Exhibit (a)(5)(i)

     Roche Finance Report 2008

Table of Contents

Roche Group	2
Finance in brief	2
Finance – 2008 in brief	3
Financial Review	4
Roche Group Consolidated Financial Statements	28
Notes to the Roche Group Consolidated Financial Statements	34
Report of Roche Management on Internal Control over Financial Reporting	119
Report of the Statutory Auditor on the Consolidated Financial Statements	120
Report of the Independent Auditor on Internal Control over Financial Reporting	122
Multi-Year Overview and Supplementary Information	124
Roche Securities	131
Roche Holding Ltd, Basel	133
Financial Statements	133
Notes to the Financial Statements	135
including Board and Executive remuneration disclosures as required by Swiss Law	137
Appropriation of Available Earnings	142
Report of the Statutory Auditor on the Financial Statements	143

2          Roche Finance Report 2008     |     Roche Group – Finance in brief

Finance in brief

Key results

	2008		2007				% change				% of sales
	(mCHF)		(mCHF)		(CHF)		(LC)		2008		2007
Sales		45,617		46,133		–1		+6
Research and development		8,845		8,385		+5		+13		19.4		18.2
Operating profit		13,924		14,468		–4		+4		30.5		31.4
Operating free cash flow		12,378		10,671		+16		+27		27.1		23.1
Net income		10,844		11,437		–5				23.8		24.8
Free cash flow		4,979		3,982		+25				10.9		8.6
Core EPS (CHF)1)		11.04		11.85		–7		+2
Dividend per share2) in CHF		5.00		4.60		+9

	31 December		31 December		% change
	2008		2007		(CHF)
Net cash		16,682		17,336		–4
Equity		53,822		53,443		+1
Equity ratio		70.7%		68.2%

1)   See page 128 for definition of Core EPS.
2)   Proposed by the Board of Directors.
LC = local currencies

Finance Executive Committee

Erich Hunziker	Chief Financial Officer
Hubert Buck	Management Development
Peter Eisenring	Tax and Insurance
Marco Frei	Pension Asset Management
Andreas Knierzinger	Treasury
Steve Krognes	Corporate Development
Karl Mahler	Investor Relations
Carole Nuechterlein	Venture Funds
Erwin Schneider	Accounting and Controlling

Finance – 2008 in brief      |     Roche Finance Report 2008           3          

Finance – 2008 in brief

	Sales
•	Group sales increase by 6% in local currencies to 45.6 billion Swiss francs. Excluding Tamiflu pandemic sales, which declined sharply as expected, the increase is 10% in local currencies.
•	Pharmaceuticals sales increase by 10% or 3.3 billion Swiss francs in local currencies (excluding Tamiflu pandemic sales), twice the global market growth thanks to the key oncology products and also Bonviva/Boniva and CellCept.
•	Oncology sales grow by 15% in local currencies to 19.7 billion Swiss francs, representing 55% of Pharmaceuticals sales.
•	Diagnostics sales increase by 10% in local currencies to 9.7 billion Swiss francs. Organic growth is 6% while the acquisition of the Ventana tissue diagnostics business adds 4 percentage points.
	Operating results
•	Operating profit increases by 4% in local currencies to 13.9 billion Swiss francs thanks to strong underlying sales growth and continuing productivity improvements, and despite substantially lower Tamiflu pandemic sales and strong increases in R & D.
•	Operating profit margin decreases by 0.9 percentage points to 30.5% mainly driven by a lower Diagnostics margin following recent acquisitions and competition in the US diabetes care market. Further increase of the Pharma margin to 36.2%.
•	R & D expenditure increases by 13% in local currencies to 8.8 billion Swiss francs, representing 19.4% of Group sales.
•	Substantial unfavourable exchange rate impact on Swiss franc denominated consolidated results.
•	On 21 July 2008 Roche made an offer to purchase all outstanding shares of Genentech for 89.00 US dollars per share in cash and announced a reorganisation of its US pharmaceuticals business.
	Treasury
•	Minimal adverse effect from financial crisis due to conservative investment approach with limited exposure to equities.
•	Net financial income reaches 0.2 billion Swiss francs. The reduction of 0.6 billion Swiss francs compared to 2007 is primarily due to lower interest income resulting from lower liquid funds and reductions in interest rates.
•	Redemption on maturity of 2.3 billion Swiss francs of capital market debt.
	Financial condition
•	Strong financial condition with free cash flow of 5.0 billion Swiss francs and net cash of 16.7 billion Swiss francs.
•	Increase in equity ratio to 71% from 68%.
•	Following the announcement of the intent to take Genentech fully private, Moody’s put Roche’s Aa1 rating on review for downgrade and Standard & Poor’s lowered Roche’s rating to AA- from AA+.
	Net income and Core EPS
•	Net income down by 5% to 10.8 billion Swiss francs, primarily driven by strong exchange rate impact.
•	Core EPS at constant exchange rates 2% above the record 2007 level.
	Shareholder return
•	Roche’s market capitalisation decreases by 18% to 141 billion Swiss francs, broadly in line with the European and global pharmaceuticals sector.
•	Increase in proposed dividend of 9% to 5.00 Swiss francs, representing the 22nd consecutive year of dividend growth.
•	If approved by shareholders, this will result in an increased payout ratio of 49% and a higher dividend yield on the Roche share of 3.0% and on the non-voting equity security of 3.1%, based on year-end prices.

4          Roche Finance Report 2008          Roche Group – Financial Review

Roche Group

Financial Review

Group operating results

In 2008 the Group continued the strong underlying operating performance from previous years. The Pharmaceuticals Division further increased its operating profit margin as the growth in the underlying business more than compensated for the expected sharp decline in Tamiflu pandemic sales and the planned increases in research and development. In the Diagnostics Division the impact of recent acquisitions and competition in the US diabetes care market resulted in a decline in the operating profit margin. The strengthening of the Swiss franc against most currencies had a substantial negative impact on the Group’s overall operating results when translated from local currencies into Swiss francs.

Total sales grew by 6% in local currencies (–1% in Swiss francs; 10% in US dollars) to 45.6 billion Swiss francs, with the Pharmaceuticals Division representing 79% of Group sales and the Diagnostics Division contributing 21%. The sales increase in the underlying business more than compensated for the anticipated fall in Tamiflu pandemic government and corporate sales from 1.9 billion Swiss francs in 2007 to 237 million Swiss francs in 2008. Local currency sales growth excluding Tamiflu pandemic sales was 10%. The strength of the Swiss franc over the last twelve months resulted in approximately 3.2 billion lower sales when translated into Swiss francs.

Demand for the Group’s oncology drugs Avastin, MabThera/Rituxan, Herceptin, Tarceva and Xeloda continued to grow strongly. Additional growth drivers in the Pharmaceuticals Division were Bonviva/Boniva in metabolism/bone and CellCept in transplantation. In the Diagnostics Division the main growth areas were Professional Diagnostics, Applied Science and Tissue Diagnostics, with these business areas growing above their respective markets. Following the acquisition of Ventana at the beginning of February 2008, sales in the new Tissue Diagnostics business area were 376 million Swiss francs, contributing 4 percentage points to local currency sales growth of the Diagnostics Division.

The Group’s operating profit increased by 4% in local currencies to 13.9 billion Swiss francs. The operating profit margin declined by 0.9 percentage point to 30.5% due to a margin reduction in the Diagnostics Division of 5.3 percentage points. The Pharmaceuticals margin increased to 36.2% from 35.5% in 2007 despite significantly lower Tamiflu pandemic sales and increased investments in the strong development pipeline. More than half of the fall in the margin of the Diagnostics Division was due to the impact of recent acquisitions (one-time charges, amortisation of acquired intangible assets and investments to develop the acquired businesses) and the rest was mainly due to strong competition in the US diabetes care market and portfolio mix effects.

5

In 2008 the average US dollar exchange rate against the Swiss franc was 10% lower than in the comparative period. The euro was 4% lower whereas the Japanese yen was 3% higher. The movements in exchange rates have had a significant impact on Swiss franc growth rates: Sales and operating profit growth rates reported in Swiss francs were 7 and 8 percentage points below local currency growth respectively. Natural hedges in the structure of the Group’s operations meant that the Group operating margin was not significantly impacted by foreign exchange movements.

In the Pharmaceuticals Division there were two exceptional items: income of 271 million Swiss francs from the settlement of Genentech’s litigation with the City of Hope Medical Center and expenses of 243 million Swiss francs from the initial stages of Pharmaceuticals Division US reorganisation. The net impact of these on the Group and divisional results is not significant.

Group operating results for 2008

	Pharmaceuticals		Diagnostics		Corporate			Group
	(mCHF)		(mCHF)		(mCHF)			(mCHF)
Sales		35,961		9,656		–			45,617
Operating profit before exceptional items		12,974		1,187		(265	)		13,896
– margin, % of sales		36.1		12.3		–			30.5
Operating free cash flow		12,053		600		(275	)		12,378
– margin, % of sales		33.5		6.2		–			27.1

Group operating results – Development of results compared to 2007

	Pharmaceuticals		Diagnostics		Corporate		Group
Sales
– % increase in local currencies		+5		+10		–		+6
Operating profit before exceptional items
– % increase in local currencies		+8		–22		+19		+4
– margin: percentage point increase		+0.6		–5.3		–		–0.9
Operating free cash flow
– % increase in local currencies		+31		–33		–38		+27
– margin: percentage point increase		+6.2		–5.2		–		+4.0

Pharmaceuticals operating results

The Pharmaceuticals Division increased its sales by 5% in local currencies (–2% in Swiss francs; 8% in US dollars) to 36.0 billion Swiss francs. Excluding Tamiflu pandemic government and corporate sales, local sales growth was 10% outpacing global market growth by a factor of around two. Operating profit before exceptional items was 13.0 billion Swiss francs, and the corresponding margin 36.1%, an increase of 0.6 percentage points compared to 2007 despite significantly lower Tamiflu pandemic sales and increased investments in research and development.

Marketing costs increased moderately in local currencies in spite of continued support for the growing oncology and rheumatoid arthritis portfolios. Investments were made in the broader indications particularly for Avastin, as well as investments for the launch of Actemra/RoActemra. The strong expected increase in research and development expenses, significantly above the increase in sales, was due to continued high investments in the strong pipeline and expanded portfolio as well as the large number of clinical trials.

For more information on the divisional business and its pipeline, see the Business Report (Part 1 of this Annual Report).

6          Roche Finance Report 2008     |     Roche Group – Financial Review

Pharmaceuticals Division results

Sales

The major growth drivers were key products in the therapeutic areas oncology, inflammation/ autoimmune/transplantation,virology (excluding Tamiflu pandemic sales) and metabolism/bone. Sales in the therapeutic area renal anemia decreased in an increasingly competitive, cost-sensitive market.

Pharmaceuticals Division – Sales by therapeutic area for 2008

	Sales					% change
Therapeutic area	(mCHF)		% of sales			(local currencies)
Oncology		19,654		55			+15
Virology		3,408		9/9	1)		–27/+7	1)
Inflammation/Autoimmune/Transplantation		3,264		9			+19
Metabolism/Bone		2,839		8			+7
Renal anemia		1,318		4			–11
Others		5,478		15			–5
Total		35,961		100			+5/+10	1)

1)   Excluding Tamiflu pandemic government and corporate sales.

In 2008 the Top 20 Pharmaceuticals products, which represented 86% of the Pharmaceuticals portfolio, grew 8% (14% excluding Tamiflu pandemic sales) with the majority of products showing sales growth. The local sales growth of the Pharmaceuticals Division was driven by seven products: Avastin, MabThera/Rituxan, Herceptin, Bonviva/Boniva, CellCept, Tarceva and Xeloda. These products represent 61% of the portfolio (2007: 53%; 2006: 48%) and together generated over 2 billion Swiss francs of additional sales compared to 2007 despite the strong negative currency impact mainly from the US dollar. Sales of Tamiflu declined due to non-recurring pandemic sales. Other sales declines were primarily due to generic erosion following patent expiry, strong competition in certain franchises and the return by Chugai of a group of marketed products in Japan to Sanofi-Aventis.

7

Pharmaceuticals Division – Sales of Top 20 products for 2008

	Sales				% change
Product	(mCHF)		% of sales		(local currencies)		Franchise
MabThera/Rituxan		5,923		16		+16	Oncology/IAT1)
Avastin		5,207		15		+37	Oncology
Herceptin		5,092		14		+12	Oncology
CellCept		2,099		6		+13	IAT1)
NeoRecormon/Epogin		1,774		5		–13	Renal anemia, Oncology
Pegasys		1,635		5		+6	Virology
Tarceva		1,215		3		+23	Oncology
Xeloda		1,211		3		+13	Oncology
Bonviva/Boniva		1,108		3		+35	Metabolism/Bone
Lucentis		960		3		+7	Ophthalmology
Tamiflu		609		2		–68	Virology
– of which pandemic		237		1		–86	Virology
Xolair		560		2		+10	Respiratory diseases
Valcyte/Cymevene		553		2		+10	Virology
Xenical		502		1		–13	Metabolism/Bone
Pulmozyme		496		1		+12	Respiratory diseases
Nutropin		413		1		–2	Metabolism/Bone
Neutrogin		404		1		–3	Oncology
Rocephin		344		1		–10	Infectious diseases
Activase/TNKase		342		1		–1	Cardiovascular diseases
Madopar		311		1		+4	Nervous System
Total Top 20 products		30,758		86		+8
Other products		5,203		14		–12
Total		35,961		100		+5
Excluding Tamiflu pandemic government and corporate sales
Total Top 20 products		30,521		85		+14
Other products		5,203		15		–12
Total		35,724		100		+10

1)   Inflammation/Autoimmune/Transplantation.

MabThera/Rituxan | Double-digit sales growth was driven by increasing use in oncology indications and rheumatoid arthritis. In Europe and the US most of the oncology sales growth was due to increasing usage of MabThera/Rituxan following first-line therapy of indolent non-Hodgkin’s lymphoma (NHL), including maintenance use. The already high penetration rates for first-line treatment of indolent and aggressive NHL were sustained in the US and Europe’s five largest markets (France, Germany, Italy, Spain and the United Kingdom), while increasing adoption in these settings was seen in emerging markets. Adoption in rheumatoid arthritis (RA) continued to increase in both the US and Europe/Rest of World (RoW). An estimated 800 million Swiss francs of sales were generated in the RA indication.

Avastin | Sales increased 37% worldwide compared to 2007, with strong growth in all regions, particularly Europe/RoW (+67%). In the US growth was driven primarily by increased usage in metastatic breast cancer following accelerated approval by the US Food and Drug Administration (FDA) in February. Sales growth in Europe was driven primarily by increased use of the medicine for metastatic colorectal and breast cancer. Sales in Europe also benefited from the rollout of new indications and increasing uptake for non-small cell lung cancer and renal cell carcinoma.

8          Roche Finance Report 2008     |     Roche Group – Financial Review

Herceptin | Growth continued to be driven by increasing adoption in adjuvant (early stage) HER2-positive breast cancer. Roche estimates that by the end of 2008 the product’s market share in the adjuvant setting was approximately 75% (versus 70% a year earlier) in the five largest European markets. Elsewhere, market penetration in this setting also continues to build. In the US penetration into this market flattened during 2008 due to earlier, more rapid adoption of Herceptin for adjuvant treatment. In the metastatic setting, adoption rates and treatment duration remained stable both in the US and in the top five European markets.

CellCept | The immunosuppressant CellCept continued to record double digit sales growth worldwide (+13%), driven by solid demand in both the US and Europe. Growth continues to be driven by physicians’ recognition of the long-term protective benefits of CellCept in transplant patients compared with other, more toxic therapeutic options.

NeoRecormon/Epogin | Combined sales of Roche’s NeoRecormon and Chugai’s Epogin (epoetin beta) were down 13% in a market that remains highly competitive due to pricing pressure from branded competitors and the entry of biosimilar versions of epoetin alfa in Europe. The market share of NeoRecormon has decreased only slightly, with global sales down 10% in 2008. In Japan, where Epogin remains the market leader, a decline in sales of 18% for the medicine was due primarily to sustained pricing pressure.

Pegasys | In 2008 Pegasys maintained its clear leadership of the global pegylated interferon market and continued to gain market share. Global sales increased 6% to 1.6 billion Swiss francs, driven by strong growth in Japan of 54% and growth in key emerging markets. This was combined with solid growth in the United States, where Pegasys now accounts for 70% of new prescriptions for hepatitis C.

Tarceva | Tarceva recorded strong growth in 2008 (+23%), particularly in the Europe/RoW sales region (+27%), which now accounts for 55% of overall sales. US sales increased by 10% in a competitive market environment. Tarceva is still the only epidermal growth factor receptor inhibitor with a proven survival benefit in advanced lung and pancreatic cancer.

Xeloda | Xeloda recorded sustained double-digit sales growth throughout 2008. Growth in Japan was particularly strong at 74%, and solid increases were also recorded in the US (+9%) and Europe/RoW (+14%). Sales were driven by expanded indications approved in 2007 and 2008, notably stomach cancer and advanced colorectal cancer, along with uptake in breast cancer.

Bonviva/Boniva | In a highly competitive market, sales of Bonviva/Boniva (ibandronic acid) for the treatment of postmenopausal osteoporosis, increased by 221 million Swiss francs to 1.1 billion Swiss francs compared with 2007. The majority of sales come from the US, where the product’s market share remained robust despite the entry of generic versions of competitor products. Bonviva gained reimbursement status and was launched in many European markets in 2006.

Lucentis | Sales of Lucentis for the treatment of neovascular (wet) age-related macular degeneration (wet AMD) in the US grew 7% in 2008, driven primarily by an increased number of Lucentis dosage per patient. New patient share was broadly stable as off-label usage of an unapproved therapy in wet AMD remained high. Outside the US, Lucentis is marketed by Novartis.

Tamiflu | Sales of Tamiflu in 2008 declined by 1.5 billion Swiss francs or 68% versus 2007. Seasonal sales were 143 million Swiss francs higher and pandemic sales decreased by 1.6 billion Swiss francs compared to 2007, as most stockpiling programmes from governments and corporations were completed in 2007. Seasonal sales of Tamiflu in Japan were negatively affected by the mild 2007/2008 flu season. In addition, there was a substantial decrease in pandemic sales to the Japanese government.

See the Business Report for more information on Roche’s pharmaceutical products including the R&D pipeline (end pages of the Business Report).

 9

Sales by region | Sales excluding Tamiflu pandemic government and corporate sales continued to grow across all regions. Growth in North America was 10% in local currencies compared to an almost stagnant market, driven by products marketed by Genentech (oncology products, Lucentis, Xolair and Pulmozyme) as well as the Roche Pharmaceuticals products Tamiflu (seasonal sales), Bonviva/Boniva, CellCept, Pegasys and Xeloda. Roche Pharmaceuticals continued to gain market share in the Western Europe and Latin America regions, driven by further strong sales growth of Avastin, MabThera/Rituxan, Herceptin, Bonviva/Boniva, Tarceva and CellCept. Sales in Japan increased, as the launches of Avastin, the combination therapy Pegasys plus Copegus and Tarceva compensated for normal biennial price cuts in Japan, which became effective 1 April 2008, and the return of a group of marketed products to Sanofi-Aventis. Tamiflu sales decreased sharply due to the completion of most pandemic stockpiling orders from governments and corporations in 2007 particularly in Western Europe, Japan and the CEMAI region.

Pharmaceuticals Division – Sales by region for 2008

	Sales				% change
Region	(mCHF)		% of sales		(local currencies)
North America		14,679		41		+102)/+5
Western Europe		10,330		29		+82)/+5
CEMAI1)		3,187		9		+122)/+5
Japan		3,336		9		+42)/–4
Latin America		2,394		6		+162)/+15
Asia–Pacific		1,698		5		+92)/+6
Other regions		337		1		+12)/–1
Total		35,961		100		+102)/+5

1)   Central and Eastern Europe, Middle East, Africa, Central Asia, Indian Subcontinent.
2)   Excluding Tamiflu pandemic government and corporate sales.

Operating results
Royalties and other operating income | The increase of 91 million Swiss francs or 12% in local currencies was due to higher royalty income and gains on disposal of products which offset 302 million Swiss francs lower income from out-licensing agreements. The fall in out-licensing income was mainly due to a number of significant milestone payments in 2007 such as for orlistat OTC rights from GlaxoSmithKline, 80 million Swiss francs as part of a third-party collaboration agreement at Genentech and 42 million Swiss francs relating to Lucentis for approval in the European Union and filing in Japan. Gains on product divestments were 235 million Swiss francs higher than in 2007 and include a gain of 132 million Swiss francs from the second stage of the disposal of three products to Actavis, a gain of 50 million Swiss francs from the disposal of products in Turkey as well as a gain of 158 million Swiss francs from Meda and a gain of 96 million Swiss francs from a sale of other product rights, all being part of the continuous realignment of the product portfolio. The increase in royalty income was driven by Genentech. Royalties and other operating income as percentage of sales increased by 0.4 percentage points to 6.0%.

Pharmaceuticals Division – Royalties and other operating income

	2008		2007		% change
	(mCHF)		(mCHF)		(local currencies)
Royalty income		1,234		1,076		+26
Income from out-licensing agreements		420		722		–38
Income from disposal of products and other		494		259		+95
Total		2,148		2,057		+12

10          Roche Finance Report 2008     |     Roche Group – Financial Review

Cost of sales | Costs remained stable in local currencies mainly driven by an 8% decline in manufacturing cost of goods sold and period costs. This was due to manufacturing efficiencies, favourable product mix effects and the comparison period in 2007 including 135 million Swiss francs Viracept recall costs. Amortisation of intangible assets decreased by 17% in local currencies as some intangible assets became fully amortised. All of the above compensated for the 19% local currency increase in collaboration and profit sharing agreements and the 6% local currency increase in royalty expenses on product sales to 2,105 million Swiss francs (2007: 2,089 million Swiss francs). Genentech’s collaboration profit-sharing expenses with its partners Biogen Idec, Novartis and OSI increased due to higher sales of MabThera/Rituxan, Tarceva and Xolair, respectively and reached 1,330 million Swiss francs (2007: 1,297 million Swiss francs), despite being impacted by the weaker US dollar. The gross profit share to GlaxoSmithKline has increased to 478 million Swiss francs (2007: 379 million Swiss francs) following increased Bonviva/Boniva sales. Royalty expenses on Tamiflu were lower in 2008 due to less pandemic sales, however this has been more than offset by strong growth in other royalty-bearing products, in particular Cellcept (autoimmune), Tarceva, Herceptin and Avastin, and additionally often the royalty rates are tiered to certain sales levels. As a percentage of sales, cost of sales decreased to 24.9% from 25.8% in 2007.

Pharmaceuticals Division – Cost of sales

	2008			2007			% change
	(mCHF)			(mCHF)			(local currencies)
Manufacturing cost of goods sold and period costs		(4,463	)		(5,041	)		–8
Royalty expenses		(2,105	)		(2,089	)		+6
Collaboration and profit-sharing agreements		(1,908	)		(1,755	)		+19
Amortisation of intangible assets		(477	)		(614	)		–17
Impairment of property, plant and equipment		(10	)		(3	)		+287
Impairment of intangible assets		–			–			–
Total		(8,963	)		(9,502	)		0

Marketing and distribution | Costs increased 2% in local currencies and reached 6.7 billion Swiss francs (2007: 7.0 billion Swiss francs). Significant investments continued in leveraging the rich oncology portfolio, with the rollout of additional approved indications and in particular the pan-tumour positioning of Avastin. Heavy levels of investment continued in Bonviva/Boniva and Pegasys and additionally there were preparations for the launch of Actemra/RoActemra in rheumatoid arthritis. These increases were offset by the absence of last year’s pre-launch preparation for Mircera in the United States. Marketing and distribution costs as a percentage of sales decreased 0.5 percentage points to 18.6% (2007: 19.1%).

Research and development | The increase of 11% in local currencies to almost 8 billion Swiss francs reflects continued investment to realise the full potential of the strong development portfolio. This investment includes the late-stage clinical testing of promising compounds such as dalcetrapib (CETP inhibitor for dyslipidemia), ocrelizumab (autoimmune disorders), pertuzumab (breast cancer), and taspoglutide (GLP-1 analogue for type 2 diabetes). Investments were also made in numerous programmes aimed at expanding the use of Roche’s leading anticancer medicines into additional indications, such as Avastin in adjuvant colon cancer. Moreover, impairments of intangible assets were higher than in the comparative period. Research and development costs as a percentage of sales were 22.0% compared to 20.7% in 2007 and 21.3% in the first half of 2008. The Pharmaceuticals Division in total spent 363 million Swiss francs on the in-licensing of pipeline compounds and technologies, which are capitalised as intangible assets as required by IFRS. In total the division spent 8.1 billion Swiss francs on internal and purchased R&D from in-licensing and other alliance deals, representing 22.6% of sales. In addition, Roche Pharmaceuticals spent a further 513 million Swiss francs on the acquisitions of the biotechnology companies Piramed, Mirus and ARIUS.

11

Pharmaceuticals Division – Investments in research and development

	2008			2007			% change
	(mCHF)			(mCHF)			(local currencies)
Research and development expenses		7,904			7,598			+11
Less non-cash items
– Amortisation of intangible assets		(34	)		(31	)		+22
– Impairment of intangible assets		(99	)		(58	)		+77
Research and development expenses excluding
non-cash items		7,771			7,509			+11
Product intangibles – not available for use		363			739			–46
Technology intangibles		–			3			–100
Research and development related capital expenditure		363			742			–46
Total investments in research and development		8,134			8,251			+6

General and administration | Overall costs remained stable in local currencies due to lower legal and restructuring expenses and lower implementation costs for a business harmonisation project including the establishment of a European shared services centre in Budapest, in spite of the loss on the divestment of 46 million Swiss francs for the Cenexi business in France. General and administration expenses as a percentage of sales decreased to 4.4% from 4.6%.

Pharmaceuticals Division – General and administration

	2008			2007			% change
	(mCHF)			(mCHF)			(local currencies)
Administration		(1,497	)		(1,665	)		–4
Legal and environmental settlements		(1	)		(15	)		–78
Business combinations – transaction expenses		(8	)		–			–
Gain (loss) on divestment of businesses		(46	)		–			–
Restructuring expenses		(32	)		(107	)		–67
Gains (losses) on disposal of property, plant and equipment		(7	)		17			–
Other general items		19			90			–82
Total		(1,572	)		(1,680	)		0

Sub-divisional results

Pharmaceuticals sub-divisional results

			Operating			Operating
			profit before			profit before
			exceptional			exceptional		Operating		Operating
	Sales		items			items as		free cash flow		free cash flow
	(mCHF)		(mCHF)			% of sales		(mCHF)		as % of sales
2008
Roche Pharmaceuticals		22,164		6,795			30.7		6,579		29.7
Genentech		10,461		5,821			55.6		5,089		48.6
Chugai		3,336		591			17.7		385		11.5
Elimination within division1)		–		(233	)		–		–		–
Pharmaceuticals Division		35,961		12,974			36.1		12,053		33.5

1) Unrealised internal profits on inventories that have been sold from one sub-division to another, but which have not yet been sold on to external customers at the balance sheet date are eliminated as a consolidation entry.

12          Roche Finance Report 2008     |     Roche Group – Financial Review

			Operating			Operating
			profit before			profit before
			exceptional			exceptional		Operating		Operating
	Sales		items			items as		free cash flow		free cash flow
	(mCHF)		(mCHF)			% of sales		(mCHF)		as % of sales
2007
Roche Pharmaceuticals		22,970		7,225			31.5		5,595		24.4
Genentech		10,414		5,298			50.9		3,880		37.3
Chugai		3,399		610			17.9		569		16.7
Elimination within division1)		–		(91	)		–		–		–
Pharmaceuticals Division		36,783		13,042			35.5		10,044		27.3

1) Unrealised internal profits on inventories that have been sold from one sub-division to another, but which have not yet been sold on to external customers at the balance sheet date are eliminated as a consolidation entry.

Roche Pharmaceuticals | Sales increased by 3% in local currencies despite the impact from declining Tamiflu pandemic government and corporate sales. Excluding these, local sales growth was 9%. Operating profit margin before exceptional items decreased by 0.8 percentage points to 30.7%. Higher investments in research and development and higher expenses to alliance and collaboration partners as well as lower income from out-licensing agreements outweighed favourable developments in cost of sales from manufacturing efficiencies and some product mix impacts and the inclusion of the Viracept recall costs in the 2007 results. Royalty expenses to third parties were 1,316 million Swiss francs (2007: 1,344 million Swiss francs) and royalty expenses to Genentech were 1,702 million Swiss francs (2007: 1,417 million Swiss francs) following the continued success of the oncology portfolio outside the US.

Genentech | Sales grew by 11% in local currencies and the operating profit margin before exceptional items improved by 4.7 percentage points to 55.6%. The main drivers here were strong sales growth and higher royalty and other operating income both from third parties and from Roche Pharmaceuticals which more than compensated for continued heavy investments in research and development and higher collaboration profit sharing expenses with Biogen Idec.

Chugai | Sales decreased by 4% in local currencies, driven primarily by governmental Tamiflu pandemic stockpiling in 2007. Excluding Tamiflu pandemic, sales increased 4% in local currencies, driven by the successful launches of Avastin, the combination therapy Pegasys plus Copegus and Tarceva, which outweighed 18% lower Epogin sales and the decline in sales from the return of a group of marketed products to Sanofi-Aventis in early 2008. This product group had a sales value of around 110 million Swiss francs in 2007 and reduced Chugai’s reported sales growth by 3 percentage points in 2008. Operating profit decreased by 8% in local currencies driven by lower sales. In spite of lower sales, increased support for product launches and the stable high level of research and development expenses, the operating profit margin of 17.7% was only slightly lower compared to 17.9% in 2007. In June 2008 the Group increased its ownership interest in Chugai’s outstanding shares to 61.5% through a tender offer.

Additional information on the Pharmaceuticals Division’s sub-divisional results is given in Note 2 to the Consolidated Financial Statements and further information on Genentech and Chugai is given in Notes 3 and 4.

Exceptional items
Major legal cases | Following the California Supreme Court decision of 24 April 2008, Genentech’s litigation with the City of Hope National Medical Center was settled with a positive net impact on the operating results of 271 million Swiss francs. Additional information is given in Note 25 to the Consolidated Financial Statements.

Changes in Group organisation | On 21 July 2008 the Group announced a proposal to purchase all of the outstanding shares of Genentech and also a reorganisation of the Group’s US Pharmaceuticals business. During 2008 expenses of 243 million Swiss francs were incurred for already committed costs, mainly for termination costs for the closure of manufacturing operations at Nutley, New Jersey, and the research site at Palo Alto, California. Additional information is given in Note 8 to the Consolidated Financial Statements.

13

Pharmaceuticals Division – Total operating results

	Roche					Pharmaceuticals
	{Pharmaceuticals					Genentech					Chugai				Division1)
	2008			2007		2008			2007		2008		2007		2008			2007
	(mCHF)			(mCHF)		(mCHF)			(mCHF)		(mCHF)		(mCHF)		(mCHF)			(mCHF)
Operating profit before
exceptional items		6,795			7,225		5,821			5,298		591		610		12,974			13,042
Major legal cases		–			–		271			–		–		–		271			–
Changes in Group organisation		(149	)		–		(94	)		–		–		–		(243	)		–
Operating profit		6,646			7,225		5,998			5,298		591		610		13,002			13,042

1) Includes unrealised internal profits of 233 million Swiss francs (2007: 91 million Swiss francs) on inventories that have been sold from one sub-division to another, but which have not yet been sold on to external customers at the balance sheet date and which are eliminated as a consolidation entry.

Operating free cash flow
All three sub-divisions of the Pharmaceuticals Division continue to generate strong cash flows. The cash generated supports the expansion of the business with the investments in new production facilities and in intellectual property through in-licensing deals. At Genentech in particular, a significant part of the free cash flow has usually been used in their equity compensation plans, including the purchase of their own equity to maintain Roche’s ownership percentage. In 2008 this was equivalent to 109 million Swiss francs (2007: 1,071 million Swiss francs) with the considerable fall in 2008 being due to the prepayment of some repurchases by Genentech at the end of 2007 and the increased cash inflows from exercise of options by Genentech employees. Overall operating free cash flow increased by 31% in local currencies driven by improved net working capital management and lower capital expenditures and outflows for equity compensation plans. As a percentage of sales, operating free cash flow of the Pharmaceuticals Division increased to 33.5% compared to 27.3% in 2007.

Pharmaceuticals Division – Operating free cash flow

	Roche									Elimination within			Pharmaceuticals
	Pharmaceuticals			Genentech			Chugai			division1)			Division
	(mCHF)			(mCHF)			(mCHF)			(mCHF)			(mCHF)
2008
Operating profit		6,646			5,998			591			(233	)		13,002
Operating profit cash adjustments2)		1,290			2			204			–			1,496
(Increase)/decrease in net working capital		(281	)		179			(146	)		233			(15	)
Investments in property, plant and equipment		(907	)		(850	)		(264	)		–			(2,021	)
Investments in intangible assets		(169	)		(240	)		–			–			(409	)
Operating free cash flow		6,579			5,089			385			–			12,053
– as % of sales		29.7			48.6			11.5			–			33.5
2007
Operating profit		7,225			5,298			610			(91	)		13,042
Operating profit cash adjustments2)		724			(61	)		166			–			829
(Increase)/decrease in net working capital		(866	)		133			42			91			(600	)
Investments in property, plant and equipment		(987	)		(1,310	)		(241	)		–			(2,538	)
Investments in intangible assets		(501	)		(180	)		(8	)		–			(689	)
Operating free cash flow		5,595			3,880			569			–			10,044
– as % of sales		24.4			37.3			16.7			–			27.3

1)	Unrealised internal profits on inventories that have been sold from one sub-division to another, but which have not yet been sold on to external customers at the balance sheet date are eliminated as a consolidation entry.
2)	Operating profit cash adjustments consist of the elimination of depreciation, amortisation and impairment charges and the replacement of the operating income/expenses for provisions, equity compensation plans and disposals of property, plant and equipment and intangibles assets with their cash equivalents. A detailed breakdown is provided on pages 129–130.

14          Roche Finance Report 2008     |     Roche Group – Financial Review

Diagnostics operating results

The Diagnostics Division increased sales to 9.7 billion Swiss francs, growing 10% in local currencies (3% in Swiss francs; 15% in US dollars), leveraged by additional sales from the Ventana acquisition, while strengthening its leading market position in most of the existing businesses. The operating profit decreased by 22% in local currencies to 1.2 billion Swiss francs and the corresponding margin declined 5.3 percentage points to 12.3%. More than half of this decline was due to acquisition impacts, including amortisation of acquired intangible assets and investments to develop the acquired businesses. The remainder of the decline was mostly due to strong competition in the US diabetes care market and portfolio mix effects. In the first half of 2008 the division completed the acquisition of Ventana for a total consideration of 3.8 billion Swiss francs.

For more information on the divisional business and its pipeline, see the Business Report (Part 1 of this Annual Report).

Diagnostics Division results

Sales
Diagnostics continued to grow well above the market with an increase of 10% in local currencies over the previous year. Major drivers of sales growth were Professional Diagnostics leveraged by Immunodiagnostics, Applied Science, in particular the DNA sequencing business, and Tissue Diagnostics through sales of advanced staining instruments and reagents. Roche Diabetes Care’s sales decreased by 1% mainly as a result of strong competition in the US diabetes care market. Molecular Diagnostics’ sales increased by 5%, driven by sales of automated real-time PCR virology and blood screening products. The acquisition of Ventana was completed at the beginning of February 2008 and sales in the new Tissue Diagnostics business area were 376 million Swiss francs for the eleven months to 31 December 2008. These contributed 4 percentage points to local currency sales growth of the Diagnostics Division.

Diagnostics Division – Sales by business area for 2008

	Sales				% change
Business area	(mCHF)		% of sales		(local currencies)
Professional Diagnostics		4,422		46		+9
Diabetes Care		2,971		31		–1
Molecular Diagnostics		1,122		11		+5
Applied Science		765		8		+19
Tissue Diagnostics		376		4		n/a
Total		9,656		100		+10

Professional Diagnostics | Roche Professional Diagnostics continued to gain market share in 2008 as its sales increased 9% in local currencies to 4.4 billion Swiss francs. Immunochemistry sales rose 19% in local currencies to 1.4 billion Swiss francs, showing double-digit sales growth for the eighth consecutive year. Growth was fuelled by a strong uptake of the anti-HCV assay (diagnosis of hepatitis C infection) which was launched in the first half of 2008 outside the US. Growth was also driven by continued demand for the

15

Elecsys NT-proBNP and Troponin T cardiac tests. The new immunoassays launched in 2007/early 2008, were rolled out across European markets providing further growth. These included tests for anti-TSH receptor (thyroid marker), Toxo IgG (toxoplasmosis), vitamin D (osteoporosis), anti-CCP (rheumatoid arthritis), anti-CMV IgG/IgM for diagnosis CMV infection and Brahms Procalcitonin (sepsis). The first two were also approved in the US in the third quarter of 2008, strengthening our offering in the largest market. With the launch of these new tests, Roche has one of the broadest immunoassay menus, and rollout to new markets will continue to drive growth. The clinical chemistry business grew in line with the market amid continuing price erosion in this mature segment. Demand for the cobas 6000 analyser series for medium-workload laboratories remained strong, with additional configurations launched in 2008 increasing its competitiveness. The rollout of the smaller cobas 4000 instruments for small- to medium-size laboratories, continued with the July 2008 launch of the cobas c 311 clinical chemistry analyser in all markets outside the US.

