 48
Other................. 126 146 128 154
--- --- --- ---
383 627 513 806
=== === === ===
</TABLE>
Provisions for personnel costs includes accrued salaries (vacation and
holiday, bonuses, and bonus payments based on years of service (known as
jubilee premiums)), as well as early retirement benefits transferred from the
provisions for restructuring costs. Third party claims include indemnities
related to the sale of businesses and expected costs relating to a patent
infringement litigation. Environmental matters includes asbestos clean-up as
well as various other clean-up obligations in Germany and the United States.
Provision for restructuring consists primarily of expected costs for early
retirement benefits where the affected employee has not yet signed the benefit
agreement.
F-21
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(25) Liabilities
<TABLE>
<CAPTION>
Dec. 31, 1999 Dec. 31, 1998
------------------------------- -------------------------------
E millions E millions E millions E millions
Current Total Current Total
<S> <C> <C> <C> <C>
Liabilities to banks.... 151 186 118 177
Advance payments
received............... 2 2 3 3
Trade payables.......... 260 261 228 230
Bills payable........... 2 2 1 1
Amounts due to companies
in which an equity
interest is held....... 1 1 2 2
Taxes payable........... 47 47 20 20
Social security costs
payable................ 22 23 20 20
Other liabilities....... 104 126 97 118
--- --- --- ---
589 648 489 571
=== === === ===
</TABLE>
"Liabilities to banks" include long-term liabilities of E58m (December
31, 1998: E57m) bearing interest at rates between 3.5% and 7.0% per annum.
The long-term liabilities to banks are due for repayment as follows:
<TABLE>
<CAPTION>
Dec. 31, 1999 Dec. 31, 1998
---------------- ----------------
E millions E millions
<S> <C> <C>
1999....................................... -- 2
2000....................................... 23 23
2001....................................... 26 26
2002....................................... 0 0
2003....................................... 3 3
2004....................................... 3 3
after 2004................................. 3 0
--- ---
58 57
=== ===
</TABLE>
"Other liabilities" include E11m (December 31, 1998: E10m) due
after more than 5 years.
(26) Total amount of collateralized loans
The total amount of collateralized loans at December 31, 1999 (all
collateralized by mortgages) was E64m (December 31, 1998: E58m).
F-22
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
D. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENTS
(27) Cash and cash equivalents
"Cash and cash equivalents" includes cash at banks and cash on hand.
Marketable securities no longer are considered to be part of "Cash and cash
equivalents"; the consolidated cash flow statements for the years 1997 and
1998 have been reclassified accordingly.
(28) Cash flows from operating activities
"Cash flows from operating activities" include interest received of
E83m (1998: E65m; 1997: E43m) and interest paid of E20m
(1998: E21m; 1997: E30m). Payments for income taxes amounted to
E350m (1998: E171m; 1997: E148m).
The change in short-term liabilities reflects a tax payment relating to a
government tax audit. Other non-cash expenses and income include the loss from
AgrEvo.
(29) Cash flows used in investing activities
"Cash flows used in investing activities" include the E133m acquisition
cost for Diatide, Inc., USA, and a capital increase of E159m at AgrEvo.
"Purchase and sale of marketable securities" includes purchases of
E200m and sales of E332m (1998: purchases of E627m and sales of
E234m; 1997: purchases of E279m and sales of E51m).
F-23
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
E. ADDITIONAL INFORMATION
(30) Derivative financial instruments
As we operate on a global basis, the Schering AG Group is subject to various
market risks. We make use of exchange-traded and over-the-counter derivative
financial instruments to reduce currency and interest rate risks resulting
from anticipated transactions and from existing assets and liabilities. We
also make use of derivative financial instruments to manage the asset and
maturity profile of our investment portfolio.
The following derivative positions were open at the balance sheet date:
<TABLE>
<CAPTION>
Notional
amount Fair value
December 31, December 31,
-------------- ---------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
E millions
Currency hedging of anticipated sales and
costs
Currency forwards.......................... 468 338 (4) (2)
Options.................................... 50 -- 0 --
------ ------ ------ ------
518 338 (4) (2)
====== ====== ====== ======
Currency hedging of assets and liabilities
Currency forwards.......................... 637 362 (10) (4)
====== ====== ====== ======
Asset and liability management
Options.................................... 57 18 19 7
Interest rate swaps........................ 77 50 (2) 2
Interest rate futures...................... 157 17 3 0
------ ------ ------ ------
291 85 20 9
====== ====== ====== ======
</TABLE>
Notional amounts reflect the net of sale and purchase contracts. Purchase
contracts were immaterial in each individual currency.
The underlying exposure in each currency is defined as the net amount of
receivables and liabilities on the balance sheet date as well as anticipated
sales and expenses for the next 12 months. At the balance sheet date,
approximately 87% (December 31, 1998: 71%) of the underlying exposure of
E1.3 billion (December 31, 1998: E1.0 billion) was hedged. Yen and
US dollar amounts accounted for approximately 82% (December 31, 1998: 80%) of
currency hedging.
We measure financial derivatives at fair values. Unrealized gains are
included in "Other receivables and other assets" and unrealized losses in
"Other provisions". Classifiction in the income statement is consistent with
the hedging intent. Accordingly, gains and losses arising from currency
hedging are included in other operating income and expenses, while gains and
losses relating to asset and liability management are included in financial
result. The Schering call options acquired for the purpose of a partial hedge
of the stock option program are measured at acquisition cost.
In order to properly match gains and losses from currency hedging of
anticipated sales and costs with the underlying hedged transaction, we have
deferred gains of E6m at December 31, 1998 and losses of E26m at
December 31, 1999.
Gains and losses resulting from currency hedging of existing assets and
liabilities generally correspond to changes in the hedged balance sheet items.
F-24
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At the balance sheet date, our net financial position based on liquid funds
(cash and cash equivalents plus marketable securities) and bank loans was
approximately E0.4 billion (December 31, 1998: E0.8 billion). The
average maturity of fixed rate interest bearing securities and fixed rate
deposits including financial derivatives was less than one year (December 31,
1998: 1.6 years).
Market risks resulting from open derivative positions are estimated by a
risk assessment system using a simulation of historical data. Various measures
have been put in place to manage the risks. These include the setting of
limits for individual classes of instruments, the segregation of duties
between dealing, settlement, accounting and controlling as well as the regular
reporting on open positions and results based on mark-to-market valuations.
Derivative financial instruments create credit risk limited to the positive
market values of these derivatives.
In order to minimize credit risks, investments and transactions in
derivative instruments are entered into with high-rated debtors and banks
within fixed risk limits.
