held in Basel on March 30, 2000, 10.00 hrs, C.E.T.

Speeches English

• Franz B. Humer – Chief Executive Officer   Slides

• Henri B. Meier – Member of the Executive Committee and Head of Finance   Slides

Ladies and Gentlemen

Welcome to Roche’s Annual Media Conference. For the first time, we are broadcasting the conference live on the World Wide Web, and I would therefore also like to welcome all those joining us today on-line. I want to lead off by reviewing the most significant Group and divisional results in 1999. Dr Meier will then comment in greater detail on our financial result and on other aspects of what was a very eventful and — if I may get ahead of myself for a moment — also a very successful year at Roche. Following Dr Meier’s presentation, you will then have an opportunity to address questions to me and the other members of the Executive Committee. In keeping with time-honoured custom, we will be able to continue our discussions in the foyer over a buffet lunch, to which you are all cordially invited.

I turn now to the most important results for 1999. Roche competed very successfully in an environment dominated by continuing change. In 1999 we set new records for both sales and profit in the face of some exceptional challenges.

• As already reported, sales reached 27.6 billion Swiss francs, advancing 9% in local currencies and, because of the stronger dollar, 12% in Swiss francs.
• Net income (after taxes) rose by an impressive 31% to an all-time high of 5.8 billion Swiss francs.
• The rise in net income was due largely to another substantial improvement in operating profit, which increased 47% over the previous year, to 6.4 billion Swiss francs.
• Very strong financial gains were a major contributor to our good overall result. Net financial income increased 5% to 1.1 billion Swiss francs.
• EBITDA, (earnings before taxes, interest, depreciation and amortisation), which is a measure of gross divisional cash flow, rose 38%, or 2.4 billion francs, to 8.9 billion Swiss francs.

In addition, we continued to consolidate our position as a leading healthcare group. To an almost unprecedented degree, however, 1999 was a year in which exceptional gains and charges had an impact on our financial statements — particularly the successful Genentech stock offerings and the vitamin case, which I will return to later.

The major successes include:

• Our dynamic sales growth and further improvement in profitability. Double-digit growth led to record results in sales, operating profit and net income.
• Sales growth in the Pharmaceuticals and Diagnostics divisions was well above market average. In the Vitamins and Fine Chemicals and Fragrances and Flavours divisions sales also climbed markedly in the second half of the year, after getting off to a slow start.
• With the successful launches of Xenical, for obesity, and the novel anti-influenza drug Tamiflu we also substantially strengthened our position in the rapidly growing primary care market.

In addition to being a year of dynamic growth for Roche, 1999 also saw several watershed events.

• These include the decision to spin off the Fragrances and Flavours Division and list it on the stock exchange this summer as a separate Group operating under the Givaudan name; the demerger is still subject to shareholder approval at the Annual General Meeting. This move is a logical continuation of our long-standing strategy of focusing on healthcare.
• Gains from last year’s public offerings of Genentech stock had an extremely positive impact on the Group’s overall result. After exercising our call option in mid-1999 and temporarily holding a 100% ownership interest in Genentech, we resold some of our stake in two public offerings, at a substantial pre-tax gain of 4.5 billion Swiss francs. Dr Meier will discuss the transactions in greater detail. An additional 17.3 million shares, or 7% of Genentech stock, were floated last week at a price of 163 US dollars per share. This will reduce our holding in the company from 66% to roughly 59%. Roche and Genentech’s relationship will not be affected by the transaction; the two companies will continue to collaborate on the same terms which have proved so successful in the past.

There is no question that the repercussions of the vitamin antitrust case cast a shadow over what on the whole was a very successful year. Pre-tax expense for fines, settlements with customers and additional provisions against 1999 income totalled 2.4 billion Swiss francs. We have actively addressed the legal issues arising from our role in the case and made appropriate personnel and organisational changes. Over a four-month period Roche’s corporate principles and a range of issues relating to behaviour in competition were explained and discussed in a Group-wide programme attended by a total of about 7500 management-level employees from all four divisions and Roche’s central corporate departments. Additionally, a team whose main job will be to monitor compliance with Group principles and guidelines worldwide was set up in the internal auditing unit.