Sales of decentralised testing products rose 10% in local currencies to 793 million Swiss francs, helped by the continued move towards testing at the point-of-care (POC). Coagulation monitoring sales grew double-digit driven by the CoaguChek XS monitor for healthcare professionals and patient self-testing. The Accutrend Plus, the first hand-held device capable of measuring cholesterol, glucose, triglycerides and lactate – important indicators of cardiac risk – is now available in all markets after its initial release at the end of 2007. POC cardiac assays posted double-digit growth, fuelled by continual up-take of the Roche Cardiac proBNP assay and the cobas h 232 portable cardiac testing system, which also runs tests for troponin T, D-dimer, heart type creatine kinase and myoglobin. In July 2008 the Accu-Chek Inform II, the first and only wireless system for hospital glucose testing, was launched outside the US.

Diabetes Care | Roche Diabetes Care maintained market leadership with sales of 3.0 billion Swiss francs, a decrease of 1% in local currencies, primarily impacted by strong competition in the US market. The new blood glucose monitoring products – Accu-Chek Aviva, Accu-Chek Performa and Accu-Chek Compact Plus –almost compensated for declining sales of the older Accu-Chek Advantage. Older products that are in the process of being phased out now account for less than 30% of Diabetes Care sales. Accu-Chek Aviva is now the largest selling system, with strong double-digit growth. The Accu-Chek Compact Plus was launched in the US and Japan in April and June 2008, respectively, and global rollout is now complete for both systems. Roche’s insulin delivery business declined due to strong competition in the US market. Four important new product launches are planned for 2009 to support sales. The Accu-Chek Aviva Nano and Accu-Chek Performa Nano meters will start rollout in their first markets in the first quarter of 2009. The meters are sleeker and more discreetly versioned, targeting the young testers segment. The Accu-Chek Mobile offers complete integration of testing and lancing in a single device and features a unique ‘strip-free’ technology that employs a continuous tape of 50 tests instead of single-use strips. Rollout will commence in the first quarter of 2009. Also scheduled for EU markets beginning of 2009 is the Accu-Chek Combo system, which combines an Accu-Chek Spirit insulin pump and glucose meter with remote-control and bolus calculator capabilities.

Molecular Diagnostics | Roche Molecular Diagnostics remained the market leader in an increasingly competitive market, with sales of 1.1 billion Swiss francs, and an overall increase of 5% in local currencies. Sales of virology products, the largest segment, grew 4% in local currencies, driven by continued demand for the automated Cobas AmpliPrep/Cobas TaqMan (CAP/CTM) platform in Europe, Japan and Asia–Pacific. The FDA approved the automated Cobas TaqMan HBV Test and the fully-automated HCV Test in September and October 2008, respectively. Combined with the Cobas TaqMan HIV Test launched in 2007, the initial automation of this virology trio is now completed in the US. Blood screening sales increased by 2% in local currencies, as additional blood centres in Europe, Asia–Pacific and Latin America converted to the fully automated cobas s 201 platform and the comprehensive cobas TaqScreen MPX multiplex test (detects HIV-1 Groups M & O, HIV-2, HCV and HBV in donated blood or plasma). In December 2008 the FDA approved the multiplex test for use on the cobas s 201 system. Earlier in September the Japanese Red Cross (JRC) completed its transition to the fully automated cobas s 401 system and cobas TaqScreen MPX multiplex test, now used to screen 100% of the Japanese blood supply. In June 2008 Roche signed an exclusive deal with DxS Ltd. (UK) for distribution of the TheraScreen K-RAS Mutation Test and TheraScreen EGFR 29 Mutation Test. Both tests are real-time PCR assays and have CE Mark certification. Used in conjunction with other clinically relevant information, K-RAS and EGFR mutation testing can aid doctors in determining patients’ suitability for certain cancer therapies.

16          Roche Finance Report 2008     |     Roche Group – Financial Review

Applied Science | Roche Applied Science’s sales grew more than three times the Life Sciences market, rising 19% in local currencies to 765 million Swiss francs. The main growth drivers were again the LightCycler 480 system and reagents (for high-throughput real-time PCR) along with the ultrafast Genome Sequencer systems (DNA sequencing), where the business area gained significant market share and is the leader in instrument placement. Biochemical and industrial reagents showed moderate growth in a market impacted by flat government research funding and decreased biotech spending. Microarray systems also contributed strongly from increasing demand since Roche acquired NimbleGen in August 2007.

Tissue Diagnostics | Roche Tissue Diagnostics sales totalling 376 million Swiss francs, representing sales from the date of acquisition in February to 31 December 2008, contributed 4 percentage points to the Division’s local-currency sales growth. On a stand-alone basis, Roche Tissue Diagnostics’ sales for the entire year reached 369 million US dollars, an increase of 23% in local currencies over 2007. Significantly exceeding the estimated market growth rate, this increase was due to robust instrumentation sales of BenchMark XT and LT and immunohistochemistry reagent sales in the advanced staining segment. Commercial operations outside North America are largely integrated into Roche, with a focus on market expansion in Europe and Latin America. A significant number of distributor relationships have now been replaced by dedicated Roche sales teams.

Two major new systems, BenchMark Ultra and Vantage, were launched in 2008. BenchMark Ultra, the first automated system to simultaneously perform immunohistochemistry and in situ hybridisation on a single platform, was launched in the Unites States, Canada and Europe in the second half of the year. The Vantage workflow solution was launched in the US in April 2008 and is a complete workflow information management system for the anatomical pathology lab providing tracking capabilities that streamline and integrate lab work and information flow for greater productivity and patient safety. In addition, 10 new antibodies for various cancer diagnostics were launched to further complement the portfolio.

See the Business Report for more information on Roche’s diagnostics products and Business Areas.

Sales by regions | Overall sales continued to grow ahead or in line with the total market in all regions. In North America the increase of 14%, which includes 12 percentage points from Ventana, was driven by the Professional Diagnostics, Applied Science and Tissue Diagnostics business areas which more than compensated for the 12% decline in Diabetes Care in the North American market. Japan grew significantly more than its market with a 7% increase, while strong performance was also seen in emerging markets in Europe, Asia–Pacific and Latin America.

Diagnostics Division – Sales by region for 2008

	Sales				% change
Region	(mCHF)		% of sales		(local currencies)
EMEA1)		5,238		54		+7
North America		2,550		26		+14
Asia–Pacific		826		9		+18
Latin America		556		6		+18
Japan		450		5		+7
Other regions		36		–		–18
Total		9,656		100		+10

1) Europe, Middle East and Africa.

Operating results
Royalties and other operating income | Income of 139 million Swiss francs was 21% lower in local currencies compared to 2007, which included higher out-licensing income.

17

Diagnostics Division – Royalties and other operating income

	2008		2007		% change
	(mCHF)		(mCHF)		(local currencies)
Royalty income		102		126		–13
Income from out-licensing agreements		33		55		–38
Income from disposal of products and other		4		5		–21
Total		139		186		–21

Cost of sales | The overall increase of 19% in local currencies was considerably higher than sales growth. This was primarily a result of a number of impacts from the acquisitions made by the division over the last two years. Firstly, amortisation of product intangibles increased by 45% in local currencies, partly due to 2008 including a full twelve months amortisation charge from the 2007 acquisitions and 11 months from Ventana. Secondly, manufacturing cost of goods sold and period costs includes an acquisition accounting effect of 33 million Swiss francs of expenses relating to the fair-value write-up of Ventana’s inventory which was fully written off during the first half of 2008. Finally, royalty expenses in 2007 include the reversal of 57 million Swiss francs of BioVeris royalty accruals.

Excluding acquisition accounting impacts, the underlying manufacturing cost of goods sold and period costs grew by 14% in local currencies, primarily driven by continued investment in instrument and meter placements to expand market share, and total cost of sales as a percentage to sales increased to 47.1% in 2008 compared to 46.0% in 2007.

Diagnostics Division – Cost of sales

	2008			2007			% change
	(mCHF)			(mCHF)			(local currencies)
Manufacturing cost of goods sold and period costs		(3,956	)		(3,696	)		+15
Royalty expenses		(278	)		(215	)		+39
Collaboration and profit-sharing agreements		(1	)		–			–
Amortisation of product intangibles		(450	)		(328	)		+45
Impairment of property, plant and equipment		(8	)		(2	)		+299
Impairment of product intangibles		(5	)		–			–
Total		(4,698	)		(4,241	)		+19

Marketing and distribution | The increase of 15% in local currencies was mainly due to investments to increase market share, especially in Diabetes Care, and to competitively fund the sequencing and array businesses in Applied Science. Excluding the impact of the newly acquired Tissue Diagnostics business, marketing and distribution costs grew 10% in local currencies. Marketing and distribution as a percentage of sales was 25.6% compared to 24.7% in 2007.

Research and development | Costs increased by 26% in local currencies reflecting investments into the sequencing and array businesses, and into molecular oncology tests. Tissue Diagnostics contributed 10 percentage points to this growth. As a percentage of sales, research and development costs increased to 9.7% from 8.4% in 2007.

Diagnostics Division – Investments in research and development

	2008			2007			% change
	(mCHF)			(mCHF)			(local currencies)
Research and development expenses		941			787			+26
Less non-cash items
– Amortisation of intangible assets		(8	)		(3	)		+168
– Impairment of intangible assets		–			–			–
Research and development expenses excluding non-cash items		933			784			+26

18          Roche Finance Report 2008     |     Roche Group – Financial Review

General and administration | General and administration costs decreased by 4% in local currencies. The administration growth of 9% in local currencies is exclusively due to the acquired Tissue Diagnostics business. In the first half of 2008, there were 41 million Swiss francs of transaction expenses relating to the Ventana acquisition. Restructuring costs were lower in 2008, mainly due to 2007 including 29 million Swiss francs of post-acquisition restructuring expenses at BioVeris. Restructuring costs in 2008 were 27 million Swiss francs mainly relating to the transfer of production in Professional Diagnostics from the United States to Germany and Switzerland. Moreover expenses for legal and environmental settlements were significantly lower in 2008.

Diagnostics Division – General and administration

	2008			2007			% change
	(mCHF)			(mCHF)			(local currencies)
Administration		(384	)		(373	)		+9
Legal and environmental settlements		(15	)		(80	)		–81
Business combinations – transaction expenses		(41	)		–			–
Restructuring expenses		(27	)		(39	)		–25
Gains (losses) on disposal of property, plant and equipment		(2	)		(1	)		+159
Other general items		(26	)		(58	)		–55
Total		(495	)		(551	)		–4

Operating free cash flow
Lower operating profit was the main driver of the decline in operating free cash flow while higher investments in property, plant and equipment, particularly in instrument placements, were compensated by lower investments in intangible assets.

Diagnostics Division – Operating free cash flow

	2008			2007
	(mCHF)			(mCHF)
Operating profit		1,187			1,648
Operating profit cash adjustments 1)		1,122			1,121
(Increase)/decrease in net working capital		(464	)		(374	)
Investments in property, plant and equipment		(1,237	)		(1,069	)
Investments in intangible assets		(8	)		(257	)
Operating free cash flow		600			1,069
– as % of sales		6.2			11.4

1) Operating profit cash adjustments consist of the elimination of depreciation, amortisation and impairment charges and the replacement of the operating income/expenses for provisions, equity compensation plans and disposals of property, plant and equipment and intangibles assets with their cash equivalents. A detailed breakdown is provided on pages 129–130.

Corporate operating costs

General and administration | Costs in 2008 were 19% higher at 265 million Swiss francs (222 million Swiss francs in 2007). The 2008 results include 18 million Swiss francs of costs due to the realignment of divisional human resource activities into corporate human resources. In 2007, these costs were part of the Pharmaceuticals and Diagnostics divisional results. Operating free cash flow was a net outflow of 275 million Swiss francs (2007: net outflow of 442 million Swiss francs).

Foreign exchange impact on operating results

The Group’s exposure to movements in foreign currencies affecting its operating results, as expressed in Swiss francs, is summarised by the following key figures and comments.

19

Growth

	% change (local currencies)				% change (CHF)
	2008		2007		2008		2007
Sales		+6		+10		–1		+10
Operating profit before exceptional items		+4		+22		–4		+23

Exchange rates against the Swiss franc

	31 December		Average		31 December		Average
	2008		2008		2007		2007
1 USD		1.06		1.08		1.13		1.20
1 EUR		1.49		1.58		1.66		1.64
100 JPY		1.17		1.05		1.00		1.02

In 2008 the US dollar significantly weakened against the Swiss franc during the year, but recovered in the final quarter. The Swiss franc strengthened against the euro and many other economies’ currencies, although there was a weakening against the yen particularly in the fourth quarter. As a result, sales growth and operating profit growth expressed in Swiss francs was 7 and 8 percentage points respectively lower than in local currencies. The sensitivity of Group sales and operating profit before exceptional items in absolute terms to a 1% movement in foreign currencies against the Swiss franc during 2008 are shown in the table below.

Currency sensitivities

			Operating profit
			before
Impact of 1% change in average exchange rate	Sales		exceptional items
versus the Swiss franc	(mCHF)		(mCHF)
US dollar		167		51
Euro		127		65
Japanese yen		38		12
All other currencies		105		65

Non-operating results

Non-operating results

	2008			2007			% change
	(mCHF)			(mCHF)			(CHF)
Operating profit		13,924			14,468			–4
Associates		1			2			–50
Financial income		1,123			1,805			–38
Financing costs		(887	)		(971	)		–9
Profit before taxes		14,161			15,304			–7
Income taxes		(3,317	)		(3,867	)		–14
Net income		10,844			11,437			–5
Attributable to
– Roche shareholders		8,969			9,761			–8
– Non-controlling interests		1,875			1,676			+12

20          Roche Finance Report 2008     |     Roche Group – Financial Review

During 2008 the Group’s treasury operations delivered a positive net financial income, with net income from financial assets and foreign exchange management exceeding financing costs by 236 million Swiss francs. The Group’s effective tax rate declined to 23.4% compared to 25.3% in 2007 due mainly to declines in some local tax rates. Net income decreased due to the unfavourable exchange rate impacts and the lower net financial income, partially compensated by the lower effective tax rate.

Net financial income | in millions of CHF

Financial income
Financial income was 1,123 million Swiss francs, declining 38% compared to 2007. Interest income and income from debt securities were 392 million Swiss francs, down 61% due to lower holdings, lower US interest rates and a weaker US dollar compared to the Swiss franc. Also contributing to the lower result were losses on the sale of debt securities caused by limited investor demand during the current financial market crisis. Losses of 64 million Swiss francs were incurred on fixed income securities carried at ‘fair-value-through-profit-and-loss’, losses of 44 million Swiss francs were incurred on derivatives relating to debt securities, and impairments of 53 million Swiss francs were recorded on debt securities. Net income from equity securities was 133 million Swiss francs compared to 313 million Swiss francs in 2007. The result includes impairments of 115 million Swiss francs on equity securities. Funds continue to be invested with a conservative risk profile, with low exposures to equities. Expected returns on pension plan assets were 688 million Swiss francs, up 3% compared to 2007. Net foreign exchange losses were 65 million Swiss francs compared to losses of 153 million Swiss francs in 2007. During the second half of 2008, the erosion of certain emerging market currencies caused a significant increase in the corresponding hedge expenses. A full analysis of financial income is given in Note 5 to the Consolidated Financial Statements.

Financial costs
Financing costs were 887 million Swiss francs, 9% lower compared to 2007 reflecting the redemption of several debt instruments during 2007 and 2008, as well as a weaker US dollar compared to the Swiss franc. Time costs of provisions were 21 million Swiss francs, 48 million Swiss francs lower than in 2007, reflecting the settlement of the City of Hope litigation in the second quarter of 2008. The interest cost of pension plans was 652 million Swiss francs, an increase of 7% compared to 2007, due to changes in discount rates used for actuarial calculations. A full analysis of financing costs is given in Note 5 to the Consolidated Financial Statements.

Income taxes
The Group’s effective tax rate declined to 23.4% compared to the 2007 rate of 25.3%. The main driver is a significantly lower tax rate at Roche, with an underlying effective tax rate of 10.1% compared to 15.6% in 2007. This reflects lower taxable profits in certain high tax jurisdictions and certain one-time effects, notably a favourable change in tax rates in Basel that was effective in 2008. The improvement is despite an increasing pre-tax profit contribution from Genentech.

Analysis of the Group’s effective tax rate

	2008							2007
	Profit		Income					Profit		Income
	before tax		taxes			Tax rate		before tax		taxes			Tax rate
	(mCHF)		(mCHF)			(%)		(mCHF)		(mCHF)			(%)
Roche (excl. Genentech and Chugai)		7,402		(745	)		10.1		9,201		(1,436	)		15.6
Genentech		6,096		(2,331	)		38.2		5,470		(2,189	)		40.0
Chugai		663		(241	)		36.3		633		(242	)		38.2
Group’s effective tax rate		14,161		(3,317	)		23.4		15,304		(3,867	)		25.3

21

Net income and Earnings per share

In 2008 Group net income decreased by 5% to 10.8 billion Swiss francs. Of the total 1,875 million Swiss francs non-controlling interests, 1,659 million Swiss francs are attributable to Genentech non-controlling interests and 200 million Swiss francs to Chugai non-controlling interests. The net impact of exceptional items on net income was minor and had no impact on the net income growth rate or on the absolute amount of 10.8 billion Swiss francs.

Diluted EPS
	2008		2007
	(CHF)		(CHF)		% change
Group		10.23		11.16		–8
Core		11.04		11.85		–7

The decrease in diluted EPS was due to the decrease in net income attributable to Roche shareholders, as described above. The Core EPS, which excludes exceptional items and amortisation and impairment of intangible assets, decreased by 7%. In local currencies Core EPS increased by 2%. Supplementary net income and EPS information is given on page 128. This includes calculations of Core EPS and reconciles these to the Group’s published IFRS results.

Cash flows and net cash

Free cash flow
	Pharmaceuticals			Diagnostics			Corporate			Group
	(mCHF)			(mCHF)			(mCHF)			(mCHF)
2008
Operating profit		13,002			1,187			(265	)		13,924
Operating profit cash adjustments		1,496			1,122			(7	)		2,611
(Increase)/decrease in net working capital		(15	)		(464	)		(2	)		(481	)
Investments in property, plant and equipment		(2,021	)		(1,237	)		(1	)		(3,259	)
Investments in intangible assets		(409	)		(8	)		–			(417	)
Operating free cash flow		12,053			600			(275	)		12,378
Treasury activities											166
Taxes paid											(3,514	)
Dividends paid											(4,051	)
Free cash flow											4,979

22          Roche Finance Report 2008      |      Roche Group – Financial Review

	Pharmaceuticals			Diagnostics			Corporate			Group
	(mCHF)			(mCHF)			(mCHF)			(mCHF)
2007
Operating profit		13,042			1,648			(222	)		14,468
Operating profit cash adjustments		829			1,121			(16	)		1,934
(Increase)/decrease in net working capital		(600	)		(374	)		(202	)		(1,176	)
Investments in property, plant and equipment		(2,538	)		(1,069	)		(2	)		(3,609	)
Investments in intangible assets		(689	)		(257	)		–			(946	)
Operating free cash flow		10,044			1,069			(442	)		10,671
Treasury activities											832
Taxes paid											(4,494	)
Dividends paid											(3,027	)
Free cash flow											3,982

The free cash flow of the Group in 2008 was strong and increased by 1.0 billion Swiss francs to 5.0 billion Swiss francs. This increase was primarily due to a higher operating free cash flow and lower tax payments. These factors more than compensated for the lower cash generation from treasury activities and for the higher dividend payments.

The operating free cash flow increased by 16%, mainly due to significantly lower net cash outflow from equity compensation plans, despite strong currency translation effects. The underlying business continues with good cash generation, partly absorbed by growth in net working capital as the business expands. Operating profit cash adjustments consist of the elimination of depreciation, amortisation and impairment charges and the replacement of the operating income/expenses for provisions, equity compensation plans and disposals of property, plant and equipment and intangible assets with their cash equivalents. This includes the net impact of the Group’s equity compensation plans, including cash received from employees upon exercise, cash used by Roche to purchase own equity for delivery to employees and cash used by Genentech for their stock repurchase programme which maintains Roche’s ownership percentage. A detailed breakdown of this is provided on pages 129–130. Operating free cash flow also includes cash movements in working capital and the cash payments for capital expenditure on property, plant and equipment and intangible assets, the latter mainly arising through in-licensing deals.

Treasury operations showed positive cash generation, mainly from interest income. Cash flows from treasury activities decreased by 80% due to lower interest received, driven by lower funds held, lower interest rates and a weaker US dollar against the Swiss franc. Total taxes paid in 2008 decreased considerably compared to 2007 which included significant final settlement payments of previously accrued amounts. Dividend payments increased by 34%, or 1.0 billion Swiss francs, compared to 2007.

Net cash
	Roche			Genentech			Chugai			Group
	(mCHF)			(mCHF)			(mCHF)			(mCHF)
31 December 2007
Cash and cash equivalents		1,869			1,157			729			3,755
Marketable securities		14,496			5,209			742			20,447
Long-term debt		(1,270	)		(2,564	)		–			(3,834	)
Short-term debt		(2,357	)		(675	)		–			(3,032	)
Net cash at beginning of period		12,738			3,127			1,471			17,336
Free cash flow for 2008		1,623			3,392			(36	)		4,979
Transactions in own equity instruments		(141	)		–			–			(141	)
Business combinations		(2,964	)		–			–			(2,964	)
Changes in ownership interests in subsidiaries		(2,219	)		–			–			(2,219	)
Currency translation, fair value and other movements		(707	)		275			123			(309	)
Net change in net cash		(4,408	)		3,667			87			(654	)

23

	Roche			Genentech			Chugai		Group
	(mCHF)			(mCHF)			(mCHF)		(mCHF)
31 December 2008
Cash and cash equivalents		1,036			3,057			822		4,915
Marketable securities		8,380			6,740			736		15,856
Long-term debt		(498	)		(2,474	)		–		(2,972	)
Short-term debt		(588	)		(529	)		–		(1,117	)
Net cash at end of period		8,330			6,794			1,558		16,682

Net cash position of the Group is 16.7 billion Swiss francs, down by 0.7 billion Swiss francs during 2008. The free cash flow of 5.0 billion Swiss francs was primarily used to finance the acquisitions of Ventana (3.8 billion Swiss francs) and the increase of the ownership in Chugai (0.9 billion Swiss francs). The release of previously restricted cash relating to the City of Hope litigation at Genentech increased net cash by 0.9 billion Swiss francs, offsetting the 0.5 billion Swiss francs paid to City of Hope which is included within the operating free cash flow. The Group also repaid debt of 2.3 billion Swiss francs mainly for the ‘Rodeo’ bonds and the euro-denominated European Medium Term Notes. This reduced debt and liquid assets, but had no impact on net cash.

Balance sheet

Balance sheet | in billions of CHF

Condensed balance sheet
	31 December 2008			31 December 2007
	(mCHF)			(mCHF)			% change
Property, plant and equipment		18,190			17,832			+2
Goodwill and intangible assets		15,474			13,181			+17
Other non-current assets		3,821			4,518			–15
Cash and marketable securities		20,771			24,202			–14
Other current assets		17,833			18,632			–4
Total assets		76,089			78,365			-3
Debt (current and non-current)		(4,089	)		(6,866	)		–40
Other non-current liabilities		(7,191	)		(6,634	)		+8
Other current liabilities		(10,987	)		(11,422	)		–4
Total liabilities		(22,267	)		(24,922	)		-11
Total net assets		53,822			53,443			+1
Capital and reserves attributable to Roche shareholders		44,479			45,483			–2
Equity attributable to non-controlling interests		9,343			7,960			+17
Total equity		53,822			53,443			+1

A full consolidated balance sheet is given on page 30 of the Consolidated Financial Statements.

24          Roche Finance Report 2008      |      Roche Group – Financial Review

Non-current assets | Property, plant and equipment increased due to capital expenditure on new production facilities by Genentech, the Diagnostics Division and Chugai. This was partly offset by exchange rate impacts, primarily due to the US dollar and euro being 6% and 10% lower at 31 December 2008 compared to 31 December 2007. Goodwill and intangible assets increased by 2.3 billion Swiss francs, mainly from the Ventana, Piramed, Mirus and ARIUS acquisitions and in-licensing transactions.

Current assets | Within current assets, inventories and accounts receivable were slightly higher in local currencies, while there was a significant decrease in cash and marketable securities as shown in net cash above.

Debt | There was a reduction in debt by a further 2.8 billion Swiss francs, of which 1.0 billion Swiss francs relates to the redemption on maturity of the ‘Rodeo’ Swiss franc bonds and 1.2 billion Swiss francs to the redemption on maturity of the euro-denominated European Medium Term Notes. Most of the remaining decrease is due to exchange rate impacts.

Other non-current and current liabilities | The overall balance was stable with an increase of 1.0 billion Swiss francs in pension obligations being largely offset by the reduction of 0.7 billion Swiss francs in legal and other provisions following settlements made in 2008, notably at Genentech for the City of Hope litigation.

Total net assets/equity | The most significant movements in equity were the net income of 10.8 billion Swiss francs and the dividend payments of 4.1 billion Swiss francs, currency translation losses of 3.0 billion Swiss francs, the impact of the change in ownership interests in Ventana and Chugai of 2.2 billion Swiss francs in total and the impact of actuarial losses on post-employment plans of 1.5 billion Swiss francs, net of tax.

Strong financial condition | The Group remains solidly financed, with equity (including non-controlling interests) representing 71% of total assets and 84% of total assets financed long-term.

Pensions and other post-employment benefits

Post-employment benefit plans are classified as ‘defined contribution plans’ if the Group pays fixed contributions into a separate fund or to a third-party financial institution and will have no further legal or constructive obligation to pay further contributions. In 2008 expenses for the Group’s defined contribution plans were 253 million Swiss francs (2007: 259 million Swiss francs).

All other plans are classified as ‘defined benefit plans’, even if the Group’s potential obligation is relatively minor or has a relatively remote possibility of arising. The funding and asset management of the Group’s various defined benefit plans is overseen at a corporate level. Plans are usually established as trusts independent of the Group and are funded by payments from the Group and by employees, but in some cases the plan is unfunded and the Group pays pensions to retired employees directly from its own financial resources.

Funding status of defined benefit pension and other post-employment benefit plans
	2008			2007
	(mCHF)			(mCHF)
Funded plans
– Fair value of plan assets		9,438			12,170
– Defined benefit obligation		(10,504	)		(10,646	)
– Over (under) funding		(1,066	)		1,524
Unfunded plans
– Defined benefit obligation		(3,078	)		(3,344	)

25

Funding status | Overall the Group’s defined benefit plans continue to be adequately funded despite the financial turbulence during 2008 with the funding status at 90% compared to 114% at the beginning of the year. The main movements came from a reduction of the fair value of plan assets following declines in global financial markets.

Expenses recorded in income statement | Total pension expenses in 2008 relating to the Group’s defined benefit plans were 281 million Swiss francs compared to 312 million Swiss francs in 2007. The decrease of 10% is mainly due to changes in discount rates adopted at the end of 2007. Based on the revised actuarial assumptions at the end of 2008, total pension expenses for 2009 are expected to increase compared to 2008 due to a lower expected return on plan assets.

Full details of the Group’s pensions and other post-employment benefits are given in Note 10 to the Consolidated Financial Statements.

Roche securities

The Roche securities performed broadly in line with the MSCI Europe Pharmaceutical Index and the global pharmaceutical sector.

Share price and market capitalisation (at 31 December)
	2008		2007		% change
Share price (CHF)		168.70		213.00		–21
Non-voting equity security (Genussschein) price (CHF)		162.50		195.60		–17
Market capitalisation (billions of CHF)		141		171		–18

Roche ranked number 10 among a peer group of 20 healthcare companies¹⁾ as listed below, in terms of Total Shareholder Return (TSR), i. e. share price growth plus dividends, in 2008 when measured in Swiss francs at actual exchange rates. Year-end return was –19% for the Roche share and –15% for the Roche non-voting equity security. The combined performance of share and non-voting equity security was –16% compared to a weighted average return for the peer group of –18% at actual exchange rates.

¹⁾ Peer group for 2008: Abbott Laboratories, Amgen, Astellas, AstraZeneca, Bayer, Becton Dickinson, Biogen Idec, Bristol-Myers Squibb, Eli Lilly, Gilead, GlaxoSmithKline, Johnson & Johnson, Merck & Co., Novartis, Pfizer, Roche, Sanofi-Aventis, Schering-Plough, Takeda, Wyeth.

Total Shareholder Return development | in %

26          Roche Finance Report 2008     |     Roche Group – Financial Review

Proposed dividend

The Board of Directors is proposing an increase of 9% in the dividend for 2008 to 5.00 Swiss francs per share and non-voting equity security (2007: 4.60 Swiss francs) for approval at the Annual General Meeting. This is the 22^nd consecutive increase in the dividend. If the dividend proposal is approved by shareholders, dividend payments on the shares and non-voting equity securities in issue will amount to 4.3 billion Swiss francs (2007: 4.0 billion Swiss francs), resulting in a payout ratio of 49% (2007: 41%). Based on the prices at year-end 2008, the dividend yield on the Roche share is 3.0% (2007: 2.2%) and the yield on the non-voting equity security is 3.1% (2007: 2.4%). Further information on the Roche securities is given on pages 131–132 of the Finance Report.

Information per share and non-voting equity security
	2008		2007
	(CHF)		(CHF)		% change
Basic EPS		10.43		11.36		–8
Diluted EPS		10.23		11.16		–8
Core EPS		11.04		11.85		–7
Equity attributable to Roche shareholders per share		51.74		52.87		–2
Dividend per share		5.00		4.60		+9

For further details please refer to Notes 28 and 29 of the Consolidated Financial Statements and page 128 of the Finance Report.

Financial risks

The Group manages its financial assets and liabilities in a conservative way, with Treasury activities servicing the Group’s business requirements without materially affecting the Group’s risk profile.

Asset allocation | Surplus liquid funds are either held as cash or are invested in high-quality, investment grade fixed income securities. The majority holdings are in liquid, short term instruments with maturities of up to three months. On some longer-term holdings, Roche experiences wider credit spreads and reduced liquidity caused by the current financial markets situation. During the first quarter of 2008, Roche sold almost all remaining equity positions classified as marketable securities. Their share declined to less than one percent (31 December 2007: 1%) of total liquid funds. In addition, the Group owns equity securities classified as financial long-term assets (see Note 16 to the Consolidated Financial Statements) which are venture capital positions in connection with the Group’s strategic alliance efforts. These positions total 0.6 billion Swiss francs (31 December 2007: 0.8 billion Swiss francs).

Cash and marketable securities
	2008		2008		2007		2007
	(mCHF)		(% of total)		(mCHF)		(% of total)
Cash and cash equivalents		4,915		24		3,755		16
Money market instruments		7,961		38		11,132		46
Bonds, debentures and other investments		7,844		38		9,023		37
Shares		51		0		292		1
Total cash and marketable securities		20,771		100		24,202		100

27

Credit risk | Credit risk arises from the possibility that counterparties to transactions may default on their obligations, causing financial losses for the Group. Despite significant market difficulties in 2008, the rating profile of the Group’s 20.7 billion Swiss francs fixed income marketable securities remained strong, with 96% being invested in the A-AAA range. The counterparty profile of the Group’s 9.8 billion Swiss francs trade receivables remains well diversified across types of customer and regions, with some wholesaler concentration in the US.

Market risks | Market risk arises from changing market prices of the Group’s financial assets or financial liabilities. The exposures are predominantly related to changes in foreign exchange rates, interest rates and equity prices. The Group uses Value-at-Risk (VaR) to assess the impact of market risk on its financial instruments. VaR data indicates the value range within which a given financial instrument will fluctuate with a pre-set probability as a result of movements in market prices. The VaR data in the table below indicate the loss level over a period of one month which with 95% probability will not be exceeded. Actual future gains and losses associated with our treasury activities may differ materially from the VAR analyses performed due to the inherent limitations associated with predicting the timing and amount of changes to interest rates, foreign currency exchanges rates and equity investment prices, particularly in periods of high market volatilities. Furthermore, the VaR numbers below do not include a credit risk component.

Market risk of financial instruments
	31 December 2008			31 December 2007
	(mCHF)			(mCHF)
VaR – Foreign exchange component		96			75
VaR – Interest rate component		27			40
VaR – Other price component		62			93
Diversification		(52	)		(65	)
VaR – Total		133			143

At 31 December 2008, the total VaR of the financial assets and liabilities was 133 million Swiss francs (31 December 2007: 143 million Swiss francs). The foreign exchange VaR increased and comes mainly from hedging of non-US dollar cash flows from future royalty income over the next five years at Genentech. The lower contribution from the interest rate component was caused by the ageing of fixed-term liabilities. Other price risk arises mainly from movements in the prices of equity securities. The decrease of the other price component is due to the significantly reduced equity security holdings. At 31 December 2008, the Group held equity securities with a market value of 0.6 billion Swiss Francs (31 December 2007: 1.1 billion Swiss francs). This number includes holdings in biotechnology companies, which were acquired in the context of licensing transactions or scientific collaborations. The lower holdings in equity securities resulted in a lower VaR for other price risk.

Further information on financial risk management and financial risks and the VaR methodology is included in Note 32 to the Consolidated Financial Statements.

International Financial Reporting Standards

The Roche Group has been using International Financial Reporting Standards (IFRS) to report its consolidated results since 1990. The Group has made changes to its accounting policies with respect to new and revised International Financial Reporting Standards and interpretations. The Group has implemented the revised versions of IFRS 3 ‘Business Combinations’ and IAS 27 ‘Consolidated and Separate Financial Statements’. The main impacts of these on the 2008 results are that transaction costs from business combinations are now expensed instead of being included as part of the acquisition price. The Group has also implemented IFRIC interpretation 14 which relates to IAS 19 ‘Employee benefits’ which results in an increase in the pension assets recorded on the Group’s balance sheet and a corresponding increase in the Group’s equity.

28          Roche Finance Report 2008     |     Roche Group – Roche Group Consolidated Financial Statements

Roche Group
Consolidated Financial Statements

Roche Group consolidated income statement for the year ended 31 December 2008 | in millions of CHF

	Pharmaceuticals			Diagnostics			Corporate			Group
Sales2		35,961			9,656			–			45,617
Royalties and other operating income2		2,148			139			–			2,287
Cost of sales		(8,963	)		(4,698	)		–			(13,661	)
Marketing and distribution		(6,696	)		(2,474	)		–			(9,170	)
Research and development2		(7,904	)		(941	)		–			(8,845	)
General and administration		(1,572	)		(495	)		(265	)		(2,332	)
Operating profit before exceptional items2		12,974			1,187			(265	)		13,896
Major legal cases25		271			–			–			271
Changes in Group organisation8		(243	)		–			–			(243	)
Operating profit2		13,002			1,187			(265	)		13,924
Associates15											1
Financial income5											1,123
Financing costs5											(887	)
Profit before taxes											14,161
Income taxes6											(3,317	)
Net income											10,844
Attributable to
– Roche shareholders											8,969
– Non-controlling interests											1,875
Earnings per share and non-voting equity security29
Basic (CHF)											10.43
Diluted (CHF)											10.23

Reference numbers indicate corresponding Notes to the Consolidated Financial Statements.