(31) Contingent liabilities and other financial commitments
<TABLE>
<CAPTION>
Dec. 31, 1999 Dec. 31, 1998
--------------- ---------------
E millions E millions
<S> <C> <C>
Contingent liabilities
Bills and notes.............................. 2 --
Financial guarantees......................... 17 20
--- ---
Total.................................... 19 20
=== ===
Other financial commitments
Liabilities under operating leases
due within 1 year.......................... 29 30
due between 1 and 5 years.................. 81 85
due after 5 years.......................... 23 58
Authorized capital commitments............... 186 185
--- ---
Total.................................... 319 358
=== ===
</TABLE>
Schering AG Group has entered into long-term research agreements with
various third parties under which Schering AG Group will fund various research
projects and other commitments based upon the achievement of certain
milestones or other specific conditions. The approximate payments to these
third parties, assuming the milestones or other conditions are met, are as
follows:
<TABLE>
<CAPTION>
E millions
<S> <C>
2000........................................ 56
2001........................................ 51
2002........................................ 36
2003........................................ 41
2004........................................ 43
Thereafter.................................. 11
---
Total................................... 238
===
</TABLE>
F-25
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(32) Segment reporting (in Emillions)
<TABLE>
<CAPTION>
Segment External
net Internal net Change over
sales net sales sales last year
------- --------- -------- -----------
<S> <C> <C> <C> <C>
1999
Europe region(1)......................... 2,418 652 1,766 7%
USA region............................... 780 5 775 14%
Japan region............................. 454 -- 454 32%
Latin America/Canada region.............. 393 21 372 4%
Asia region.............................. 165 1 164 28%
Other activities......................... 204 61 143 12%
----- --- ----- ---
Segment total............................ 4,414 740 3,674 12%
Other.................................... -- -- -- --
----- --- ----- ---
Schering AG Group........................ 4,414 740 3,674 12%
===== === ===== ===
1998
Europe region(1)......................... 2,228 579 1,649 6%
USA region............................... 681 3 678 9%
Japan region............................. 343 0 343 (10)%
Latin America/Canada region.............. 371 12 359 (3)%
Asia region.............................. 129 1 128 (15)%
Other activities......................... 297 169 128 11%
----- --- ----- ---
Segment total............................ 4,049 764 3,285 3%
Other.................................... -- -- -- --
----- --- ----- ---
Schering AG Group........................ 4,049 764 3,285 3%
===== === ===== ===
</TABLE>
--------
(1) incl. Africa, Australia and New Zealand
The primary basis for our segment reporting is geographic, based on location
of customers. This reflects the management structure of our sales
organization, our system of internal financial reporting, and the predominant
source of risks and returns in our business. Segment reporting is therefore
divided into five geographic segments. Other activities (mainly our
pharmaceutical chemicals business) are managed on a worldwide basis and are
therefore also presented as a separate segment.
Following the adoption of IAS 14 (revised 1997) in 1999, prior year segment
sales, results, and assets have been revised to be comparable with the current
presentation.
Segment net sales include sales to third parties (external net sales) and
sales to Group companies belonging to a different region (internal net sales).
Inter-segment sales are determined at arm's length prices.
Information on segment net sales is generally based on the location of the
customer. However, based on our management reporting format, our European net
sales figures also include the net sales of the subsidiaries Leiras, Jenapharm
and Justesa Imagen (a subgroup), realized outside Europe. Net sales reported
for the USA region include net sales of the Medrad Group achieved outside the
United States.
F-26
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Research
and
Segment Change over Central production development Segment Change over
performance last year overhead/variances expense result last year
----------- ----------- ------------------ ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
1999
Europe region(1)........ 769 12% (63) (325) 381 20%
USA region.............. 277 13% (5) (214) 58 26%
Japan region............ 167 40% (17) (75) 75 83%
Latin America/Canada
region................. 119 14% (8) (44) 67 24%
Asia region............. 54 38% (12) (18) 24 118%
Other activities........ 75 36% (26) (8) 41 105%
----- --- ---- ---- ---- ---
Segment total........... 1,461 17% (131) (684) 646 32%
Other................... (925) 10% 131 684 (110) 39%
----- --- ---- ---- ---- ---
Schering AG Group....... 536 31% -- -- 536 31%
===== === ==== ==== ==== ===
1998
Europe region(1)........ 687 6% (70) (300) 317 1%
USA region.............. 245 4% (4) (195) 46 (19)%
Japan region............ 119 (18)% (12) (66) 41 (39)%
Latin America/Canada
region................. 104 (27)% (7) (43) 54 (42)%
Asia region............. 39 (24)% (13) (15) 11 (48)%
Other activities........ 55 2% (26) (9) 20 0 %
----- --- ---- ---- ---- ---
Segment total........... 1,249 (2)% (132) (628) 489 (15)%
Other................... (839) (2)% 132 628 (79) (48)%
----- --- ---- ---- ---- ---
Schering AG Group....... 410 (3)% -- -- 410 (3)%
===== === ==== ==== ==== ===
</TABLE>
--------
(1) incl. Africa, Australia and New Zealand
Segment performance and segment result are presented on a consolidated basis
to ensure comparability with external net sales. Segment performance is based
on the Company's management organization and internal financial reporting.
Under that approach, transfers from our centralized production facilities in
Europe are charged to the segments at standard production cost. Research and
development expenses are not included as this function is managed on a
worldwide basis.
Segment result comprises segment performance less an allocation of research
and development expenses and central production overhead and production
variances. Research and development expenses specifically attributable to
individual segments have been allocated directly while all other expenses of our
corporate research and development organization (such as general research,
global development activities, and infrastructure) have been allocated to the
segments based on sales. Central production overhead and production variances
have been allocated based on the production supplied from our central production
facilities to the individual segments.
F-27
<PAGE>
Total segment result is reconciled to consolidated operating profit as
follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
E m E m
<S> <C> <C>
Total segment result.......................................... 646 489
---- ----
Costs of corporate functions.................................. (166) (157)
Other operating income/expenses............................... 56 78
---- ----
(110) (79)
---- ----
Operating profit.............................................. 536 410
==== ====
</TABLE>
The "Costs of corporate functions" comprise administration cost of Schering
AG.
Income and expenses, which were not incurred by the segments and/or arose in
the course of unusual transactions, are summarized in "Other operating
income/expenses".
F-28
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Investments in
Other intangibles Segment Investments
significant and property, assets by by
non-cash Segment Segment plant and geographical geographical
Depreciation expenses assets liabilities equipment location location
------------ ----------- ------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Europe region(1)........ 95 18 1,471 596 73 1,630 99
USA region.............. 40 4 590 178 120 554 114
Japan region............ 16 6 356 44 15 318 9
Latin America/Canada
region................. 13 -- 203 29 22 179 18
Asia region............. 9 -- 104 10 9 82 6
Other activities........ 17 -- 98 14 12 59 5
--- --- ----- ----- --- ----- ---
Segment total........... 190 28 2,822 871 251 2,822 251
Other................... 20 14 1,807 1,605 10 1,807 10
--- --- ----- ----- --- ----- ---
Schering AG Group....... 210 42 4,629 2,476 261 4,629 261
=== === ===== ===== === ===== ===
1998
Europe region(1)........ 96 14 1,399 622 86 1,550 112
USA region.............. 42 2 443 141 37 410 31
Japan region............ 12 1 265 28 14 233 8
Latin America/Canada
region................. 12 -- 166 30 13 146 9
Asia region............. 9 -- 90 5 12 67 9
Other activities........ 18 -- 105 11 13 62 6
--- --- ----- ----- --- ----- ---
Segment total........... 189 17 2,468 837 175 2,468 175
Other................... 19 12 2,101 1,674 23 2,101 23
--- --- ----- ----- --- ----- ---
Schering AG Group....... 208 29 4,569 2,511 198 4,569 198
=== === ===== ===== === ===== ===
</TABLE>
--------
(1) incl. Africa, Australia and New Zealand
Depreciation by segment includes amortization of intangible assets and
depreciation of property, plant and equipment.
"Other significant non-cash expenses" principally consists of pension
expense.