To improve the comparability of our 1999 and 1998 results, the income effects of the Genentech transactions, the vitamin case and Genentech’s legal settlements relating to patent disputes are presented separately in the Annual Report, and results are also reported on an adjusted basis. [The combined effect of these three special items was an additional 733 million Swiss francs in net income.]

Excluding these items, net income for last year totalled 5 billion Swiss francs, representing a very solid 15% gain over 1998.

On an adjusted basis, operating profit advanced very strongly, climbing 16% from 4.4 billion Swiss francs in 1998 to 5.1 billion Swiss francs in 1999. On a comparable basis, EBITDA rose 14%, or 880 million francs, to 7.3 billion Swiss francs. The EBITDA margin increased 0.5 percentage points to roughly 27%; net income and operating profit as a percentage of sales both reached 18%, despite high additional expenditures for marketing and distribution.

The Group’s financial position continued to improve in 1999. Net debt fell substantially, primarily thanks to proceeds from the sale of Genentech shares in the second half of the year. Net debt for the year averaged 4 billion Swiss francs. At the end of 1999 the Group’s net debt amounted to 2.9 billion Swiss francs, as compared with 8.8 billion francs at mid-year. Equity and minority interests as a percentage of total assets also improved over the previous year, rising from 41% to 43%.

In view of the Group’s very good overall result, the Board of Directors will propose a 15% dividend increase, from 87 to 100 Swiss francs per share and non-voting equity security, at the Annual General Meeting. If approved, this will be the thirteenth increase in as many years. Including the market value of the proposed special dividend of Givaudan shares and the withholding taxes that will be paid by Roche, the value of this year’s total dividend is likely to exceed 600 francs.

In recent years we have vigorously pursued our objective of ranking among the leaders in all our core businesses. Since 1997 consolidated sales (including acquisitions) have risen nearly 50%.

We are especially pleased at the sustained improvement in profitability. Our EBITDA and operating profit also show an extended period of double-digit growth. In all our businesses we are striving for long-term value growth as well as short-term gains. Since 1990 our sales have trebled and operating profit has increased fourfold. Between 1990 and 1999 net income as a percentage of sales nearly doubled, from 10% to 18%, and our market capitalisation over the past decade has increased almost tenfold, from 18 billion to 174 billion Swiss francs. Roche can indeed look back on the 1990s as an exceptionally successful decade.

In the years ahead we want to stay ahead of the market through internal growth in our core businesses. To do that, we intend to continue using Roche’s strong earnings performance for substantial investments in research, development, production and marketing.

We have made substantial investments in recent years in strengthening our marketing and distribution organisations. In 1999 we significantly expanded our market presence, increasing expenditures for marketing and distribution by roughly 1 billion Swiss francs, to 7.8 billion francs. The costs of new product launches and of further strengthening our sales forces in the Pharmaceuticals and Diagnostics divisions accounted for a major share of this additional spending. Particularly in the United States, the costs of providing information to the medical community and consumers rose in parallel with the need for additional field force staff to serve the primary care market. There is growing public interest today in medical issues. And while this is a very positive development, it places considerable demands on everyone concerned with respect to communication and providing information. We will continue to provide more information directly to patients.

The discovery and development of new medical solutions is, and will continue to be, the motor driving Roche’s business. Over the years Roche has steadily reinforced its commitment in this area. In 1999 the Group increased its R&D spending by 11% to 3.8 billion Swiss francs. The increase is attributable to our many development projects, new initiatives by our Integrated Health Care Solutions unit and research projects in genetics. As in 1998, R&D spending accounted for 14% of consolidated sales. In the pharmaceuticals division, which accounted for roughly 80% of the total figure, R&D investment equalled a good 18% of sales. Worldwide, Roche currently employees some 3,200 people in pharmaceutical research, 1,220 of them in Basel. Clearly, then, we have the critical mass to take advantage of opportunities and cope with the risks inherent in pharmaceutical research and development.