29

Roche Group consolidated income statement for the year ended 31 December 2007 | in millions of CHF

	Pharmaceuticals			Diagnostics			Corporate			Group
Sales2		36,783			9,350			–			46,133
Royalties and other operating income2		2,057			186			–			2,243
Cost of sales		(9,502	)		(4,241	)		–			(13,743	)
Marketing and distribution		(7,018	)		(2,309	)		–			(9,327	)
Research and development2		(7,598	)		(787	)		–			(8,385	)
General and administration		(1,680	)		(551	)		(222	)		(2,453	)
Operating profit2		13,042			1,648			(222	)		14,468
Associates15											2
Financial income5											1,805
Financing costs5											(971	)
Profit before taxes											15,304
Income taxes6											(3,867	)
Net income											11,437
Attributable to
– Roche shareholders											9,761
– Non-controlling interests											1,676
Earnings per share and non-voting equity security29
Basic (CHF)											11.36
Diluted (CHF)											11.16

30          Roche Finance Report 2008     |     Roche Group – Roche Group Consolidated Financial Statements

Roche Group consolidated balance sheet |  in millions of CHF

	31 December			31 December
	2008			2007
Non-current assets
Property, plant and equipment12		18,190			17,832
Goodwill13		8,353			6,835
Intangible assets14		7,121			6,346
Associates15		9			9
Financial long-term assets16		940			1,333
Other long-term assets16		451			527
Deferred income tax assets6		1,829			1,317
Post-employment benefit assets10		592			1,332
Total non-current assets		37,485			35,531
Current assets
Inventories17		5,830			6,113
Accounts receivable18		9,755			9,804
Current income tax assets6		268			263
Other current assets19		1,980			2,452
Marketable securities20		15,856			20,447
Cash and cash equivalents21		4,915			3,755
Total current assets		38,604			42,834
Total assets		76,089			78,365
Non-current liabilities
Long-term debt27		(2,972	)		(3,834	)
Deferred income tax liabilities6		(1,409	)		(1,527	)
Post-employment benefit liabilities10		(4,669	)		(3,696	)
Provisions25		(654	)		(688	)
Other non-current liabilities26		(459	)		(723	)
Total non-current liabilities		(10,163	)		(10,468	)
Current liabilities
Short-term debt27		(1,117	)		(3,032	)
Current income tax liabilities6		(2,193	)		(2,215	)
Provisions25		(804	)		(1,517	)
Accounts payable22		(2,017	)		(1,861	)
Accrued and other current liabilities23		(5,973	)		(5,829	)
Total current liabilities		(12,104	)		(14,454	)
Total liabilities		(22,267	)		(24,922	)
Total net assets		53,822			53,443
Equity
Capital and reserves attributable to Roche shareholders28		44,479			45,483
Equity attributable to non-controlling interests30		9,343			7,960
Total equity		53,822			53,443

As disclosed in Note 1, post-employment benefit assets, deferred tax liabilities and equity have been restated in the 31 December 2007 balance sheet following the adoption of IFRIC interpretation 14 in 2008. A reconciliation to the previously published balance sheet is provided in Note 1.

31

Roche Group consolidated cash flow statement |  in millions of CHF

	Year ended 31 December
	2008			2007
Cash flows from operating activities
Cash generated from operations31		17,626			18,480
(Increase) decrease in working capital		(524	)		(1,207	)
Payments made for defined benefit post-employment plans10		(353	)		(352	)
Utilisation of provisions25		(1,061	)		(696	)
Other operating cash flows		3			(3	)
Cash flows from operating activities, before income taxes paid		15,691			16,222
Income taxes paid		(3,514	)		(4,494	)
Total cash flows from operating activities		12,177			11,728
Cash flows from investing activities
Purchase of property, plant and equipment		(3,139	)		(3,519	)
Purchase of intangible assets		(418	)		(946	)
Disposal of property, plant and equipment		69			116
Disposal of intangible assets		–			–
Disposal of products		472			247
Business combinations7		(3,004	)		(2,310	)
Divestments of subsidiaries34		40			–
Interest and dividends received31		611			1,079
Sales of marketable securities		16,666			13,165
Purchases of marketable securities		(12,758	)		(13,377	)
Other investing cash flows		(261	)		(243	)
Total cash flows from investing activities		(1,722	)		(5,788	)
Cash flows from financing activities
Proceeds from issue of long-term debt instruments27		–			719
Repayment and redemption of long-term debt instruments27		(2,188	)		(1,908	)
Increase (decrease) in other long-term debt		(234	)		4
Increase (decrease) in short-term borrowings		(190	)		(389	)
Transactions in own equity instruments28		(98	)		1,085
Change in ownership interest in subsidiaries
– Chugai4		(934	)		–
– Ventana7		(1,285	)		–
Interest and dividends paid31		(4,267	)		(3,324	)
Exercises of equity-settled equity compensation plans11		598			450
Genentech and Chugai share repurchases3,4		(844	)		(1,895	)
Other financing cash flows		–			(12	)
Total cash flows from financing activities		(9,442	)		(5,270	)
Net effect of currency translation on cash and cash equivalents		147			(125	)
Increase (decrease) in cash and cash equivalents		1,160			545
Cash and cash equivalents at 1 January		3,755			3,210
Cash and cash equivalents at 31 December 21		4,915			3,755

32          Roche Finance Report 2008     |     Roche Group – Roche Group Consolidated Financial Statements

Roche Group consolidated statement of recognised income and expense | in millions of CHF

	Year ended 31 December
	2008			2007
Available-for-sale investments
– Valuation gains (losses) taken to equity28		(671	)		(198	)
– Transferred to income statement on sale or impairment28		163			(128	)
Cash flow hedges
– Gains (losses) taken to equity28		(55	)		(45	)
– Transferred to income statement28		83			(3	)
– Transferred to the initial balance sheet carrying value of hedged items28		–			–
Currency translation of foreign operations
– Exchange differences28		(2,982	)		(1,906	)
– Accumulated differences transferred to income statement on divestment28		(16	)		–
Defined benefit post-employment plans
– Actuarial gains (losses)28		(2,820	)		1,178
– Limit on asset recognition28		636			(636	)
Income taxes on items taken directly to or transferred from equity28		738			(214	)
Net income recognised directly in equity		(4,924	)		(1,952	)
Net income recognised in income statement		10,844			11,437
Total recognised income and expense		5,920			9,485
Attributable to
– Roche shareholders28		4,285			8,341
– Non-controlling interests30		1,635			1,144
Total		5,920			9,485
Effect of changes in accounting policy attributable to
– Roche shareholders1		–			297
– Non-controlling interests1		–			–
Total		–			297

As disclosed in Note 1, the entries for defined benefit post-employment plans have been restated in the statement of recognised income and expense for 2007 following the adoption of IFRIC interpretation 14 in 2008. A reconciliation to the previously published statement of recognised income and expense is provided in Note 1.

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Roche Group consolidated statement of changes in equity | in millions of CHF
	Roche			Non-controlling
	shareholders			interests			Total
Year ended 31 December 2007
At 1 January 2007 – as previously published		39,444			7,370			46,814
Changes in accounting policy1		297			–			297
At 1 January 2007 – restated		39,741			7,370			47,111
Net income recognised directly in equity		(1,420	)		(532	)		(1,952	)
Net income recognised in income statement		9,761			1,676			11,437
Total recognised income and expense		8,341			1,144			9,485
Dividends paid28, 30		(2,930	)		(97	)		(3,027	)
Transactions in own equity instruments28		1,085			–			1,085
Equity compensation plans28, 30		559			449			1,008
Genentech and Chugai share repurchases28, 30		(1,044	)		(851	)		(1,895	)
Convertible debt instruments28, 30		(324	)		–			(324	)
Changes in non-controlling interests28, 30		55			(55	)		–
At 31 December 2007		45,483			7,960			53,443

Year ended 31 December 2008
At 1 January 2008	45,483		7,960		53,443
Net income recognised directly in equity	(4,684	)	(240	)	(4,924	)
Net income recognised in income statement	8,969		1,875		10,844
Total recognised income and expense	4,285		1,635		5,920
Ventana acquisition7	–		321		321
Dividends paid28, 30	(3,969	)	(95	)	(4,064	)
Transactions in own equity instruments28	(98	)	–		(98	)
Equity compensation plans28, 30	789		574		1,363
Genentech and Chugai share repurchases28, 30	(472	)	(372	)	(844	)
Changes in ownership interests in subsidiaries
– Chugai4	(530	)	(404	)	(934	)
– Ventana7	(964	)	(321	)	(1,285	)
Changes in non-controlling interests28, 30	(45	)	45		–
At 31 December 2008	44,479		9,343		53,822

As disclosed in Note 1, equity as at 1 January 2007 and the entries for defined benefit post-employment plans have been restated in the statement of recognised income and expense for 2007 following the adoption of IFRIC interpretation 14 in 2008. A reconciliation to the previously published statement of recognised income and expense is provided in Note 1.

34          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

Notes to the Roche Group Consolidated
Financial Statements

1. Summary of significant accounting policies

Basis of preparation of the consolidated financial statements

The consolidated financial statements of the Roche Group have been prepared in accordance with International Financial Reporting Standards (IFRS) and comply with Swiss law. They have been prepared using the historical cost convention except that, as disclosed in the accounting policies below, certain items, including derivatives and available-for-sale investments, are shown at fair value. They were approved for issue by the Board of Directors on 29 January 2009 and are subject to approval by the Annual General Meeting of shareholders on 10 March 2009.

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities at the date of the financial statements. If in the future such estimates and assumptions, which are based on management’s best judgement at the date of the financial statements, deviate from the actual circumstances, the original estimates and assumptions will be modified as appropriate in the year in which the circumstances change.

Changes in accounting policies that arise from the application of new or revised standards and interpretations are applied retrospectively, unless otherwise specified in the transitional requirements of the particular standard or interpretation. Retrospective application requires that the results of the comparative period and the opening balances of that period are restated as if the new accounting policy had always been applied. In some cases the transitional requirements of the particular standard or interpretation specify that the changes are to be applied prospectively. Prospective application requires that the new accounting policy only be applied to the results of the current period and the comparative period is not restated. In addition comparatives have been reclassified or extended from the previously reported results to take into account any presentational changes.

Consolidation policy

These financial statements are the consolidated financial statements of Roche Holding Ltd, a company registered in Switzerland, and its subsidiaries (‘the Group’).

The subsidiaries are those companies controlled, directly or indirectly, by Roche Holding Ltd, where control is defined as the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. This control is normally evidenced when Roche Holding Ltd owns, either directly or indirectly, more than 50% of the voting rights or currently exercisable potential voting rights of a company’s share capital. Special Purpose Entities are consolidated where the substance of the relationship is that the Special Purpose Entity is controlled by the Group. Companies acquired during the year are consolidated from the date on which control is transferred to the Group, and subsidiaries to be divested are included up to the date on which control passes from the Group. Inter-company balances, transactions and resulting unrealised income are eliminated in full. Changes in ownership interests in subsidiaries are accounted for as equity transactions if they occur after control has already been obtained and if they do not result in a loss of control.

Reference numbers indicate corresponding Notes to the Consolidated Financial Statements.

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Investments in associates are accounted for using the equity method. These are companies over which the Group exercises, or has the power to exercise, significant influence, but which it does not control. This is normally evidenced when the Group owns 20% or more of the voting rights or currently exercisable potential voting rights of the company. Balances and transactions with associates that result in unrealised income are eliminated to the extent of the Group’s interest in the associate. Interests in joint ventures are reported using the line-by-line proportionate consolidation method.

Segment reporting

The determination of the Group’s operating segments is based on the organisation units for which information is reported to the Group’s management. The Group has two divisions, Pharmaceuticals and Diagnostics. Revenues are primarily generated from the sale of prescription pharmaceutical products and diagnostic instruments, reagents and consumables, respectively. Both divisions also derive revenue from the sale or licensing of products or technology to third parties. Within the Pharmaceuticals Division there are three subdivisions, Roche Pharmaceuticals, Genentech and Chugai. The three sub-divisions have separate management and reporting structures within the Pharmaceuticals Division and are considered separately reportable operating segments. Certain headquarter activities are reported as ‘Corporate’. These consist of corporate headquarters, including the Corporate Executive Committee, corporate communications, corporate human resources, corporate finance, including treasury, taxes and pension fund management, corporate legal and corporate safety and environmental services.

Transfer prices between operating segments are set on an arm’s length basis. Operating assets and liabilities consist of property, plant and equipment, goodwill and intangible assets, trade receivables/payables, inventories and other assets and liabilities, such as provisions, which can be reasonably attributed to the reported operating segments. Non-operating assets and liabilities mainly include current and deferred income tax balances, post-employment benefit assets/liabilities and financial assets/liabilities such as cash, marketable securities, investments and debt.

Foreign currency translation

Most Group companies use their local currency as their functional currency. Certain Group companies use other currencies (such as US dollars, Swiss francs or euros) as their functional currency where this is the currency of the primary economic environment in which the entity operates. Local transactions in other currencies are initially reported using the exchange rate at the date of the transaction. Gains and losses from the settlement of such transactions and gains and losses on translation of monetary assets and liabilities denominated in other currencies are included in income, except when they are qualifying cash flow hedges or arise on monetary items that, in substance, form part of the Group’s net investment in a foreign entity. In such cases the gains and losses are deferred into equity.

Upon consolidation, assets and liabilities of Group companies using functional currencies other than Swiss francs (foreign entities) are translated into Swiss francs using year-end rates of exchange. Sales, costs, expenses, net income and cash flows are translated at the average rates of exchange for the year. Translation differences due to the changes in exchange rates between the beginning and the end of the year and the difference between net income translated at the average and year-end exchange rates are taken directly to equity. On disposal of a foreign entity, the identified cumulative currency translation differences within equity relating to that foreign entity are recognised in income as part of the gain or loss on divestment.

Revenues

Sales represent amounts received and receivable for goods supplied to customers after deducting trade discounts, cash discounts and volume rebates, and exclude value added taxes and other taxes directly linked to sales. Revenues from the sale of products are recognised upon transfer to the customer of significant risks and rewards. Trade discounts, cash discounts and volume rebates are recorded on an accrual basis consistent with the recognition of the related sales. Estimates of expected sales returns, charge-backs and other rebates, including Medicaid in the United States and similar rebates in other countries, are also deducted from sales and recorded as accrued liabilities or provisions or as a deduction from accounts receivable. Such estimates are based on analyses of existing contractual or legislatively mandated obligations, historical trends and the Group’s experience. Other revenues are recorded as earned or as the services are

36          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

performed. Where necessary, single transactions are split into separately identifiable components to reflect the substance of the transaction. Conversely, two or more transactions may be considered together for revenue recognition purposes, where the commercial effect cannot be understood without reference to the series of transactions as a whole.

Cost of sales

Cost of sales includes the corresponding direct production costs and related production overheads of goods sold and services rendered. Royalties, alliance and collaboration expenses, including all collaboration profit-sharing arrangements are also reported as part of cost of sales. Start-up costs between validation and the achievement of normal production capacity are expensed as incurred.

Research and development

In addition to its internal research and development activities, the Group is also party to in-licensing and similar arrangements with its alliance partners. The Group may also acquire in-process research and development assets, either through business combinations or through purchases of specific assets.

Internal research costs are charged against income as incurred. Internal development costs are capitalised as intangible assets only when there is an identifiable asset that can be completed and that will generate probable future economic benefits and when the cost of such an asset can be measured reliably. The Group does not currently have any such internal development costs that qualify for capitalisation as intangible assets. Internal development costs are therefore charged against income as incurred since the criteria for their recognition as an asset are not met.

In-process research and development assets acquired either through in-licensing arrangements, business combinations or separate purchases are capitalised as intangible assets as described below. Once available for use, such intangible assets are amortised on a straight-line basis over the period of the expected benefit and are reviewed for impairment at each reporting date.

Licensing, milestone and other upfront receipts and payments

Royalty income is recognised on an accrual basis in accordance with the substance of the respective licensing agreements. If the collectability of a royalty amount is not reasonably assured, those royalties are recognised as revenue when the cash is received. Certain Group companies receive from third parties upfront, milestone and other similar payments relating to the sale or licensing of products or technology. Revenue associated with performance milestones is recognised based on achievement of the deliverables as defined in the respective agreements. Upfront payments and licence fees for which there are subsequent deliverables are initially reported as deferred income and are recognised in income as earned over the period of the development collaboration or the manufacturing obligation.

Payments made by Group companies to third parties and associates for such items are capitalised as intangible assets.

Accounting and reporting of transactions between Roche, Genentech and Chugai

Within the Group’s consolidated financial statements, transactions and balances between consolidated subsidiaries, such as between Genentech, Chugai and other Roche Group subsidiaries, are eliminated on consolidation.

Genentech and Chugai are considered separately reportable operating segments for the purposes of the Group’s operating segment disclosures in Note 2. Additional information relating to Genentech and Chugai results is given in Notes 3 and 4, respectively.

Profits on product sales between the Roche Pharmaceuticals, Genentech and Chugai operating segments are recorded as part of the segment results of the operating segment making the sale. Unrealised internal profits on inventories that have been sold by one operating segment to another but which have not yet been sold on to external customers as at the balance sheet date are eliminated as a consolidation entry at a Pharmaceuticals Division level.

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Additionally the results of each operating segment may include income received from another operating segment in respect of:

•   Royalties.
•   Licensing, milestone and other upfront payments.
•   Transfers in respect of research collaborations.

These are recognised as income in the segment results of the operating segment receiving the income consistently with the accounting policies applied to third-party transactions and set out in these financial statements. Corresponding expenses are recorded in the other operating segment so that these eliminate at a Pharmaceuticals Division level.

Employee benefits

Wages, salaries, social security contributions, paid annual leave and sick leave, bonuses, and non-monetary benefits are accrued in the year in which the associated services are rendered by employees of the Group. Where the Group provides long-term employee benefits, the cost is accrued to match the rendering of the services by the employees concerned. Liabilities for long-term employee benefits are discounted to take into account the time value of money, where material.

Pensions and other post-employment benefits

Most employees are covered by defined benefit and defined contribution post-employment plans sponsored by Group companies. The Group’s contributions to defined contribution plans are charged to the appropriate income statement heading within the operating results in the year to which they relate. The accounting and reporting of defined benefit plans are based on recent actuarial valuations. The defined benefit obligations and service costs are calculated using the projected unit credit method. This reflects service rendered by employees to the dates of valuation and incorporates actuarial assumptions primarily regarding discount rates used in determining the present value of benefits, projected rates of remuneration growth and long-term expected rates of return for plan assets. Discount rates are based on the market yields of high-quality corporate bonds in the country concerned. Past service costs are allocated over the average period until the benefits become vested. Current and past service costs are charged to the appropriate income statement heading within the operating results. Pension plan administration and funding is overseen at a corporate level and any settlement gains and losses resulting from changes in funding arrangements are reported as general and administration expenses within the ‘Corporate’ segment. The expected returns on plan assets and interest costs are charged to financial income and financing costs, respectively. Actuarial gains and losses, which consist of differences between assumptions and actual experiences and the effects of changes in actuarial assumptions, are recorded directly in equity. Pension assets and liabilities in different defined benefit plans are not offset unless the Group has a legally enforceable right to use the surplus in one plan to settle obligations in the other plan. The recognition of pension assets is limited to the total of the present value of any future refunds from the plans or reductions in future contributions to the plans and any cumulative unrecognised past service costs. Adjustments arising from the limit on the recognition of assets for defined benefit plans are recorded directly in equity.

Equity compensation plans

Certain employees of the Group participate in equity compensation plans, including separate plans at Genentech and Chugai. The fair value of all equity compensation awards granted to employees is estimated at the grant date and recorded as an expense over the vesting period. The expense is charged to the appropriate income statement heading within the operating results. For equity-settled plans, an increase in equity is recorded for this expense and any subsequent cash flows from exercises of vested awards are recorded as changes in equity. For cash-settled plans, a liability is recorded, which is measured at fair value at each balance sheet date with any movements in fair value being recorded to the appropriate income statement heading within the operating results. Any subsequent cash flows from exercise of vested awards are recorded as a reduction of the liability.

38          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

Property, plant and equipment

Property, plant and equipment are initially recorded at cost of purchase or construction, and include all costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. These include items such as costs of site preparation, installation and assembly costs and professional fees. The net costs of testing whether the asset is functioning properly, including validation costs, are also included in the initially recorded cost of construction. Interest and other borrowing costs incurred with respect to qualifying assets are capitalised and included in the carrying value of the assets.

Property, plant and equipment are depreciated on a straight-line basis, except for land, which is not depreciated. Estimated useful lives of major classes of depreciable assets are as follows:

Land improvements	40 years
Buildings	10–50 years
Machinery and equipment	5–15 years
Diagnostic instruments	3–5 years
Office equipment	3 years
Motor vehicles	5 years

Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate components. The estimated useful life of the assets is regularly reviewed and, if necessary, the future depreciation charge is accelerated. Repairs and maintenance costs are expensed as incurred.

Leases

Where the Group is the lessee, leases of property, plant and equipment where the Group has substantially all of the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the start of the lease at fair value, or the present value of the minimum lease payments, if lower. The rental obligation, net of finance charges, is reported within debt. Assets acquired under finance leases are depreciated in accordance with the Group’s policy on property, plant and equipment. If there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the lease term and its useful life. The interest element of the lease payment is charged against income over the lease term based on the effective interest rate method. Leases where substantially all of the risks and rewards of ownership are not transferred to the Group are classified as operating leases. Payments made under operating leases are charged against income on a straight-line basis over the period of the lease.

Where the Group is the lessor, which primarily occurs in the Diagnostics Division, assets subject to finance leases are initially reported as receivables at an amount equal to the net investment in the lease. Assets subject to operating leases are reported within property, plant and equipment. Lease income from finance leases is subsequently recognised as earned income over the term of the lease based on the effective interest rate method. Lease income from operating leases is recognised over the lease term on a straight-line basis.

Business combinations and goodwill

Business combinations are accounted for using the purchase method of accounting. The cost of acquisition is the consideration given in exchange for control over the identifiable assets, liabilities and contingent liabilities of the acquired company. This consideration includes the cash paid plus the fair value at the date of exchange of assets given, liabilities incurred or assumed and equity instruments issued by the Group. Contingent consideration arrangements are included in cost of acquisition at fair value. Directly attributable transaction costs are expensed in the current period and reported within general and administration expenses. The acquired net assets, being the identifiable assets, liabilities and contingent liabilities, are initially recognised at fair value. Where the Group does not acquire 100% ownership of the acquired company non-controlling interests are recorded as the proportion of the fair value of the acquired net assets attributable to the non-controlling interest. Goodwill is recorded as the surplus of the cost of acquisition over the Group’s interest in the fair value of the acquired net assets. Any goodwill and fair value adjustments are recorded as assets and liabilities of the acquired company in the functional currency of that company. Goodwill is not amortised, but is assessed for possible impairment at each balance sheet date and is additionally tested annually for impairment.

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Goodwill may also arise upon investments in associates, being the surplus of the cost of investment over the Group’s share of the fair value of the net identifiable assets. Such goodwill is recorded within investments in associates. Changes in ownership interests in subsidiaries are accounted for as equity transactions if they occur after control has already been obtained and if they do not result in a loss of control.

Intangible assets

Purchased patents, licences, trademarks and other intangible assets are initially recorded at cost. Where these assets have been acquired through a business combination, this will be the fair value allocated in the acquisition accounting. Intangible assets are amortised over their useful lives on a straight-line basis beginning from the point when they are available for use. Estimated useful life is the lower of the legal duration and the economic useful life. The estimated useful life of intangible assets is regularly reviewed.

Impairment of property, plant and equipment and intangible assets

An impairment assessment is carried out when there is evidence that an asset may be impaired. In addition intangible assets that are not yet available for use are tested for impairment annually. When the recoverable amount of an asset, being the higher of its fair value less costs to sell and its value in use, is less than its carrying value, then the carrying value is reduced to its recoverable amount. This reduction is reported in the income statement as an impairment loss. Value in use is calculated using estimated cash flows, generally over a five-year period, with extrapolating projections for subsequent years. These are discounted using an appropriate long-term pre-tax interest rate. When an impairment loss arises, the useful life of the asset in question is reviewed and, if necessary, the future depreciation/amortisation charge is accelerated. The impairment of financial assets is discussed below in the ‘Financial assets’ policy.

Impairment of goodwill

Goodwill is assessed for possible impairment at each balance sheet date and is additionally tested annually for impairment. Goodwill is allocated to cash-generating units as described in Note 13. When the recoverable amount of the cash-generating unit, being the higher of its fair value less costs to sell or its value in use, is less than its carrying value, then the carrying value of the goodwill is reduced to its recoverable amount. This reduction is reported in the income statement as an impairment loss. The methodology used in the impairment testing is further described in Note 13.

Inventories

Inventories are stated at the lower of cost and net realisable value. The cost of finished goods and work in process includes raw materials, direct labour and other directly attributable costs and overheads based upon the normal capacity of production facilities. Cost is determined using the weighted average method. Net realisable value is the estimated selling price less cost to completion and selling expenses.

Accounts receivable

Accounts receivable are carried at the original invoice amount less allowances made for doubtful accounts, trade discounts, cash discounts, volume rebates and similar allowances. An allowance for doubtful accounts is recorded for the difference between the carrying value and the recoverable amount where there is objective evidence that the Group will not be able to collect all amounts due. Trade discounts, cash discounts, volume rebates and similar allowances are recorded on an accrual basis consistent with the recognition of the related sales, using estimates based on existing contractual obligations, historical trends and the Group’s experience. Long-term accounts receivable are discounted to take into account the time value of money, where material.

Cash and cash equivalents

Cash and cash equivalents include cash on hand and time, call and current balances with banks and similar institutions. Such balances are only reported as cash if they are readily convertible to known amounts of cash, are subject to insignificant risk of changes in value and have a maturity of three months or less from the date of acquisition. This definition is also used for the cash flow statement.

40          Roche Finance Report 2008     |      Roche Group – Notes to the Roche Group Consolidated Financial Statements

Provisions

Provisions are recognised where a legal or constructive obligation has been incurred which will probably lead to an outflow of resources that can be reasonably estimated. In particular, restructuring provisions are recognised when the Group has a detailed formal plan that has either commenced implementation or been announced. Provisions are recorded for the estimated ultimate liability that is expected to arise, taking into account foreign currency effects arising from their translation from their functional currency into Swiss francs and the time value of money, where material. A contingent liability is disclosed where the existence of the obligation will only be confirmed by future events or where the amount of the obligation cannot be measured with reasonable reliability. Contingent assets are not recognised, but are disclosed where an inflow of economic benefits is probable.

Fair values

Fair value is the amount for which a financial asset, liability or instrument could be exchanged between knowledgeable and willing parties in an arm’s length transaction. It is determined by reference to quoted market prices or by the use of established valuation techniques such as option pricing models and the discounted cash flow method if quoted prices in an active market are not available. Valuation techniques are typically used for derivative financial instruments. The fair values of financial assets and liabilities at the balance sheet date are not materially different from their reported carrying values unless specifically mentioned in the Notes to the Consolidated Financial Statements.

Financial assets

Financial assets, principally investments, including marketable securities, are classified as either ‘Fair-value-through-profit-or-loss’, ‘Available-for-sale’, ‘Held-to-maturity’ or ‘Loans and receivables’. Fair-value-through-profit-or-loss financial assets are either classified as held-for-trading or designated upon initial recognition. Held-for-trading financial assets are acquired principally to generate profit from short-term fluctuations in price. Financial assets are designated as fair-value-through-profit-or-loss if doing so results in more relevant information by eliminating a measurement or recognition inconsistency. Held-to-maturity financial assets are securities with a fixed maturity that the Group has the intent and ability to hold until maturity. Loans and receivables are financial assets created by the Group or acquired from the issuer in a primary market.

They are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. All other financial assets are considered to be available-for-sale.

All financial assets are initially recorded at fair value, including transaction costs, except for assets at fair-value-through-profit-or-loss, which exclude transaction costs. All purchases and sales are recognised on the settlement date. Fair-value-through-profit-or-loss financial assets are subsequently carried at fair value, with all changes in fair value recorded as financial income in the period in which they arise. Held-to-maturity financial assets are subsequently carried at amortised cost using the effective interest rate method. Available-for-sale financial assets are subsequently carried at fair value, with all unrealised changes in fair value recorded in equity except for interest calculated using the effective interest rate method and foreign exchange components. When the available-for-sale financial assets are sold, impaired or otherwise disposed of, the cumulative gains and losses previously recognised in equity are included in financial income for the current period. Loans and receivables are subsequently carried at amortised cost using the effective interest rate method.

Financial assets are individually assessed for possible impairment at each balance sheet date. An impairment charge is recorded where there is objective evidence of impairment, such as where the issuer is in bankruptcy, default or other significant financial difficulty. In addition any available-for-sale equity securities that have a market value of more than 25% below their original cost, net of any previous impairment, will be considered as impaired. Any available-for-sale equity securities that have a market value below their original cost, net of any previous impairment, for a sustained six-month period will also be considered as impaired. Any decreases in the market price of less than 25% of original cost, net of any previous impairment, which are also for less than a sustained six-month period are not by themselves considered as objective evidence of impairment. Such movements in fair value are recorded in equity until there is objective evidence of impairment or until the asset is sold or otherwise disposed of. For financial assets carried at amortised cost, any impairment charge is the difference between the carrying value and the recoverable amount, calculated

41

using estimated future cash flows discounted using the original effective interest rate. For available-for-sale financial assets, any impairment charge is the amount currently carried in equity for the difference between the original cost, net of any previous impairment, and the fair value. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For debt securities measured at amortised cost or available-for-sale, the reversal is recognised in income. For equity securities held available-for-sale, the reversal is recognised directly in equity.

A financial asset is derecognised when the contractual cash flows from the asset expire or when the Group transfers the rights to receive the contractual cash flows from the financial assets in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability.

Derivatives

Derivative financial instruments are initially recorded and subsequently carried at fair value. Apart from those derivatives designated as qualifying cash flow hedging instruments as discussed in the ‘Hedging’ policy below, all changes in fair value are recorded as financial income in the period in which they arise. Embedded derivatives are recognised separately if not closely related to the host contract and where the host contract is carried at amortised cost.

Hedging

For the purposes of hedge accounting, hedging relationships may be of three types. Fair value hedges are hedges of particular risks that may change the fair value of a recognised asset or liability. Cash flow hedges are hedges of particular risks that may change the amount or timing of future cash flows. Hedges of net investment in a foreign entity are hedges of particular risks that may change the carrying value of the net assets of a foreign entity.

To qualify for hedge accounting the hedging relationship must meet several strict conditions on documentation, probability of occurrence (for cash flow hedges), hedge effectiveness and reliability of measurement. If these conditions are not met, then the relationship does not qualify for hedge accounting. In this case the hedging instrument and the hedged item are reported independently as if there were no hedging relationship. In particular any derivatives are reported at fair value, with changes in fair value included in financial income.

For qualifying fair value hedges, the hedging instrument is recorded at fair value and the hedged item is recorded at its previous carrying value, adjusted for any changes in fair value that are attributable to the hedged risk. Any changes in the fair values are reported in financial income.

For qualifying cash flow hedges, the hedging instrument is recorded at fair value. The portion of any change in fair value that is an effective hedge is included in equity, and any remaining ineffective portion is reported in financial income. If the hedging relationship is the hedge of the foreign currency risk of a firm commitment or highly probable forecasted transaction that results in the recognition of a non-financial asset or liability, the cumulative changes in the fair value of the hedging instrument that have been recorded in equity are included in the initial carrying value of the asset or liability at the date of recognition. For all other qualifying cash flow hedges, the cumulative changes in the fair value of the hedging instrument that have been recorded in equity are included in financial income when the forecasted transaction affects net income.

For qualifying hedges of net investment in a foreign entity, the hedging instrument is recorded at fair value. The portion of any change in fair value that is an effective hedge is included in equity. Any remaining ineffective portion is recorded in financial income where the hedging instrument is a derivative and in equity in other cases. If the entity is disposed of, then the cumulative changes of fair value of the hedging instrument that have been recorded in equity are reclassified to income.

42          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

Debt instruments

Debt instruments are initially recorded at cost, which is the proceeds received, net of transaction costs. Subsequently they are reported at amortised cost. Any discount between the net proceeds received and the principal value due on redemption is amortised over the duration of the debt instrument and is recognised as part of financing costs using the effective interest rate method. Certain debt instruments may be designated as ‘fair-value-through-profit-or-loss’ where doing so results in more relevant information as it eliminates or significantly reduces measurement or recognition inconsistencies. Such debt instruments are reported at fair value, based on quoted prices in an active market, with movements in fair value reported within financial income. Those debt instruments that are designated as fair-value-through-profit-or-loss are disclosed in Note 27. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expired.

Taxation

Income taxes include all taxes based upon the taxable profits of the Group, including withholding taxes payable on the distribution of retained earnings within the Group. Other taxes not based on income, such as property and capital taxes, are included within general and administration expenses.

Liabilities for income taxes, mainly withholding taxes, which could arise on the remittance of retained earnings, principally relating to subsidiaries, are only recognised where it is probable that such earnings will be remitted in the foreseeable future.

Deferred income tax assets and liabilities are recognised on temporary differences between the tax bases of assets and liabilities and their carrying values in the financial statements. Deferred income tax assets relating to the carry-forward of unused tax losses are recognised to the extent that it is probable that future taxable profit will be available against which the unused tax losses can be utilised.

Current and deferred income tax assets and liabilities are offset when the income taxes are levied by the same taxation authority and when there is a legally enforceable right to offset them. Deferred income taxes are determined based on the currently enacted tax rates applicable in each tax jurisdiction where the Group operates.

Discontinued businesses and non-current assets held for sale

A discontinued business is a component of the Group’s business that represents a separate major line of business or geographical area of operations or is a subsidiary acquired exclusively with a view to resale. Reclassification as a discontinued business occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier.

A disposal group is a group of assets that are to be disposed of as a group in a single transaction, together with the liabilities directly associated with those assets that will be transferred in the transaction. The assets and liabilities in a disposal group are reclassified as held for sale if their value will be recovered principally through a sale rather than through continuing use. The disposal group must be available for sale in its current condition and the sale must be highly probable.

Immediately before classification as held for sale, the measurement of all assets and liabilities in a disposal group is updated in accordance with applicable accounting policies. Then, on initial classification as held for sale, disposal groups are recognised at the lower of carrying value and fair value less costs to sell. Impairment losses on initial classification as held for sale are included in the income statement.

Own equity instruments

The Group’s holdings in its own equity instruments are recorded as a deduction from equity. The original purchase cost, consideration received for subsequent resale of these equity instruments and other movements are reported as changes in equity. These instruments have been acquired primarily to meet the potential obligations to employees that may arise in respect of certain of the Group’s equity compensation plans.

43

Management judgements made in applying accounting policies
The application of the Group’s accounting policies may require management to make judgements, apart from those involving estimates, that can have a significant effect on the amounts recognised in the consolidated financial statements. Management judgement is particularly required when assessing the substance of transactions that have a complicated structure or legal form. These include, but are not limited to, the following areas:

Revenue recognition | The nature of the Group’s business is such that many sales transactions do not have a simple structure. Sales agreements may consist of multiple components occurring at different times. The Group is also party to various out-licensing agreements, which can involve upfront and milestone payments that may occur over several years. These agreements may also involve certain future obligations. Revenue is only recognised when, in management’s judgement, the significant risks and rewards of ownership have been transferred and when the Group does not retain continuing managerial involvement or effective control over the goods sold or when the obligation has been fulfilled. For some transactions this can result in cash receipts being initially recognised as deferred income and then released to income over subsequent periods on the basis of the performance of the conditions specified in the agreement.

Consolidation of subsidiaries and associates | The Group periodically undertakes transactions that may involve obtaining the right to control or significantly influence the operations of other companies. These transactions include the acquisition of all or part of the equity of other companies, the purchase of certain assets and assumption of certain liabilities and contingent liabilities of other companies, and entering into alliance agreements with other companies. Also included are transactions involving Special Purpose Entities and similar vehicles. In all such cases management makes an assessment as to whether the Group has the right to control or significantly influence the other company’s operations, and based on this assessment the other company is consolidated as a subsidiary or associated company. In making this assessment management considers the underlying economic substance of the transaction and not only the contractual terms.

Business combinations | Where the Group acquires control of another business, the cost of the acquisition has to be allocated to the assets, liabilities and contingent liabilities of the acquired business, with any residual recorded as goodwill. This process involves management making an assessment of the fair value of these items. Management judgement is particularly involved in the recognition and measurement of the following items:

• Intellectual property. This may include patents, licences, trademarks and similar rights for currently marketed products, and also the rights and scientific knowledge associated with projects that are currently in research or development phases.

• Contingencies such as legal and environmental matters.

• Contingent consideration arrangements.

• The recoverability of any accumulated tax losses previously incurred by the acquired company.

In all cases management makes an assessment based on the underlying economic substance of the items concerned, and not only on the contractual terms, in order to fairly present these items.