Segment assets include all assets with the exception of assets relating to
corporate functions, investments accounted for under the equity method, loans
and other receivables, tax assets, marketable securities and cash and cash
equivalents.
Segment liabilities include all liabilities with the exception of
liabilities relating to corporate functions, financial liabilities and tax
liabilities. Financial liabilities include in 1999 E 1,101 m (1998:
E 1,049 m) pension obligations from German retirement benefit plans with
corresponding E69 m (1998: E71 m) interest costs included in
financial result.
F-29
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The secondary basis for our segment reporting are the business areas:
<TABLE>
<CAPTION>
Investments in
Change intangibles
External over and property,
net last Segment plant and
sales year assets equipment
-------- ------ ------- --------------
<S> <C> <C> <C> <C>
1999
Fertility Control and
Hormone Therapy........ 1,173 6% 849 58
Therapeutics............ 1,128 14% 698 43
Diagnostics............. 1,040 18% 950 134
Dermatology............. 199 5% 175 9
Other sources........... 134 18% 150 7
----- --- ----- ---
Segment total........... 3,674 12% 2,822 251
Other................... -- -- 1,807 10
----- --- ----- ---
Schering AG Group....... 3,674 12% 4,629 261
===== === ===== ===
1998
Fertility Control and
Hormone Therapy........ 1,109 8% 804 60
Therapeutics............ 991 4% 642 46
Diagnostics............. 882 (4)% 740 47
Dermatology............. 189 (2)% 158 13
Other sources........... 114 0% 124 9
----- --- ----- ---
Segment total........... 3,285 3% 2,468 175
Other................... -- -- 2,101 23
----- --- ----- ---
Schering AG Group....... 3,285 3% 4,569 198
===== === ===== ===
</TABLE>
F-30
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(33) Information on principal companies included in the Consolidated Financial
Statements
The table below contains information on principal companies included in the
Consolidated Financial Statements as of and for the year ended December 31,
1999 (the complete list of Group ownership interests will be filed in the
Commercial Register of the Amtsgericht Charlottenburg, Berlin):
<TABLE>
<CAPTION>
Name and location of
company % of equity Equity Result Sales Employees
-------------------- ----------- ----------- ----------- ----------- ---------
E m(1) E m(1) E m(1)
<S> <C> <C> <C> <C> <C>
Germany
Schering AG, Berlin(2).. 1,429 218 1,726 7,509
Schering Deutschland
Holding AG,
Hamburg(3)............. 100.0 271 37 381 805
Jenapharm GmbH & Co. KG,
Jena(3)................ 74.9 73 29 139 1,016
Europe (excluding
Germany)
N.V. Schering S.A.,
Diegem/Belgium......... 100.0 17 1 51 125
Leiras Oy,
Turku/Finland(3)....... 100.0 127 30 177 1,058
Schering S.A., Lys-Lez-
Lannoy/France(3)....... 99.9 90 11 191 698
Schering Holdings Ltd.,
Burgess Hill/UK(3)..... 100.0 25 4 117 350
Schering S.p.A.,
Milan/Italy(3)......... 100.0 40 10 223 815
Schering Nederland B.V.,
Weesp/Netherlands...... 100.0 19 4 42 60
Schering Wien Ges. mbH,
Vienna/Austria......... 100.0 268 10 57 177
Schering Lusitana Lda.,
Mem Martins/Portugal... 100.0 8 1 34 113
Schering (Schweiz) AG,
Zurich/Switzerland..... 100.0 9 2 40 48
Schering Espana S.A.,
Madrid/Spain(3)........ 99.9 36 6 147 635
Schering Alman Ilac ve
Ecza Ticaret Ltd.,
Sirketi,
Istanbul/Turkey........ 100.0 4 0 40 130
North America
Schering Berlin Inc.,
Wilmington,
Del./USA(3)............ 100.0 436 60 796 2,652
Berlex Canada Inc.,
Lachine/Canada......... 100.0 5 2 44 143
Latin America
Schering Argentina
S.A.I.C., Buenos
Aires/Argentina........ 100.0 15 2 79 381
Schering do Brasil
Ltda., Sao
Paulo/Brazil........... 100.0 52 0 128 816
Schering Colombiana
S.A., Bogota/Colombia.. 100.0 13 1 39 311
Schering Mexicana S.A.,
Mexico City/Mexico..... 100.0 30 14 68 229
Asia/Australia
P.T. Schering Indonesia,
Jakarta/Indonesia...... 76.8 9 0 14 524
Nihon Schering K.K.,
Osaka/Japan............ 99.9 114 (5) 434 1,211
Schering Pty. Ltd.,
Sydney/Australia....... 100.0 20 7 66 105
Schering Korea Ltd.,
Seoul/Korea............ 100.0 18 0 36 217
Schering Chemicals Ltd.,
Bangkok/Thailand(3).... 100.0 6 1 12 156
Africa
Schering (Pty.) Ltd.,
Midrand/South Africa... 100.0 11 2 28 94
</TABLE>
--------
(1) With companies outside the European Monetary Union, equity and annual
results were converted from local currency amounts into E at the
exchange rate in effect on December 31, 1999. Sales were converted into
E at the annual average rate of exchange.
(2) Schering AG sells its products mainly to subsidiaries; these sales are not
included in the Consolidated Financial Statements.
(3) Details include consolidated subsidiaries.
F-31
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(34) Emoluments of the Supervisory Board and the Executive Board; loans
granted
The total remuneration of the members of the Supervisory Board amounts to
E2,040k and that of the Executive Board to E6,554k. A provision for
the pensions of former members of the Executive Board and their dependents of
E16,187k has been recognized; the expenses for the year ended December
31, 1999 totalled E1,668k.
As part of a stock option plan set up in 1998, members of the Executive
Board held non-transferable stock options on up to a maximum of 90,000
Schering AG shares as at December 31, 1999. The exercise of the options
depends on certain performance criteria of the Schering share price which are
determined under the provisions of the plan.
We have granted a loan of E43k to one member of the Supervisory Board
and loans of E352k to members of the Executive Board (repayments in 1999:
E59k). Interest is charged on the loans at either 5% or 6%. The loans are
repayable over 10, 11, 13 and 16 years.
(35) Long Term Incentive (LTI) Plan 1998
Schering AG implemented a Long Term Incentive (LTI) Plan in 1998. Under the
plan, participants (approximately 215 key executives) invest in Schering AG
shares and receive option rights (entitling them to award shares) based on the
number of shares purchased. If those shares are held for at least 3 years, the
option rights become fully vested, and may be exercised in year 4 or 5.
However, the number of shares available under each option right varies based
on any increase in the share price (performance shares) and the performance of
Schering AG's shares relative to the DAX (out performance shares). The maximum
number of shares the participants can receive is ten times the number of
shares personally acquired as part of the LTI Plan. In addition, performance
shares for members of the Executive Board are available only if the increase
in Schering AG's share price is at least 20%.
Compensation costs are based on an estimate of the future value of
Schering's share price and the DAX on each balance sheet date. The effect of a
change in the estimated number of award shares is recognized over the entire
vesting period at each balance sheet date. Compensation costs of E4m were
recognized in income in 1999 (1998: E4m).
A total of 4,055 options have been issued, each option entitling the
participant to a maximum of 180 award shares. 3,945 options were outstanding
at December 31, 1999 (December 31, 1998: 3,965 options). No options were
exercised during 1998 or 1999. 20 options were forfeited or cancelled during
1999 (1998: 90 options).