We have further expanded our technology base in molecular biology, genetics, bioinformatics and automation as a step towards developing even more effective ways of preventing and treating disease. As our understanding of the molecular and genetic bases of disease deepens, these areas are coming to play an increasingly prominent role in our research. For this reason, we drafted a code of conduct known as the Roche Charter on Genetics and created the Science and Ethics and Advisory Group. In so doing, Roche has pledged itself to comply at all times with applicable scientific, ethical, societal and legal standards in these areas.

In 1999 the Pharmaceuticals Division consolidated its global lead in the hospital market while substantially strengthening its position in primary care. EBITDA increased 15% to 4.8 billion Swiss francs, and operating profit showed a healthy 16% gain, advancing to 3.5 billion Swiss francs, as sales rose 15% to 16.5 billion francs. The division’s operating profit and EBITDA margins held steady at 21% and 29%, respectively, despite a substantial increase in marketing and distribution costs.

In the United States Genentech sales surged 50% to 1.5 billion Swiss francs, thanks to very good market responses to the new anticancer medicines Rituxan/Mabthera and Herceptin.

Sales by our OTC business declined 3% for the year to 1.6 billion Swiss francs against a background of generally weak growth in the consumer self-medication market, with the volatile economic conditions in Brazil and Russia a major factor.

Six of our ten top-selling prescription medicines posted double-digit growth last year. With Xenical joining Rocephin and Roaccutane on the market, we now have three products with expected annual sales of over 1 billion Swiss francs. Although it was not introduced in the United States until May 1999, Xenical generated nearly 1 billion Swiss francs in sales last year, quickly becoming our third largest-selling product. And five additional products — Dormicum, CellCept, NeoRecormon, Viracept and Mabthera/Rituxan — have the potential to generate annual sales of over half a billion Swiss francs.

Less than 15% of our pharmaceutical sales last year came from products that will be affected by patent expiries over the next five years; this is one of the lowest percentages in the industry.

One highlight of 1999, without any doubt, was the extremely successful launch of Xenical. By the end of the year Xenical was already available in most industrialised countries. To date more than 5 million patients in over 40 countries have been treated with Xenical. Worldwide, there are approximately 200 million people who suffer from obesity and its complications.

Xenical has clear advantages. It is the only antiobesity drug that acts solely in the digestive tract, where it reduces absorption of dietary fats by one-third or more. In addition, study findings published in November 1999 have confirmed that Xenical not only helps patients lose weight but also improves various obesity-related risk factors, including high cholesterol and high blood pressure. On the basis of convincing clinical results, reimbursement of Xenical prescriptions for severely overweight patients has already been approved in some countries, notably the United States, Sweden, the United Kingdom and Switzerland. In the United States roughly 35% of all prescriptions are currently reimbursed. Reimbursability is under review in other countries.

In October of last year we launched our first large-scale information campaign directed at both patients and doctors in the United States and Canada. The campaign explains the serious health risks associated with obesity and provides information on the benefits of safe, effective treatment with Xenical. In the United States we are now the leader in the obesity segment.

Clinical development of Xenical for supplementary approval for the prevention and treatment of non-insulin-dependent (type II) diabetes is moving ahead on schedule. We expect to submit a regulatory filing for this large additional market some time from late 2001 on.

In the last two years Roche has launched no fewer than 10 prescription medicines either for the first time or for a new indication. In the Pharmaceuticals Division products that have been on the market less than five years accounted for 21% of sales last year, up from 12% in 1998.