Leases | The Group is party to leasing arrangements, both as a lessee and as a lessor. The treatment of leasing transactions in the financial statements is mainly determined by whether the lease is considered to be an operating lease or a finance lease. In making this assessment, management looks at the substance of the lease, as well as the legal form, and makes a judgement about whether substantially all of the risks and rewards of ownership are transferred. Arrangements which do not take the legal form of a lease but that nevertheless convey the right to use an asset are also covered by such assessments.

Key assumptions and sources of estimation uncertainty
The preparation of the consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income, expenses and related disclosures. The estimates and underlying assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

44          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

The estimates and underlying assumptions are reviewed on an ongoing basis. Changes in accounting estimates may be necessary if there are changes in the circumstances on which the estimate was based, or as a result of new information or more experience. Such changes are recognised in the period in which the estimate is revised.

The key assumptions about the future and key sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying value of assets and liabilities within the next twelve months are described below.

Sales allowances | The Group has provisions and accruals for expected sales returns, charge-backs and other rebates, including Medicaid in the United States and similar rebates in other countries, which at 31 December 2008 total 913 million Swiss francs. Such estimates are based on analyses of existing contractual or legislatively-mandated obligations, historical trends and the Group’s experience. Management believes that the total provisions and accruals for these items are adequate, based upon currently available information. As these deductions are based on management estimates, they may be subject to change as better information becomes available. Such changes that arise could impact the provisions and accruals recognised in the balance sheet in future periods and consequently the level of sales recognised in the income statement in future periods.

Property, plant and equipment and intangible assets, including goodwill | The Group has property, plant and equipment with a carrying value of 18,190 million Swiss francs as disclosed in Note 12. Goodwill has a carrying value of 8,353 million Swiss francs (see Note 13) and intangible assets have a carrying value of 7,121 million Swiss francs (see Note 14). All of these assets are reviewed annually for impairment as described above. To assess whether any impairment exists, estimates are made of the future cash flows expected to result from the use of the asset and its eventual disposal. Actual outcomes could vary significantly from such estimates of discounted future cash flows. Factors such as changes in the planned use of buildings, machinery or equipment, or closure of facilities, the presence or absence of competition, technical obsolescence or lower than anticipated sales of products with capitalised rights could result in shortened useful lives or impairment. Changes in the discount rates used could also lead to impairments.

Pensions and other post-employment benefits | Many of the Group’s employees participate in post-employment defined benefit plans. The calculations of the recognised assets and liabilities from such plans are based upon statistical and actuarial calculations. In particular the present value of the defined benefit obligation is impacted by assumptions on discount rates used to arrive at the present value of future pension liabilities, and assumptions on future increases in salaries and benefits. Furthermore, the Group’s independent actuaries use statistically based assumptions covering areas such as future withdrawals of participants from the plan and estimates of life expectancy. At 31 December 2008 the present value of the Group’s defined benefit obligation is 10,504 million Swiss francs for funded plans and 3,078 million Swiss francs for unfunded plans (see Note 10). The actuarial assumptions used may differ materially from actual results due to changes in market and economic conditions, higher or lower withdrawal rates, longer or shorter life spans of participants, and other changes in the factors being assessed. These differences could impact the assets or liabilities recognised in the balance sheet in future periods.

Legal provisions | Group companies are party to various legal proceedings, including claims arising from trade, and the most significant matters are described in Note 25. Legal provisions at 31 December 2008 total 223 million Swiss francs. Additional claims could be made which might not be covered by existing provisions or by insurance. There can be no assurance that there will not be an increase in the scope of these matters or that any future lawsuits, claims, proceedings or investigations will not be material. Such changes that arise could impact the provisions recognised in the balance sheet in future periods.

Environmental provisions | The Group has provisions for environmental remediation costs, which at 31 December 2008 total 161 million Swiss francs, as disclosed in Note 25. The material components of the environmental provisions consist of costs to fully clean and refurbish contaminated sites and to treat and contain contamination at certain other sites. Future remediation expenses are affected by a number of uncertainties that include, but are not limited to, the detection of previously unknown contaminated sites,

45

the method and extent of remediation, the percentage of waste material attributable to the Group at the remediation sites relative to that attributable to other parties, and the financial capabilities of the other potentially responsible parties. Management believes that the total provisions for environmental matters are adequate based upon currently available information. However, given the inherent difficulties in estimating liabilities in this area, it cannot be guaranteed that additional costs will not be incurred beyond the amounts accrued. The effect of the resolution of environmental matters on the results of operations cannot be predicted due to uncertainty concerning both the amount and the timing of future expenditures. Such changes that arise could impact the provisions recognised in the balance sheet in future periods.

Income taxes | At 31 December 2008, the net liability for current income taxes is 1,925 million Swiss francs and the net asset for deferred income taxes is 420 million Swiss francs, as disclosed in Note 6. Significant estimates are required to determine the current and deferred assets and liabilities for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. Management believes that the estimates are reasonable and that the recognised liabilities for income tax-related uncertainties are adequate. Various internal and external factors may have favourable or unfavourable effects on the income tax assets and liabilities. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, future levels of research and development spending and changes in overall levels of pre-tax earnings. Such changes that arise could impact the assets and liabilities recognised in the balance sheet in future periods.

Changes in accounting policies
In 2007 the Group early adopted IFRS 8 ‘Operating Segments’ and IAS 23 (revised) ‘Borrowing Costs’ which are required to be implemented from 1 January 2009 at the latest. In 2008 the Group early adopted the revised versions of IFRS 3 ‘Business Combinations’ and IAS 27 ‘Consolidated and Separate Financial Statements’ that were published in early 2008 and which are required to be implemented from 1 January 2010 at the latest. The Group has implemented the amendments to IAS 39 ‘Financial Instruments: Recognition and Measurement’ and IFRS 7 ‘Financial Instruments: ‘Disclosures’ published in October 2008 relating to the reclassification of Financial Assets. The Group has also adopted IFRIC interpretation 14 which relates to IAS 19 ‘Employee benefits’.

The Group is currently assessing the potential impacts of the other new and revised standards and interpretations that will be effective from 1 January 2009 and beyond, and which the Group has not early adopted. These include further revisions to IAS 1 ‘Presentation of Financial Statements’ and revisions to IFRS 2 ‘Share based Payment’. The Group does not anticipate that these will have a material impact on the Group’s overall results and financial position.

IFRS 3 (revised) ‘Business combinations’ | Amongst other matters, the revised standard requires that directly attributable transaction costs are expensed in the current period, rather than being included in the cost of acquisition as previously. The revised standard also requires that contingent consideration arrangements should be included in acquisition accounting at fair value and expands the disclosure requirements for business combinations. The Group has applied the revised standard prospectively for all business combinations since 1 January 2008 and directly attributable transaction costs totalling 47 million Swiss francs have been expensed in 2008 that would have been included in the cost of acquisition under the previous accounting policy. Business combinations in 2007 and prior periods have not been restated. Had the new accounting policy been applied in 2007, the Group would have expensed an additional 15 million Swiss francs of directly attributable transaction costs in that year and goodwill would have been reduced by this amount. This change has a negative impact of 0.06 Swiss francs on earnings per share and non-voting equity security (basic and diluted) in 2008, and would have had a negative impact of 0.02 Swiss francs in 2007 if the revised standard had been applied retrospectively.

IAS 27 (revised) ‘Consolidated and separate financial statements’ | Amongst other matters, the revised standard requires that changes in ownership interests in subsidiaries are accounted for as equity transactions if they occur after control has already been obtained and if they do not result in a loss of control. Additionally the revised standard renames ‘minority interests’ as ‘non-controlling interests’. The Group has applied the revised standard retrospectively. There were no transactions in 2007 that required restatement.

46          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

IAS 39 ‘Financial Instruments: Recognition and Measurement’ and IFRS 7 ‘Financial Instruments: Disclosures’ | These amendments relate to the reclassification of financial assets and have been applied prospectively by the Group from 1 July 2008. The application of these amendments had no significant impact on the Group’s results.

IFRIC interpretation 14 to IAS 19 ‘Employee benefits’ | The interpretation adds to the existing requirements of IAS 19 regarding the interaction between the limits on recognition of assets from defined benefit post-employment plans and any minimum funding requirement of such plans. Some of the Group’s plans do have a minimum funding requirement and the application of this interpretation results in an increase in the assets recorded on the Group’s balance sheet and a corresponding increase in the Group’s equity. The Group has applied the revised standard retrospectively which results in an impact of 297 million Swiss francs on equity as at 1 January 2007. The impacts on the previously published 31 December 2007 balance sheet and the statement of recognised income and expense for the year then ended are shown in the tables below. The application of the interpretation has no impact on net income and earnings per share.

Restated balance sheet (selected items) at 31 December 2007 | in millions of CHF

	As originally			Application of			Group
	published			IFRIC 14			restated
Post-employment benefit assets		1,150			182			1,332
Deferred tax liabilities		(1,481	)		(46	)		(1,527	)
					136
Capital and reserves attributable to Roche shareholders		45,347			136			45,483

Restated statement of recognised income and expense for the year
ended 31 December 2007 | in millions of CHF

	As originally			Application of			Group
	published			IFRIC 14			Restated
Available-for-sale investments
– Valuation gains (losses) taken to equity		(198	)		–			(198	)
– Transferred to income statement on sale or impairment		(128	)		–			(128	)
Cash flow hedges
– Gains (losses) taken to equity		(45	)		–			(45	)
– Transferred to income statement		(3	)		–			(3	)
– Transferred to the initial balance sheet carrying value of hedged items		–			–			–
Exchange differences on translation of foreign operations		(1,906	)		–			(1,906	)
Defined benefit post-employment plans
– Actuarial gains (losses)		1,178			–			1,178
– Limit on asset recognition		(422	)		(214	)		(636	)
Income taxes on items taken directly to or transferred from equity		(267	)		53			(214	)
Net income recognised directly in equity		(1,791	)		(161	)		(1,952	)
Net income recognised in income statement		11,437			–			11,437
Total recognised income and expense		9,646			(161	)		9,485
Attributable to
– Roche shareholders		8,502			(161	)		8,341
– Non-controlling interests		1,144			–			1,144
Total		9,646			(161	)		9,485

47

2. Operating segment information

Divisional information | in millions of CHF

	Pharmaceuticals					Diagnostics
				Division				Division					Corporate						Group
	2008			2007		2008		2007		2008			2007			2008			2007
Revenues from external customers
Sales		35,961			36,783		9,656		9,350		–			–			45,617			46,133
Royalties and other operating income		2,148			2,057		139		186		–			–			2,287			2,243
Total		38,109			38,840		9,795		9,536		–			–			47,904			48,376
Revenues from other operating segments
Sales		8			8		9		5		–			–			17			13
Royalties and other operating income		–			–		–		–		–			–			–			–
Elimination of inter-divisional revenue																	(17	)		(13	)
Total		8			8		9		5		–			–			–			–
Segment results
Operating profit before exceptional items		12,974			13,042		1,187		1,648		(265	)		(222	)		13,896			14,468
Major legal cases		271			–		–		–		–			–			271			–
Changes in Group organisation		(243	)		–		–		–		–			–			(243	)		–
Operating profit		13,002			13,042		1,187		1,648		(265	)		(222	)		13,924			14,468
Capital expenditure
Business combinations		631			1,165		3,266		1,186		–			–			3,897			2,351
Additions to property, plant and equipment		1,940			2,588		1,245		1,058		2			2			3,187			3,648
Additions to intangible assets		410			791		8		258		–			–			418			1,049
Total capital expenditure		2,981			4,544		4,519		2,502		2			2			7,502			7,048
Research and development
Research and development costs		7,904			7,598		941		787		–			–			8,845			8,385
Other segment information
Depreciation of property, plant and equipment		1,022			957		649		599		5			4			1,676			1,560
Amortisation of intangible assets		511			645		458		331		–			–			969			976
Impairment of property, plant and equipment		20			4		8		2		–			–			28			6
Impairment of goodwill		–			–		–		–		–			–			–			–
Impairment of intangible assets		99			58		5		–		–			–			104			58
Equity compensation plan expenses		469			568		31		26		13			14			513			608

48          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

Pharmaceutical sub-divisional information |  in millions of CHF

				Roche											Pharmaceuticals
	Pharmaceuticals								Genentech				Chugai					Division
	2008			2007		2008			2007		2008		2007		2008			2007
Revenues from external customers
Sales		22,164			22,970		10,461			10,414		3,336		3,399		35,961			36,783
Royalties and other operating income		898			900		1,196			1,078		54		79		2,148			2,057
Total		23,062			23,870		11,657			11,492		3,390		3,478		38,109			38,840
Revenues from other operating segments
Sales		747			562		940			922		51		–		1,738			1,484
Royalties and other operating income		42			10		1,753			1,510		68		57		1,863			1,577
Elimination of revenue within division																(3,593	)		(3,053	)
Total		789			572		2,693			2,432		119		57		8			8
Segment results
Operating profit before exceptional items		6,795			7,225		5,821			5,298		591		610		13,207			13,133
Elimination of profit within division																(233	)		(91	)
Sub-total		6,795			7,225		5,821			5,298		591		610		12,974			13,042
Major legal cases		–			–		271			–		–		–		271			–
Changes in Group organisation		(149	)		–		(94	)		–		–		–		(243	)		–
Operating profit		6,646			7,225		5,998			5,298		591		610		13,002			13,042
Capital expenditure
Business combinations		631			94		–			1,071		–		–		631			1,165
Additions to property, plant and equipment		811			1,045		851			1,327		278		216		1,940			2,588
Additions to intangible assets		169			501		241			282				8		410			791
Total capital expenditure		1,611			1,640		1,092			2,680		278		224		2,981			4,544
Research and development
Research and development costs		4,673			4,415		2,723			2,678		634		621		8,030			7,714
Elimination of costs within division																(126	)		(116	)
Total		4,673			4,415		2,723			2,678		634		621		7,904			7,598
Other segment information
Depreciation of property, plant and equipment		594			530		336			337		92		90		1,022			957
Amortisation of intangible assets		252			398		190			179		69		68		511			645
Impairment of property, plant and equipment		11			2		–			–		9		2		20			4
Impairment of goodwill		–			–		–			–		–		–		–			–
Impairment of intangible assets		99			16		–			42		–		–		99			58
Equity compensation plan expenses		98			100		369			465		2		3		469			568

49

Net operating assets | in millions of CHF

				Assets						Liabilities						Net assets
	2008			2007			2008			2007			2008			2007
Roche Pharmaceuticals	16,112				16,384			(3,615	)		(3,288	)		12,497			13,096
Genentech		12,404			12,993			(2,731	)		(4,049	)		9,673			8,944
Chugai		4,715			3,663			(867	)		(561	)		3,848			3,102
Elimination within division	(748		)		(450	)		–			–			(748	)		(450	)
Pharmaceuticals Division	32,483				32,590			(7,213	)		(7,898	)		25,270			24,692
Diagnostics Division	18,750				16,323			(2,141	)		(2,263	)		16,609			14,060
Corporate		156			232			(248	)		(271	)		(92	)		(39	)
Total operating		51,389			49,145			(9,602	)		(10,432	)		41,787			38,713
Non-operating		24,700			29,220			(12,665	)		(14,490	)		12,035			14,730
Group		76,089			78,365			(22,267	)		(24,922	)		53,822			53,443

Information by geographical area | in millions of CHF

	Revenues from external customers						Non-current assets
			Royalties and
			other operating		Property, plant		Goodwill and
	Sales		income		and equipment		intangible assets
2008
Switzerland		509		493		2,625		2,366
European Union		15,601		272		4,732		2,381
– of which Germany		3,200		252		3,321		2,334
Rest of Europe		1,521		16		43		3
Europe		17,631		781		7,400		4,750
United States		16,362		1,449		8,095		10,032
Rest of North America		932		1		117		90
North America		17,294		1,450		8,212		10,122
Latin America		2,975		2		397		22
Japan		3,532		54		1,807		579
Rest of Asia		2,920		–		287		–
Asia		6,452		54		2,094		579
Africa, Australia and Oceania		1,265		–		87		1
Total		45,617		2,287		18,190		15,474

50          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

	Revenues from external customers						Non-current assets
			Royalties and
			other operating		Property, plant		Goodwill and
	Sales		income		and equipment		intangible assets
2007
Switzerland		489		430		2,404		2,354
European Union		15,465		127		5,096		2,755
– of which Germany		3,277		117		3,437		2,699
Rest of Europe		1,620		–		53		4
Europe		17,574		557		7,553		5,113
United States		17,069		1,598		7,949		7,446
Rest of North America		1,004		3		126		19
North America		18,073		1,601		8,075		7,465
Latin America		2,784		–		454		42
Japan		3,562		85		1,382		559
Rest of Asia		2,681		–		254		–
Asia		6,243		85		1,636		559
Africa, Australia and Oceania		1,459		–		114		2
Total		46,133		2,243		17,832		13,181

Sales are allocated to geographical areas by destination according to the location of the customer. Royalties and other operating income are allocated according to the location of the Group company that receives the revenue. European Union information is based on members of the EU as at 31 December 2008.

Major customers

The US national wholesale distributor, AmerisourceBergen Corp., represented approximately 6 billion Swiss francs (2007: 6 billion Swiss francs) of the Group’s revenues. Over 85% of these revenues were in the Genentech operating segment, with the residual in the Roche Pharmaceuticals and Diagnostics segments. The Group also reported substantial revenues from the US national wholesale distributors, Cardinal Health Inc. and McKesson Corp., and in total these three customers represented approximately a quarter of the Group’s revenues, the majority of this being at Genentech.

3. Genentech

Effective 7 September 1990 the Roche Group acquired a majority interest of approximately 60% of Genentech, Inc., a biotechnology company in the United States. On 13 June 1999 the Group exercised its option to acquire the remaining shares of Genentech on 30 June 1999, at which point Genentech became a 100% owned subsidiary of the Group. On 23 July 1999, 26 October 1999 and 29 March 2000 the Group completed public offerings of Genentech’s common stock, which reduced the Group’s majority interest to 60%. During 2004 the Group’s ownership of Genentech decreased by 2.45% due to the conversion and redemption of the ‘LYONs IV’ US dollar exchangeable notes. At 31 December 2008 the Group’s interest in Genentech was 55.8% (2007: 55.8%).

The common stock of Genentech is publicly traded and is listed on the New York Stock Exchange, under the symbol ‘DNA’. Genentech prepares financial statements in conformity with accounting principles generally accepted in the United States (US GAAP). These are filed on a quarterly basis with the US Securities and Exchange Commission (SEC).

51

Roche’s proposal to fully purchase Genentech

On 21 July 2008 the Group announced a proposal to purchase all of the outstanding shares of Genentech common stock not owned by Roche at a price of USD 89.00 in cash per share, equivalent to a total cash payment of approximately 43.7 billion US dollars (the ‘Roche Proposal’). On 24 July 2008 Genentech announced that a special committee of its Board of Directors composed of its independent directors (the ‘Special Committee’) had been formed to review, evaluate, and, in the Special Committee’s discretion, negotiate and recommend or not recommend the acceptance of the Roche Proposal. On 13 August 2008 Genentech announced that the Special Committee did not support the proposal.

The impacts of the Roche Proposal on the 2008 results are described in Note 8.

Roche’s relationship with Genentech

Genentech has entered into certain agreements with Roche, which are discussed below:

Affiliation Arrangements | As a result of the June 1999 redemption of Genentech’s Special Common Stock and subsequent public offerings, Genentech amended their certificate of incorporation and bylaws and entered into or amended certain affiliation arrangements with Roche. Amongst other matters these cover the following areas:

• Roche’s rights as a shareholder.

• Roche’s rights to nominate members of Genentech’s Board of Directors.

• Certain limitations on Roche’s ability to buy or sell Genentech’s common stock.

• The process under which Roche may effect a merger of Genentech with Roche.

• The approval of the directors designated by Roche should Genentech seek to make significant business acquisitions or divestments.

• The approval of the directors designated by Roche should Genentech seek to issue, repurchase or redeem its capital stock.

Genentech issues additional shares of common stock in connection with its equity compensation plans, and may issue additional shares for other purposes, which affects Roche’s percentage ownership interest. The affiliation agreement between Roche and Genentech provides, amongst other matters, that Genentech establishes a stock repurchase programme to maintain Roche’s percentage ownership interest in Genentech.

Licensing Agreements | In July 1999 Roche and Genentech agreed an amended and restated licensing and marketing agreement granting Roche an option to license, use and sell Genentech’s products in non-US markets. This licensing and marketing agreement was subsequently amended to delete or add certain Genentech products under Roche’s commercialisation and marketing rights for Canada. In addition, Roche and Genentech have a July 1998 licensing and marketing agreement relating to anti-HER2 antibodies (Herceptin and pertuzumab), providing Roche with exclusive marketing rights outside of the US.

Depending on the specific circumstances and the terms of the agreement, this may result in payments on an arm’s-length basis from Roche to Genentech, for any or all of the following matters:

• Fees to extend Roche’s option to license a product.

• Partial reimbursement of Genentech’s previously incurred development costs where Roche exercises an option to license a product.

• Milestones and similar payments, dependent upon the achievement of agreed objectives or performance targets.

• Royalties on Roche’s aggregate sales of that product.

Manufacturing Agreements | Genentech has agreed, in general, to manufacture for and supply to Roche its clinical requirements at cost and its commercial requirements on a cost plus basis. Roche has the right to manufacture Genentech’s products under certain circumstances. In July 2006, Roche and Genentech signed two new product supply agreements. The Umbrella Manufacturing Supply Agreement (or ‘Umbrella Agreement’) supersedes any existing product supply agreements. Under this agreement, Roche has agreed to purchase specified amounts of Herceptin and Avastin through 2012 and, on a perpetual basis, either party may order other collaboration products from the other, including Herceptin and Avastin after 2012.

52          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

The Short-Term Supply Agreement (or ‘Short-Term Agreement’) supplements the terms of the Umbrella Agreement. Under this agreement, Roche has agreed to purchase specified amounts of Herceptin, Avastin and MabThera/Rituxan through 2008.

Research Collaboration Agreement | In April 2004, Roche and Genentech entered into a research collaboration agreement that outlines the process by which the parties may agree to conduct and share in the costs of joint research on certain molecules. The agreement further outlines how development and commercialisation efforts will be coordinated with respect to select molecules, including the financial provisions for a number of different development and commercialisation scenarios undertaken by either or both parties.

Tax Sharing Agreement | Roche and Genentech have a tax sharing agreement that relates to the US state and local tax returns in which they are consolidated or combined. Genentech calculates its tax liability or refund with the Group for these state and local jurisdictions as if Genentech were a stand-alone entity.

Differences between IFRS and US GAAP

Due to certain consolidation entries and differences in the requirements of International Financial Reporting Standards (IFRS) and US GAAP, there are differences between Genentech’s stand-alone financial results on a US GAAP basis and the financial results of Genentech as consolidated by the Roche Group in accordance with IFRS.

Reconciliation of Genentech results

				2008						2007
	USD			CHF			USD			CHF
	millions			millions			millions			millions
Operating income (US GAAP basis)		5,329						4,229
– Redemption and Tanox costs		172						126
– Equity compensation plan expenses (US GAAP basis)		399						403
– Tanox acquisition accounting (US GAAP basis)		–						(44	)
– Special litigation items and Roche proposal costs		(246	)					54
Operating income (non-US GAAP basis)		5,654						4,768
Add (deduct) differences and consolidation entries
– Add back redemption and Tanox costs		(172	)					(126	)
– Equity compensation plan expenses (IFRS basis)		(341	)					(387	)
– Capitalised in-process research and development		179						204
– Changes in Group organisation reclassification		87						–
– Other differences and consolidation entries		(30	)					(45	)
Operating profit before exceptional items (IFRS basis)		5,377			5,821			4,414			5,298
Add (deduct) exceptional items
– Major legal cases		250			271			–			–
– Changes in Group organisation		(87	)		(94	)		–			–
Segment result/operating profit (IFRS basis)		5,540			5,998			4,414			5,298
Add (deduct) non-operating items (IFRS basis)
– Financial income, financing costs and consolidation entries					98						172
– Income taxes					(2,331	)					(2,189	)
Net income (IFRS basis)					3,765						3,281
Non-controlling interest calculation
Non-controlling interest percentage (average during year)					44.1%						44.2%
Income applicable to non-controlling interest (IFRS basis)					1,659						1,451
Translated at 1 USD = 1.08 CHF (2007: 1 USD = 1.20 CHF).

53

Effective 1 January 2005 the Group implemented IFRS 2 ‘Share-based Payment’ in its IFRS financial statements. Amongst other matters, the standard required that the fair value of all equity compensation plans awarded to employees be estimated at grant date and recorded as an expense over the vesting period. The expense is charged against the appropriate income statement heading. The standard also required retrospective application, within certain transitional requirements. In 2008 a pre-tax expense of 341 million US dollars or 369 million Swiss francs relating to plans at Genentech has been recorded (2007: 387 million US dollars or 465 million Swiss francs). Effective 1 January 2006 Genentech implemented US Statement of Financial Accounting Standards No. 123R — ‘Share-Based Payment’ (FAS 123R) in its US GAAP financial statements. Amongst other matters, this required that companies reporting under US GAAP recognise compensation expenses for such plans. Due to the different dates of first application, measurement requirements and transitional arrangements of FAS 123R and IFRS 2, the expenses recorded by Genentech in its US GAAP financial statements for equity compensation plans are not the same as the expenses recorded in the Roche Group IFRS financial statements for these same plans.

In 2005 the Group implemented IAS 38 (revised) ‘Intangible Assets’ in its IFRS financial statements. Amongst other matters, the revised standard typically results in more intangible assets being recognised from in-licensing arrangements and similar research and development alliances. In Genentech’s US GAAP financial statements such expenditure would usually be recorded as research and development expenses.

There are other differences between IFRS and US GAAP, but these have a relatively minor impact.

Genentech share repurchases

On 15 April 2008 Genentech’s Board of Directors approved an extension of the existing stock repurchase programme authorising Genentech to repurchase up to 150 million shares of Genentech’s common stock for a total of 10 billion US dollars through 30 June 2009. Since the programme’s inception, Genentech has repurchased approximately 89 million shares for a total of approximately 6.5 billion US dollars.

During 2008 the net cash outflow from repurchases of Genentech common stock was 780 million US dollars or 844 million Swiss francs (2007: 1,344 million US dollars or 1,613 million Swiss francs, which includes 300 million US dollars from the prepaid share repurchase program).

Manufacturing agreements with Lonza

Effective 8 December 2006 Genentech sold its wholly-owned subsidiary Genentech España, including the manufacturing facility in Porriño, Spain, to Lonza Group Ltd. (‘Lonza’) for 150 million US dollars. As part of this agreement Genentech has entered into a short-term supply contract with Lonza for the production of Avastin using a portion of the production capacity of the Porriño facility. At the same time Genentech has entered into a supply agreement for the manufacture of certain Genentech products at Lonza’s facility under construction in Singapore which is currently expected to receive US Food and Drug Administration (‘FDA’) licensure in 2010. Genentech is committed to fund the pre-commissioning production qualification costs at this facility and, upon FDA licensure, Genentech is committed to purchase 100% of products successfully manufactured at the facility for a period of three years after commissioning of the facility. The estimated total cost of these pre- and post-commissioning commitments is approximately 440 million US dollars. Genentech has also received an exclusive option to purchase the Lonza Singapore facility during the period from 2007 up to one year after FDA licensure for a purchase price of 290 million US dollars. Regardless of whether the purchase option is exercised, Genentech will be obliged to make a milestone payment of 70 million US dollars if certain performance milestones are met at the facility being constructed. For accounting purposes, due to the nature of the supply agreement and Genentech’s involvement in the construction of the buildings, Genentech is considered to be the owner of the assets during the construction period even though the funds to construct the building shell and some infrastructure costs are paid by Lonza.

54          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

Genentech has also entered into a loan agreement with Lonza to advance up to 299 million US dollars to Lonza for the construction of the Singapore facility. As at 31 December 2008 a total of 225 million US dollars has been advanced (2007: 25 million US dollars). If Genentech exercises its option to purchase the facility then any outstanding advances may be offset against the purchase price. If Genentech does not exercise its purchase option then the advances may be offset against supply purchases.

As at 31 December 2008, construction in progress totalling 284 million Swiss francs (2007: 182 million Swiss francs) has been capitalised and a net financing obligation totalling 46 million Swiss francs (2007: 155 million Swiss francs) has been recorded.

Leasing arrangements
In December 2004 Genentech entered into a Master Lease Agreement with Slough SSF LLC, which was subsequently acquired by Health Care Properties (‘HCP’) for the development of property adjacent to Genentech’s South San Francisco site. The development includes a total of eight buildings, which are subject to separate agreements as contemplated by the Master Lease Agreement. HCP as the developer will construct the building shell for each building and Genentech will finish the interior of each building as laboratory or office space, as applicable. The construction of the first buildings was completed in 2006, at which point the lease term for those buildings was deemed to begin. Construction of the final buildings was completed during 2008. The lease term expires twelve years from the occupation of the final building. Genentech has two five-year renewal options for each building and has an option to purchase the various buildings at different dates between 2016 and 2020. Genentech also has a right of first refusal with respect to each building or the entire development should HCP consider selling part or all of the development.

As at 31 December 2008, based on the status of the development to date, the total carrying value of property, plant and equipment from this agreement was 239 million Swiss francs (2007: 261 million Swiss francs) and the carrying value of the leasing obligation was 291 million Swiss francs (2007: 305 million Swiss francs). Estimates of the total future minimum lease payments anticipated by the entire Master Lease Agreement are shown below.

Estimated total future minimum lease payments under HCP leases |  in millions of CHF

							Total minimum
	Principal		Ground lease		Interest		lease payment
Within one year		12		7		19		38
Between one and five years		67		32		67		166
More than five years		208		55		53		316
Total		287		94		139		520

Other matters
Details of other Genentech matters are given in the following Notes:

• Acquisition of Tanox in 2007: Note 7.

• Changes in Group organisation: Note 8.

• Genentech’s equity compensation plans: Note 11.

• Genentech legal cases: Note 25.

• Genentech’s Senior Notes and Commercial Paper Program: Note 27.

4. Chugai

Effective 1 October 2002 the Roche Group and Chugai completed an alliance to create a leading research–driven Japanese pharmaceutical company, which was formed by the merger of Chugai and Roche’s Japanese pharmaceuticals subsidiary, Nippon Roche. The merged company, known as Chugai, is a fully consolidated subsidiary of the Group. At 31 December 2008 the Group’s interest in Chugai was 61.5% (2007: 51.5%).

55

The common stock of Chugai is publicly traded and is listed on the Tokyo Stock Exchange under the stock code ‘TSE:4519’. Chugai prepares financial statements in conformity with accounting principles generally accepted in Japan (JGAAP). These are filed on a quarterly basis with the Tokyo Stock Exchange.

Roche’s relationship with Chugai
Chugai has entered into certain agreements with Roche, which are discussed below:

Basic Alliance Agreement |  As part of the Basic Alliance Agreement signed in December 2001, Roche and Chugai entered into certain arrangements covering the future operation and governance of Chugai. Amongst other matters these cover the following areas:

• The structuring of the alliance.

• Roche’s rights as a shareholder.

• Roche’s rights to nominate members of Chugai’s Board of Directors.

• Certain limitations to Roche’s ability to buy or sell Chugai’s common stock.

Chugai issues additional shares of common stock in connection with its convertible debt and equity compensation plans, and may issue additional shares for other purposes, which affects Roche’s percentage ownership interest. The Basic Alliance Agreement provides, amongst other matters, that Chugai will guarantee Roche’s right to maintain its shareholding percentage in Chugai at not less than 50.1%.

Licensing Agreements |  Under the Japan Umbrella Rights Agreement signed in December 2001, Chugai has exclusive rights to market Roche’s pharmaceutical products in Japan. Chugai also has first right of refusal on the development and marketing in Japan of all development compounds advanced by Roche.

Under the Rest of the World Umbrella Rights Agreement signed in May 2002, Roche has the right of first refusal on the development and marketing of Chugai’s development compounds in markets outside Japan, excluding South Korea, if Chugai decides that it requires a partner for such activities.

Further to these agreements, Roche and Chugai have signed a series of separate agreements for certain specific products. Depending on the specific circumstances and the terms of the agreement, this may result in payments on an arm’s-length basis between Roche and Chugai, for any or all of the following matters:

• Upfront payments, if a right of first refusal to license a product is exercised.

• Milestone payments, dependent upon the achievement of agreed performance targets.

• Royalties on future product sales.

These specific product agreements may also cover the manufacture and supply of the respective products to meet the other party’s clinical and/or commercial requirements on an arm’s-length basis.

Research Collaboration Agreements |  Roche and Chugai have entered into research collaboration agreements in the areas of small molecule synthetic drug research and biotechnology based drug discovery.

Differences between IFRS and JGAAP
Due to certain consolidation entries and differences in the requirements of International Financial Reporting Standards (IFRS) and JGAAP, there are differences between Chugai’s stand-alone financial results on a JGAAP basis and the financial results of Chugai as consolidated by the Roche Group in accordance with IFRS.

The acquisition by Roche of a 50.1% interest in Chugai was treated as a business combination for IFRS. For JGAAP the alliance was treated as a merger between Chugai and Nippon Roche. Therefore the JGAAP results of Chugai do not include the goodwill and fair value adjustments that are recorded in Roche’s results, and which are quantified in the table below. Moreover the acquisition accounting only includes Roche’s 50.1% of these fair value adjustments, based on applicable IFRS at that time, and therefore the impact of these on net income needs to be added back in the non-controlling interest calculations in Roche’s IFRS results.

56          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

In Roche’s IFRS results, depreciation on property, plant and equipment is calculated using the straight-line method. In Chugai’s JGAAP results the reducing balance method is used. Additionally certain income and expenses, notably some restructuring costs, are required by JGAAP to be reported as extraordinary items. In Chugai’s JGAAP results extraordinary items are reported below the operating profit line. In Roche’s IFRS results such items are normally included as part of operating profit and are not treated as extraordinary or exceptional items. There are other differences between IFRS and JGAAP, but these have a relatively minor impact.

Reconciliation of Chugai results

				2008						2007
	JPY			CHF			JPY			CHF
	billions			millions			billions			millions
Operating profit (JGAAP basis)		51.6						66.7
– Depreciation basis difference		10.5						5.1
– Classification of extraordinary items		5.9						(1.3	)
– Other differences and consolidation entries		(4.8	)					(4.0	)
Operating profit before acquisition accounting impacts (IFRS basis)		63.2			661			66.5			678
– Depreciation of property, plant and equipment		(0.7	)		(7	)		(0.7	)		(7	)
– Amortisation of intangible assets arising from business combinations		(6.0	)		(63	)		(6.0	)		(61	)
Operating profit (IFRS basis)		56.5			591			59.8			610
Add (deduct) Corporate and non-operating items (IFRS basis)
– Financial income and financing costs					72						23
– Income taxes					(241	)					(242	)
Net income (IFRS basis)					422						391
Non-controlling interest calculation
Add back acquisition accounting impact on net income					42						41
Net income excluding acquisition accounting					464						432
Non-controlling interest percentage (average during year)					43.1%						48.7%
Income applicable to non-controlling interest (IFRS basis)					200						211

Translated at 100 JPY = 1.05 CHF (2007: 1.02 CHF).

Dividends
The dividends distributed to third parties holding Chugai shares during 2008 totalled 74 million Swiss francs (2007: 91 million Swiss francs) and have been recorded against non-controlling interests (see Note 30). Dividends paid by Chugai to Roche are eliminated on consolidation as inter-company items.

Tender offer for Chugai shares
On 22 May 2008, the Group announced a tender offer to acquire additional common shares of Chugai to increase the Group’s ownership of Chugai’s issued shares from 50.1% to 59.9%. The tender offer was fully subscribed at the offer price of 1,730 Japanese yen per share and on 24 June 2008 the Group acquired 54.9 million common shares of Chugai for a cash consideration of 95.0 billion Japanese yen (912 million Swiss francs). Taking into account the shares that had previously been repurchased by Chugai but not retired, the Group’s ownership in Chugai’s outstanding shares increased to 61.5%. The total cash outflow of 934 million Swiss francs, including directly attributable costs of 22 million Swiss francs, has been recorded to equity as a change in ownership interest in subsidiaries.

57

Chugai share repurchases
There were no share repurchases in 2008. During 2007 Chugai repurchased 9.5 million of its common shares for a total consideration of 27.6 billion Japanese yen (282 million Swiss francs). As a result the Group’s ownership in Chugai increased to 51.5%.

Other matters
Details of Chugai’s equity compensation plans are given in Note 11. Details of the ‘Series 6 Chugai Pharmaceutical Unsecured Convertible Bonds’ are given in Note 27.