(36) Subsequent Events
The Group is expected to acquire the Japanese company Mitsui Pharmaceuticals
in March 2000. Mitsui specializes in the oncology, cardiovascular and central
nervous system fields. Mitsui had net sales of pharmaceutical products of
approximately E102m during its fiscal year ended March 31, 1999
(excluding sales of its medical and chemical businesses, which we will not
acquire).
The Group is expected to acquire 60% of the shares of the French company
ORIS/CIS bio international in April 2000. Net sales of ORIS/CIS bio
international were E153m in 1999.
The aggregate anticipated purchase price for the two expected acquisitions
is approximately E109m. After deduction of an estimated fair value of net
assets expected to be acquired, we expect to account for negative goodwill of
E9m.
At the Annual General Meeting to be held on April 27, 2000, shareholders are
expected to authorize a three-for-one stock split. The stock split is expected
to be completed in May 2000. All share and per share amounts have been
restated to reflect the split.
In early 2000, the German government announced plans to implement a
reduction in German corporate tax rates. The impact of the change on the
Schering AG Group would be a reduction of deferred tax assets of E15m
with an offsetting charge to income.
F-32
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
F. SIGNIFICANT DIFFERENCES BETWEEN IAS AND US GAAP
(37) Reconciliation to United States Generally Accepted Accounting Principles
(US GAAP)
The Group's Consolidated Financial Statements have been prepared in
accordance with IAS, which, as applied by the Group, differ in certain
significant respects from US GAAP. The effects of the application of US GAAP
to net income and shareholders' equity are set out in the tables below:
Reconciliation of net income to US GAAP (in E millions except per share data):
<TABLE>
<CAPTION>
Note 1999 1998
---- ----- -----
<S> <C> <C> <C>
Net income under IAS........................................ 272 245
US GAAP adjustments
Business combinations (acquired R&D)...................... (a) (17) 3
Business combinations (higher value of intangibles)....... (a) 1 (5)
Property, plant and equipment (capitalization of
interest)................................................ (b) (4) (4)
Internal use software..................................... (c) 10 --
Available-for-sale securities............................. (d) -- --
Equity investment (AgrEvo); net of tax (1999: E22m;
1998: E(2)m)............................................ (e) 26 3
Inventories............................................... (f) (2) 0
Provisions for pensions................................... (g) 3 (1)
Environmental provisions.................................. (h) (27) (6)
Restructuring provisions.................................. (i) (16) 4
Provisions for personnel costs............................ (j) 1 1
Treasury shares/Schering call options..................... (k) -- --
Long Term Incentive Plan 1998............................. (l) 0 3
Cash flow hedges.......................................... (m) (32) 11
Tax effect on US GAAP adjustments......................... (n) 33 0
--- ----- -----
Net income under US GAAP.................................... 248 254
=== ===== =====
Basic and diluted earnings per share under US GAAP.......... (o) 1.23 1.24
=== ===== =====
Reconciliation of shareholders' equity to US GAAP (in E millions):
<CAPTION>
Note 1999 1998
---- ----- -----
<S> <C> <C> <C>
Shareholders'equity under IAS............................... 2,098 2,010
US GAAP adjustments
Business combinations (acquired R&D)...................... (a) (81) (64)
Business combinations (higher value of intangibles)....... (a) 52 51
Property, plant and equipment (capitalization of
interest)................................................ (b) 24 28
Internal use software..................................... (c) 10 --
Available-for-sale securities............................. (d) 118 69
Equity investment (AgrEvo)................................ (e) (53) (79)
Inventories............................................... (f) 16 18
Provisions for pensions................................... (g) (4) (7)
Environmental provisions.................................. (h) 3 30
Restructuring provisions.................................. (i) 24 40
Provisions for personnel costs............................ (j) 7 6
Treasury shares/Schering call options..................... (k) (18) (5)
Long Term Incentive Plan 1998............................. (l) 8 4
Cash flow hedges.......................................... (m) (26) 6
Tax effect on US GAAP adjustments......................... (n) (117) (128)
--- ----- -----
Shareholders'equity under US GAAP........................... 2,061 1,979
=== ===== =====
</TABLE>
F-33
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
a.) Business combinations
Under IAS, research-in-process is not identified as an acquired asset in
connection with the allocation of the purchase price but rather capitalized as
goodwill. US GAAP requires the identification of research-in-process as a
separate component of the purchase price allocation. Such amounts must be
charged as an expense at the time of the acquisition. In addition, certain
identifiable intangible assets recognized under US GAAP are included in
goodwill under IAS; tax effects relating to identifiable intangible assets are
included under "Tax effect on US GAAP adjustments". The adjustments are
related to the acquisitions of Medrad Group (1995), Leiras Group and Jenapharm
(both 1996) and Diatide (1999). Research-in-process charged to expense
relating to Diatide was E20m in 1999.
b.) Property, plant and equipment (capitalization of interest)
Schering does not capitalize interest costs on self-constructed assets under
IAS. Under US GAAP, interest costs incurred during the construction period
must be capitalized and amortized. Costs of E2m, E3m and E5m
that were expensed in the years 1999, 1998 and 1997 were capitalized under US
GAAP. Total capitalized interest under US GAAP as of December 31, 1999 was E24m
(December 31, 1998: E28m). The reduction relates to depreciation.
c.) Internal use software
As of January 1, 1999, we adopted SOP 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" under US GAAP. The
statement requires capitalization of certain costs incurred in the development
of internal-use software, including payroll and payroll-related costs. Under
IAS, these costs are expensed as incurred.
d.) Available-for-sale securities
In accordance with IAS, securities are stated at the lower of their
amortized acquisition cost or fair value on the balance sheet date. Under US
GAAP, securities are classified into one of three categories: held-to-maturity
securities, available-for-sale securities or trading securities. The
securities of the Group are considered to be available-for-sale and therefore
valued at market value at the balance sheet date. Unrealized gains and losses
are excluded from earnings and reported as a separate component of other
comprehensive income.
e.) Equity investment (AgrEvo)
The application of US GAAP resulted in a number of differences. The most
significant differences relate to acquired research-in-process from certain
prior AgrEvo acquisitions, the timing of recognition of restructuring charges,
capitalization of interest costs, and unrecognized gains on securities.
f.) Inventories
Under IAS, the allocation of fixed production overheads to the cost of
inventories is based on the normal capacity of the production facilities. Idle
facility expense is treated as a current period charge. Under US GAAP, idle
facility expenses are allocated between cost of sales and inventories.
g.) Provisions for pensions
Prior to 1999, pension costs and similar obligations were accounted for in
accordance with IAS 19 "Retirement Benefit Costs". As of January 1, 1999 IAS
19 "Employee Benefits" (revised 1998) was adopted. The Group has elected not
to apply the "corridor approach" under IAS; any actuarial gain/loss is
amortized over the average remaining service period of active employees.