The roll-out of our new anticancer medicines is moving ahead very successfully.
Herceptin, the first targeted treatment for certain types of breast cancer, was launched in Canada, Switzerland and other countries. Last year we also filed a marketing application for the product in the European Union, and we expect to receive the go-ahead for a launch there in the second half of this year. Mabthera (marketed as Rituxan in the United States) has already established itself as standard therapy for certain types of lymphoma. Sales in the United States, where the product is marketed by Genentech, rose sharply to 280 million US dollars. Xeloda, an oral chemotherapeutic agent for patients with metastatic breast cancer resistant to certain standard chemotherapies, received regulatory approval in the United States, Switzerland, Canada and 20 other countries. In September we filed applications in Europe and with the US FDA for supplementary approval of the product as first-line treatment in colorectal cancer.

With the launch of Tamiflu, our novel oral medicine for influenza, we further reinforced our strong position in virology. Flu prevention and treatment is a new and fast-growing market segment. Each year a total of more than 100 million people catch the flu in the United States, Europe and Japan. In the United States and Switzerland Tamiflu has quickly established clear market leadership. Regulatory clearance in Canada and some Latin American countries followed earlier this year. Additional regulatory filings have been submitted in the European Union and Japan, and we are expecting decisions from the authorities there in the second half of this year.

We substantially increased our share of the transplantation market. Zenapax was approved in the European Union for the prevention of kidney transplant rejection. Sales of CellCept for the same indication rose sharply, helped by approval to market the product in Japan. In October the division submitted a global filing for the use of CellCept in liver transplantation. Expanded labelling for this new indication and for use in heart transplantation is expected to fuel continued strong sales growth for this product.

In 1999 we began realigning our operations in pharmaceutical research and marketing. Clear priorities have been set for our entire pharmaceuticals portfolio — from research and development projects to products in production. In sharpening our focus in research, development and marketing, our aim is to be even faster to market with cost-effective ways to prevent and treat disease. The Pharmaceuticals Division is currently pursuing a total of 150 projects in research and 64 projects in development. Our development pipeline includes 29 projects involving new chemical entities and 35 projects working on additional indications for existing products — a solid portfolio aimed squarely at market needs.

As previously reported, late-phase development of the oral agent sibrafiban and of injectable lamifiban was halted at Roche after clinical trials failed to show the expected degree of efficacy. As expected, final results from clinical trials with lazabemide showed the drug to be highly effective in Alzheimer’s disease; however, in view of isolated reports of renal complications, Roche has decided not to pursue this project further. In the inflammatory diseases segment, clinical testing of the matrix metalloproteinase inhibitor Trocade in patients with arthritis was recently suspended because of an unfavourable risk–benefit profile. Such negative project outcomes are one of the business risks faced by any research-based pharmaceutical company.

• We have a number of products in late-phase development which we want to put onto the market in the near future:
• We anticipate regulatory decisions this year on marketing authorisation of Tamiflu in Europe and Japan. A filing for supplementary approval for the treatment of children and for flu prophylaxis is being prepared.
• We plan to launch Xeloda for metastatic colorectal cancer this year in the United States and Europe.
• We anticipate European and Japanese approval and launch of Herceptin for metastatic breast cancer later this year.
• Clinical development of Bonviva for treatment and prevention of osteoporosis is progressing well. Regulatory filings for an oral formulation of this product are planned for 2001. In clinical trials of an injectable formulation, administration of a single 1 mg dose once every three months has not yet produced the desired results; work on testing and optimising the intravenous dosage and dosing frequency are ongoing.
• Clinical trials with Pegasys, a pegylated formulation of interferon alfa-2a, have shown it to have a significantly longer duration of action than Roferon-A in chronic hepatitis C. Pegasys offers the additional advantage that it only has to be administered once a week. We expect to be able to file marketing applications in the second half of this year.
• In June 1999 an agreement was signed with Trimeris, Inc, for the development of a new class of anti-HIV medicines known as fusion inhibitors. The two novel agents covered by the agreement — which have already drawn considerable attention — are the first drugs to prevent HIV from fusing with host cells; initial clinical testing has produced very promising results.
• A major international study of carvedilol (Dilatrend/Coreg) was stopped this month — a year ahead of schedule — because of the significant survival benefit (over 50% higher) shown with the drug in severe heart failure. Based on these positive results, we will be able to significantly accelerate approval in this indication.
• Bondronat is in late-phase development for the treatment of bone metastases in patients with breast cancer and other tumours.