5. Financial income and financing costs

Financial income | in millions of CHF

	Year ended 31 December
	2008			2007
Gains on sale of equity securities		231			350
(Losses) on sale of equity securities		(1	)		(8	)
Dividend income		5			8
Gains (losses) on equity security derivatives, net		13			(2	)
Write-downs and impairments of equity securities		(115	)		(35	)
Net income from equity securities		133			313
Interest income		698			1,072
Gains on sale of debt securities		23			160
(Losses) on sale of debt securities		(168	)		(185	)
Gains (losses) on debt security derivatives, net		(44	)		—
Net gains (losses) on financial assets at fair-value-through-profit-or-loss		(64	)		22
Write-downs and impairments of debt securities		(53	)		(68	)
Net interest income and income from debt securities		392			1,001
Expected return on plan assets of defined benefit plans10		688			670
Foreign exchange gains (losses), net		(393	)		110
Gains (losses) on foreign currency derivatives, net		328			(263	)
Net foreign exchange gains (losses)		(65	)		(153	)
Net other financial income (expense)		(25	)		(26	)
Total financial income		1,123			1,805

Financing costs | in millions of CHF

	Year ended 31 December
	2008			2007
Interest expense		(214	)		(281	)
Amortisation of discount on debt instruments		(1	)		(8	)
Gains (losses) on debt derivatives, net		(4	)		(2	)
Net gains (losses) on financial liabilities at fair-value-through-profit-or-loss		5			1
Time cost of provisions25		(21	)		(69	)
Interest cost of defined benefit plans10		(652	)		(612	)
Total financing costs		(887	)		(971	)

58          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

Net financial income | in millions of CHF

	Year ended 31 December
	2008			2007
Financial income		1,123			1,805
Financing costs		(887	)		(971	)
Net financial income		236			834
Financial result from Treasury management		200			776
Financial result from Pension management		36			58
Net financial income		236			834

Net gains (losses) on financial liabilities at fair-value-through-profit-or-loss includes the change in the fair value that is attributable to changes in the liabilities’ credit risk component. This is calculated by comparing the difference between the present value of the future cash flows on the bonds, discounted by using a swap yield curve based on LIBOR, and the market prices of the bonds. Due to a widening of the credit spread during 2008 relative to the swap yield curve, the change in fair value that is attributable to changes in the liabilities’ credit risk component was a gain of 6 million Swiss francs (2007: gain of 4 million Swiss francs). The cumulative change in fair value that is attributable to the change in credit risk since the issuance of the instruments was a gain of 27 million Swiss francs (2007: gain of 21 million Swiss francs). Interest expense on liabilities at fair-value-through-profit-or-loss was 76 million Swiss francs (2007: 106 million Swiss francs). Interest income includes interest on financial assets held at fair-value-through-profit-and-loss amount of 44 million Swiss francs (2007: 46 million Swiss francs).

6. Income taxes

Income tax expenses | in millions of CHF

	2008			2007
Current income taxes		(3,617	)		(4,976	)
Adjustments recognised for current tax of prior periods		35			83
Deferred income taxes		265			1,026
Total income (expense)		(3,317	)		(3,867	)

Since the Group operates internationally, it is subject to income taxes in many different tax jurisdictions. The Group calculates its average expected tax rate as a weighted average of the tax rates in the tax jurisdictions in which the Group operates. This rate changes from year to year due to changes in the mix of the Group’s taxable income and changes in local tax rates. The average expected rate decreased in 2008 compared to 2007 due to lower taxable profits in certain high tax jurisdictions and certain one-time effects, notably a favourable change in tax rates in Basel that was effective in 2008. The Group’s effective tax rate can be reconciled to the Group’s average expected tax rate as follows:

Reconciliation of the Group’s effective tax rate

	2008		2007
Average expected tax rate		23.0%		23.7%
Tax effect of
– Utilisation of previously unrecognised tax losses		-0.2%		-0.0%
– Non-taxable income/non-deductible expenses		+1.2%		+0.2%
– Genentech equity compensation plans		+0.5%		+0.9%
– Other differences		-1.1%		+0.5%
Group’s effective tax rate before exceptional items		23.4%		25.3%

59 

							2008							2007
	Profit			Income					Profit		Income
	before tax			taxes			Tax rate		before tax		taxes			Tax rate
	(mCHF)			(mCHF)			(%)		(mCHF)		(mCHF)			(%)
Roche (excluding Genentech and Chugai)		7,551			(802	)		10.6		9,201		(1,436	)		15.6
Genentech		5,919			(2,262	)		38.2		5,470		(2,189	)		40.0
Chugai		663			(241	)		36.3		633		(242	)		38.2
Group’s effective tax rate before exceptional items		14,133			(3,305	)		23.4		15,304		(3,867	)		25.3
Major legal cases25		271			(105	)		38.7		–		–			–
Changes in Group organisation8		(243	)		93			38.3		–		–			–
Group’s effective tax rate		14,161			(3,317	)		23.4		15,304		(3,867	)		25.3

Income tax assets (liabilities) |  in millions of CHF

	2008			2007
Current income taxes
– Assets		268			263
– Liabilities		(2,193	)		(2,215	)
Net current income tax assets (liabilities)		(1,925	)		(1,952	)
Deferred income taxes
– Assets		1,829			1,317
– Liabilities		(1,409	)		(1,527	)
Net deferred income tax assets (liabilities)		420			(210	)

As disclosed in Note 1, post-employment benefit assets, deferred tax liabilities and equity have been restated in the 31 December 2007 balance sheet following the adoption of IFRIC interpretation 14 in 2008. A reconciliation to the previously published balance sheet is provided in Note 1.

Deferred income tax assets are recognised for tax loss carry forwards only to the extent that realisation of the related tax benefit is probable. The Group has unrecognised tax losses, including valuation allowances, as follows:

Unrecognised tax losses: expiry |  in millions of CHF

			2008					2007
			Applicable					Applicable
	Amount		tax rate			Amount		tax rate
Within one year		–			–		42		35%
Between one and five years		68		22	%		96		25%
More than five years		223		31	%		176		32%
Total unrecognised tax losses		291		29	%		314		30%

Deferred income tax liabilities have not been established for the withholding tax and other taxes that would be payable on the unremitted earnings of certain foreign subsidiaries, as such amounts are currently regarded as permanently reinvested. These unremitted earnings totalled 41.7 billion Swiss francs at 31 December 2008 (2007: 38.8 billion Swiss francs).

The deferred income tax assets and liabilities and the deferred income tax charges (credits) are attributable to the following items:

60          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

Deferred income taxes: movements in recognised net assets (liabilities) |  in millions of CHF

	Property, plant and			Other
	equipment, and			temporary
	intangible assets			differences			Total
Year ended 31 December 2007
Net deferred income tax asset (liability) at 1 January 2007 – restated1		(2,717	)		2,243			(474	)
BioVeris acquisition7		(41	)		41			–
Tanox acquisition7		(282	)		41			(241	)
Other business combinations7		(98	)		54			(44	)
(Charged) credited to the income statement		309			717			1,026
(Charged) credited to equity from other recognised gains and losses28		–			(214	)		(214	)
(Charged) credited to equity from equity compensation plans and other transactions with shareholders		–			(209	)		(209	)
Currency translation effects and other		90			(144	)		(54	)
Net deferred income tax asset (liability) at 31 December 2007		(2,739	)		2,529			(210	)
Year ended 31 December 2008
Net deferred income tax asset (liability) at 1 January 2008		(2,739	)		2,529			(210	)
Ventana acquisition7		(545	)		123			(422	)
Other business combinations7		(121	)		2			(119	)
(Charged) credited to the income statement		157			108			265
(Charged) credited to equity from other recognised gains and losses28		–			738			738
(Charged) credited to equity from equity compensation plans and other transactions with shareholders		–			113			113
Currency translation effects and other		208			(153	)		55
Net deferred income tax asset (liability) at 31 December 2008		(3,040	)		3,460			420

7. Business combinations

Acquisitions – 2008
Ventana |  Ventana Medical Systems, Inc. (‘Ventana’), a publicly owned US company based in Tucson, Arizona that had been listed on the NASDAQ under the symbol ‘VMSI’. Prior to 8 February 2008, the Group owned shares in Ventana representing 0.4% of the outstanding shares of Ventana. Effective 8 February 2008 the Group acquired a further 70.5% of the outstanding shares of Ventana and obtained control of Ventana. Ventana develops, manufactures and markets instrument/reagent systems that automate slide preparation and staining in clinical histology and drug discovery laboratories. Ventana’s clinical systems are used in the diagnosis and treatment of cancer and infectious diseases and their drug discovery systems are used by pharmaceutical and biotechnology companies to accelerate the discovery of new drug targets and to evaluate the safety of new drug compounds. Ventana is now reported as part of the Diagnostics operating segment. The acquisition of Ventana, a leader in the fast-growing histopathology (tissue-based diagnostics) business segment, will allow the Group to broaden its diagnostic offerings and complement its world leadership in both in-vitro diagnostic systems and oncology therapies.

61

The purchase consideration was 2,532 million Swiss francs in cash. This has been allocated as follows:

Ventana acquisition: net assets acquired |  in millions of CHF

	Carrying value			Fair value			Carrying value
	prior to acquisition			adjustments			upon acquisition
Property, plant and equipment		87			8			95
Goodwill		16			(16	)		–
Intangible assets
– Product intangibles: in use		17			802			819
– Product intangibles: not available for use		–			570			570
Inventories		26			34			60
Deferred income taxes		120			(542	)		(422	)
Cash		45			–			45
Other net assets (liabilities)		(47	)		(17	)		(64	)
Net identifiable assets		264			839			1,103
Non-controlling interests								(321	)
Goodwill								1,750
Purchase consideration								2,532

Goodwill represents the strategic value to the Group of entering the tissue diagnostics business area. It also represents the premium paid over the traded market price to obtain control of the business. None of the goodwill recognised is expected to be deductible for income tax purposes. The non-controlling interests in Ventana were measured at their proportionate share (29.1%) of Ventana’s identifiable net assets.

The fair value of other net assets (liabilities) includes receivables with a fair value of 117 million Swiss francs. Included within this fair value is an allowance for doubtful trade accounts receivable of 2 million Swiss francs. Finance lease receivables totalling 9 million Swiss francs are also included in this total and the gross amount due under these contracts is 9 million Swiss francs.

The Group recognised a gain of 5 million Swiss francs as a result of measuring at fair value its 0.4% equity interest in Ventana held prior to the acquisition date. This gain is included in financial income for 2008. Directly attributable acquisition-related costs of 41 million Swiss francs were incurred in the transaction. These are reported within general and administration expenses in the current period as part of the operating result of the Diagnostics operating segment.

Subsequent to the effective date of the acquisition on 8 February 2008, the Group purchased the remaining shares in Ventana held by third parties to give the Group a 100% interest in Ventana. The cash consideration was 1,285 million Swiss francs, which has been recorded to equity as a change in ownership interest in subsidiaries.

Other acquisitions |  Effective 23 May 2008 the Group acquired a 100% controlling interest in Piramed Ltd. (‘Piramed’), a privately owned biotechnology company based in the UK. Piramed discovers and develops new medicines primarily for the treatment of cancer and immune inflammatory disorders such as arthritis and asthma. Piramed is a leading company in the discovery of highly selective drugs that inhibit different isoforms of PI3-K enzymes that are increasingly recognised as key players in a wide variety of disease processes. Piramed is reported as part of the Roche Pharmaceuticals operating segment. The acquisition will further strengthen the Group’s research and development pipeline in oncology and inflammatory disease. The purchase consideration was 183 million Swiss francs. This consisted of 176 million Swiss francs paid in cash and 7 million Swiss francs from a contingent consideration arrangement. The contingent consideration arrangement consists of a potential milestone payment of 15 million US dollars which is due upon the commencement of phase II clinical trials for Piramed’s oncology programme. A liability of 7 million US dollars (7 million Swiss francs) was recognised at the acquisition date, based on management’s best estimate of the probability-adjusted expected cash outflow from the arrangement. As at 31 December 2008 the amount recognised for this arrangement was unchanged, based on the most recent management estimates.

62          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

Effective 24 September 2008 the Group acquired a 100% controlling interest in ARIUS Research Inc. (‘ARIUS’), a publicly owned Canadian biotechnology company that had been listed on the TSX under the symbol ‘ARI’. ARIUS discovers and develops antibody therapeutics to treat cancer and other diseases, including a proprietary antibody platform, which rapidly identifies and selects antibodies based on their functional ability to affect disease before progressing into clinical development. ARIUS is reported as part of the Roche Pharmaceuticals operating segment. The acquisition will further strengthen the Group’s developmental portfolio, initially within the areas of oncology and inflammatory diseases where this new technique offers potentially broad therapeutic applications. The purchase consideration was 201 million Swiss francs, paid in cash.

Effective 30 September 2008 the Group acquired a 100% controlling interest in Mirus Bio Corporation (‘Mirus’), a privately owned US biotechnology company based in Madison, Wisconsin. Mirus (now renamed Roche Madison Inc.) focuses on the discovery and development of innovative nucleic acid based technologies, including a proprietary RNAi (ribonucleic acid interference) delivery platform. Mirus is reported as part of the Roche Pharmaceuticals operating segment. The acquisition will further strengthen the Group’s research and development pipeline in RNAi therapeutics, which provides the capabilities to target complex diseases such as cancer, respiratory or metabolic disorders. The purchase consideration was 136 million Swiss francs, paid in cash.

There were other minor business combinations with a total purchase consideration of 17 million Swiss francs.

The combined purchase consideration for other acquisitions has been allocated as shown below.

Other acquisitions: net assets acquired |   in millions of CHF

	Carrying value			Fair value			Carrying value
	prior to acquisition			adjustments			upon acquisition
Property, plant and equipment		4			(1	)		3
Intangible assets
– Product intangibles: in use		–			26			26
– Product intangibles: not available for use		–			253			253
– Technology intangibles: in use		–			92			92
Deferred income taxes		–			(119	)		(119	)
Cash		13			–			13
Other net assets (liabilities)		(20	)		–			(20	)
Net identifiable assets		(3	)		251			248
Goodwill								289
Purchase consideration								537

Goodwill represents a control premium and synergies that can be obtained from the Group’s existing business. None of the goodwill recognised is expected to be deductible for income tax purposes.

The fair value of other net assets (liabilities) includes receivables with a fair value of 3 million Swiss francs which is expected to be fully collectable.

Directly attributable transaction costs of 6 million Swiss francs were incurred in these transactions. These are reported within general and administration expenses in the current period as part of the operating result of the Roche Pharmaceuticals operating segment.

63

Acquisitions – 2008: impact on results |  in millions of CHF

	Revenues from		Inventory
	external		fair value			Amortisation of
	customers		adjustment			intangible assets			Operating profit			Net income
Impact on reported results
Piramed		–		–			–			(10	)		(7	)
ARIUS		–		–			–			(6	)		(4	)
Mirus		–		–			(2	)		(4	)		(2	)
Pharmaceuticals Division		–		–			(2	)		(20	)		(13	)
Ventana		380		(33	)		(74	)		(59	)		(38	)
Minor business combinations		–		–			–			–			–
Diagnostics Division		380		(33	)		(74	)		(59	)		(38	)
Group		380		(33	)		(76	)		(79	)		(51	)
Estimated impact on results if acquisition assumed effective 1 January 2008
Piramed		–		–			–			(15	)		(11	)
ARIUS		–		–			–			(17	)		(11	)
Mirus		–		–			(9	)		(13	)		(7	)
Pharmaceuticals Division		–		–			(9	)		(45	)		(29	)
Ventanaa)		405		–			(80	)		(16	)		(10	)
Minor business combinations		8		–			(5	)		(4	)		(3	)
Diagnostics Division		413		–			(85	)		(20	)		(13	)
Group		413		–			(94	)		(65	)		(42	)

The above figures exclude directly attributable transaction costs of 6 million Swiss francs related to acquisitions by the Pharmaceuticals Division and 41 million Swiss francs related to acquisitions by the Diagnostics Division. Corresponding tax impacts are also excluded.

a) The figures exclude inventory fair value adjustments of 33 million Swiss francs and integration costs of 15 million Swiss francs related to Ventana. Corresponding tax impacts are also excluded.

Acquisitions – 2008 net cash outflow |  in millions of CHF

	Cash consideration			Cash in		Net cash
	paid			acquired company		outflow
Ventana		(2,532	)		45		(2,487	)
Other acquisitions		(530	)		13		(517	)
Total		(3,062	)		58		(3,004	)

The above cash consideration paid for Ventana does not include the subsequent payment of 1,285 million Swiss francs to purchase the remaining shares in Ventana held by third parties to give the Group a 100% interest in Ventana. This is reported as financing cash flow in the cash flow statement within the heading ‘Change in ownership interest in subsidiaries’.

64          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

Future acquisitions |   The Group has announced a number of minor business combinations which are expected to be completed in the first half of 2009, subject to shareholder approval and regulatory clearance as appropriate. The total purchase consideration, excluding transaction costs, is estimated at approximately 77 million Swiss francs in cash. Funds will be provided from Group’s cash on hand at the time of closing.

Acquisitions – 2007

BioVeris |  Effective 26 June 2007 the Group acquired a 100% controlling interest in BioVeris Corporation (‘BioVeris’), a publicly owned US company that had been listed on the NASDAQ under the symbol ‘BIOV’. BioVeris is a healthcare and biosecurity company based in Gaithersburg, Maryland, that specialises in developing proprietary technologies in diagnostics. BioVeris is now reported as part of the Diagnostics operating segment. The purchase consideration was 745 million Swiss francs, which consisted of 741 million Swiss francs of cash and 4 million Swiss francs of directly attributable costs. This has been allocated as follows:

BioVeris acquisition: net assets acquired |  in millions of CHF

	Carrying value		Fair value			Carrying value
	prior to acquisition		adjustments			upon acquisition
Property, plant and equipment		5		–			5
Intangible assets
– Product intangibles: in use		16		101			117
Deferred income taxes		8		(8	)		–
Cash		6		–			6
Other net assets (liabilities)		77		–			77
Net identifiable assets		112		93			205
Goodwill							540
Purchase consideration							745

Goodwill represents assets that cannot be recognised separately and measured reliably and synergies that can be obtained from the Group’s existing electrochemiluminescence (ECL) immunochemistry business. It also represents the premium paid over the traded market price to obtain control of the business. Following the acquisition, restructuring expenses of 29 million Swiss francs were incurred. These were reported within general and administration expenses as part of the operating result for 2007 of the Diagnostics operating segment.

Tanox |   Effective 2 August 2007, Genentech acquired a 100% controlling interest in Tanox, Inc. (‘Tanox’), a publicly owned US company that had been listed on the NASDAQ under the symbol ‘TNOX’. Tanox is a biotechnology company based in Houston, Texas, that specialises in the discovery and development of biotherapeutics based on monoclonal antibody technology. Genentech and Tanox have been working together in collaboration with Novartis since 1996 to develop and commercialise Xolair. The purchase consideration was 1,124 million Swiss francs, which consisted of 1,114 million Swiss francs of cash and 10 million Swiss francs of directly attributable costs. This has been allocated as follows:

65

Tanox acquisition: net assets acquired |  in millions of CHF

	Carrying value		Fair value			Carrying value
	prior to acquisition		adjustments			upon acquisition
Property, plant and equipment		13		–			13
Intangible assets
– Product intangibles: in use		–		613			613
– Product intangibles: not available for use		–		93			93
Deferred income taxes		9		(250	)		(241	)
Cash		120		–			120
Marketable securities		123		–			123
Other net assets (liabilities)		19		32			51
Net identifiable assets		284		488			772
Goodwill							352
Purchase consideration							1,124

Goodwill represents assets that cannot be recognised separately and measured reliably, such as early-stage research projects. It also represents the premium paid over the traded market price to obtain control of the business.

Other acquisitions |  Effective 28 March 2007 the Group acquired a 100% controlling interest in Therapeutic Human Polyclonals, Inc. (‘THP’), a privately owned US biotechnology company based in California and Germany. THP is reported as part of the Roche Pharmaceuticals operating segment. The purchase consideration paid was 69 million Swiss francs in cash.

Effective 25 May 2007 the Group acquired a 100% controlling interest in 454 Life Sciences, a majority-owned US subsidiary of CuraGen Corporation. 454 Life Sciences develops and commercialises novel instrumentation for high-throughput DNA sequencing and is based in Branford, Connecticut. 454 Life Sciences is reported as part of the Diagnostics operating segment. The purchase consideration paid was 189 million Swiss francs in cash, which consisted of 188 million Swiss francs of cash and 1 million Swiss francs of directly attributable costs.

Effective 8 August 2007 the Group acquired a 100% controlling interest in NimbleGen Systems, Inc. (‘NimbleGen’), a privately owned US company. NimbleGen develops and commercialises high density DNA microarrays and is based in Madison, Wisconsin. NimbleGen is reported as part of the Diagnostics operating segment. The purchase consideration was 316 million Swiss francs in cash.

There were other minor business combinations with a total purchase consideration of 18 million Swiss francs.

The combined purchase consideration for other acquisitions has been allocated as shown below.

Other acquisitions: net assets acquired |  in millions of CHF

	Carrying value			Fair value			Carrying value
	prior to acquisition			adjustments			upon acquisition
Property, plant and equipment		16			(1	)		15
Intangible assets
– Product intangibles: in use		19			204			223
– Product intangibles: not available for use		–			10			10
– Technology intangibles: in use		–			34			34
Deferred income taxes		–			(44	)		(44	)
Cash		25			–			25
Other net assets (liabilities)		(9	)		2			(7	)
Net identifiable assets		51			205			256
Goodwill								336
Purchase consideration								592

66          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

Goodwill represents assets that cannot be recognised separately and measured reliably, such as early-stage research projects, a control premium and synergies that can be obtained from the Group’s existing business.

Acquisitions – 2007: net cash outflow |  in millions of CHF

	Cash consideration			Cash in		Net cash
	paid			acquired company		outflow
BioVeris		(745	)		6		(739	)
Tanox		(1,124	)		120		(1,004	)
Other acquisitions		(592	)		25		(567	)
Total		(2,461	)		151		(2,310	)

8. Changes in Group organisation

As described in Note 3, on 21 July 2008 the Group announced an offer to purchase all outstanding shares of Genentech. Following the closing of a transaction, Genentech’s South San Francisco site would become the headquarters of the Group’s combined pharmaceuticals operations in the United States. On 21 July 2008 the Group also announced that the Roche Pharmaceuticals business in the US would close manufacturing operations at its site in Nutley, New Jersey, and commercial operations would be moved to Genentech. The research site at Palo Alto, California, would be closed with the research activities being transferred to Nutley and to Genentech.

The current status of the offer is described in Note 3. During 2008 significant costs were incurred in connection with the proposed Genentech transaction and the US reorganisation, as described below. These are disclosed separately in the income statement due to the materiality of the amounts and in order to fairly present the Group’s results. Costs of other restructuring programmes that are less material and do not fundamentally change the Group’s organisation are expensed in the current period and reported within general and administration expenses.

Changes in Group organisation |  in millions of CHF

	2008
Roche Pharmaceuticals operating segment
– US reorganisation costs		149
Total Roche Pharmaceuticals operating segment		149
Genentech operating segment
– Genentech Employee Retention Program expenses		94
Total Genentech operating segment		94
Total Pharmaceuticals Division		243

The total income tax benefit recorded in respect of changes in Group organisation was 93 million Swiss francs (see Note 6).

Roche Pharmaceuticals US reorganisation |  During 2008 costs were incurred as shown in the table below which are independent of the completion of the proposed Genentech transaction. These mainly relate to the closure of the Palo Alto site and the closure of manufacturing at the Nutley site, but also include costs associated with the reorganisation including the transfer of the research operations from Palo Alto and other activities.

67

Roche Pharmaceuticals US reorganisation costs |  in millions of CHF

	2008
Employee-related costs
– Termination costs		99
– Pensions and other post-employment benefits		(12	)
– Retention plans and other employee benefits		15
– Other employee-related costs		6
Total employee-related costs		108
Site closure costs
– Impairment of property, plant and equipment		10
– Accelerated depreciation of property, plant and equipment		26
– Other site closure costs		5
Total site closure costs		41
Other reorganisation expenses		–
Total US reorganisation costs		149

Genentech Employee Retention Program |  On 18 August 2008 Genentech announced a broad-based employee retention program, consisting of two retention plans that together cover substantially all employees of the company. The program is estimated to cost approximately 375 million US dollars payable in cash and is being implemented in lieu of Genentech’s 2008 annual stock option grant. The timing of the payments related to this program will depend on the outcome of the Roche Proposal. If a merger of Genentech with Roche or an affiliate of Roche has not occurred on or before 30 June 2009, Genentech will pay the retention bonus at that time in accordance with the terms of the program. The costs of the retention program are currently recognised on a straight-line basis over the period from 18 August 2008 to 30 June 2009. If a merger of Genentech with Roche or an affiliate of Roche has occurred on or before 30 June 2009, then the timing of the payments and the recognition of the expense will depend on the terms of the merger. During 2008, total costs for the retention program were 175 million Swiss francs, of which 146 million Swiss francs were expensed and 29 million Swiss francs were capitalised into inventory, which will be recognised as cost of sales as products manufactured after the initiation of the retention program are sold. If Genentech had granted an annual stock option award, as in previous years, with the same total value as the retention program then the costs would have been expensed over the four year vesting period and the amount expensed in 2008 would have been approximately 52 million Swiss francs. Accordingly the additional incremental costs incurred in 2008 for the retention plan are reported as part of changes in Group organisation, since these are directly attributable to the announcement of the Roche Proposal.

Genentech Employee Retention Program expenses |  in millions of CHF

	2008
Marketing and distribution		14
Research and development		26
General and administration		12
Total included in operating profit before exceptional items		52
Changes in Group organisation		94
Total Genentech Employee Retention Program expenses		146

68          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

9. Employee benefits

Employee remuneration |  in millions of CHF

	2008			2007
Wages and salaries		8,363			8,180
Social security costs		948			943
Defined contribution post-employment plans		253			259
Operating expenses for defined benefit post-employment plans10		317			370
Equity compensation plans11		513			608
Genentech Employee Retention Program8		146			–
Termination costs – Roche Pharmaceuticals US reorganisation8		99			–
Other employee benefits		526			465
Employee remuneration included in operating results		11,165			10,825
Expected return on plan assets for defined benefit post-employment plans10		(688	)		(670	)
Interest cost for defined benefit post-employment plans10		652			612
Total employee remuneration		11,129			10,767

Other employee benefits consist mainly of life insurance schemes and certain other insurance schemes providing medical coverage and other long-term and short-term disability benefits. The charges for employee benefits in the operating results are included in the relevant expenditure line by function. The expected return on plan assets and interest cost from defined benefit plans are included as part of financial income and financing costs, respectively (see Note 5).

10. Pensions and other post-employment benefits

The Group’s objective is to provide attractive and competitive post-employment benefits to employees, while at the same time ensuring that the various plans are appropriately financed and managing any potential impacts on the Group’s long-term financial position. Most employees are covered by pension plans sponsored by Group companies. The nature of such plans varies according to legal regulations, fiscal requirements and market practice in the countries in which the employees are employed. Other post-employment benefits consist mostly of post-retirement healthcare and life insurance schemes, principally in the United States. Post-employment benefit plans are classified for IFRS as ‘defined contribution plans’ if the Group pays fixed contributions into a separate fund or to a third-party financial institution and will have no further legal or constructive obligation to pay further contributions. All other plans are classified as ‘defined benefit plans’, even if the Group’s potential obligation is relatively minor or has a relatively remote possibility of arising. Consequently most of the Group’s post-employment benefit plans are classified as ‘defined benefit plans’ for the purpose of these financial statements.

Defined contribution plans
Defined contribution plans typically consist of payments by employees and by the Group to funds administered by third parties. Payments by the Group were 253 million Swiss francs (2007: 259 million Swiss francs). No assets or liabilities are recognised in the Group’s balance sheet in respect of such plans, apart from regular prepayments and accruals of the contributions withheld from employees’ wages and salaries and of the Group’s contributions.

69

Defined benefit plans

The Group’s major defined benefit plans are located in Switzerland, the United States, Germany, the United Kingdom and Japan. Plans are usually established as trusts independent of the Group and are funded by payments from the Group and by employees. In some cases, notably for the major defined benefit plans in Germany, the plan is unfunded and the Group pays pensions to retired employees directly from its own financial resources.

Current and past service costs are charged to the appropriate income statement heading within the operating results. Pension plan administration and funding is overseen at a corporate level, and any settlement gains and losses resulting from changes in funding arrangements are reported as general and administration expenses within the Corporate segment. The expected returns on plan assets and interest costs are charged to financial income and financing costs, respectively. Actuarial gains and losses are recorded directly in equity. The recognition of pension assets is limited to the total of the present value of any future refunds from the plans or reductions in future contributions to the plans and any cumulative unrecognised past service costs. Adjustments arising from the limit on the recognition of assets for defined benefit plans are recorded directly in equity.

Defined benefit plans: expenses |   in millions of CHF

							2008									2007
				Other post-									Other post-
	Pension			employment						Pension			employment
	plans			benefit plans			Total			plans			benefit plans			Total
Current service cost		320			17			337			361			22			383
Past service cost		(3	)		8			5			(2	)		–			(2	)
(Gain) loss on curtailment		(22	)		(3	)		(25	)		(11	)		–			(11	)
(Gain) loss on settlement		–			–			–			–			–			–
Total operating expenses		295			22			317			348			22			370
Expected return on plan assets		(647	)		(41	)		(688	)		(630	)		(40	)		(670	)
Interest cost		593			59			652			556			56			612
Total financial (income) expense		(54	)		18			(36	)		(74	)		16			(58	)
Total expense recognised in income statement		241			40			281			274			38			312

The funding of the Group’s various defined benefit plans is overseen at a corporate level. Qualified independent actuaries carry out valuations on a regular basis and for major plans annually as at the balance sheet date. For funded plans, which are usually trusts independent of the Group’s finances, the net asset/liability recognised on the Group’s balance sheet corresponds to the over/under funding of the plan, adjusted for unrecognised past service costs. For unfunded plans, where the Group meets the pension obligations directly from its own financial resources, a liability for the defined benefit obligation is recorded in the Group’s balance sheet. Pension assets and liabilities in different defined benefit plans are not offset unless the Group has a legally enforceable right to use the surplus in one plan to settle obligations in the other plan. Amounts recognised in the balance sheet for post-employment benefits are predominantly non-current and are reported in non-current assets and liabilities.

70           Roche Finance Report 2008     |      Roche Group – Notes to the Roche Group Consolidated Financial Statements

Defined benefit plans: funding status at 31 December  |   in millions of CHF

							2008									2007
	Funded			Unfunded						Funded			Unfunded
	plans			plans			Total			plans			plans			Total
Fair value of plan assets		9,438			–			9,438			12,170			–			12,170
Defined benefit obligation		(10,504	)		(3,078	)		(13,582	)		(10,646	)		(3,344	)		(13,990	)
Over (under) funding		(1,066	)		(3,078	)		(4,144	)		1,524			(3,344	)		(1,820	)
Unrecognised past service costs		(21	)		(1	)		(22	)		(23	)		(1	)		(24	)
Limit on asset recognition		–			–			–			(636	)		–			(636	)
Reimbursement rights		76			13			89			99			17			116
Net recognised asset (liability)		(1,011	)		(3,066	)		(4,077	)		964			(3,328	)		(2,364	)
Reported as
– Defined benefit plans		503			–			503			1,216			–			1,216
– Reimbursement rights		76			13			89			99			17			116
Post-employment benefit assets		579			13			592			1,315			17			1,332
Post-employment benefit liabilities		(1,590	)		(3,079	)		(4,669	)		(351	)		(3,345	)		(3,696	)
Net recognised asset (liability)		(1,011	)		(3,066	)		(4,077	)		964			(3,328	)		(2,364	)

As disclosed in Note 1, post-employment benefit assets, deferred tax liabilities and equity have been restated in the 31 December 2007 balance sheet following the adoption of IFRIC interpretation 14 in 2008. A reconciliation to the previously published balance sheet is provided in Note 1.

Further detailed information on plan assets and the defined benefit obligation is given below.

Defined benefit plans: fair value of plan assets and reimbursement rights |  in millions of CHF

							2008									2007
	Fair value			Reim-						Fair value			Reim-
	of plan			bursement						of plan			bursement
	assets			rights			Total			assets			rights			Total
At 1 January		12,170			116			12,286			11,632			116			11,748
Expected return on plan assets		680			8			688			663			7			670
Actuarial gains (losses)		(2,787	)		(22	)		(2,809	)		491			4			495
Currency translation effects and other		(463	)		(7	)		(470	)		(373	)		(10	)		(383	)
Employer contributions		217			(6	)		211			207			(1	)		206
Employee contributions		61			–			61			45			–			45
Benefits paid – funded plans		(440	)		–			(440	)		(494	)		–			(494	)
Past service cost		–			–			–			–			–			–
Business combinations		–			–			–			–			–			–
Divestment of subsidiaries		–			–			–			–			–			–
Curtailments		–			–			–			–			–			–
Settlements		–			–			–			(1	)		–			(1	)
At 31 December		9,438			89			9,527			12,170			116			12,286

	2008	2007
Invested as
– Shares and other equity instruments	4,033	6,055
– Bonds, debentures and other debt instruments	4,106	4,343
– Property	242	337
– Other assets	1,146	1,551
Total	9,527	12,286

Included within the fair value of plan assets are 337 thousand of the Group’s non-voting equity securities with a fair value of 55 million Swiss francs (2007: 340 thousand non-voting equity securities with a total fair value of 66 million Swiss francs).

71

Defined benefit plans: defined benefit obligation  |   in millions of CHF

							2008									2007
				Other post-									Other post-
	Pension			employment						Pension			employment
	plans			benefit plans			Total			plans			benefit plans			Total
At 1 January		12,988			1,002			13,990			13,572			1,026			14,598
Current service cost		320			17			337			361			22			383
Interest cost		593			59			652			556			56			612
Employee contributions		61			–			61			45			–			45
Actuarial (gains) losses		64			(53	)		11			(718	)		35			(683	)
Currency translation effects and other		(794	)		(65	)		(859	)		(235	)		(79	)		(314	)
Benefits paid – funded plans		(399	)		(41	)		(440	)		(448	)		(46	)		(494	)
Benefits paid – unfunded plans		(131	)		(11	)		(142	)		(134	)		(12	)		(146	)
Past service cost		–			8			8			1			–			1
Business combinations		–			–			–			–			–			–
Divestment of subsidiaries		(11	)		–			(11	)		–			–			–
Curtailments		(22	)		(3	)		(25	)		(11	)		–			(11	)
Settlements		–			–			–			(1	)		–			(1	)
At 31 December		12,669			913			13,582			12,988			1,002			13,990
Of which
– Funded plans		9,807			697			10,504			9,904			742			10,646
– Unfunded plans		2,862			216			3,078			3,084			260			3,344

Actuarial assumptions

Actuarial assumptions are unbiased and mutually compatible estimates of variables that determine the ultimate cost of providing post-employment benefits. They are set on an annual basis by local management and actuaries and are subject to approval by corporate management and the Group’s actuaries. Actuarial assumptions consist of demographic assumptions on matters such as mortality and employee turnover, and financial assumptions on matters such as salary and benefit levels, interest rates, return on investments and costs of medical benefits. The Group operates defined benefit plans in many countries and the actuarial assumptions vary based upon local economic and social conditions.

Demographic assumptions   |   The most significant demographic assumptions relate to mortality rates. The Group’s actuaries use mortality tables which take into account historic patterns and expected changes, such as further increases in longevity. The mortality tables used for the major schemes are:

• Germany: Heubeck tables 2005G.

• Japan: National Census (No. 19 Life Table).

• Switzerland: BVG 2005.

• United Kingdom: non-pensioners – PA92C25 rated down one year.

• United Kingdom: pensioners – PA92C10 rated down one year.

• United States: RP2000 projected to 2010.

Rates of employee turnover, disability and early retirement are based on historical behaviour within Group companies.

Financial assumptions  |   These are based on market expectations for the period over which the obligations are to be settled. The ranges of assumptions used in the actuarial valuations of the most significant plans, which are in countries with stable currencies and interest rates, are shown below.

72          Roche Finance Report 2008     |      Roche Group – Notes to the Roche Group Consolidated Financial Statements

Defined benefit plans: financial actuarial assumptions

				2008						2007
	Weighted						Weighted
	average			Range			average			Range
Discount rates		4.84	%		2%–9	%		4.96	%		2%–8%
Expected rates of return on plan assets		5.67	%		1%–10	%		5.83	%		1%–10%
Expected rates of salary increases		3.50	%		2%–7	%		3.59	%		0%–7%
Medical cost trend rate		8.76	%		8%–9	%		9.39	%		8%–10%

Discount rates, which are used to calculate the discounted present value of the defined benefit obligation, are determined with reference to market yields on high quality corporate bonds, or government bonds in countries where there is not a deep market in corporate bonds. The currency and term of the bonds is consistent with the obligation being discounted. The interest cost included in the income statement is calculated by multiplying the discount rate by the defined benefit obligation.