F-34
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under US GAAP, pension costs and similar obligations are accounted for in
accordance with Statement of Financial Accounting Standards (SFAS) No. 87
"Employers' Accounting for Pensions". Companies located outside the USA had to
adopt the provisions of SFAS No. 87 for fiscal years beginning after December
15, 1988. Due to the long period of time between the effective date and the
time when the Group first prepared US GAAP information, adoption of the
provisions of SFAS No. 87 as of January 1, 1989 was not feasible. The Group
adopted SFAS No. 87 as of January 1, 1998 and recognized a transition
obligation of E13m. On January 1, 1998, the average remaining service
period of active employees was 20 years. An amount of E6m was directly
recorded to equity (for the period 1989 to 1997). E1m (5% of the
transition obligation) has to be recognized in income each year through 2008.
As we make use of the "corridor approach" under US GAAP we excluded the
amounts recognized as "amortization of unrecognized actuarial losses" under
IAS (see note (23)) from income.
h.) Environmental provisions
The adjustments are primarily related to liabilities for asbestos clean-up
costs. Under US GAAP, liabilities have been recognized based on whether the
relevant government directives required clean-up either immediately or in the
medium term. Liabilities have not been recognized for clean-up operations that
would be required only in the event of closure or significant construction
activity.
Under IAS, liabilities have been recognized based on the Group's assessment
of the likelihood that clean-up would be required under current and
anticipated government directives and enforcement thereof.
i.) Restructuring provisions
The Group has undertaken a number of restructuring programs over the last
several years. These programs principally involved the closure or
reorganization of production facilities. Related costs have consisted
primarily of employee termination benefits. Almost all reductions in headcount
have been accomplished through our early retirement program. Under the terms
of our early retirement program, an employee older than 54 is offered the
opportunity to work half time for up to five years for 85% of pay. Under IAS,
a liability for such benefits is recognized when management is demonstrably
committed to the employee terminations. The restructuring provision is
determined by the number of employees identified for termination and the
expected incremental costs arising from the early retirement. When the
employee formally accepts the offer the restructuring liability is
reclassified as a personnel provision (see letter (j) below). Under US GAAP, a
liability for these benefits is established only after the employee has
accepted the offer.
j.) Provisions for personnel costs
Under IAS, incremental costs arising from the early retirement program are
recognized on a discounted basis (see letter (i) above). Under US GAAP, such
amounts are recognized over the employees' remaining service period (on an
undiscounted basis).
k.) Treasury shares/Schering call options
As of December 31, 1999, 216,000 treasury shares held for distribution to
employees under employee stock bonus programs are shown as an asset under IAS
(see note (20) to Consolidated Financial Statements). In addition, the
Schering call options acquired for the purpose of a partial hedge of the stock
option program are recognized as an asset under IAS. Under US GAAP, treasury
shares and the Schering call options are deducted from equity.
l.) Long Term Incentive Plan 1998
For a description of the Long Term Incentive Plan 1998 refer to note (35) of
the Consolidated Financial Statements.
F-35
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Compensation costs under IAS are measured on an estimate on the outcome of
the performance conditions on each balance sheet date. For US GAAP purposes we
elected to follow APB No. 25 "Accounting for Stock Issued to Employees" in
accounting for our 1998 stock option plan and to provide the disclosures
required under SFAS No. 123 "Accounting for Stock Based Compensation". Our
stock option plan is a variable award plan. Compensation costs are recognized
over the 3 year vesting period based upon the fair value of the Schering AG
share on the respective balance sheet dates. Under IAS, the accumulated
unvested compensation costs are shown as a liability. Under US GAAP, these
costs are a part of shareholders' equity.
m.) Cash Flow Hedges
For a description of our policies for deferring profits and losses on
hedging instruments see note (30) to our Consolidated Financial Statements.
Under US GAAP, our hedging strategies do not qualify for hedge accounting. The
following profits and losses were deferred under IAS, but are included in
income under US GAAP:
<TABLE>
<CAPTION>
1999 1998
------- -------
Em Em
<S> <C> <C>
profits/(losses) on hedging instruments of the previous year,
which are related to sales and costs of the actual year....... 6 (5)
(profits)/losses on hedging instruments of the actual year,
which are related to planned sales and costs of the following
year.......................................................... 26 (6)
--- ---
Total effect on income under IAS............................. 32 (11)
=== ===
</TABLE>
n.) Tax effect on US GAAP adjustments
This reconciliation item includes all tax effects due to the aforementioned
reconciling items except the adjustment related to the equity method (AgrEvo),
which is presented net of tax.
US GAAP requires recognition of deferred tax assets and liabilities for
temporary differences using enacted tax rates in effect at year-end in
accordance with SFAS No. 109 "Accounting for income taxes".
The tax rates used under IAS were the enacted tax rates, as there were no
substantively enacted tax rate changes as of December 31, 1999 or 1998
(announced tax reductions in Germany have not been recognized due to the
uncertainty of their realisation).
o.) Earnings per share
Diluted earnings per share include 165,690 potential dilutive ordinary
shares (1998: 59,475) relating to our stock option plan. The dilutive impact
of these shares on earnings per share for the years 1999 and 1998 is below
E 0.01 per share.
(38) Additional US GAAP information
SFAS 130 "Reporting Comprehensive Income"
SFAS 130 "Reporting Comprehensive Income" requires the display and reporting
of comprehensive income, which includes all changes in shareholders' equity
except those resulting from investments by or distributions to shareholders.
F-36
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Statement of comprehensive income for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
E m E m
<S> <C> <C>
US GAAP net income (see note (37))........................ 248 254
--- ---
Currency translation adjustments.......................... 90 (32)
Unrealized gains and losses on available-for-sale
securities (after tax expense 1999: E23m; 1998:
E9m).................................................... 27 12
Less: Realized gains on available-for-sale securities in
net income (after tax expense 1999: E0m; 1998:
E15m)................................................... -- (14)
--- ---
Other comprehensive income, net of tax.................... 117 (34)
--- ---
Comprehensive income, net of tax.......................... 365 220
=== ===
</TABLE>
Accumulated other comprehensive income balances as of December 31:
<TABLE>
<CAPTION>
Unrealized Accumulated
Currency Gains and Other Com-
Translation Losses on prehensive
Adjustment Securities Income
----------- ---------- -----------
E m E m E m
<S> <C> <C> <C>
January 1, 1998.............................. 8 40 48
Other comprehensive income 1998.............. (32) (2) (34)
--- --- ---
December 31, 1998............................ (24) 38 14
Other comprehensive income 1999.............. 90 27 117
--- --- ---
December 31, 1999............................ 66 65 131
=== === ===
</TABLE>
--------
Statement of US GAAP equity as of December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
E m E m
<S> <C> <C>
Equity according to US GAAP before accumulated other
comprehensive income................................... 1,930 1,965
Accumulated other comprehensive income.................. 131 14
----- -----
Total equity according to US GAAP....................... 2,061 1,979
===== =====
</TABLE>
Available-for-sale securities
Available-for-sale securities consisted of the following:
<TABLE>
<CAPTION>
Gross Gross
Book unrealized unrealized Fair
value gains losses value
-------- ---------- ---------- --------
E m E m E m E m
<S> <C> <C> <C> <C>
As of December 31, 1999
Investments (non-current)............ 23 21 -- 44
Fund investment (included in
marketable securities).............. 119 83 -- 202
Other marketable securities.......... 360 14 -- 374
--- --- --- ---
Total.............................. 502 118 -- 620
=== === === ===
As of December 31, 1998
Investments (non-current)............ 10 -- 3 7
Fund investment (included in
marketable securities).............. 97 71 -- 168
Other marketable securities.......... 535 1 -- 536
--- --- --- ---
Total.............................. 642 72 3 711
=== === === ===
</TABLE>
F-37
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Proceeds from sales of available-for-sale securities in 1999 were E332m
(1998: E290m; 1997: E51m). Gross gains in 1999 and 1997 and gross
losses in 1999, 1998 and 1997 on such sales were immaterial. In 1998 gross
gains of E28m were realized on the sale of shares of a listed German
company.