The list of successes posted by our drug development organisation is impressive.

In 1999 sales by the Diagnostics Division grew substantially faster than the global average, helping us to expand our market lead in this industry. Sales rose 14% to 5.3 billion Swiss francs. EBITDA gained 18% to 1.4 billion Swiss francs, and operating profit was up 29% to 0.8 billion Swiss francs. The division’s EBITDA margin continued to improve, advancing one percentage point to 27%, and the operating profit margin increased from 13% to 15%. The marked increase in operating profit margin over 1998 was due partly to above-average sales growth in the patient care and molecular diagnostics segments and to integration benefits.

All four divisional business units contributed to this strong performance and further increased their market share.

Laboratory Systems, the division’s largest business unit, posted a 7% sales increase in local currencies in a fiercely contested market. The new Roche/Hitachi and Cobas Integra product lines were well received in the extremely competitive clinical chemistry market. In the immunochemistry market the Elecsys analysers maintained their double-digit growth rate. Our recently launched analytical systems offer innovative solutions for automating and integrating laboratory workflows, and their market potential is correspondingly high.

Sales by the Patient Care business unit, the world’s leading provider of products for people with diabetes and of innovative point-of-care diagnostic tests, were up 14% in local currencies. Market share gains in the United States and major European markets were the main factors sustaining strong growth in this hotly contested segment.

Sales by Roche Molecular Systems, the market leader in PCR-based diagnostic testing — a technique pioneered by Roche — rose by a substantial 26% in local currencies, driven mainly by steadily rising demand for tests to diagnose and monitor infectious diseases such as AIDS and hepatitis.

A key growth driver in the molecular biochemicals segment was the LightCycler diagnostic system, which was introduced in additional markets during the year; the system uses PCR to amplify fragments of DNA and then analyses them — all in a matter of minutes. Sales were up 11% in local currency terms.

The targeted efforts we initiated in 1998 to combine diagnostic and therapeutic products in integrated healthcare solutions yielded further concrete results, including a rapid test for influenza developed by the Diagnostics Division. The test, which received FDA approval in December 1999, gives doctors and the general public early warning of flu outbreaks, making it the ideal companion to our innovative anti-influenza drug Tamiflu. In the field of cardiac care, a test for troponin T (a key marker for the early detection of heart damage) was developed during clinical trials. In the HIV area 1999 saw the launch of three initiatives to identify drug-resistant viruses, an important contribution to treatment response monitoring and targeted use of AIDS drugs.

In the next few years we expect to see new findings from research into disease markers for conditions such as osteoporosis, diseases of the central nervous system and diabetes and for monitoring treatment with innovative anticancer agents such as Xeloda and Herceptin.

In the Vitamins and Fine Chemicals Division sales advanced by a modest 1% for the year, to 3.6 billion Swiss francs, following a marked upturn in the second half. Prices on world markets continued to fall, primarily as a result of heavy competition from Chinese suppliers. Consequently, profit margins remained under pressure. EBITDA fell to 0.8 billion Swiss francs, equivalent to 22% of sales. Operating profit declined 13% to 0.6 billion Swiss francs, and the operating profit margin was down to 16%.

For the Vitamins and Fine Chemicals Division 1999 was largely dominated by the repercussions of the vitamin antitrust case. A new divisional management team has initiated the steps necessary to maintain Roche’s global market and cost leadership in the long term — a position built on know-how and superior technology. Sales showed a significant upturn in the second half of 1999. The effects of price erosion were partially offset by increased sales volumes — particularly for vitamins A, B1 and C and biotin — and by productivity gains. In volume terms, sales reached a new all-time high. Overall, we maintained our global leadership while continuing to expand our lead for some products.