Expected returns on plan assets are based on market expectations of expected returns on the assets in funded plans over the duration of the related obligation. This takes into account the split of the plan assets between equities, bonds, property and other investments. The calculation includes assumptions concerning expected dividend and interest income, realised and unrealised gains on plan assets and taxes and administration costs borne by the plan. These are based on long-term market expectations and the actual performance is continually monitored by corporate management. Due to the long-term nature of the obligations, the assumptions used for matters such as returns on investments may not necessarily be consistent with recent historical patterns. The expected return on plan assets included in the income statement is calculated by multiplying the expected rate of return by the fair value of plan assets. The difference between the expected return and the actual return in any twelve month period is an actuarial gain/loss and is recorded directly to equity. The actual return on plan assets was a loss of 2,107 million Swiss francs (2007: gain of 703 million Swiss francs).

Expected rates of salary increases, which are used to calculate the defined benefit obligation and the current service cost included in the income statement, are based on the latest expectation and historical behaviour within Group companies.

Medical cost trend rates are used to calculate the defined benefit obligation and the current service cost included in the income statement of post-employment medical plans. These take into account the benefits set out in the plan terms and expected future changes in medical costs. Since the Group’s major post-employment medical plans are for US employees, these rates are driven by developments in the United States. The effect of one percentage point increase or decrease in the medical cost trend rate is shown below.

Defined benefit plans: sensitivity of medical cost trend rate |  in millions of CHF

			2008					2007
	+1%		-1%			+1%		-1%
Current service cost and interest cost		9		(8	)		10		(9	)
Defined benefit obligation		87		(74	)		60		(151	)

Funding summary

A five-year summary of the funding status of the Group’s defined benefit plans is shown in the table below.

73

Defined benefit plans: summary of funding status  |   in millions of CHF

	2008			2007			2006			2005			2004
Funded plans
– Fair value of plan assets		9,438			12,170			11,632			10,858			9,922
– Defined benefit obligation		(10,504	)		(10,646	)		(11,002	)		(10,976	)		(10,233	)
– Over (under) funding		(1,066	)		1,524			630			(118	)		(311	)
Unfunded plans
– Defined benefit obligation		(3,078	)		(3,344	)		(3,596	)		(3,630	)		(2,731	)
Increase (decrease) in funding status arising from experience adjustments
– Fair value of plan assets		(2,787	)		40			626			547			13
– Defined benefit obligation		(126	)		(235	)		(249	)		49			77
Increase (decrease) in funding status arising from changes in actuarial assumptions
– Fair value of plan assets		–			–			–			–			–
– Defined benefit obligation		115			1,295			384			(1,148	)		(636	)

Cash flows

The Group incurred cash flows from its defined benefit plans as shown in the table below.

Defined benefit plans: cash flows  |   in millions of CHF

	2008			2007
Employer contributions – funded plans		(211	)		(206	)
Benefits paid – unfunded plans		(142	)		(146	)
Total cash inflow (outflow)		(353	)		(352	)

Based on the most recent actuarial valuations, the Group expects that employer contributions for funded plans in 2009 will be approximately 494 million Swiss francs, which include an estimated 317 million Swiss francs of additional contributions. Benefits paid for unfunded plans are estimated to be approximately 130 million Swiss francs.

Amounts recorded in equity

The actuarial gains and losses recognised in the statement of recognised income and expense were losses of 2,820 million Swiss francs (2007: gains of 1,178 million Swiss francs). The total amount at 31 December 2008 was an accumulated loss of 1,433 million Swiss francs (2007: accumulated gain of 1,387 million Swiss francs).

In addition the recognition of pension assets is limited to the total of the present value of any future refunds from the plans or reductions in future contributions to the plans and the cumulative unrecognised past service costs. Adjustments arising from this limit on asset recognition are recorded directly in equity. In 2008 this adjustment was an increase of 636 million Swiss francs (2007: decrease of 636 million Swiss francs).

74          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

11. Employee stock options and other equity compensation benefits

The Group operates several equity compensation plans, including separate plans at Genentech and Chugai. Effective 1 January 2005 the Group adopted IFRS 2 ‘Share-based Payment’. Amongst other matters, the standard requires that the fair value of all equity compensation plan awards granted to employees be estimated at grant date and recorded as an expense over the vesting period. The expense is charged against the appropriate income statement heading.

Expenses for equity compensation plans |  in millions of CHF

	2008			2007
Cost of sales		70			90
Marketing and distribution		101			132
Research and development		174			206
General and administration		168			180
Total operating expenses		513			608
Share option plans
Roche Option Plan		7			6
Genentech Stock Option Plan		336			433
Chugai Stock Acquisition Rights		2			3
Total share option plans		345			442
Other equity compensation plans
Roche Connect		13			13
Genentech Employee Stock Purchase Program		33			32
Roche Stock-settled Stock Appreciation Rights		120			100
Roche Performance Share Plan		15			16
Roche Stock Appreciation Rights		(13	)		5
Total other equity compensation plans		168			166
Total operating expenses		513			608
of which
– Equity-settled		526			603
– Cash-settled		(13	)		5

 75

Cash inflow (outflow) from equity compensation plans |  in millions of CHF

	2008			2007
Share option plans
Roche Option Plan		(18	)		(19	)
Genentech Stock Option Plan		620			408
Chugai Stock Acquisition Rights		–			1
Total share option plans		602			390
Other equity compensation plans
Roche Connect		(13	)		(13	)
Genentech Employee Stock Purchase Program		115			134
Roche Stock-settled Stock Appreciation Rights		(106	)		(61	)
Roche Performance Share Plan		–			–
Roche Stock Appreciation Rights		(35	)		(97	)
Total other equity compensation plans		(39	)		(37	)
Total cash inflow (outflow)		563			353
of which
– Equity-settled		598			450
– Cash-settled		(35	)		(97	)

Roche Long-Term |  During 2005 the Group implemented a new global long-term incentive programme which is available to certain directors, management and employees selected at the discretion of the Group. The programme consists of Stock-settled Stock Appreciation Rights
(S-SARs), with the Group having the alternative of granting awards under the existing Roche Option Plan.

Share option plans
Roche Option Plan |  Awards under this plan give employees the right to purchase non-voting equity securities at an exercise price specified at the grant date. The options, which are non-tradable equity-settled awards, have a seven-year duration and vest on a phased basis over three years, subject to continued employment. The Group covers such obligations by purchasing non-voting equity securities or derivatives thereon (see Note 28). With the introduction of Roche Long-Term in 2005, the number of options granted under the Roche Option Plan was significantly reduced, as most eligible employees now receive Roche Stock-settled Stock Appreciation Rights instead.

Roche Option Plan – movement in number of options outstanding

				2008					2007
	Number			Weighted average		Number			Weighted average
	of options			exercise price		of options			exercise price
	(thousands)			(CHF)		(thousands)			(CHF)
Outstanding at 1 January		1,203			139.50		1,416			117.83
Granted		362			194.64		194			229.68
Forfeited		(40	)		199.24		(10	)		163.98
Exercised		(131	)		111.80		(397	)		105.64
Expired		–			–		–			–
Outstanding at 31 December		1,394			154.71		1,203			139.50
– of which exercisable		890			127.45		875			115.71

76          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

Roche Option Plan – terms of options outstanding as at 31 December 2008

					Options outstanding				Options exercisable
	Number		Weighted average		Weighted average		Number		Weighted average
	outstanding		years remaining		exercise		exercisable		exercise
Year of grant	(thousands)		contractual life		price (CHF)		(thousands)		price (CHF)
2002		53		0.20		115.09		53		115.09
2003		222		1.17		78.48		222		78.48
2004		362		2.17		129.50		362		129.50
2005		116		3.17		123.16		116		123.16
2006		112		4.17		195.18		74		195.18
2007		177		5.18		229.68		60		229.68
2008		352		6.11		194.61		3		195.80
Total		1,394		3.56		154.71		890		127.45

Genentech Stock Option Plan |  The Genentech Stock Option Plan was adopted in 1999 and amended thereafter. In April 2004 Genentech’s shareholders approved an equity incentive plan. The plans allow for the granting of various stock options, incentive stock options and stock purchase rights to employees, directors and consultants of Genentech. No incentive stock options and stock purchase rights have been granted under this plan to date. The options granted, which are non-tradable equity-settled awards, have a ten-year duration and vest on a phased basis over four years, subject to continued employment.

Genentech Stock Option Plan – movement in number of options outstanding

				2008					2007
	Number			Weighted average		Number			Weighted average
	of options			exercise price		of options			exercise price
	(millions)			(USD)		(millions)			(USD)
Outstanding at 1 January		92			60.94		88			54.53
Granted		1			79.23		18			79.40
Forfeited		(3	)		80.52		(4	)		76.45
Exercised		(13	)		44.83		(10	)		32.76
Expired		–			–		–			–
Outstanding at 31 December		77			63.06		92			60.94
– of which exercisable		56			56.51		54			48.46

Genentech Stock Option Plan – terms of options outstanding at 31 December 2008

					Options outstanding				Options exercisable
	Number		Weighted average		Weighted average		Number		Weighted average
	outstanding		years remaining		exercise		exercisable		exercise
Range of exercise prices (USD)	(millions)		contractual life		price (USD)		(millions)		price (USD)
6.27–8.89		0.2		6.39		6.81		0.2		6.81
10.00–14.35		6.2		2.85		13.68		6.2		13.68
15.04–22.39		4.5		2.35		20.89		4.5		20.89
22.88–33.00		0.1		2.52		26.08		0.1		26.08
35.63–53.23		20.3		4.76		47.11		20.3		47.11
53.95–75.90		2.0		7.85		68.03		0.9		63.31
75.99–98.80		44.1		7.75		81.77		23.8		82.70
Total		77.4		6.25		63.06		56.0		56.51

Chugai Stock Acquisition Rights |  During 2003 Chugai adopted a Stock Acquisition Rights programme. The programme allows for the granting of rights to employees and directors of Chugai. Each right entitles the holder to purchase 100 Chugai shares at a specified exercise price. The options, which are non-tradable equity-settled awards, have a ten-year duration and vest after two years.

77 

Chugai Stock Acquisition Rights – movement in number of rights outstanding

				2008					2007
				Weighted average					Weighted average
	Number			exercise price		Number			exercise price
	of options			(JPY)		of options			(JPY)
Outstanding at 1 January		13,002			217,089		9,886			182,925
Granted		–			–		3,550			303,900
Forfeited		–			–		–			–
Exercised		(36	)		145,400		(434	)		148,965
Expired		–			–		–			–
Outstanding at 31 December		12,966			217,288		13,002			217,089
– of which exercisable		9,416			184,633		6,012			161,587

Chugai Stock Acquisition Rights – terms of rights outstanding at 31 December 2008

					Rights outstanding				Rights exercisable
			Weighted average		Weighted average				Weighted average
	Number		years remaining		exercise		Number		exercise
Year of grant	outstanding		contractual life		price (JPY)		exercisable		price (JPY)
2003		1,276		4.50		145,400		1,276		145,400
2004		2,180		5.25		167,500		2,180		167,500
2005		2,520		6.25		164,900		2,520		164,900
2006		3,440		7.25		224,500		3,440		224,500
2007		3,550		8.25		303,900		–		–
Total		12,966		6.72		217,288		9,416		184,633

Issues of share options in 2008 |  Issues of share options in 2008, including the methodology used to calculate fair value and the main inputs to the valuation models, are described below.

Issues of share option plans in 2008

	Roche		Genentech Stock
	Option Plan		Option Plan
Number of options granted	362 thousand		1 million
Underlying equity	Roche non-voting equity securities		Genentech common stock
Currency	Swiss francs		US dollars
Vesting period	Progressively		Progressively
	over 3 years		over 4 years
Contractual life	7 years		10 years
Weighted average fair value of options issued		22.24		22.39
Option pricing model used	Binomial		Binomial
Inputs to option pricing model
– Share price at grant date		194.64		79.23
– Exercise price		194.64		79.23
– Expected volatility		24.6%		24.1%
– Expected dividend yield		7.65%		0%
– Early exercise factor		1.649		1.484
– Expected exit rate		8.2%		8.6%

Volatility for Roche options was determined primarily by reference to historically observed prices of the underlying equity. Volatility for Genentech options was determined primarily by reference to the implied volatility of Genentech’s traded options. Risk-free interest rates are derived from zero coupon swap rates at the grant date taken from Datastream. The early exercise factor describes the ratio between the expected market price at the exercise date and the exercise price at which early exercises can be expected, based on historically observed behaviour.

78          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

Other equity compensation plans
Roche Connect |  This programme enables all employees worldwide, except for those in the United States and certain other countries, to make regular deductions from their salaries to purchase non-voting equity securities. It is administered by independent third parties. The Group contributes to the programme, which allows the employees to purchase non-voting equity securities at a discount (usually 20%). The administrator purchases the necessary non-voting equity securities directly from the market. At 31 December 2008 the administrator held 1.4 million non-voting equity securities (2007: 1.1 million). The programme has been operational since 1 October 2002. During the year the cost of the plan was 13 million Swiss francs (2007: 13 million Swiss francs), which was reported within the relevant expenditure line by function.

Genentech Employee Stock Purchase Program (ESPP) |  Genentech has an employee stock purchase programme that allows employees to purchase Genentech’s common stock at 85% of the lower of market value at the grant date or purchase date. In 2008 a total of 1.8 million shares of Genentech common stock were purchased (2007: 1.7 million shares) resulting in a cash inflow of 115 million Swiss francs (2007: 134 million Swiss francs). During the year the cost of the plan was 33 million Swiss francs (2007: 32 million Swiss francs), which was reported within the relevant expenditure line by function.

Roche Stock-settled Stock Appreciation Rights |  With the introduction of Roche Long-Term in 2005, the Group offers Stock-settled Stock Appreciation Rights (S-SARs) to certain directors, management and employees selected at the discretion of the Group. The S-SARs give employees the right to receive non-voting equity securities reflecting the value of any appreciation in the market price of the non-voting equity securities between the grant date and the exercise date. The options, which are non-tradable equity-settled awards, have a seven-year duration and vest on a phased basis over three years, subject to continued employment. The Group covers such obligations by purchasing non-voting equity securities, or derivatives thereon (see Note 28).

Roche S-SARs – movement in number of rights outstanding

				2008					2007
	Number			Weighted average		Number			Weighted average
	of rights			exercise price		of rights			exercise price
	(thousands)			(CHF)		(thousands)			(CHF)
Outstanding at 1 January		7,782			185.60		5,883			156.07
Granted		6,397			194.25		3,025			229.37
Forfeited		(477	)		206.55		(189	)		180.91
Exercised		(639	)		131.40		(937	)		142.36
Expired		–			–		–			–
Outstanding at 31 December		13,063			191.72		7,782			185.60
– of which exercisable		4,221			170.86		2,101			149.17

Roche S-SARs – terms of rights outstanding at 31 December 2008

	Rights outstanding						Rights exercisable
					Weighted				Weighted
	Number		Weighted average		average		Number		average
	outstanding		years remaining		exercise		exercisable		exercise
Year of grant	(thousands)		contractual life		price (CHF)		(thousands)		price (CHF)
2005		1,878		3.17		123.39		1,878		123.39
2006		2,157		4.17		195.17		1,388		195.17
2007		2,802		5.17		229.36		941		229.36
2008		6,226		6.11		194.21		14		195.80
Total		13,063		5.17		191.72		4,221		170.86

The weighted average fair value of the options granted in 2008 was calculated using a binomial model. The inputs to the model were consistent with those used for the Roche Option Plan 2008 awards given previously. The resulting weighted average fair value per right is CHF 22.09, giving a total fair value of 141 million Swiss francs which is charged over the vesting period of three years.

79

Roche Performance Share Plan |  The Group offers future non-voting equity security awards (or, at the discretion of the Board of Directors, their cash equivalent) to certain directors and key senior managers. The programme was established at the beginning of 2002 and was in effect for three years. During 2004 the Board of Directors approved a new three-year cycle of the Roche Performance Share Plan (PSP) to operate during 2005–2007. Additional cycles of the PSP with similar conditions were approved to operate during 2006–2008, 2007–2009 and 2008–2010. The terms of these awards are set out in the table below. The amount of non-voting equity securities allocated will depend upon the individual’s salary level, the achievement of performance targets linked to the Group’s Total Shareholder Return (shares and non-voting equity securities combined) relative to the Group’s peers during the three-year period from the date of the grant, and the discretion of the Board of Directors. These are non-tradable equity-settled awards. Each award will result in between zero and two non-voting equity securities, depending upon the achievement of the performance targets.

Roche Performance Share Plan – terms of outstanding awards at 31 December 2008

	2006–2008		2007–2009		2008–2010
Number of awards outstanding (thousands)		50		74		89
Vesting period	3 years		3 years		3 years
Allocated to recipients in	Feb. 2009		Feb. 2010		Feb. 2011
Fair value per unit at grant (CHF)		210.06		239.49		201.22
Total fair value at grant (CHF millions)		12		19		18

The weighted average fair value of the awards granted in 2008 was calculated using a Monte Carlo simulation. The input parameters to the model were the covariance matrix between Roche and the other individual companies of the peer group based on a three-year history and a risk-free rate of 2.97%. The valuation also takes into account the defined rank and performance structure which determines the payout of the PSP.

Roche Stock Appreciation Rights |  Some employees of certain North American subsidiaries of the Group receive Stock Appreciation Rights (SARs) as part of their compensation. The SARs, which are non-tradable cash-settled awards, may be exercised after a vesting period of between one and three years for a cash payment, based upon the amount by which the market price of the Group’s American Depositary Receipts (ADRs) at the point of exercise exceeds the strike price (grant price at issuance). Following the implementation of Roche Long-Term (see above), the Group does not plan to award any further cash-settled SARs and no awards have been made since 2004. On 9 January 2009 the ratio of ADRs to non-voting equity securities (Genussscheine) was changed from 2:1 to 4:1. The information below has been restated for this change.

Roche Stock Appreciation Rights |  in millions of CHF

	2008		2007
Liability at 31 December		43		97
Intrinsic value of vested rights at 31 December		43		97

Roche Stock Appreciation Rights – terms of rights outstanding at 31 December 2008

			Rights outstanding and exercisable
	Number outstanding
	and exercisable			Weighted average
Year of grant	(thousands)		Expiry	price (USD)
2003		824	Feb. 2010		14.41
2004		1,744	Feb. 2011		26.04
Total		2,568			22.31

The fair value at 31 December 2008 was calculated using a binomial model. The inputs to the model were the ADR price at 31 December 2008 (USD 76.55, before change in exchange ratio on 9 January 2009); the exercise prices given in the above table, and other inputs consistent with those used for the Roche Option Plan 2008 awards given previously.

80          Roche Finance Report 2008      |      Roche Group – Notes to the Roche Group Consolidated Financial Statements

12. Property, plant and equipment

Property, plant and equipment: movements in carrying value of assets |   in millions of CHF

				Buildings
				and land			Machinery and			Construction
	Land			improvements			equipment			in progress			Total
At 1 January 2007
Cost		1,126			9,419			13,581			3,273			27,399
Accumulated depreciation and impairment		–			(3,030	)		(7,952	)		–			(10,982	)
Net book value		1,126			6,389			5,629			3,273			16,417
Year ended 31 December 2007
At 1 January 2007		1,126			6,389			5,629			3,273			16,417
Additions		22			209			983			2,434			3,648
Disposals		(11	)		(17	)		(113	)		(21	)		(162	)
BioVeris acquisition7		–			1			4			–			5
Tanox acquisition7		–			–			–			13			13
Other business combinations7		–			–			12			3			15
Transfers		–			1,033			1,115			(2,148	)		–
Depreciation charge		–			(332	)		(1,228	)		–			(1,560	)
Impairment charge		–			(1	)		(5	)		–			(6	)
Currency translation effects		(45	)		(247	)		(116	)		(130	)		(538	)
At 31 December 2007		1,092			7,035			6,281			3,424			17,832
Cost		1,092			10,207			14,681			3,424			29,404
Accumulated depreciation and impairment		–			(3,172	)		(8,400	)		–			(11,572	)
Net book value		1,092			7,035			6,281			3,424			17,832
Year ended 31 December 2008
At 1 January 2008		1,092			7,035			6,281			3,424			17,832
Additions		11			144			877			2,155			3,187
Disposals		(13	)		(11	)		(61	)		(12	)		(97	)
Ventana acquisition7		15			25			25			30			95
Other business combinations7		–			–			3			–			3
Divestments of subsidiaries34		(4	)		(46	)		(51	)		(6	)		(107	)
Transfers		–			1,692			1,262			(2,954	)		–
Depreciation charge		–			(479	)		(1,197	)		–			(1,676	)
Impairment charge		–			(17	)		(11	)		–			(28	)
Currency translation effects		(28	)		(406	)		(401	)		(184	)		(1,019	)
At 31 December 2008		1,073			7,937			6,727			2,453			18,190
Cost		1,073			11,410			15,203			2,453			30,139
Accumulated depreciation and impairment		–			(3,473	)		(8,476	)		–			(11,949	)
Net book value		1,073			7,937			6,727			2,453			18,190

Impairment charges arise from changes in the estimates of the future cash flows expected to result from the use of the asset and its eventual disposal. Factors such as changes in the planned use of buildings, machinery or equipment, or closure of facilities, the presence or absence of competition and technical obsolescence could result in shortened useful lives or impairment. Impairment charges of 18 million Swiss francs (2007: 5 million Swiss francs) are reported as part of ‘Cost of sales’ and impairment charges of 10 million Swiss francs (2007: zero) are reported as part of ‘Changes in Group organisation’ (see Note 8).

81

Borrowing costs totalling 42 million Swiss francs using a rate of 4.79% (2007: 48 million Swiss francs using a rate of 4.79%) were capitalised as property, plant and equipment.

Leasing arrangements where the Group is the lessee

Finance leases |  As at 31 December 2008 the capitalised cost of property, plant and equipment under finance leases was 174 million Swiss francs (2007: 188 million Swiss francs) and the net book value of these assets was 53 million Swiss francs (2007: 66 million Swiss francs).

Finance leases: future minimum lease payments under non-cancellable leases |  in millions of CHF

	Future minimum lease				Present value of future
			payments		minimum lease payments
	2008		2007		2008		2007
Within one year		3		6		3		6
Between one and five years		2		3		1		3
More than five years		–		–		–		–
Total		5		9		4		9
Future finance charges		–		–		1		–
Total future minimum lease payments (undiscounted)		5		9		5		9

In addition to the above, Genentech leasing arrangements are disclosed in Note 3.

Operating leases |  Group companies are party to a number of operating leases, mainly for plant and machinery, including motor vehicles, and for certain short-term property rentals. The arrangements do not impose any significant restrictions on the Group. Total operating lease rental expense was 411 million Swiss francs (2007: 402 million Swiss francs).

Operating leases: future minimum lease payments under non-cancellable leases |  in millions of CHF

	2008		2007
Within one year		220		224
Between one and five years		412		404
More than five years		173		196
Total minimum payments		805		824

Leasing arrangements where the Group is the lessor

Finance leases |  Certain assets, mainly diagnostics instruments, are leased to third parties through finance lease arrangements. Such assets are reported as receivables at an amount equal to the net investment in the lease. Lease income from finance leases is recognised over the term of the lease based on the effective interest rate method.

82          Roche Finance Report 2008      |      Roche Group – Notes to the Roche Group Consolidated Financial Statements

Finance leases: future minimum lease payments under non-cancellable leases |  in millions of CHF

							Present value of future
	Gross investment in lease						minimum lease payments
	2008			2007			2008		2007
Within one year		25			27			23		23
Between one and five years		41			44			38		37
More than five years		2			2			2		2
Total		68			73			63		62
Unearned finance income		(3	)		(6	)		n/a		n/a
Unguaranteed residual value		n/a			n/a			2		5
Net investment in lease		65			67			65		67

The accumulated allowance for uncollectible minimum lease payments was 1 million Swiss francs (2007: 1 million Swiss francs). There were no contingent rents recognised in income.

Operating leases |  Certain assets, mainly some diagnostics instruments, are leased to third parties through operating lease arrangements. Such assets are reported within property, plant and equipment. Lease income from operating leases is recognised over the lease term on a straight line basis.

Operating leases: future minimum lease payments under non-cancellable leases |  in millions of CHF

	2008		2007
Within one year		94		72
Between one and five years		212		150
More than five years		–		–
Total minimum payments		306		222

At 31 December 2008, machinery and equipment with an original cost of 2,356 million Swiss francs (2007: 2,422 million Swiss francs) and a net book value of 997 million Swiss francs (2007: 973 million Swiss francs) was being leased to third parties. There was no contingent rent recognised as income.

Capital commitments

The Group has non-cancellable capital commitments for the purchase or construction of property, plant and equipment totalling 2.0 billion Swiss francs (2007: 2.3 billion Swiss francs). In addition, Genentech’s capital commitments in respect of its manufacturing agreements with Lonza and its leasing arrangements are described in Note 3.

83

13. Goodwill

Goodwill: movements in carrying value of assets |  in millions of CHF

	2008			2007
At 1 January		6,835			5,914
BioVeris acquisition7		–			540
Tanox acquisition7		–			352
Ventana acquisition7		1,750			–
Other business combinations7		289			336
Impairment charge		–			–
Currency translation effects		(521	)		(307	)
At 31 December		8,353			6,835
Allocated to the following cash-generating units
Pharmaceuticals Division
–  Roche Pharmaceuticals		374			128
–  Genentech		1,765			1,880
–  Chugai		129			110
Total Pharmaceuticals Division		2,268			2,118
Diagnostics Division
–  Diabetes Care		770			770
–  Professional Diagnostics		1,752			1,879
–  Molecular Diagnostics		–			–
–  Applied Science		247			263
–  Tissue Diagnostics		799			–
–  Strategic goodwill (held at divisional level and not allocated to business areas)		2,517			1,805
Total Diagnostics Division		6,085			4,717
Total Group		8,353			6,835

There are no accumulated impairment losses in goodwill. The goodwill arising from investments in associates is classified as part of the investments in associates (see Note 15).

Goodwill impairment testing

Pharmaceuticals Division |  The division’s reportable operating segments are the cash-generating units used for the testing of goodwill. For Genentech and Chugai, the recoverable amount is based on fair value less costs to sell, determined with reference to the publicly quoted share prices of Genentech and Chugai shares. The goodwill in Roche Pharmaceuticals is not significant in comparison with the Group’s total carrying value of goodwill.

Diagnostics Division |  The division’s business areas are the cash-generating units used for the testing of goodwill. The goodwill arising from the Corange/Boehringer Mannheim acquisition and part of the goodwill from the Ventana acquisition is recorded and monitored at a divisional level as it relates to the strategic development of the whole division and cannot be meaningfully allocated to the division’s business areas. Therefore the cash-generating unit for this goodwill is the entire division. The recoverable amount used in the impairment testing is based on value in use. The cash flow projections used are based on the most recent business plans approved by management. These assume no significant changes in the organisation of the division and include management’s latest estimates on sales volume and pricing, and production and other operating costs. These reflect past experience and are projected over five years. The estimates for the Tissue Diagnostics business area are projected over ten years, which management believes reflects the long-term nature of this business. The cash flow projections used do not extend beyond management’s most recent business plans. The discount rate used is based on a rate of 8.4%, which is derived from a capital asset pricing model using data from Swiss capital markets, including Swiss Federal Government ten-year bonds and the Swiss Market Index. A weighted average tax rate of 19.7% is used in the calculations. Management believes that any reasonably possible change in any of the key assumptions would not cause the carrying value of goodwill to exceed the recoverable amount.

84          Roche Finance Report 2008      |      Roche Group – Notes to the Roche Group Consolidated Financial Statements

14. Intangible assets

Intangible assets: movements in carrying value of assets |  in millions of CHF

				Product
	Product			intangibles:			Technology
	intangibles:			not available			intangibles:
	in use			for use			in use			Total
At 1 January 2007
Cost		13,646			778			709			15,133
Accumulated amortisation and impairment		(9,070	)		–			(594	)		(9,664	)
Net book value		4,576			778			115			5,469
Year ended 31 December 2007
At 1 January 2007		4,576			778			115			5,469
BioVeris acquisition7		117			–			–			117
Tanox acquisition7		613			93			–			706
Other business combinations7		223			10			34			267
Additions		255			743			51			1,049
Disposals		(1	)		–			–			(1	)
Amortisation charge		(942	)		–			(34	)		(976	)
Impairment charge		–			(58	)		–			(58	)
Currency translation effects		(173	)		(52	)		(2	)		(227	)
At 31 December 2007		4,668			1,514			164			6,346
Cost		14,251			1,514			772			16,537
Accumulated amortisation and impairment		(9,583	)		–			(608	)		(10,191	)
Net book value		4,668			1,514			164			6,346
Allocation by operating segment
–  Roche Pharmaceuticals		326			1,085			52			1,463
–  Genentech		955			408			35			1,398
–  Chugai		440			8			–			448
–  Diagnostics		2,947			13			77			3,037
Total Group		4,668			1,514			164			6,346
Year ended 31 December 2008
At 1 January 2008		4,668			1,514			164			6,346
Ventana acquisition7		819			570			–			1,389
Other business combinations7		26			253			92			371
Additions		55			363			–			418
Disposals		–			–			–			–
Amortisation charge		(927	)		–			(42	)		(969	)
Impairment charge		(5	)		(99	)		–			(104	)
Currency translation effects		(223	)		(100	)		(7	)		(330	)
At 31 December 2008		4,413			2,501			207			7,121
Cost		14,304			2,568			805			17,677
Accumulated amortisation and impairment		(9,891	)		(67	)		(598	)		(10,556	)
Net book value		4,413			2,501			207			7,121
Allocation by operating segment
–  Roche Pharmaceuticals		77			1,361			129			1,567
–  Genentech		774			576			11			1,361
–  Chugai		440			9			–			449
–  Diagnostics		3,122			555			67			3,744
Total Group		4,413			2,501			207			7,121

85

Significant intangible assets as at 31 December 2008 |  in millions of CHF

		Operating	Net book		Remaining
		segment	value		amortisation period
Product intangibles in use
Tanox acquisition		Genentech		475	11 years
Chugai acquisition		Chugai		440	4 –12 years
Corange/Boehringer Mannheim acquisition		Diagnostics		1,299	9 years
Igen acquisition		Diagnostics		389	8 years
Ventana acquisition		Diagnostics		713	9 years
Product intangibles not available for use
Alnylam alliance	Roche Pharmaceuticals			324		n/a
Ventana acquisition		Diagnostics		546		n/a

Classification of amortisation and impairment expenses |  in millions of CHF

			2008				2007
	Amortisation		Impairment		Amortisation		Impairment
Cost of sales
–  Pharmaceuticals		477		–		614		–
–  Diagnostics		450		5		328		–
Research and development
–  Pharmaceuticals		34		99		31		58
–  Diagnostics		8		–		3		–
Total		969		104		976		58

Internally generated intangible assets

The Group currently has no internally generated intangible assets from development as the criteria for the recognition as an asset are not met.

Intangible assets with indefinite useful lives

The Group currently has no intangible assets with indefinite useful lives.

Impairment of intangible assets

Impairment charges arise from changes in the estimates of the future cash flows expected to result from the use of the asset and its eventual disposal. Factors such as the presence or absence of competition, technical obsolescence or lower than anticipated sales for products with capitalised rights could result in shortened useful lives or impairment.

2008 |  In the Roche Pharmaceuticals operating segment an impairment charge of 30 million Swiss francs was recorded in the first half of 2008 and a further 69 million Swiss francs were recorded in the second half of 2008. These relate to product intangibles not available for use and follow from decisions to terminate development of three compounds with alliance partners. The assets concerned, which were not yet being amortised, were fully written-down by these charges. In the Diagnostics operating segment an impairment charge of 5 million Swiss francs was recorded in the second half of 2008 relating to product intangible assets in use. These followed the regular updating of the division’s business plans and technology assessments in the second half of 2008. The assets were written down to their recoverable amount of 13 million Swiss francs, based on a value in use calculation using a discount rate of 8.4%.

2007 |  In the Genentech operating segment an impairment charge of 42 million Swiss francs was recorded in the second half of 2007, which relates to a decision to terminate development of compounds with two alliance partners. In the Roche Pharmaceuticals operating segment an impairment charge of 16 million Swiss francs was recorded in the first half of 2007, which relates to a decision to terminate development of one compound with an alliance partner. The assets concerned, which were not yet being amortised, were fully written-down by these charges.

86          Roche Finance Report 2008      |      Roche Group — Notes to the Roche Group Consolidated Financial Statements

Intangible assets that are not yet available for use mostly represent in-process research and development assets acquired either through in-licensing arrangements, business combinations or separate purchases. As at 31 December 2008 the carrying value of such assets in the Pharmaceuticals Division is 1,946 million Swiss francs. Of this amount approximately 40% represents projects that have potential decision points within the next twelve months which in certain circumstances could lead to impairment. Due to the inherent uncertainties in the research and development process, such assets are particularly at risk of impairment if the project in question does not result in a commercialised product.

Potential commitments from alliance collaborations

The Group is party to in-licensing and similar arrangements with its alliance partners. These arrangements may require the Group to make certain milestone or other similar payments dependent upon the achievement of agreed objectives or performance targets as defined in the collaboration agreements.

The Group’s current estimate of future third-party commitments for such payments is set out in the table below. These figures are not risk adjusted, meaning that they include all such potential payments that can arise assuming all projects currently in development are successful. The timing is based on the Group’s current best estimate. These figures do not include any potential commitments within the Group, such as may arise between the Roche Pharmaceuticals, Genentech and Chugai businesses.

Potential future third-party collaboration payments as at 31 December 2008 |  in millions of CHF

	Pharmaceuticals		Diagnostics		Group
Within one year		113		24		137
Between one and two years		152		10		162
Between two and three years		135		10		145
Total		400		44		444

15. Associates

The Group’s investments in associates are accounted for using the equity method. The goodwill arising from investments in associates is classified as part of the investments in associates.

Investments in associates |   in millions of CHF

	Share of net income				Balance sheet value
	2008		2007		2008		2007
Total investments in associates		1		2		9		9

The Group has no significant investments in associates and there were no material transactions between the Group and its associates. Additional information about associates is given in Note 34.

87

16. Financial and other long-term assets

Financial and other long-term assets |  in millions of CHF

	2008		2007
Available-for-sale investments		588		836
Held-to-maturity investments		16		19
Loans receivable		16		19
Long-term trade receivables		73		190
Restricted cash		205		226
Other		42		43
Total financial long-term assets		940		1,333
Long-term employee benefits		230		273
Other		221		254
Total other long-term assets		451		527

Financial long-term assets are held for strategic purposes and are classified as non-current. The available-for-sale investments are mainly equity investments. Unquoted equity investments classified as available-for-sale are generally measured at cost, as their fair value cannot be measured reliably. These are primarily investments in private biotechnology companies, which are kept as part of the Group’s strategic alliance efforts. The carrying value of equity investments held at cost is 25 million Swiss francs (2007: 26 million Swiss francs). The average effective interest rate of held-to-maturity investments is 2.5% (2007: 4.4%). Loans receivable comprise all loans to third parties with a term of over one year.

17. Inventories

Inventories |  in millions of CHF

	2008			2007
Raw materials and supplies		702			603
Work in process		1,003			1,168
Finished goods and intermediates		4,466			4,590
Less: provision for slow-moving and obsolete inventory		(341	)		(248	)
Total inventories		5,830			6,113

In 2008 expenses relating to inventories expensed through cost of sales totalled 8,419 million Swiss francs (2007: 8,737 million Swiss francs).

18. Accounts receivable

Accounts receivable |  in millions of CHF

	2008			2007
Trade accounts receivable		9,804			9,834
Notes receivable		181			190
Less: allowances		(230	)		(220	)
Total accounts receivable		9,755			9,804

88          Roche Finance Report 2008      |      Roche Group – Notes to the Roche Group Consolidated Financial Statements

At 31 December 2008 accounts receivable include amounts denominated in US dollars equivalent to 2.8 billion Swiss francs (2007: 3.8 billion Swiss francs) and amounts denominated in euros equivalent to 3.9 billion Swiss francs (2007: 3.8 billion Swiss francs).

Net bad debt expense was 43 million Swiss francs (2007: 26 million Swiss francs). Significant concentrations within trade receivables of counterparty credit risk are described in Note 32.