Other marketable securities consisted of fixed-term securities. Maturities
as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Book Fair
value value
-------- --------
E m E m
<S> <C> <C>
Less than 1 year........................................... 271 271
Between 1 and 5 years...................................... 84 98
More than 5 years.......................................... 5 5
--- ---
360 374
=== ===
</TABLE>
Impairment of long-lived assets
The Group periodically evaluates the carrying value of long-lived assets to
be held and used, including goodwill and other intangible assets, when events
and circumstances warrant such a review. The carrying value of a long-lived
asset is considered impaired when the anticipated cash flow from such an asset
is separately identifiable and is less than its carrying value. In that event,
a loss is recognized based on the amount by which the carrying value exceeds
the fair market value of the long-lived asset. Fair market value is determined
primarily using anticipated cash flows discounted at a rate commensurate with
the risk involved. As of December 31, 1998 and 1999 there was no
reconciliation item arising from different policies for recognizing impairment
of long-lived assets under IAS and US GAAP.
Summarized financial information for significant associated companies
At December 31, 1999, four investments were accounted for under the equity
method:
<TABLE>
<CAPTION>
Percentage of
Common Stock
Dec. 31, 1999
-------------
<S> <C>
Hoechst Schering AgrEvo GmbH, Berlin........................... 40
AgrEvo USA Company, USA........................................ 40
Medac GmbH, Hamburg............................................ 25
Metreon Bioproducts GmbH, Freiburg............................. 50
</TABLE>
The table below contains financial information of the Hoechst Schering
AgrEvo Group (including the agrochemical joint venture in the USA) as of and
for the years ended December 31, 1999, 1998 and 1997 (other associated
companies are of minor importance):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
E m E m E m
<S> <C> <C> <C>
Net sales........................................... 2,158 2,169 2,081
Gross profit........................................ 998 1,056 931
Net income.......................................... (102) 55 38
Current assets...................................... 1,678 1,406 1,368
Noncurrent assets................................... 1,364 1,097 1,166
Current liabilities................................. 1,685 1,526 1,617
Noncurrent liabilities.............................. 293 226 199
Shareholders' equity................................ 1,064 751 718
</TABLE>
F-38
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The share of the net income in the Schering Group accounts amounted to a loss
of E60m (1998: gain of E25m; 1997: gain of E18m) after conforming the AgrEvo
financial statements to Schering accounting policies and principles. (In
December 1999, Rhone-Poulenc S.A. acquired Hoechst AG; Rhone- Poulenc
subsequently changed its name to Aventis S.A.; Schering AG entered into a
Partners' Agreement with Hoechst AG, Aventis S.A. and Rhone-Poulenc S.A. on
December 29, 1999, pursuant to which Aventis agreed to contribute all of its
shares in Rhone-Poulenc Agro S.A., Hoechst agreed to contribute all of its
shares in AgrEvo GmbH, and we agreed to contribute all of our shares in AgrEvo
GmbH to Aventis CropScience S.A.). As of January 1, 2000, we received a 24%
share in Aventis CropScience S.A. in exchange for our 40% share in Hoechst
Schering AgrEvo. The transaction has been accounted for at recorded amounts.
As of December 31, 1999, the market value of publicly traded associates
exceeded book value by E30m (December 31, 1998: E9m).
Corporate Debt
At December 31, 1999 Schering AG had aggregate unused committed lines of
credit of E41m (December 31, 1998: E50m).
Employee benefit plans
The information required by FAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits" are included in note (4) and note
(23) to the Consolidated Financial Statements.
Pension obligations and expenses determined under SFAS No. 87 were based on
the following assumptions (weighted average figures for foreign plans):
<TABLE>
<CAPTION>
German Plans Foreign Plans
-------------- ---------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Discount rate................................. 6.5% 6.0% 5.7% 6.3%
Increase in salaries.......................... 3.0% 2.2% 4.2% 4.5%
Increase in pensions.......................... 1.5% 1.0% 0.7% 0.9%
Expected return on plan assets................ n.a. n.a. 6.5% 6.0%
</TABLE>
Under IAS, interest relating to the unfunded pension obligation is
classified in financial result (see note (23)). Under US GAAP, interest on
pension obligations is considered a component of compensation expense.
Accordingly "operating profit" under US GAAP would be lower and "financial
result" higher by E69m (1998: E71m; 1997: E64m).
Stock option plan 1998
In electing to continue to follow APB No. 25 for expense recognition purposes,
we are obliged to provide the expanded disclosures required under SFAS No. 123.
The fair value at date of grant of one option (entitling the holder to up to 180
award shares) based on a Monte Carlo Simulation was E2,408 ( E10m for all
options). The pro forma information for the years ended December 31, 1999 and
1998, prepared in accordance with the provisions of FAS No. 123, is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Pro forma net income................................. E 248m E 253m
Pro forma earnings per share--basic.................. E1.23 E1.23
Pro forma earnings per share--diluted................ E1.23 E1.23
</TABLE>
F-39
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Litigation
The Group is involved in a number of legal proceedings and claims incidental
to the normal conduct of its business, relating to such matters as product
liability, patent infringement, tax assessments, competition, past waste
disposal practices and release of chemicals into the environment. Although the
outcome of these proceedings and claims cannot be predicted with certainty, we
believe that any resulting liabilities will not, in the aggregate, have a
material adverse effect on the Group's consolidated results of operations,
financial condition and cash flows; where these legal proceedings and claims
meet the conditions of SFAS No. 5 "Accounting for Contingencies", a liability
is recognized in the Consolidated Financial Statements.
Schering AG historically has provided certain indemnities in connection with
the sale of businesses. These indemnities related to environmental and other
contingencies. Remaining contingencies totaling E16m related to the sale of the
electroplating division in 1993 were reversed in 1999, as the guarantee period
ended. Guarantee related to the sale of the Industrial Chemicals and Natural
Substances divisions in 1992, will end in 2004. The Group has recognized a
liability for servicing indemnities of E25m relating to probable claims to be
asserted by the buyer.
During 1996 Hoffmann-LaRoche Inc. and Genentech, Inc. (collectively "Roche")
filed suit in the United States District Court for New Jersey against Berlex
Laboratories, Inc. alleging that Berlex's product Betaseron(R) infringes a
certain Roche patent. Berlex answered denying infringement and counterclaimed
for declaratory judgment that the Roche patent is invalid and not infringed by
Betaseron(R). The litigation was settled by an agreement during 1998, and was
dismissed with prejudice. Pursuant to the settlement agreement, a private
arbitration was commenced determine the question of infringement. In March
2000 the panel held that Betaseron(R) does not literally infringe the Roche
patent. A decision on the question of infringement under the doctrine of
equivalents is expected at the end of 2000 or in early 2001. If the panel
finds that Betaseron(R) infringes the Roche patent under the doctrine of
equivalents, Berlex will pay Roche certain past and future royalties; if the
panel finds Betaseron(R) does not infringe the Roche patent, then Berlex will
not pay anything. The settlement agreement also provides for other potential
royalties or payments in the event that Roche prevails in an interference
proceeding against a third party.