The Fragrances and Flavours Division consolidated its global market lead despite tougher competition in both of its business segments. Thanks to a sustained upswing in the second half-year, sales grew 5% to 2.1 billion Swiss francs. An uncompromising focus on the needs of major global customers and consolidation in purchasing and production resulted in substantial gains in efficiency and profitability. EBITDA rose sharply, to 524 million Swiss francs. EBITDA as a percentage of sales was up 5 percentage points to 24%. The operating profit margin increased even faster, from 13% to 19%.

The division is optimally equipped to expand its global market lead in the fragrances and flavours industry. Subject to approval at the Annual General Meeting, we intend to spin off the Fragrances and Flavours Division at the beginning of June 2000. It will be listed on the stock exchange as an independent company under the Givaudan name. Dr Meier, the designated chairman of the board of Givaudan, who will be speaking to you next, will add some more details about the proposed spin-off.

The effects of a spin-off on Roche’s sales and income will be relatively slight; based on the 1999 figures, they will amount to 8% of consolidated sales and 3% of net income.

Before I close, Ladies and Gentlemen, allow me to say a few words about the outlook for the current year. In all our divisions we have created excellent conditions for internally generated growth ahead of the market.

• The Pharmaceuticals Division has a broad portfolio of new and well-established products providing a solid basis for future growth.
• The Diagnostics Division continues to extend its lead in all segments of the global diagnostics market.
• In future, the targeted combination of preventive, diagnostic and therapeutic products and services to form integrated healthcare solutions will play an ever greater role. Roche is in a unique position of strength here.
• Thanks to substantial volume growth the Vitamins and Fine Chemicals Division has consolidated its global market leadership over the past few months. Although competition remains intense, the vitamins business offers attractive market prospects.

The Group has continued to show positive growth through the first months of 2000. Barring extraordinary events, we anticipate another good overall result for the current year.

Henri B. Meier

Income Statement 1999 and 1998

Following IAS, the consolidated financial statements show a net income of 5.8 billion Swiss francs, a rise of 31%. This result has been strongly influenced by special items. The most important of these occur at the level of operating profit and relate to the Genentech transactions, the vitamin case and Genentech’s settlements with the University of California and the US federal authorities regarding the marketing of human growth hormone. ‘Genentech transactions’ refers here to the buy-out and our first two subsequent public offerings of Genentech stock. The non-operating section of the income statement — specifically taxes and minority interests — is also affected. One peculiarity this year is the positive impact on minority interests. The US Securities and Exchange Commission has required Genentech to carry Roche’s intangible assets, including goodwill, and the corresponding amortisation charge on its books. This has resulted in Genentech’s reporting a large loss, which we have had to adjust for in consolidating accounts.

As shown schematically here, the impact of these special items thus extends from the operating results to taxes, minority interests and, finally, net income. The effect is so great that we felt it necessary to present adjusted figures to improve comparability.

On a comparable basis, excluding special items, net income rose 15% in 1999.

This chart shows the relationship between operating profit and net income on an adjusted basis. Financial income for 1999 totalled 1.1 billion Swiss francs, roughly a 5% increase over 1998, while the Group’s net debt position averaged 4 billion Swiss francs (compared with an average of 4.5 billion Swiss francs in 1998). Taxes rose 12% to 1.1 billion Swiss francs. After adjusting for the pension plan surplus now required under IAS and after deducting the share of income attributable to minority interests (primarily Genentech) and associated companies (LabCorp), net income amounts to 5 billion Swiss francs, a rise of 15% on a comparable basis. This represents a 0.5 percentage point improvement in profitability relative to sales.

Please note the 106 million Swiss franc share of income allocated to Genentech’s minority shareholders. At the end of the year they owned approximately one-third of Genentech.

The financial result for 1999 was exceptionally good, showing a 5% increase to 1.1 billion Swiss francs despite a weak Swiss stock market and rising interest rates. Gains on the sale of marketable securities accounted for the lion’s share of this figure. Exchange losses consisted entirely of unrealised losses on the closing date, 31 December 1999, and these were turned into unrealised gains just three weeks later. Interest expense increased primarily as a result of financing the Genentech buy-out.