19. Other current assets

Other current assets |  in millions of CHF

	2008		2007
Accrued interest income		145		37
Derivative financial instruments24		262		70
Restricted cash		–		889
Other		624		593
Total financial current assets		1,031		1,589
Prepaid expenses		452		355
Other		497		508
Total non-financial current assets		949		863
Total other current assets		1,980		2,452

Restricted cash in 2007 includes 889 million Swiss francs of the surety bond posted by Genentech in connection with the City of Hope litigation (see Note 25). Following the settlement of this litigation the entirety of the pledged amount became unrestricted cash and available for use in Genentech’s operations during the third quarter of 2008.

20. Marketable securities

Marketable securities |  in millions of CHF

	2008		2007
Financial assets at fair-value-through-profit-or-loss
Held-for-trading investments
–  Bonds and debentures		1,027		1,129
Designated as fair-value-through-profit-or-loss
–  Bonds and debentures		–		78
–  Money market instruments and time accounts over three months		–		167
–  other investments		–		178
Total financial assets at fair-value-through-profit-or-loss		1,027		1,552
Available-for-sale financial assets
–  Shares		51		292
–  Bonds and debentures		6,814		7,624
–  Money market instruments and time accounts over three months		7,961		10,965
–  Other investments		3		14
Total available-for-sale financial assets		14,829		18,895
Total marketable securities		15,856		20,447

89

Marketable securities are held for fund management purposes and are classified as current. They are primarily denominated in US dollars and euros. Other investments held for strategic purposes are classified as non-current (see Note 16).

Shares |  These consist primarily of readily saleable equity securities.

Bonds and debentures |  The carrying values, contract maturity and average effective interest rate of debt securities is shown below.

Bonds and debentures |  in millions of CHF

			2008					2007
			Average effective					Average effective
Contracted maturity	Amount		interest rate			Amount		interest rate
Within one year		2,612		5.81	%		2,367		5.05	%
Between one and five years		4,178		5.81	%		5,690		4.89	%
More than five years		1,051		5.35	%		774		5.40	%
Total bonds and debentures		7,841		5.75	%		8,831		4.98	%

Money market instruments |  These generally have fixed interest rates ranging from 0.05% to 5.50% (2007: 0.72% to 6.13%) depending upon the currency in which they are denominated. They are contracted to mature within one year of 31 December 2008.

21. Cash and cash equivalents

Cash and cash equivalents |  in millions of CHF

	2008		2007
Cash
–  Cash in hand and in current or call accounts		1,999		2,792
Cash equivalents
–  Time accounts with a maturity of three months or less		2,916		963
Total cash and cash equivalents		4,915		3,755

22. Accounts payable

Accounts payable |  in millions of CHF

	2008		2007
Trade accounts payable		1,053		1,188
Other taxes payable		437		406
Dividends payable		15		–
Other accounts payable		512		267
Total accounts payable		2,017		1,861

90          Roche Finance Report 2008     |      Roche Group – Notes to the Roche Group Consolidated Financial Statements

23. Accrued and other current liabilities

Accrued liabilities and other current liabilities |   in millions of CHF

	2008		2007
Deferred income		262		231
Accrued payroll and related items		1,838		1,566
Interest payable		95		104
Derivative financial instruments24		194		80
Other accrued liabilities		3,584		3,848
Total accrued and other current liabilities		5,973		5,829

24. Derivative financial instruments

The Group uses derivative financial instruments as part of its risk management and trading strategies. This is discussed in Note 32. Derivative financial instruments are carried at fair value. The methods used for determining fair value are described in Note 1.

Derivative financial instruments |   in millions of CHF

			Assets					Liabilities
	2008		2007		2008			2007
Foreign currency derivatives
– Forward exchange contracts and swaps		155		29		(151	)		(71	)
– Other		21		4		–			(4	)
Interest rate derivatives
– Swaps		20		7		(1	)		–
– Other		23		–		–			(1	)
Other derivatives		43		30		(42	)		(4	)
Total derivative financial instruments19, 23		262		70		(194	)		(80	)

Hedge accounting

The Group’s accounting policy on hedge accounting, which is described in Note 1, requires that to qualify for hedge accounting the hedging relationship must meet several strict conditions on documentation, probability of occurrence, hedge effectiveness and reliability of measurement.

As described in Note 32, the Group has financial risk management policies for foreign exchange risk, interest rate risk, market risk, credit risk and liquidity risk. When deemed appropriate, certain of the above risks are managed through the use of derivatives. While many of these transactions can be considered as hedges in economic terms, if the required conditions are not met, then the relationship does not qualify for hedge accounting. In this case the hedging instrument and the hedged item are reported independently as if there were no hedging relationship, which means that any derivatives are reported at fair value, with changes in fair value included in financial income.

The Group generally limits the use of hedge accounting to certain significant transactions. Consequently as at 31 December 2008 the Group has no fair value hedges, cash flow hedges or hedges of net investment in a foreign entity that meet the strict requirements to qualify for hedge accounting, apart from those described below.

The Group has hedged some of its fixed-term debt instruments with interest rate swaps. As at 31 December 2008 such instruments, which have been designated and qualify as fair value hedges, are recorded in the balance sheet as an asset with a fair value of 20 million Swiss francs (2007: asset of 7 million Swiss francs). During 2008 a gain of 14 million Swiss francs was recorded on these interest rate swaps (2007: gain of 20 million Swiss francs). As the fair value hedge has been highly effective since inception, the result of the interest rate swaps is largely offset by changes in the fair value of the hedged debt instruments.

91

Genentech has non-US dollar cash flows from future royalty income and development expenses expected over the next one to five years. To hedge part of this foreign exchange risk Genentech enters into derivative financial instruments such as options and forward contracts. Genentech has equity investments in various biotechnology companies that are subject to a greater risk of market fluctuation than the stock market in general. To manage part of this exposure Genentech enters into derivative financial instruments such as zero cost collars and forward contracts. As at 31 December 2008 such instruments, which are designated and qualify for hedge accounting, are recorded as assets with a fair value of 42 million Swiss francs (2007: assets of 27 million Swiss). These matters are also described in Genentech’s annual report and quarterly SEC filings.

Movements on the fair value reserve for designated cash flow hedges are included in Note 28.

25. Provisions and contingent liabilities

Provisions: movements in recognised liabilities |   in millions of CHF

	Legal			Environmental			Restructuring			Employee			Other
	provisions			provisions			provisions			provisions			provisions			Total
Year ended 31 December 2007
At 1 January 2007		1,445			186			174			237			307			2,349
Additional provisions created		123			36			132			125			339			755
Unused amounts reversed		(111	)		(1	)		(28	)		(4	)		(17	)		(161	)
Utilised during the year		(340	)		(11	)		(82	)		(77	)		(186	)		(696	)
Unwinding of discount5		64			3			–			2			–			69
Currency translation effects		(79	)		(10	)		(3	)		(6	)		(13	)		(111	)
At 31 December 2007		1,102			203			193			277			430			2,205
Of which
– Current portion		999			30			116			41			331			1,517
– Non-current portion		103			173			77			236			99			688
Total provisions		1,102			203			193			277			430			2,205
Year ended 31 December 2008
At 1 January 2008		1,102			203			193			277			430			2,205
Additional provisions created		125			3			191			110			426			855
Unused amounts reversed		(354	)		(18	)		(17	)		(10	)		(39	)		(438	)
Utilised during the year		(618	)		(22	)		(91	)		(76	)		(254	)		(1,061	)
Unwinding of discount5		15			4			1			1			–			21
Currency translation effects		(47	)		(9	)		(13	)		(23	)		(32	)		(124	)
At 31 December 2008		223			161			264			279			531			1,458
Of which
– Current portion		90			19			186			60			449			804
– Non-current portion		133			142			78			219			82			654
Total provisions		223			161			264			279			531			1,458
Expected outflow of resources
– Within one year		90			19			186			60			449			804
– Between one to two years		39			16			29			90			17			191
– Between two to three years		19			10			24			10			17			80
– More than three years		75			116			25			119			48			383
Total provisions		223			161			264			279			531			1,458

92          Roche Finance Report 2008     |      Roche Group – Notes to the Roche Group Consolidated Financial Statements

Major legal cases

Income (expense) from major legal cases is disclosed separately in the income statement due to the materiality of the amounts and in order to fairly present the Group’s results. Income of 271 million Swiss francs was recorded in 2008 following the 24 April 2008 California Supreme Court decision in the City of Hope litigation (see below). This consists of the 310 million US dollars released to income as a favourable litigation settlement, net of amounts recorded in respect of final settlement negotiations with the City of Hope National Medical Center. Costs of other litigation matters that are less material are expensed in the current period and reported within general and administration expenses. The total income tax expense recorded in respect of major legal cases was 105 million Swiss francs (see Note 6).

Legal provisions

Legal provisions consist of a number of separate legal matters, including claims arising from trade, in various Group companies. The majority of any cash outflows for these other matters are expected to occur within the next one to three years, although these are dependent on the development of the various litigations. Significant provisions are discounted by between 4% and 5% where the time value of money is material.

Environmental provisions

Provisions for environmental matters include various separate environmental issues in a number of countries. By their nature the amounts and timing of any outflows are difficult to predict. The estimated timings of these cash outflows are shown in the table above. Significant provisions are discounted by between 7% and 8% where the time value of money is material.

Restructuring provisions

These arise from planned programmes that materially change the scope of business undertaken by the Group or the manner in which business is conducted. Such provisions include only the costs necessarily entailed by the restructuring which are not associated with the recurring activities of the Group. The timings of these cash outflows are reasonably certain on a global basis and are shown in the table above. Significant provisions are discounted by 4% where the time value of money is material.

Employee provisions

These mostly relate to certain employee benefit obligations, such as sabbatical leave and long-service benefits. The timings of these cash outflows can be reasonably estimated based on past performance and are shown in the table above. Significant provisions are discounted by 6% where the time value of money is material.

Other provisions

Other provisions mostly relate to sales returns and various other provisions from Group companies that do not fit into the above categories. The timings of cash outflows are by their nature uncertain and the best estimates are shown in the table above. These provisions are not discounted as the time value of money is not material in these matters.

Contingent liabilities

The operations and earnings of the Group continue, from time to time and in varying degrees, to be affected by political, legislative, fiscal and regulatory developments, including those relating to environmental protection, in the countries in which it operates. The industries in which the Group operates are also subject to other risks of various kinds. The nature and frequency of these developments and events, not all of which are covered by insurance, as well as their effect on future operations and earnings, are not predictable.

The Group has entered into strategic alliances with various companies in order to gain access to potential new products or to utilise other companies to help develop the Group’s own potential new products. Potential future payments may become due to certain collaboration partners achieving certain milestones as defined in the collaboration agreements. The Group’s best estimates of future commitments for such payments are given in Note 14.

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Roche Pharmaceuticals legal cases

Hoffmann-La Roche Inc. (‘HLR’) and various other Roche affiliates have been named as defendants in numerous legal actions in the United States and elsewhere relating to the acne medication Accutane. The litigation alleges that Accutane caused certain serious conditions, including, but not limited to, inflammatory bowel disease (‘IBD’), birth defects and psychiatric disorders. As of 31 December 2008 HLR is defending approximately 560 actions brought in various federal and state courts throughout the United States for personal injuries allegedly resulting from their use of Accutane. Most of the actions allege IBD as a result of Accutane use.

All of the actions pending in federal court alleging IBD were consolidated for pre-trial proceedings in a MultiDistrict Litigation in the United States District Court for the Middle District of Florida, Tampa Division. In July 2007 the District Court granted summary judgment in favour of HLR in the lead federal IBD cases. The plaintiffs appealed and in August 2008 these rulings were affirmed by the United States Court of Appeals for the Eleventh Circuit.

All of the actions pending in state court in New Jersey alleging IBD were consolidated for pre-trial proceedings in the Superior Court of New Jersey, Law Division, Atlantic County. As of 31 December 2008 juries in the Superior Court have ruled in favour of the plaintiff in five cases, assessing total compensatory damages totalling 26 million US dollars. HLR has appealed in one case to the Superior Court of New Jersey, Appellate Division and is reviewing its post-trial option in the other cases.

In October 2007 a jury in the Circuit Court of Escambia County, Florida, returned a verdict in favour of the plaintiff, assessing total compensatory damages of 7 million US dollars, subsequently reduced to 6.8 million US dollars by the court, against the Company. HLR has appealed to the District Court of Appeal, State of Florida.

As of 31 December 2008 the Group has recorded provisions totalling 96 million US dollars (102 million Swiss francs) in respect of these matters. Additional trials are scheduled for 2009. Individual trial results depend on a variety of factors, including many that are unique to the particular case and therefore the trial results to date may not be predictive of future trial results. The Group continues to defend vigorously the remaining personal injury cases and claims.

Genentech legal cases

On 10 June 2002 Genentech announced that a Los Angeles County Superior Court jury voted to award the City of Hope National Medical Center (‘City of Hope’) approximately 300 million US dollars in compensatory damages based on a finding of a breach of a 1976 agreement between Genentech and the City of Hope. On 24 June 2002 the jury voted to award the City of Hope 200 million US dollars in punitive damages in the same case. On 13 September 2002 Genentech filed a notice of appeal of the jury verdict and damages awards with the California Court of Appeal. On 21 October 2004 the Court of Appeal affirmed the verdict and damages awards in all respects. Also, on 21 October 2004 Genentech announced that it would seek review by the California Supreme Court, which has discretion over which cases it will review. On 24 November 2004 Genentech filed its petition for review by the California Supreme Court and on 2 February 2005 the California Supreme Court granted this petition. The appeal to the California Supreme Court was heard on 5 February 2008 and on 24 April 2008 overturned the award of 200 million US dollars in punitive damages to the City of Hope, but upheld the award of 300 million US dollars in compensatory damages. On 9 May 2008 Genentech paid 476 million US dollars to the City of Hope, reflecting the amount of compensatory damages awarded, plus interest thereon from the date of the original decision on 10 June 2002.

During the appeals process interest had accrued on the total amount of the damages at a simple annual rate of 10%. During 2008 interest of 11 million Swiss francs (2007: 60 million Swiss francs) was recorded as the time cost of provisions within financing costs.

94          Roche Finance Report 2008     |      Roche Group – Notes to the Roche Group Consolidated Financial Statements

A full provision, totalling 776 million US dollars as at 31 December 2007, had been recorded for these awards. As a result of the 24 April 2008 California Supreme Court decision, provisions totalling 310 million US dollars were released to income as a favourable litigation settlement, of which 200 million US dollars relates to the original award recorded in 2002 as an exceptional major legal case expense and 110 million US dollars relates to interest accrued as a charge to financing costs in the intervening periods.

On 3 October 2002 Genentech entered into an arrangement with third-party insurance companies to post a surety bond in connection with this judgment. As part of this arrangement Genentech had pledged 788 million US dollars in cash and investments to secure this bond. This amount, which was equivalent to 889 million Swiss francs at 31 December 2007, was recorded as restricted cash within other current assets in the Annual Financial Statements. During the third quarter of 2008 the court completed certain administrative procedures to dismiss the case. As a result the restrictions were lifted from the restricted cash and investments and the funds became available for use in Genentech’s operations.

Genentech and City of Hope are in discussions but have not yet reached agreement regarding additional royalties and other amounts that Genentech owes to City of Hope under the 1976 agreement for third-party product sales and settlement of a third-party patent litigation that occurred after the 2002 judgement. Additional accruals have been made representing management’s best estimate of the final obligation.

On 4 October 2004 Genentech received a subpoena from the United States Department of Justice, requesting documents related to the promotion of Rituxan. Genentech is co-operating with the associated investigation. Through counsel Genentech are having discussions with government representatives about the status of their investigation and Genentech’s views on this matter, including potential resolution. Previously the investigation had been both civil and criminal in nature. Genentech was informed in August 2008 by the criminal prosecutor who handled this matter that the government has declined to prosecute Genentech criminally in connection with this investigation. The civil matter is still ongoing. The outcome of this matter cannot be determined at this time.

On 11 April 2003 MedImmune, Inc. (‘MedImmune’) filed a lawsuit against Genentech, the City of Hope National Medical Center, and Celltech R&D Ltd., in the US District Court for the Central District of California, Los Angeles. The lawsuit relates to US Patent No. 6,331,415 (‘the Cabilly patent’) that is co-owned by Genentech and the City of Hope National Medical Center and under which MedImmune and other companies have been licensed and are paying royalties. The lawsuit included claims for violation of antitrust, patent and unfair competition laws. On 11 June 2008 Genentech announced that it had settled its patent litigation with MedImmune. Under the terms of the settlement agreement the litigation which was pending before the US District Court for the Central District of California has now been fully resolved and dismissed.

On 13 May 2005 a request was filed by a third party for re-examination of the Cabilly patent. On 7 July 2005 the US Patent and Trademark Office ordered a re-examination of this patent. On 13 September 2005 the Patent Office issued an initial non-final Office action rejecting the claims of the patent. Genentech filed a response on 25 November 2005. A second re-examination request for this same patent was filed on 23 December 2005 by another third party and on 23 January 2006 the Patent Office granted that re-examination request. On 6 June 2006 the two re-examinations were combined by the Patent Office into a single re-examination. On 16 August 2006 the Patent Office issued a non-final Office action in the merged proceeding, rejecting the claims of the Cabilly patent based on the issues raised in the two re-examination requests. Genentech filed its response on 30 October 2006. On 16 February 2007 the Patent Office mailed a final Office action rejecting all thirty six claims of the Cabilly patent. On 21 May 2007 Genentech responded to the final Office action and petitioned for continued re-examination. On 31 May 2007 the Patent Office granted Genentech’s petition, withdrew the finality of the February 2007 Office action and agreed to treat Genentech’s 21 May 2007 filing as a response to a first Office action. On 25 February 2008 the Patent Office mailed a final Patent Office action rejecting all the claims of the Cabilly patent. Genentech filed a response to that final Patent Office action on 6 June 2008. On 19 July 2008 the Patent Office mailed an advisory action replying to Genentech’s response and confirming the rejection of all claims of the Cabilly patent. Genentech filed a notice of appeal challenging the rejection on 22 August 2008. Genentech’s opening appeal brief was on 9 December 2008. The Cabilly patent, which expires in 2018, relates to methods used by Genentech and

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others to make certain antibodies or antibody fragments, as well as cells and DNA used in these methods. Genentech has licensed the Cabilly patent to other companies and derives significant royalties from these licences. The claims of the Cabilly patent remain valid and enforceable throughout the re-examination and appeals processes. No provisions have been recorded in respect of this litigation as the outcome of this matter cannot be determined at this time. During the fourth quarter of 2008 the process of recognising revenue from the Cabilly patents was changed from an estimated accruals basis to a cash basis. As a result of this change, net royalties decreased by approximately 66 million US dollars, equivalent to 71 million Swiss francs, in the fourth quarter of 2008 compared to the third quarter. The Cabilly patent licences contributed operating profit of 156 million US dollars in 2008, equivalent to 169 million Swiss francs (2007: 133 million US dollars, equivalent to 160 million Swiss francs).

On 30 May 2008 Centocor, Inc. filed a patent lawsuit against Genentech and City of Hope in the US District Court for the Central District of California. The lawsuit relates to the Cabilly patent and seeks a declaratory judgment of patent invalidity and unenforceability with regard to the Cabilly patent and of patent non-infringement with regard to certain of Centocor’s products. Centocor filed an amended complaint on 3 September 2008. Genentech answered the complaint on 19 September 2008 and also filed counterclaims against Centocor alleging that four Centocor products infringe certain Genentech patents. Genentech filed an amendment to those counterclaims on 10 October 2008 and Centocor answered these counterclaims on 26 November 2008. A status conference has been set in the case for 9 February 2009. The outcome of this matter cannot be determined at this time.

In 2006 Genentech made development decisions involving its humanised anti-CD20 programme, and its collaborator, Biogen Idec Inc., disagreed with certain of Genentech’s development decisions related to humanised anti-CD20 products. Under Genentech’s 2003 collaboration agreement with Biogen Idec, Genentech believe that it is permitted to proceed with further trials of certain humanised anti-CD20 antibodies, but Biogen Idec disagreed with Genentech’s position. The disputed issues have been submitted to arbitration. In the arbitration, Biogen Idec filed motions for a preliminary injunction and summary judgment seeking to stop Genentech from proceeding with certain development activities, including planned clinical trials. On 20 April 2007, the arbitration panel denied Biogen Idec’s motion for a preliminary injunction and Biogen Idec’s motion for summary judgment. Resolution of the arbitration could require that both parties agree to certain development decisions before moving forward with humanised anti-CD20 antibody clinical trials (and possibly clinical trials of other collaboration products, including Rituxan), in which case Genentech may have to alter or cancel planned clinical trials in order to obtain Biogen Idec’s approval. Each party is also seeking monetary damages from the other. The arbitrators held hearings on this matter over several days in September 2008 and closing arguments on 9 December 2008. The hearings formally closed on 8 January 2009. A final decision from the arbitrators is expected by no later than July 2009. The outcome of this matter cannot be determined at this time.

On 28 June 2003 Mr Ubaldo Bao Martinez filed a lawsuit against Porriño Town Council and Genentech España S. L. in the Contentious Administrative Court Number One of Pontevedra, Spain. The lawsuit challenges the Town Council’s decision to grant licenses to Genentech España S.L. for the construction and operation of a warehouse and biopharmaceutical manufacturing facility in Porriño, Spain. On 21 January 2008 the Administrative Court ruled in favour of Mr Bao on one of the claims in the lawsuit and ordered the closing and demolition of the facility, subject to certain further legal proceedings. On 12 February 2008, Genentech and the Town Council filed appeals of the Administrative Court decision at the High Court in Galicia, Spain. In addition, Genentech are evaluating with legal counsel in Spain whether there may be other administrative remedies available to overcome the Administrative Court’s ruling. Genentech sold the assets of Genentech España S. L., including the Porriño facility, to Lonza Group Ltd. (‘Lonza’) in December 2006, and Lonza has operated the facility since that time. Under the terms of that sale, Genentech retained control of the defence of this lawsuit and agreed to indemnify Lonza against certain contractually defined liabilities up to a specified limit, which is currently estimated to be approximately 100 million US dollars. No provisions have been recorded in respect of this litigation as the outcome of this matter and Genentech’s indemnification obligation to Lonza, if any, cannot be determined at this time.

96          Roche Finance Report 2008     |      Roche Group – Notes to the Roche Group Consolidated Financial Statements

On 8 May, 11 June, 8 August, and 29 September of 2008, Genentech was named as a defendant, along with InterMune, Inc. and its former chief executive officer, W. Scott Harkonen, in four separate class-action complaints filed in the US District Court for the Northern District of California on behalf of plaintiffs who allegedly paid part or all of the purchase price for a product that was licensed by Genentech to Connectics Corporation and was subsequently assigned to InterMune. The complaints are related in part to royalties that Genentech received. The 8 May, 11 June, 8 August complaints have been consolidated into a single amended complaint that claims and seeks damages for violations of federal racketeering laws, unfair competition laws, and consumer protection laws, and for unjust enrichment. The 29 September complaint includes six claims, but only names Genentech as a defendant in one claim for damages for unjust enrichment. This matter was formally related to the consolidated complaint on 10 December 2008. Genentech’s motion to dismiss these matters is currently scheduled for hearing on 2 February 2009. The outcome of these matters cannot be determined at this time.

Subsequent to the Roche Proposal, more than thirty shareholder lawsuits have been filed against Genentech and/or the members of its Board of Directors, and various Roche entities including Roche Holdings, Inc. (RHI) and Roche Holding Ltd. (Roche Holding AG). The lawsuits are currently pending in various state courts, including the Delaware Court of Chancery and San Mateo County Superior Court, as well as in the United States District Court for the Northern District of California. The lawsuits generally assert class-action claims for breach of fiduciary duty and aiding and abetting breaches of fiduciary duty based in part on allegations that, in connection with Roche’s offer to purchase the remaining shares, some or all of the defendants have failed to properly value Genentech, have failed to solicit other potential acquirers and are engaged in improper self-dealing. Several of the suits also seek the invalidation, in whole or in part, of the July 1999 Affiliation Agreement between Genentech and RHI (Affiliation Agreement), and an order deeming Articles 8 and 9 of Genentech’s Amended and Restated Certificate of Incorporation inapplicable or invalid to a potential transaction with Roche. The outcome of these matters cannot be determined at this time.

On 27 October 2008 Genentech and Biogen Idec Inc. filed a complaint against Sanofi-Aventis Deutschland GmbH (‘Sanofi’), Sanofi-Aventis US LLC and Sanofi-Aventis US Inc. in the Northern District of California seeking a declaratory judgement that certain Genentech products, including Rituxan, do not infringe Sanofi’s US Patents 5,849,522 (‘the ‘522 patent’) and 6,218,140 (‘the ‘140 patent’) and a declaratory judgement that the ‘522 and ‘140 patents are invalid. On 2 December 2008 Sanofi filed a motion to dismiss this complaint for lack of jurisdiction. A discovery hearing relating to this motion is currently set for 13 February 2009. Also on 27 October 2008 Sanofi filed suit against Genentech and Biogen Idec in the Eastern District of Texas, Lufkin Division, claiming that Rituxan and at least eight other Genentech products infringe the ‘522 and ‘140 patents. On 22 January 2009 Genentech filed a motion to transfer this matter to the Northern District of California. Sanofi is seeking preliminary and permanent injunctions, compensatory and exemplary damages, and other relief. In addition on 24 October 2008 Hoechst GmbH filed with the ICC International Court of Arbitration (Paris) a request for arbitration with Genentech, relating to a terminated agreement between Hoechst’s predecessors and Genentech that pertained to the above patents and related patents outside the United States. Genentech’s answer to the arbitration request was filed on 19 January 2009. Hoechst is seeking payments on royalties on sales of Genentech products, damages for breach of contract, and other relief. Genentech intends to vigorously defend itself. The outcome of these matters cannot be determined at this time.

Genentech’s annual report and quarterly SEC filings contain the detailed disclosures of litigation matters that are required by US GAAP. These include further details on the above matters as well as including information on other litigation that is not currently as significant as the matters referred to above.

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26. Other non-current liabilities

Other non-current liabilities |  in millions of CHF

	2008		2007
Deferred income		174		243
Other long-term liabilities		285		480
Total other non-current liabilities		459		723

27. Debt

Debt: recognised liabilities |  in millions of CHF

	2008		2007
Debt instruments		3,564		6,294
Amounts due to banks and other financial institutions		77		130
Genentech leasing obligations 3		337		305
Finance lease obligations 12		4		9
Other borrowings		107		128
Total debt		4,089		6,866
Reported as
– Long-term debt		2,972		3,834
– Short-term debt		1,117		3,032
Total debt		4,089		6,866

Debt: repayment terms |  in millions of CHF

	2008		2007
Within one year		1,117		3,032
Between one and two years		565		584
Between two and three years		6		576
Between three and four years		4		25
Between four and five years		3		3
More than five years		2,394		2,646
Total debt		4,089		6,866

The fair value of the debt instruments is 3.5 billion Swiss francs (2007: 6.2 billion Swiss francs) and the fair value of total debt is 4.0 billion Swiss francs (2007: 6.8 billion Swiss francs). This is calculated based on the observable market prices of the debt instruments or the present value of the future cash flows on the instrument, discounted at a market rate of interest for instruments with similar credit status, cash flows and maturity periods.

There are no pledges on the Group’s assets in connection with debt.

Amounts due to banks and other financial institutions

These amounts are denominated in various currencies, notably in Chinese renminbi, and the average interest rate was 4.5%. The average interest rate in 2007 was 5.8%, when the balance was primarily denominated in euros. Repayment dates are up to five years and 61 million Swiss francs (2007: 105 million Swiss francs) are due within one year.

98          Roche Finance Report 2008     |      Roche Group – Notes to the Roche Group Consolidated Financial Statements

Debt instruments

Recognised liabilities and effective interest rates of debt instruments |  in millions of CHF

	Effective
	interest rate			2008		2007
European Medium Term Note programme
4% bonds due 9 October 2008, principal 750 million euros		4.16	%		–		1,240
5.375% bonds due 29 August 2023, principal 250 million pounds sterling		5.46	%		377		553
Swiss franc bonds
‘Rodeo’ 1.75% due 20 March 2008, principal 1 billion Swiss francs		3.00	%		–		998
US dollar bonds
‘Chameleon’ 6.75% due 6 July 2009, principal 487 million US dollars		6.77	%		522		568
Genentech Senior Notes
4.40% Senior Notes due 15 July 2010, principal 500 million US dollars		4.53	%		549		569
4.75% Senior Notes due 15 July 2015, principal 1 billion US dollars		4.87	%		1,058		1,127
5.25% Senior Notes due 15 July 2035, principal 500 million US dollars		5.39	%		529		564
Genentech commercial paper
Notes due at various dates until 23 January 2009,
principal 500 million US dollars (2007: principal 600 million US dollars		0.80	%
due until 22 January 2008)		(2007: 4.46	%)		529		675
Japanese yen convertible bonds issued by Chugai
‘Series 6 Chugai Pharmaceutical Unsecured Convertible Bonds’ 1.05% due 30 September 2008 (2007: outstanding principal amount 42 million Japanese yen)		1.05	%		–		–
Total debt instruments					3,564		6,294
Unamortised discount included in carrying value of debt instruments |  in millions of CHF
				2008		2007
Sterling bonds					5		8
Total unamortised discount					5		8

Fair Value Option

In 2005 the Group applied the Fair Value Option on three of its outstanding debt instruments on which the Group had been applying fair value hedge accounting in the past. These debt instruments are the ‘European Medium Term Note programme’ Euro bonds, the ‘Chameleon’ US dollar bonds and the ‘Rodeo’ Swiss franc bonds. The Fair Value Option treatment is based on the elimination of an accounting mismatch which had been recognised between the hedging swaps (reported at fair value) and the hedged bonds (reported at amortised cost). The difference between the carrying value and the principal amount for these debt instruments totals 6 million Swiss francs (2007: 12 million Swiss francs).

Issuance of new debt instruments – 2007

Genentech commercial paper program |  In October 2007 Genentech established a commercial paper program under which it can issue up to 1 billion US dollars of unsecured commercial paper notes. Maturities under the program generally vary from overnight to five weeks and cannot exceed 397 days. As at 31 December 2008 unsecured commercial paper notes with a principal amount of 500 million US dollars (2007: 600 million US dollars) and an average interest rate of 0.80% (2007: 4.46%) were outstanding. Genentech intends to use the proceeds for general corporate purposes.

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Repayments, redemptions and conversions of debt instruments – 2008

Redemption of ‘Rodeo’ Swiss franc bonds |  On the due date of 20 March 2008 the Group redeemed these bonds at the original issue amount plus accrued original issue discount (‘OID’). The effective interest rate of these bonds was 3.00%. The cash outflow was 1,000 million Swiss francs and there was no gain or loss recorded on the redemption.

Redemption of European Medium Term Note programme Euro bonds |  On the due date of 9 October 2008 the Group redeemed at the original issue amount plus accrued original issue discount (‘OID’). The effective interest rate of these bonds was 4.16%. The cash outflow was 1,188 million Swiss francs and there was no gain or loss recorded on the redemption.

Conversion and redemption of ‘Series 6 Chugai Pharmaceutical Unsecured Convertible Bonds’ |  During 2008 the remaining outstanding bonds with a face value of 42 million Japanese yen (0.4 million Swiss francs) were either converted to shares of Chugai or redeemed at the issue price on the due date of 30 September 2008. The Group’s percentage ownership of Chugai was unaffected by this conversion, as the Group had bonds convertible into Chugai shares that mirrored those that Chugai had outstanding with third parties. There was no gain or loss recorded in the income statement upon the conversion and redemption. The cash outflow was less than 1 million Swiss francs.

Repayments, redemptions and conversions of debt instruments – 2007

Conversion and redemption of ‘LYONs V’ US dollar exchangeable notes |  On 22 June 2007 the Group announced that it would exercise its option to call these notes for redemption on 25 July 2007 at the original issue amount plus accrued original issue discount (‘OID’). In the period to 24 July 2007 notes with a principal amount of 848 million US dollars were converted into 4.5 million non-voting equity securities and the remaining notes were redeemed for cash on 25 July 2007. A total of 324 million Swiss francs were recorded to equity, which consists of the 1,008 million Swiss francs of cash used to purchase the non-voting equity securities used in the conversion and redemption, less the 622 million Swiss francs carrying value of the converted bonds and the related tax effects of 62 million Swiss francs. There was no gain or loss recorded in the income statement upon the conversion and redemption.

Redemption of European Medium Term Note programme US dollar bonds |  On the due date of 2 October 2007 the Group redeemed these bonds with a principal value of 750 million US dollars at the original issue amount plus accrued original issue discount (‘OID’). The cash outflow was 900 million Swiss francs. There was no gain or loss recorded in the income statement upon the redemption.

Partial conversion of ‘Series 6 Chugai Pharmaceutical Unsecured Convertible Bonds’ |  During 2007 bonds with a face value of 0.1 billion Japanese yen (1 million Swiss francs) were converted to shares of Chugai. The Group’s percentage ownership of Chugai was unaffected by this conversion, as the Group has bonds convertible into Chugai shares that mirror those that Chugai has outstanding with third parties. There was no gain or loss recorded in the income statement upon the partial conversion.

Cash outflows from repayments, redemptions and conversions of debt instruments |  in millions of CHF

	2008			2007
‘LYONs V’ US dollar exchangeable notes		–			(1,008	)
European Medium Term Note programme US dollar bonds		–			(900	)
‘Rodeo’ Swiss franc bonds		(1,000	)		–
European Medium Term Note programme Euro bonds		(1,188	)		–
Genentech commercial paper (net repayment)		(107	)
Japanese yen convertible bonds issued by Chugai		–			–
Total cash outflows from repayments and redemptions during the year		(2,295	)		(1,908	)

100          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

28. Equity attributable to Roche shareholders

Changes in equity attributable to Roche shareholders |  in millions of CHF

	Share		Own equity			Retained			Fair value			Hedging			Translation
Year ended 31 December 2007	capital		instruments			earnings			reserve			reserve			reserve			Total
At 1 January 2007 – restated 1		160		(2,102	)		44,548			459			15			(3,339	)		39,741
Available-for-sale investments
– Valuation gains (losses) taken to equity		–		–			–			(198	)		–			–			(198	)
– Transferred to income statement on sale or impairment		–		–			–			(128	)		–			–			(128	)
Cash flow hedges
– Gains (losses) taken to equity		–		–			–			–			(45	)		–			(45	)
– Transferred to income statement a)		–		–			–			–			(3	)		–			(3	)
– Transferred to the initial balance sheet carrying value of hedged items		–		–			–			–			–			–			–
Exchange differences on translation of foreign operations		–		–			–			(10	)		1			(1,897	)		(1,906	)
Defined benefit plans
– Actuarial gains (losses) 10		–		–			1,178			–			–			–			1,178
– Limit on asset recognition 10		–		–			(636	)		–			–			–			(636	)
Income taxes on items taken directly to or transferred from equity		–		–			(242	)		9			19			–			(214	)
Non-controlling interests		–		–			(3	)		(7	)		13			529			532
Net income recognised directly in equity		–		–			297			(334	)		(15	)		(1,368	)		(1,420	)
Net income recognised in income statement		–		–			9,761			–			–			–			9,761
Total recognised income and expense		–		–			10,058			(334	)		(15	)		(1,368	)		8,341
Dividends paid		–		–			(2,930	)		–			–			–			(2,930	)
Transactions in own equity instruments		–		1,085			–			–			–			–			1,085
Equity compensation plans		–		–			559			–			–			–			559
Genentech and Chugai share repurchases 3, 4		–		–			(1,044	)		–			–			–			(1,044	)
Convertible debt instruments 27		–		–			(324	)		–			–			–			(324	)
Changes in non-controlling interests		–		–			55			–			–			–			55
At 31 December 2007		160		(1,017	)		50,922			125			–			(4,707	)		45,483

a) Of amounts transferred to income statement, losses of 10 million Swiss francs were reported as ‘Royalties and other operating income’ and gains of 7 million Swiss francs as ‘Financial income’.

As disclosed in Note 1, post-employment benefit assets, deferred tax liabilities and equity have been restated in the 31 December 2007 balance sheet following the adoption of IFRIC interpretation 14 in 2008. A reconciliation to the previously published balance sheet is provided in Note 1.