The Group's Brazilian subsidiary is a defendant in approximately 400 civil
actions brought in courts in Brazil by women, suing individually. Many of them
claim that they became unintentionally pregnant after taking placebo pills
packaged by the subsidiary in connection with test runs of a new packaging
machine between January and April 1998. The placebo pills were intended for
destruction and not for sale. However, some packages were stolen and illegally
appeared in the hands of some women. Most of these claims are still pending.
In the majority of the judgments obtained to date, the claims were rejected by
the Brazilian courts. In connection with this incident, in July 2000 two
managers of the Group's Brazilian subsidiary were convicted in a Brazilian
court of the first instance for the failure to label properly the pouches and
blisters for the placebo pills. The Brazilian court imposed community service
activities to be rendered during a 28 month period. Both managers have filed
appeals.
The Group's subsidiary in the United Kingdom, Schering Health Care Limited,
is one of three manufacturers of so-called "third generation" combined oral
contraceptive pills against whom claims have been made by women who allege
they have suffered injury as a result of taking such pills. As of December 31,
1999, approximately 130 individuals had submitted claims in respect of all of
the manufacturers. Of these claims, 52 concern Schering Health Care. The
claimants have not quantified their claims in terms of damages. The primary
allegations made in the Statements of Claim of the claimants are that the
"third generation" combined oral contraceptive pills should not have been
marketed, or, alternatively, that the manufacturers should have discovered and
warned prescribers and consumers that there was an increased risk of venous
thrombo-embolism (VTE) associated with "third generation" combined oral
contraceptive pills as compared with "second generation" oral contraceptive
pills. The Legal Aid Board in the United Kingdom granted funding to the
F-40
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
claimants to pursue their claims in England and Wales. All of the cases were
transferred to a court in London, England. Two of the cases against each of
the manufacturers are pending as pilot cases, and the remainder of the claims
have been sustained. An initial procedural hearing was held before a court-
appointed Master in July 1997. The firm representing all of the claimants
served a Statement of Claim on each of the three manufacturers (including
Schering Health Care) in 1997 and February 1998. Schering Health Care and the
other manufacturers served Defences in November 1998. The plaintiffs amended
their Statement of Claim in the two pilot cases against Schering Health Care.
The amended Statement of Claim no longer alleges that the "third generation"
combined oral contraceptive pills should not have been marketed, but now
includes a claim under the Consumer Protection Act. The defendants responded
to the amended Statement of Claim on June 30, 2000. Schering Health Care
denies these allegations and intends to continue to contest this litigation
vigorously.
Schering AG has been named as one of several defendants in two cases filed
in United States District Court in New Jersey during May 1999 in which class
certification is sought on behalf of persons alleging that they were the
subject of medical experiments performed in concentration camps during World
War II. The claimants seek unspecified amounts in damages. Schering AG has not
been served with the complaints in these cases and believes that the claims as
directed to Schering AG are without merit. It is expected that these cases
will be dismissed due to the conclusion of an agreement between the United
States and Germany relating to World War II claims by United States persons.
During November 1998, Liebel-Flarsheim, Inc. filed an action against Medrad,
Inc. in the United States District Court for the Southern District of Ohio
alleging that Medrad infringes three of Liebel-Flarsheim's patents through
Medrad's manufacture and sale of front load medical injectors used to inject
contrast medium and certain types of syringes used with these injectors.
Medrad several days later filed an action against Liebel-Flarsheim, Inc., and
several of its affiliates, including Mallinckrodt Inc., in the United States
District Court for the Western District of Pennsylvania alleging that certain
activities undertaken by Mallinckrodt with respect to the manufacture, use and
sale by Mallinckrodt of a certain syringe adapter assembly for use with
injectors manufactured by Medrad constitute as to Medrad unfair competition
and trademark dilution under United States federal law; unfair competition,
misappropriation, damage to business reputation and dilution, tortious
interference with contractual and prospective business relationships and civil
conspiracy under Pennsylvania state and common law; and infringement of a
Medrad patent. Medrad subsequently amended its complaint to add an additional
unfair competition claim and filed a second action against Liebel-Flarsheim in
Pennsylvania to declare Liebel-Flarsheim's three patents both not infringed by
Medrad and invalid. Liebel-Flarsheim filed an amended complaint in Ohio in
March 1999 alleging that Medrad had engaged in certain activities in
connection with the sale of syringes for injectors which violate United States
antitrust laws and constitute tortious interference with contractual relations
and prospective business relations, and subsequently filed a seconded amended
complaint adding a declaratory judgment count to declare Medrad's patent both
not infringed by Liebel-Flarsheim and invalid. As to the allegations of
infringement of its four patents, Liebel-Flarsheim seeks preliminary and
permanent injunctive relief, damages resulting from the infringement and an
award of three times actual damages because of Medrad's alleged willful
infringement of the patents; as to the allegations of violation of the
antitrust laws, Liebel-Flarsheim seeks a permanent injunction and compensatory
damages to be trebled as permitted under the antitrust laws; and as to
allegations of tortious interference with contractual business relations,
Liebel-Flarsheim seeks permanent injunctive relief, compensatory damages and
punitive damages. The two actions filed in Pennsylvania were transferred to
Ohio in June 1999. Medrad dismissed the second action it had filed in
Pennsylvania during November 1999, and incorporated its request for
declaratory relief as to the four Liebel-Flarsheim patents as counterclaims in
Medrad's answer filed in November 1999 to the initial action in Ohio. Medrad
also denied all of the allegations made by Liebel-Flarsheim in the Ohio
action. Mallinckrodt also filed an answer in November 1999 to the Pennsylvania
action in which it denied all of the allegations made by Medrad and included a
counterclaim that Medrad's patent was invalid and not infringed by
Mallinckrodt's syringe adapter
assembly. Liebel-Flarsheim filed a fourth amended complaint in January 2000
alleging that Medrad's
F-41
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
manufacture and sale of certain medical injectors and syringes further
infringes a Liebel-Flarsheim United States patent related to the Liebel-
Flarsheim patent on which Medrad was originally sued. Medrad filed a second
amended complaint in January 2000 to add Couer Laboratories, Inc. as an
additional defendant. The two actions are consolidated for discovery purposes
and discovery is now ongoing. The court has issued a scheduling order by which
fact discovery is to close on August 1, 2000 and which sets the trials of both
actions for June 2001. The two actions have not been consolidated for trial.
Medrad will continue to contest vigorously this litigation against Liebel-
Flarsheim, Mallinckrodt and the other parties.
Dividends
Under the German Commercial Code (HGB), dividends can be paid only from the
unappropriated retained earnings of the parent company, Schering AG. At December
31, 1999, unappropriated retained earnings of Schering AG totaled E165m,
resulting from 1999 net income of E213m less a transfer of E48m to retained
earnings, as determined by the Executive Board and the Supervisory Board.