The changes in Roche’s net debt position were of course primarily due to the Genentech transactions. Late in the first half of the year we recorded an outflow of 6.2 billion Swiss francs as a result of the Genentech buy-out. This was followed shortly afterwards by an inflow of 3.1 billion Swiss francs from our public offering of 17% of Genentech’s shares. The second offering of Genentech stock, in October, resulted in a cash inflow of 4.2 billion Swiss francs. Net indebtedness for 1999 averaged approximately 4 billion Swiss francs.

The balance sheet grew substantially, in part because of the strong US dollar. Reported assets were up 26% from 1998. Apart from currency effects, the Genentech transactions were mainly responsible for this increase. Their impact can be seen in the changes in liquid funds and intangible assets, including goodwill. Inventories and accounts receivable increased 28%. Again apart from currency effects, the build-up of inventories in preparation for Y2K had an effect, as did the relocation of some production activities as a result of the Boehringer Mannheim acquisition. The sharp increase in accounts receivable was due partly to strong fourth-quarter sales.

The liabilities side of the balance sheet shows that Roche is very solidly financed, with roughly 80% non-current liabilities, 43% of which is equity.

The cash flow statement demonstrates Roche’s impressive capacity to generate a high cash flow and utilise liquidity. Cash flows from operating activities — operating profit, depreciation and amortisation — amounted to 7 billion Swiss francs. Capital market transactions yielded an additional inflow of approximately 12 billion Swiss francs. The right-hand column shows how the 21 billion Swiss francs were used. The largest expense items were the purchase price for the remaining Genentech shares, the repayment of long-term debt, and tax and interest payments. Approximately 5 billion Swiss francs were invested in property, plant and equipment and in working capital.

Biotech stocks have undergone a dramatic revaluation over the last one and a half years. The chart very strikingly illustrates why Roche exercised its option to purchase 100% of Genentech and subsequently refloated some of its stake at higher prices. During the same period US pharmaceutical stocks slipped in value by as much as 30%.

To briefly review the train of events: In 1990 we acquired a 60% interest in Genentech, purchasing shares for roughly 0.5 billion US dollars from the company and for 1.6 billion US dollars on the market. Between 1990 and 1998 we bought shares on the market for an additional 0.7 billion US dollars when the price was favourable. We acquired the remaining third of Genentech’s stock when we exercised our call option in mid-1999. Our total investment for a 100% interest in Genentech thus amounted to 6.8 billion US dollars. This works out to an average acquisition price per share of 46 US dollars. In two transactions in 1999 we then resold some of our stake for 4.9 billion US dollars, resulting in a net purchase price of 1.9 billion US dollars for a 66% interest in Genentech. The market value as of the end of December 1999 was many times higher. These transactions were followed this year by an issue of bonds convertible into Genentech shares and the sale of another 17.3 million shares at a price of 163 US dollars. In short, in the space of nine months we have effected five capital market transactions with Genentech shares (the largest secondary offering in US history), with the result that we have more than recouped our investment while retaining virtually the same major shareholding as we had 10 years ago (59% instead of 60%).

Roche’s non-voting equity securities have steadily increased in value over the past 10 years. Since 1 January 1990 they have gained an average of 26% per year. During this period there was only one steep drop in price; this came in 1994 when the Syntex acquisition was announced. Since then Roche has enjoyed a reputation for knowing how to handle acquisitions successfully.

I now turn to the distribution of available earnings.

At an extraordinary meeting held yesterday evening the Board of Directors decided to propose a cash dividend of 100 Swiss francs, a special dividend of one Givaudan share with a nominal value of 10 Swiss francs, plus payment of the 5.39 Swiss francs in withholding tax due on the dividend, at the Annual General Meeting in May 2000. The total nominal value of the proposed dividend is thus 115.39 Swiss francs. Figuring in the anticipated market value of the Givaudan shares, the value of the total dividend increases to 627 Swiss francs.

This slide graphically illustrates the effect on the dividend of taking the Givaudan shares at their market value rather than at nominal value. At market value, the shares result in roughly a sevenfold dividend increase over the previous year.

Givaudan

Good progress has been made in preparing for the Givaudan spin-off.

The spin-off was decided on at the Board of Directors meeting on 4 December 1999, and if all goes according to plan (i.e. subject to approval at the AGM), Givaudan shares will start trading on the Swiss Stock Exchange six months from that date, on 8 June 2000. The first meeting of the new Givaudan board will be held in just 14 days’ time, and investor presentations will be taking place shortly after Roche’s AGM on 9 May 2000, at which time the shareholders will vote on the spin-off.

A glance at the history of Givaudan shows that mergers are no recent invention. The oldest of the roughly 20 companies in Givaudan’s family tree (Dodge & Olcott) was founded at the time of the French Revolution (1790). Today’s Givaudan has five direct antecedents: Givaudan and Roure, which were acquired in the mid-1960s, and FDO (Fritzsche, Dodge & Olcott), Riedel Arom and Tastemaker, all acquired in the 1990s. These companies have their roots in Switzerland, France, Germany, the United States and the Netherlands.

This slide and the next four in your press kits provide a brief overview of Givaudan’s production facilities, personnel and markets.

There are six sites for flavours production, each of them specialising in particular activities.

Dübendorf (near Zurich) concentrates on natural flavours, while Barneveld (Netherlands) primarily manfactures flavour chemicals. At the Lakeland (Florida) site flavours are manufactured from citrus fruits, and the sites in Devon (Kentucky) and Cincinnati (Ohio) include spray drying facilities. Natural flavours and flavour chemicals are also produced in East Hanover (New Jersey), at a modern plant we acquired from the BASF subsidiary Riedel Arom. Additional production facilities are located in Shanghai, Singapore, Buenos Aires and São Paulo.

Givaudan employs some 5000 people worldwide.

The flavours business has roughly 10% more employees than the fragrances business and accounts for a correspondingly greater proportion of sales. Roughly 4% of staff work in research.

The most important segment is consumer goods, which includes products such as fragrances for soaps, shower gels and body lotions. The Fragrances Division serves a highly concentrated customer base. The five biggest customers account for roughly 50% of sales in each business segment.

The customer base for flavours is broader, since regional customers also play an important role in this industry. Beverage makers head the list of customers, followed by major food companies.

Geographically, the American continent is currently the leading market, accounting for better than 50% of sales, followed by Europe, with roughly 30%. Now for a look ahead at the future. The new Givaudan’s goals have already been set.

Givaudan is setting out on its own with a clear mission: to remain the market leader. The company is thus clearly performance-oriented, and it will be starting off in a strong position both financially and in the marketplace.

Givaudan has a 14% share of a global market estimated at about 14 billion Swiss francs — roughly the same market share as its main competitor. The American continent is the largest market, followed by Europe and Asia.

Now, how do we increase sales and profits in the years ahead?

Givaudan’s strategy for achieving growth and profitability has five main elements.

• Strengthen relationships with major customers. The operative word here is ‘key account management’.
• Facilitate the flow of ideas between research, development, creative units and customers to promote rapid innovation.
• Expand sales in new markets, particularly China and India.
• Continuously optimise logisctics.
• Continuously adapt information systems and their use, exploiting them as a factor for success.

A number of initiatives to improve profits are being prepared, and some are already being implemented.

Innovation is the lifeblood of the fragrances and flavours industry. In addition to its research centre in Dübendorf, Givaudan has recently set up a research and development unit in Cincinnati.

Givaudan will be striking out on its own with a healthy balance sheet: it will have no net debt and equity comparable to that of its main competitor. A publicly traded Givaudan will be a prize for investors. It is a company from a good family, with a sizeable dowry and tremendous potential.