Related Party Transactions
On December 29, 1999, we entered into a Partner's Agreement with Hoechst AG
and Aventis S.A. pursuant to which Aventis agreed to contribute all of its
shares in Rhone-Poulenc Agro S.A., Hoechst agreed to contribute all of its
shares in AgrEvo GmbH and we agreed to contribute all of our shares in AgrEvo
GmbH to Aventis CropScience S.A. The agreement, among other things, provided
for the establishment of a research cooperation between us and Aventis
CropScience to provide for a mutual exchange of compounds and certain other
technologies. Aventis CropScience has the right to an exclusive license for
the compounds we contribute and we have the right to an exclusive license for
compounds contributed by Aventis CropScience, subject to a right of first
refusal by Aventis. Since the formation of AgrEvo through December 31, 1999,
we have contributed an aggregate of approximately E500 million to the
AgrEvo/Aventis CropScience joint venture. We believe that all past
transactions with AgrEvo GmbH have been on an arms' length basis. Professor
Dr. Klaus Pohle, Vice-Chairman of the Executive Board of Schering AG, is a
member of the Supervisory Board of Aventis CropScience.
Allianz Versicherungs-AG, which is the corporate parent of AS
Industriebesitz und Beteiligungen Allianz Versicherungs-AG & Co. OHG,
currently provides insurance services to the Schering AG Group in a number of
different areas such as property, business interruption, directors' and
officers' liability, marine, personal accident and automobile insurance. We
believe that these services are provided on an arms'-length basis.
Professor John A. Dormandy, a member of the Supervisory Board, has provided
consultancy services to Schering AG in connection with research relating to
certain cardiovascular indications pursuant to a consultancy agreement since
June of 1996 for an annual fee of E56,242.
Certain members of the Supervisory and Executive Boards are members of
supervisory boards of certain financial institutions with which we engage in
transactions in the ordinary course of business.
New Accounting Standards under IAS (not adopted yet)
IAS 36 "Impairment of Assets" is effective for fiscal periods beginning on
or after July 1, 1999. The standard establishes the procedures that an
enterprise should apply to ensure that its assets are not overstated in the
financial statements. It also prescribes the method an enterprise should use
to assess the amount to be recovered from an asset and the timing when an
enterprise should account for an impairment loss.
IAS 37 "Provisions, Contingent Liabilities and Contingent Assets" is
effective for fiscal periods beginning on or after July 1, 1999. The standard
clearly establishes for the first time the conditions that must be met for a
provision to be recognized. Additional guidance also is provided on
restructuring obligations.
F-42
<PAGE>
SCHERING AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
IAS 38 "Intangible Assets" is effective for fiscal periods beginning on or
after July 1, 1999. Under the standard, intangible assets are recognized only
when it is probable that future economic benefits attributable to the asset
will flow to the enterprise and the cost of the asset can be reliably
measured. Internally generated goodwill, brand names, publishing titles,
customer lists, mastheads and research costs may not be recognized as
intangible assets.
IAS 39 "Financial Instruments: Recognition and Measurement" is effective for
fiscal periods beginning after December 31, 2000. The standard significantly
increases the use of fair values in accounting for financial instruments,
particularly with respect to assets reported in the balance sheet. In
addition, it establishes specific criteria relating to hedge accounting.
We adopted IAS 38, IAS 37 and IAS 36 as of January 1, 2000, and are evaluating
the effects IAS 39 will have on our Consolidated Financial Statements. The
adoption of IAS 36 and IAS 37 did not change our previous valuation and
accounting policies. As a result of the adoption of IAS 38, we will capitalize
certain internally generated intangible assets in 2000. We expect an impact on
net income in the range of E5 million to E10 million.
New Accounting Standards under US GAAP
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities"
is effective for fiscal periods beginning after June 15, 2000. The statement
requires that all derivatives be recognized in the balance sheet as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be designated, documented and reassessed pursuant to the
provisions in the standard. We are evaluating the effect the standard will
have on our Consolidated Financial Statements.
F-43
<PAGE>
SCHERING AG
CONSOLIDATED INCOME STATEMENTS
for the six months ended June 30,
(in millions except per share data)
<TABLE>
<CAPTION>
2000 1999
------ ------
E E
(unaudited)
<S> <C> <C>
Net sales..................................................... 2,217 1,754
Cost of sales................................................. (535) (398)
----- -----
Gross profit.................................................. 1,682 1,356
Marketing and selling costs................................... (689) (548)
Engineering and administration costs.......................... (214) (183)
Research and development costs................................ (402) (324)
Other operating income and expenses........................... (16) (20)
----- -----
Operating profit.............................................. 361 281
Financial result.............................................. 29 16
----- -----
Profit on ordinary activities................................. 390 297
Taxes on profit............................................... (178) (123)
----- -----
Income before minority interests.............................. 212 174
Minority interests............................................ (3) (5)
----- -----
Net income.................................................... 209 169
===== =====
EARNINGS PER SHARE (basic and diluted) *...................... 1.05 0.83
===== =====
</TABLE>
--------
* Figures for 1999 adjusted because of a 1:3 share split
F-44
<PAGE>
SCHERING AG
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-------------- -----------------
E million E million
(unaudited)
<S> <C> <C>
ASSETS
Intangible assets............................. 499 454
Property, plant and equipment................. 1,194 1,123
Financial assets.............................. 630 581
----- -----
Fixed assets................................ 2,323 2,158
----- -----
Inventories................................... 753 682
Receivables and other assets.................. 1,364 1,206
Marketable securities......................... 357 481
Cash and cash equivalents..................... 209 102
----- -----
Other non-current and current assets......... 2,683 2,471
----- -----
TOTAL ASSETS................................. 5,006 4,629
===== =====
SHAREHOLDERS' EQUITY AND LIABILITIES
Paid-up capital of Schering AG................ 528 528
Retained earnings............................. 1,640 1,570
----- -----
Shareholders' equity......................... 2,168 2,098
----- -----
Minority interests........................... 81 55
----- -----
Provisions.................................... 2,036 1,828
Liabilities................................... 721 648
----- -----
Provisions and liabilities................... 2,757 2,476
----- -----
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES... 5,006 4,629
===== =====
</TABLE>
F-45
<PAGE>
SCHERING AG
CONSOLIDATED CASH FLOW STATEMENTS
for the six months ended June 30,
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
E million E million
(unaudited)
<S> <C> <C>
Cash flows before working capital changes...... 305 288
Changes in working capital..................... 5 (277)
---- ----
Cash flows from operating activities........... 310 11
Cash flows from investing activities........... 13 45
Cash flows used in financing activities........ (216) (108)
---- ----
Net change in cash and cash equivalents........ 107 (52)
Effect of exchange rate movements on cash and
cash equivalents.............................. 0 3
Cash and cash equivalents at January 1......... 102 367
---- ----
Cash and cash equivalents at June 30........... 209 318
==== ====
</TABLE>
F-46
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
------- ----
<C> <S> <C>
1.1 Articles of Association (Satzung) of Schering
Aktiengesellschaft, as amended to date (English-language
translation thereof)...........................................
2.1 Form of Deposit Agreement among Schering Aktiengesellschaft,
Morgan Guaranty Trust Company of New York, as depositary, and
the holders from time to time of American Depositary
Receipts.......................................................
2.2 Form of American Depositary Receipt (included in Exhibit
2.1)...........................................................
2.3 Long-term debt instruments. Schering Aktiengesellschaft
undertakes to provide the Securities and Exchange Commission
with copies upon request.......................................
4.1 Partners' Agreement dated as of December 29, 1999, among
Hoechst AG, Aventis S.A., Rhone-Poulenc S.A. and Schering AG...
8.1 Subsidiaries of Schering Aktiengesellschaft....................
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