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			Own
			equity
	Share		instru-			Retained			Fair value			Hedging			Translation
Year ended 31 December 2008	capital		ments			earnings			reserve			reserve			reserve			Total
At 1 January 2008		160		(1,017	)		50,922			125			–			(4,707	)		45,483
Available-for-sale investments
– Valuation gains (losses) taken to equity		–		–			–			(671	)		–			–			(671	)
– Transferred to income statement on sale or impairment		–		–			–			163			–			–			163
Cash flow hedges
– Gains (losses) taken to equity		–		–			–			–			(55	)		–			(55	)
– Transferred to income statementa)		–		–			–			–			83			–			83
– Transferred to the initial balance sheet carrying value of hedged items		–		–			–			–			–			–			–
Currency translation of foreign operations
– Exchange differences		–		–			–			16			–			(2,998	)		(2,982	)
– Accumulated differences transferred to income statement on divestment34		–		–			–			–			–			(16	)		(16	)
Defined benefit plans
– Actuarial gains (losses)10		–		–			(2,820	)		–			–			–			(2,820	)
– Limit on asset recognition10		–		–			636			–			–			–			636
Income taxes on items taken directly to or transferred from equity		–		–			662			88			(12	)		–			738
Non-controlling interests		–		–			18			48			(7	)		181			240
Net income recognised directly in equity		–		–			(1,504	)		(356	)		9			(2,833	)		(4,684	)
Net income recognised in income statement		–		–			8,969			–			–			–			8,969
Total recognised income and expense		–		–			7,465			(356	)		9			(2,833	)		4,285
Dividends paid		–		–			(3,969	)		–			–			–			(3,969	)
Transactions in own equity instruments		–		(98	)		–			–			–			–			(98	)
Equity compensation plans		–		–			789			–			–			–			789
Genentech and Chugai share repurchases3, 4		–		–			(472	)		–			–			–			(472	)
Changes in ownership interests in subsidiaries
– Chugai4		–		–			(530	)		–			–			–			(530	)
– Ventana7		–		–			(964	)		–			–			–			(964	)
Changes in non-controlling interests		–		–			(45	)		–			–			–			(45	)
At 31 December 2008		160		(1,115	)		53,196			(231	)		9			(7,540	)		44,479

a) Of amounts transferred to income statement, losses of 86 million Swiss francs were reported as ‘Royalties and other operating income’ and gains of 3 million Swiss francs as ‘Financial income’.

102          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

Share capital

As of 31 December 2008, the authorised and issued share capital of Roche Holding Ltd, which is the Group’s parent company, consisted of 160,000,000 shares with a nominal value of 1.00 Swiss franc each, as in the preceding year. The shares are bearer shares and the Group does not maintain a register of shareholders. Based on information supplied to the Group, a shareholder group with pooled voting rights owns 50.0125% (2007: 50.0125%) of the issued shares. This is further described in Note 33. Based on information supplied to the Group, Novartis Ltd, Basel, and its affiliates owns 33.3330% (participation below 33 ¹/₃%) of the issued shares (2007: 33.3330%).

Non-voting equity securities (Genussscheine)

As of 31 December 2008, 702,562,700 non-voting equity securities have been authorised and were in issue as in the preceding year. Under Swiss company law these non-voting equity securities have no nominal value, are not part of the share capital and cannot be issued against a contribution which would be shown as an asset in the balance sheet of Roche Holding Ltd. Each non-voting equity security confers the same rights as any of the shares to participate in the net profit and any remaining proceeds from liquidation following repayment of the nominal value of the shares and, if any, participation certificates. In accordance with the law and the Articles of Incorporation of Roche Holding Ltd, the Company is entitled at all times to exchange all or some of the non-voting equity securities into shares or participation certificates.

Dividends

On 4 March 2008 the shareholders approved the distribution of a dividend of 4.60 Swiss francs per share and non-voting equity securities (2007: 3.40 Swiss francs) in respect of the 2007 business year. The distribution to holders of outstanding shares and non-voting equity securities totalled 3,969 million Swiss francs (2007: 2,930 million Swiss francs) and has been recorded against retained earnings in 2008. The Board of Directors has proposed dividends for the 2008 business year of 5.00 Swiss francs per share and non-voting equity security. This is subject to approval at the Annual General Meeting on 10 March 2009.

Own equity instruments

Holdings of own equity instruments |  in equivalent number of non-voting equity securities

	31 December 2008		31 December 2007
	(millions)		(millions)
Non-voting equity securities		3.0		0.4
Low Exercise Price Options		–		1.9
Derivative instruments		8.5		9.3
Total own equity instruments		11.5		11.6

Own equity instruments are recorded within equity at original purchase cost. Details of own equity instruments held at 31 December 2008 are shown in the table below. Fair values are disclosed for information purposes.

Own equity instruments at 31 December 2008: supplementary information

	Equivalent number
	of non-voting
	equity securities				Strike price		Market value
	(millions)		Maturity		(CHF)		(CHF millions)
Non-voting equity securities		3.0		n/a		n/a		481
Low Exercise Price Options		–		–		–		–
Derivative instruments		8.5	2 Feb. 2010–			123.00–
			8 Feb. 2014			229.60		310
Total		11.5						791

103

Non-voting equity securities and derivative instruments are held for the Group’s potential conversion obligations that may arise from the Roche Option Plan and Roche Stock-settled Stock Appreciation Rights (see Note 11). These mainly consist of call options that are exercisable at any time up to their maturity.

The net cash outflow from transactions in own equity instruments was 98 million Swiss francs (2007: net cash inflow of 1,085 million Swiss francs). The large cash inflow in 2007 mainly arose from a reduction in own equity instrument holdings following the conversion and redemption of the ‘LYONs V’ notes.

The Group holds none of its own shares.

Reserves

Fair value reserve  |   The fair value reserve represents the cumulative net change in the fair value of available-for-sale financial assets until the asset is sold, impaired or otherwise disposed of.

Hedging reserve  |   The hedging reserve represents the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred.

Translation reserve  |   The translation reserve represents the cumulative currency translation differences relating to the consolidation of Group companies that use functional currencies other than Swiss francs.

29. Earnings per share and non-voting equity security

Basic earnings per share and non-voting equity security

For the calculation of basic earnings per share and non-voting equity security, the number of shares and non-voting equity securities is reduced by the weighted average number of its own non-voting equity securities held by the Group during the period.

Basic earnings per share and non-voting equity security

				Group
	2008			2007
Net income attributable to Roche shareholders (CHF millions)		8,969			9,761
Number of shares (millions)28		160			160
Number of non-voting equity securities (millions)28		703			703
Weighted average number of own non-voting equity securities held (millions)		(3	)		(4	)
Weighted average number of shares and non-voting equity securities in issue (millions)		860			859
Basic earnings per share and non-voting equity security (CHF)		10.43			11.36

Diluted earnings per share and non-voting equity security

For the calculation of diluted earnings per share and non-voting equity security, the net income and weighted average number of shares and non-voting equity securities outstanding are adjusted for the effects of all dilutive potential shares and non-voting equity securities.

104          Roche Finance Report 2008     |     Roche Group — Notes to the Roche Group Consolidated Financial Statements

Potential dilutive effects arise from the convertible debt instruments and the employee stock option plans. If the outstanding convertible debt instruments were to be converted then this would lead to a reduction in interest expense and an increase in the number of shares which may have a net dilutive effect on the earnings per share. The exercise of outstanding vested employee stock options would have a dilutive effect. The exercise of the outstanding vested Genentech employee stock options would have a dilutive effect if the net income of Genentech is positive. The diluted earnings per share and non-voting equity security reflects the potential impacts of these dilutive effects on the earnings per share figures.

Diluted earnings per share and non-voting equity security

				Group
	2008			2007
Net income attributable to Roche shareholders (CHF millions)		8,969			9,761
Elimination of interest expense, net of tax, of convertible debt instruments, where dilutive (CHF millions)		–			4
Increase in non-controlling share of Group net income, net of tax, assuming all outstanding Genentech and Chugai stock options exercised (CHF millions)		(159	)		(141	)
Net income used to calculate diluted earnings per share (CHF millions)		8,810			9,624
Weighted average number of shares and non-voting equity securities in issue (millions)		860			859
Adjustment for assumed conversion of convertible debt instruments, where dilutive (millions)		–			1
Adjustment for assumed exercise of equity compensation plans, where dilutive (millions)		1			2
Weighted average number of shares and non-voting equity securities in issue used to calculate diluted earnings per share (millions)		861			862
Diluted earnings per share and non-voting equity security (CHF)		10.23			11.16

105

30. Non-controlling interests

Changes in equity attributable to non-controlling interests |  in millions of CHF

	2008			2007
At 1 January		7,960			7,370
Net income recognised directly in equity		(240	)		(532	)
Net income recognised in income statement
– Genentech3		1,659			1,451
– Chugai4		200			211
– Other non-controlling interests		16			14
Total net income recognised in income statement		1,875			1,676
Total recognised income and expense		1,635			1,144
Ventana acquisition7		321			–
Dividends paid to non-controlling shareholders
– Chugai4		(74	)		(91	)
– Other non-controlling interests		(21	)		(6	)
Equity compensation plans		574			449
Genentech and Chugai share repurchases3, 4		(372	)		(851	)
Changes in ownership interests in subsidiaries
– Chugai4		(404	)		–
– Ventana7		(321	)		–
Changes in non-controlling interests		45			(55	)
At 31 December		9,343			7,960
Of which
– Genentech3		7,397			5,933
– Chugai4		1,901			1,987
– Other non-controlling interests		45			40
Total non-controlling interests		9,343			7,960

31. Cash flow statement

Cash flows from operating activities

Cash flows from operating activities arise from the Group’s primary activities in the Pharmaceuticals and Diagnostics businesses. These are calculated by the indirect method by adjusting the Group’s operating profit for any operating income and expenses that are not cash flows (for example depreciation, amortisation and impairment) in order to derive the cash generated from operations. This and other operating cash flows are shown in the cash flow statement. Operating cash flows also include income taxes paid on all activities.

106          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

Cash generated from operations  |   in millions of CHF

	2008			2007
Net income		10,844			11,437
Add back non-operating (income) expense
– Associates15		(1	)		(2	)
– Financial income5		(1,123	)		(1,805	)
– Financing costs5		887			971
– Income taxes6		3,317			3,867
– Major legal cases25		(271	)		–
– Changes in Group organisation8		243			–
Operating profit before exceptional items		13,896			14,468
Depreciation of property, plant and equipment12		1,676			1,560
Amortisation of intangible assets14		969			976
Impairment of intangible assets14		104			58
Impairment of property, plant and equipment12		28			6
Operating expenses for defined benefit post-employment plans10		317			370
Operating expenses for equity-settled equity compensation plans11		526			603
Other adjustments		110			439
Cash generated from operations		17,626			18,480

Cash flows from investing activities

Cash flows from investing activities are principally those arising from the Group’s investments in property, plant and equipment and intangible assets, and from the acquisition and divestment of subsidiaries, associates and businesses. Cash flows connected with the Group’s portfolio of marketable securities and other investments are also included, as are any interest and dividend payments received in respect of these securities and investments. These cash flows indicate the Group’s net reinvestment in its operating assets and the cash flow effects of business combinations and divestments, as well as the cash generated by the Group’s other investments.

Interest and dividends received  |   in millions of CHF

	2008		2007
Interest received		606		1,071
Dividends received		5		8
Total		611		1,079

Cash flows from financing activities

Cash flows from financing activities are primarily the proceeds from the issue and repayment of the Group’s equity and debt instruments. They also include interest payments and dividend payments on these instruments. Cash flows from short-term financing, including finance leases, are also included. These cash flows indicate the Group’s transactions with the providers of its equity and debt financing. Cash flows from short-term borrowings are shown as a net movement, as these consist of a large number of transactions with short maturity.

Interest and dividends paid  |   in millions of CHF

	2008			2007
Interest paid		(216	)		(297	)
Dividends paid28, 30		(4,051	)		(3,027	)
Total		(4,267	)		(3,324	)

107

Significant non-cash transactions

An increase in property, plant and equipment of 102 million Swiss francs (2007: 205 million Swiss francs) was recorded from Genentech leasing arrangements (see Note 3) and there was a corresponding increase in long-term debt.

32. Risk management

Group risk management

Risk management is a fundamental element of the Group’s business practice on all levels and encompasses different types of risks. At a group level risk management is an integral part of the business planning and controlling processes. Material risks are monitored and regularly discussed with the Corporate Executive Committee and the Audit Committee of the Board of Directors. This overall Group risk management process includes the performance of a risk assessment that is described in more detail in the Business Report on page 89. Financial risk management specifically is described in further detail below.

Financial risk management

The Group is exposed to various financial risks arising from its underlying operations and corporate finance activities. The Group’s financial risk exposures are predominantly related to changes in foreign exchange rates, interest rates and equity prices as well as the creditworthiness and the solvency of the Group’s counterparties.

Financial risk management within the Group is governed by policies reviewed by the boards of directors of Roche, Genentech or Chugai as appropriate to their areas of statutory responsibility. These policies cover credit risk, liquidity risk and market risk. The policies provide guidance on risk limits, type of authorised financial instruments and monitoring procedures. As a general principle, the policies prohibit the use of derivative financial instruments for speculative trading purposes. Policy implementation and day-to-day risk management are carried out by the relevant treasury functions and regular reporting on these risks is performed by the relevant accounting and controlling functions within Roche, Genentech and Chugai.

Carrying value and fair value of financial assets  |   in millions of CHF

Carrying value by asset class

FVtPL a)-

Available-

FVtPL a)-

held for

Held to

Loans and

Fair

By line items in notes

for-sale

Designated

trading

maturity

receivables

Total

value

Year ended 31 December 2008

Accounts receivable

–

–

–

–

9,755

9,755

9,755

Accrued interest income

–

–

–

–

145

145

145

Marketable securities:

– Money market instruments and time accounts over 3 months

7,961

–

–

–

–

7,961

7,961

– Bonds and debentures

6,814

–

1,027

–

–

7,841

7,841

– Shares

51

–

–

–

–

51

51

– Other investments

3

–

–

–

–

3

3

Cash and cash equivalents

–

–

–

–

4,915

4,915

4,915

Derivative financial instruments

–

–

262

–

–

262

262

Available-for-sale investments

588

–

–

–

–

588

588

Held-to-maturity investments

–

–

–

16

–

16

16

Loans receivable

–

–

–

–

16

16

16

Long-term trade receivables

–

–

–

–

73

73

73

Other financial current assets

–

–

–

–

624

624

624

Restricted cash

–

–

–

–

205

205

205

Other long-term assets

–

–

–

–

42

42

42

Total

15,417

–

1,289

16

15,775

32,497

32,497

108          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

Carrying value by asset class

FVtPL a)-

Available-

FVtPL a)-

held for

Held to

Loans and

Fair

By line items in notes

for-sale

Designated

trading

maturity

receivables

Total

value

Year ended 31 December 2007

Accounts receivable

–

–

–

–

9,804

9,804

9,804

Accrued interest income

–

–

–

–

37

37

37

Marketable securities:

– Money market instruments and time accounts over 3 months

10,965

167

–

–

–

11,132

11,132

– Bonds and debentures

7,624

78

1,129

–

–

8,831

8,831

– Shares

292

–

–

–

–

292

292

– Other investments

14

178

–

–

–

192

192

Cash and cash equivalents

–

–

–

–

3,755

3,755

3,755

Derivative financial instruments

–

–

70

–

–

70

70

Available-for-sale investments

836

–

–

–

–

836

836

Held-to-maturity investments

–

–

–

19

–

19

19

Loans receivable

–

–

–

–

19

19

19

Long-term trade receivables

–

–

–

–

190

190

190

Other financial current assets

–

–

–

–

593

593

593

Restricted cash

–

–

–

–

1,115

1,115

1,115

Other long-term assets

–

–

–

–

43

43

43

Total

19,731

423

1,199

19

15,556

36,928

36,928

a) Fair-value-through-profit-or-loss.

Credit risk

Credit risk arises from the possibility that counterparties to transactions may default on their obligations, causing financial losses for the Group. The objective of managing counterparty credit risk is to prevent losses of liquid funds deposited with or invested in such counterparties.

The maximum exposure to credit risk resulting from financial activities, without considering netting agreements and without taking account of any collateral held or other credit enhancements, is equal to the carrying value of the Group’s financial assets.

Trade receivables  |   These are subject to a policy of active credit risk management which focuses on the assessment of country risk, credit availability, ongoing credit evaluation and account monitoring procedures. The objective of the management of trade receivables is to sustain the growth and profitability of the Group by optimising asset utilisation whilst maintaining risks at an acceptable level. Except as noted below, there is no significant concentration of counterparty credit risk due to the Group’s large number of customers and their wide geographical spread. Risk limits and exposures are continuously monitored by country and by the nature of counterparties. Additionally, the Group obtains credit insurance and similar enhancements when appropriate to protect the collection of trade receivables. As at 31 December 2008 no collateral was held for loans and receivables (2007: none).

At 31 December 2008 the Group’s combined trade accounts receivable balance with three US national wholesale distributors, AmerisourceBergen Corp., Cardinal Health Inc. and McKesson Corp., was equivalent to 1.4 billion Swiss francs representing 15% of the Group’s consolidated trade accounts receivable (2007: 1.5 billion Swiss francs representing 16%).

109

Nature and geographical location of trade receivables (not overdue) counterparties |  in millions of CHF

							2008								2007
					Whole-								Whole-
					salers/								salers/
Regions	Total		Public		distributors		Private		Total		Public		distributors		Private
Switzerland		130		51		10		69		175		47		12		116
European Union		2,053		953		643		457		2,106		991		546		569
Rest of Europe		479		11		405		63		661		58		539		64
North America		2,011		154		1,622		235		2,333		308		1,737		288
Latin America		474		142		192		140		461		115		187		159
Japan		1,439		–		1,402		37		1,162		–		1,136		26
Rest of Asia		685		97		255		333		605		83		227		295
Africa, Australia and Oceania		154		30		58		66		187		51		58		78
Total		7,425		1,438		4,587		1,400		7,690		1,653		4,442		1,595

Cash and marketable securities  |   These are subject to a policy of restricting exposures to high-quality counterparties and setting defined limits for individual counterparties. These limits and counterparty credit ratings are reviewed regularly. Investments in marketable securities are entered into on the basis of guidelines with regard to liquidity, quality and maximum amount. As a general rule, the Group invests only in high quality securities with adequate liquidity. Cash and short-term time deposits are subject to rules which limit the Group’s exposure to individual financial institutions. The Group signs netting agreements under an ISDA (International Swaps and Derivatives Association) master agreement with the respective counterparties in order to control exposures on derivative positions.

Rating analysis of cash and fixed income marketable securities (market values)

	2008		2008		2007		2007
	(mCHF)		(% of total)		(mCHF)		(% of total)
AAA-range		9,884		48		5,857		25
AA-range		5,390		26		9,598		40
A-range		4,525		22		7,615		32
BBB-range		912		4		773		3
Below BBB-range		9		0		67		0
Total		20,720		100		23,910		100

Overdue assets  |   Financial assets which are past due but not impaired total 2.7 billion Swiss francs (2007: 2.4 billion Swiss francs).

Analysis of overdue but not impaired financial assets by class  |   in millions of CHF

	Total
	amount		0–1		1–3		4–6		6–12		more than
	overdue		month		months		months		months		1 year
Year ended 31 December 2008
Loans and receivables		2,656		560		681		543		438		434
Year ended 31 December 2007
Loans and receivables		2,423		720		538		483		427		255

As at 31 December 2008 there are no financial assets whose terms have been renegotiated (2007: none).

110          Roche Finance Report 2008     |     Roche Group – Notes to the Roche Group Consolidated Financial Statements

Liquidity risk

Liquidity risk arises through a surplus of financial obligations over available financial assets due at any point in time. The Group’s approach to liquidity risk is to maintain sufficient readily available reserves in order to meet its liquidity requirements at any point in time. Group liquidity is reported to senior management on a monthly basis.

Roche, Genentech and Chugai enjoy strong credit quality and are rated by at least one major credit rating agency. The ratings will permit efficient access to the international capital markets in the event of major financing requirements. In addition, the Group has unused committed credit lines with various financial institutions totalling 5.2 billion Swiss francs (2007: 5.7 billion Swiss francs). The decline is due to changes in foreign currency translation rates.

Contractual maturity analysis of financial liabilities  |   in millions of CHF

			0–3		4–6		7–12		1–2		2–3		3–4		4–5		Over 5
	Total		months		months		months		years		years		years		years		years
Year ended 31 December 2008
Total debta)		5,617		702		46		623		685		135		135		136		3,155
Trade payables		1,053		1,038		14		–		1		–		–		–		–
Accruals		5,379		3,727		429		1,162		61		–		–		–		–
Derivative financial instruments		194		194		–		–		–		–		–		–		–
Other liabilities:
current & non-current		1,343		788		66		132		136		9		170		27		15
Total financial liabilities		13,586		6,449		555		1,917		883		144		305		163		3,170
Year ended 31 December 2007
Total debta)		8,953		1,954		30		1,418		762		738		151		152		3,748
Trade payables		1,188		1,177		10		1		–		–		–		–		–
Accruals		5,319		3,945		431		881		62		–		–		–		–
Derivative financial instruments		80		80		–		–		–		–		–		–		–
Other liabilities:
current & non-current		1,253		513		51		127		284		10		186		10		72
Total financial liabilities		16,793		7,669		522		2,427		1,108		748		337		162		3,820

a) Total debt in the above table shows undiscounted cash flows, whereas the carrying value in the consolidated balance sheet reflects discounted cash flows.

Market risk

Market risk arises from changing market prices of the Group’s financial assets or financial liabilities. Market risk may affect the Group financial result and the value of Group equity.

The Group uses Value-at-Risk (VaR) to measure the impact of market risk on its financial instruments. Roche has defined VaR limits to manage market risk. VaR data are reported on a monthly basis and indicate the value range within which a given financial instrument will fluctuate with a pre-set probability as a result of movements in market prices. VaR is a statistical measure which implicitly assumes that value changes of the recent past are indicative of value changes in the future. VaR figures do not represent actual or expected losses, or possible worst-case losses over the stated period.

111

VaR figures are calculated using a historical simulation approach. For each scenario, all financial instruments are fully valued and the total change in value and earnings is determined. All VaR calculations are based on a 95% confidence level and a holding period of 20 trading days over the past ten years. This holding period reflects the time required to change the corresponding risk exposure, should this be deemed appropriate. Longer holding periods increase the probability of higher value changes and lead to increased VaR figures.

Actual future gains and losses associated with our treasury activities may differ materially from the VaR analyses performed due to the inherent limitations associated with predicting the timing and amount of changes to interest rates, foreign currency exchanges rates and equity investment prices, particularly in periods of high market volatilities. Furthermore, the VaR numbers below do not include the effect of changes in credit spreads.

Market risk of financial instruments  |   in millions of CHF

	31 December 2008			31 December 2007
VaR – Foreign exchange component		96			75
VaR – Interest rate component		27			40
VaR – Other price component		62			93
Diversification		(52	)		(65	)
VaR – total market risk		133			143

At 31 December 2008, the total VaR of the financial assets and liabilities was 133 million Swiss francs (2007: 143 million Swiss francs). The foreign exchange VaR increased and arises mainly from hedging of non-US dollar cash flows from future royalty income over the next five years at Genentech. The lower contribution from the interest rate component was caused by the ageing of fixed-term liabilities. Other price risk arises mainly from movements in the prices of equity securities and this decreased due to significantly reduced equity security holdings. At 31 December 2008 the Group held equity securities with a market value of 0.6 billion Swiss Francs (2007: 1.1 billion Swiss francs). This number includes holdings in biotechnology companies, which were acquired in the context of licensing transactions or scientific collaborations. The lower holdings in equity securities resulted in a lower VaR for other price risk.

Foreign exchange risk

The Group operates across the world and is exposed to movements in foreign currencies affecting the Group financial result and the value of Group’s equity. Foreign exchange risk arises because the amount of local currency paid or received for transactions denominated in foreign currencies may vary due to changes in exchange rates (‘transaction exposures’) and because the foreign currency denominated financial statements of the Group’s foreign subsidiaries may vary upon consolidation into the Swiss franc denominated Group Financial Statements (‘translation exposures’).

The objective of the Group’s foreign exchange risk management activities is to preserve the economic value of its current and future assets and to minimise the volatility of the Group’s financial result. The primary focus of the Group’s foreign exchange risk management activities is on hedging transaction exposures arising through foreign currency flows or monetary positions held in foreign currencies. The Group does not currently hedge translation exposures using financial instruments.

The Group monitors transaction exposures on a daily basis. The net foreign exchange result and the corresponding VaR parameters are reported on a monthly basis. The Group uses forward contracts, foreign exchange options and cross-currency swaps to hedge transaction exposures. Application of these instruments intends to continuously lock in favourable developments of foreign exchange rates, thereby reducing the exposure to potential future movements in such rates.

112           Roche Finance Report 2008      |      Roche Group – Notes to the Roche Group Consolidated Financial Statements

Interest rate risk

Interest rate risk arises from movements in interest rates which could affect the Group financial result or the value of Group equity. Changes in interest rates may cause variations in interest income and expense. In addition, they may affect the market value of certain financial assets, liabilities and hedging instruments. The primary objective of the Group’s interest rate management is to protect the net interest result.

Interest rate exposures and the corresponding VaR parameters are reported on a monthly basis. The Group uses forward contracts, options and swaps to hedge its interest rate exposures. Depending on the interest rate environment of major currencies, the Group will use these instruments to generate the appropriate mix of fixed and floating rate exposures.

Other price risk

Other price risk arises mainly from movements in the prices of equity securities held by Roche, Genentech or Chugai. At 31 December 2008, the Group held equity securities with a market value of 0.6 billion Swiss francs (2007: 1.1 billion Swiss francs). This amount includes holdings in biotechnology companies, which were acquired in the context of licensing transactions or scientific collaborations. Due to the nature of their business, biotechnology companies are exposed to greater equity volatilities than general stock market fluctuations.

The Group manages the price risk through placing limits on individual and total equity investments. These limits are defined both as a percentage of total liquid funds and as an absolute number for individual equity investments. Equity price risk is reported as a VaR figure on a monthly basis to senior management.

Impairment of financial assets

During 2008 impairments of shares were triggered by a significant or prolonged price decline below cost value. Impairments of debt securities were recorded due to significant financial difficulties of the issuers.

Impairment losses by asset classes | in millions of CHF

	2008			2007
Loans and receivables		(43	)		(26	)
Available-for-sale financial assets
– Shares		(75	)		(35	)
– Investments		(40	)		–
– Debt securities		(53	)		(68	)
Total impairment losses		(211	)		(129	)

Capital

The Group defines the capital that it manages as the Group’s total equity, including non-controlling interests. The Group’s objectives when managing capital are:

• To safeguard the Group’s ability to continue as a going concern, so that it can continue to provide benefits for patients and returns to investors.

• To provide an adequate return to investors based on the level of risk undertaken.

• To have available the necessary financial resources to allow the Group to invest in areas that may deliver future benefits for patients and returns to investors.

• To maintain sufficient financial resources to mitigate against risks and unforeseen events.

113

Capital is monitored on the basis of the equity ratio, which is calculated as being equity (including non-controlling interests) as a percentage of total assets. This is reported to senior management as part of the Group’s regular internal management reporting. The Group’s capital and equity ratio are shown in the table below.

Capital | in millions of CHF

	2008		2007
Capital and reserves attributable to Roche shareholders28		44,479		45,483
Equity attributable to non-controlling interests30		9,343		7,960
Total equity		53,822		53,443
Total assets		76,089		78,365
Equity ratio		70.7%		68.2%

The Group is not subject to regulatory capital adequacy requirements as known in the financial services industry.

The Group has majority shareholdings in Genentech (see Note 3) and Chugai (see Note 4). Genentech and Chugai are both public companies and their objectives, policies and processes for managing their own capital are determined by local management.

33. Related parties

Controlling shareholders

The share capital of Roche Holding Ltd, which is the Group’s parent company, consists of 160,000,000 bearer shares. Based on information supplied by a shareholder group with pooled voting rights, comprising Ms Vera Michalski-Hoffmann, Ms Maja Hoffmann, Mr André Hoffmann, Dr Andreas Oeri, Ms Sabine Duschmalé-Oeri, Ms Catherine Oeri, Ms Beatrice Oeri and Ms Maja Oeri, that group holds 80,020,000 shares as in the preceding year, which represents 50.0125% of the issued shares. This figure does not include any shares without pooled voting rights that are held outside this group by individual members of the group. On 28 January 2009 the pool members announced that, effective 1 April 2009, Ms Beatrice Oeri would leave the pool and that Mr Jörg Duschmalé and Mr Lukas Duschmalé would join the pool. The group would continue to hold a total 80,020,000 shares with pooled voting rights as previously.

Mr André Hoffmann and Dr Andreas Oeri are members of the Board of Directors of Roche Holding Ltd. Mr Hoffmann received remuneration totalling 400,000 Swiss francs (2007: 400,000 Swiss francs) and Dr Oeri received remuneration totalling 360,000 Swiss francs (2007: 360,000 Swiss francs).

There were no other transactions between the Group and the individual members of the above shareholder group.

Subsidiaries and associates

A listing of the major Group subsidiaries and associates is included in Note 34. Transactions between the parent company and its subsidiaries and between subsidiaries are eliminated on consolidation. There were no significant transactions between the Group and its associates.

114          Roche Finance Report 2008      |      Roche Group – Notes to the Roche Group Consolidated Financial Statements

Key management personnel

Members of the Board of Directors of Roche Holding Ltd receive an annual remuneration and payment for their time and expenses related to their membership of Board committees. Total remuneration of the Board of Directors, excluding the Chairman, in 2008 totalled 4 million Swiss francs (2007: 4 million Swiss francs).

The Chairman of the Board of Directors and members of the Corporate Executive Committee of Roche Holding Ltd receive remuneration, which consists of an annual salary, bonus and an expense allowance. The Group pays social insurance contributions in respect of the above remuneration and pays contributions to pension and other post-employment benefit plans for the Chairman of the Board of Directors and members of the Corporate Executive Committee. The Chairman of the Board of Directors and members of the Corporate Executive Committee also participate in certain equity compensation plans as described below. The terms, vesting conditions and fair value of these awards are disclosed in Note 11.

Remuneration of the Chairman of the Board of Directors and members of the Corporate Executive Committee | in millions of CHF

	2008		2007
Salaries, including bonuses and expenses		32		23
Social security costs		3		2
Pensions and other post-employment benefits		5		6
Equity compensation plans		14		22
Other employee benefits		1		–
Total		55		53

Roche Long-Term | During 2008 members of the Corporate Executive Committee were granted 494,097 Stock-settled Stock Appreciation Rights (S-SARs) and no Roche Option Plan (ROP) awards (2007: 223,797 S-SARs and no ROP awards).

Roche Connect | During 2008 contributions paid by the Group with respect to the Chairman of the Board of Directors and members of the Corporate Executive Committee totalled 0.3 million Swiss francs (2007: 0.2 million Swiss francs).

Roche Performance Share Plan | During 2008 members of the Corporate Executive Committee were targeted with 14,805 awards of the 2008–2010 cycle (2007: 19,921 awards from the 2007–2009 cycle). Each award will result in between zero and two non-voting equity securities, depending upon the achievement of the performance targets.

Transactions with former members of the Corporate Executive Committee | Pensions totalling 2 million Swiss francs (2007: 2 million Swiss francs) were paid by the Group to two former Corporate Executive Committee members.

The detailed disclosures regarding executive remuneration that are required by Swiss law are included in the financial statements of Roche Holding Ltd, Basel on pages 137–141.

Post-employment benefit plans

Transactions between the Group and the various post-employment defined benefit plans for the employees of the Group are described in Note 10.

115

34. Subsidiaries and associates

Divestments of subsidiaries

Effective 3 October 2008 the Group sold its wholly-owned subsidiary Cenexi SAS (‘Cenexi’), including the manufacturing facility in Fontenay-sous-Bois, France, for 56 million Swiss francs in cash.

Loss on divestment of Cenexi | in millions of CHF

	2008
Consideration		56
Net assets disposed
— Property, plant and equipment12		(107	)
— Cash		(16	)
— Other net assets		5
— Accumulated currency translation adjustments28		16
Gain (loss) on divestment		(46	)

The total loss on divestment has been reported within general and administration expenses in the current period as part of the segment result of the Roche Pharmaceuticals operating segment. The net cash inflow from the divestment was 40 million Swiss francs.

Listed companies

			Share capital		Equity interest
Country	Company	City		(in millions)	(in %)
Switzerland	Roche Holding Ltd	Basel	CHF	160.0
	Stock Exchange: SIX Zurich
	Valor Share: 1203211
	Valor Genussscheine: 1203204
	ISIN Share: CH0012032113
	ISIN Genussscheine: CH0012032048
	Market Capitalisation: CHF 140,677.7 m
	Basilea Pharmaceutica Ltd.	Basel	CHF	9.6	6.55
	Stock Exchange: SIX Zurich
	Valor: 1143244
	ISIN: CH0011432447
	Market Capitalisation: CHF 1,425.2 m
United States	Genentech, Inc.	South San Francisco	USD	21.0	55.8
	Stock Exchange: New York	(incorporated in Delaware)
	ISIN: US3687104063
	Market Capitalisation: USD 87,286.7 m
Japan	Chugai Pharmaceutical Co., Ltd.	Tokyo	JPY	72,966.8	61.5
	Stock Exchange: Tokyo
	ISIN: JP3519400000
	Market Capitalisation: JPY 938,714.0 m

Non-listed companies

			Share capital		Equity interest
Country	Company	City		(in millions)	(in %)
Argentina	Productos Roche S.A. Química e Industrial	Buenos Aires	ARS	83.0	100
Australia	Roche Diagnostics Australia Pty. Limited	Castle Hill	AUD	5.0	100
	Roche Products Pty. Limited	Dee Why	AUD	65.0	100
Austria	Roche Austria GmbH	Vienna	EUR	14.5	100
	Roche Diagnostics GmbH	Vienna	EUR	1.1	100
	Roche Diagnostics Graz GmbH	Graz	EUR	0.4	100
Belgium	N.V. Roche S.A.	Brussels	EUR	32.0	100
	Roche Diagnostics Belgium S.A.	Brussels	EUR	3.8	100

116           Roche Finance Report 2008      |      Roche Group – Notes to the Roche Group Consolidated Financial Statements

			Share capital		Equity interest
Country	Company	City		(in millions)	(in %)
Bermuda	Chemical Manufacturing and
	Trading Company Limited	Hamilton	USD	9.6	100
	Roche Capital Services Ltd.	Hamilton	RUB	(-)	100
	Roche Catalyst Investments Ltd.	Hamilton	USD	(-)	100
	Roche Financial Investments Ltd.	Hamilton	USD	(-)	100
	Roche Financial Management Ltd.	Hamilton	USD	(-)	100
	Roche Financial Services Ltd.	Hamilton	USD	0.1	100
	Roche International Ltd.	Hamilton	USD	(-)	100
	Roche Intertrade Limited	Hamilton	USD	10.0	100
	Roche Operations Ltd.	Hamilton	USD	1.0	100
	Roche Services Holdings Ltd.	Hamilton	USD	(-)	100
	Syntex Pharmaceuticals International Ltd.	Hamilton	USD	(-)	100
Brazil	Produtos Roche Químicos
	e Farmacêuticos S.A.	São Paulo	BRL	41.7	100
	Roche Diagnostica Brasil Ltda.	São Paulo	BRL	211.6	100
Bulgaria	Roche Bulgaria EOOD	Sofia	BGN	5.1	100
Canada	Chempharm Limited	Toronto	CAD	(-)	100
	Hoffmann-La Roche Limited	Toronto	CAD	15.3	100
	Sapac Corporation Ltd.	St. John	CAD	(-)	100
Chile	Roche Chile Limitada	Santiago de Chile	CLP	70.9	100
China	Roche Diagnostics (Hong Kong) Limited	Hong Kong	HKD	10.0	100
	Roche Diagnostics (Shanghai) Limited	Shanghai	USD	1.0	100
	Roche Hong Kong Limited	Hong Kong	HKD	10.0	100
	Roche R & D Center (China) Ltd.	Shanghai	USD	6.3	100
	Shanghai Roche Pharmaceuticals Limited	Shanghai	USD	19.5	70
Colombia	Productos Roche S.A.	Bogotá	COP	26,923.7	100
Costa Rica	Roche Servicios S.A.	Heredia	USD	(-)	100
Croatia	Roche D.O.O.	Zagreb	HRK	4.8	100
Czech Republic	Roche s.r.o.	Prague	CZK	200.0	100
Denmark	Roche a/s	Hvidovre	DKK	4.0	100
	Roche Diagnostics a/s	Hvidovre	DKK	1.3	100
Dominican Republic	Productos Roche Dominicana S.A.	Santo Domingo	DOP	0.6	100
Ecuador	Roche Ecuador S.A.	Quito	USD	1.1	100
El Salvador	Productos Roche (El Salvador) S.A.	San Salvador	SVC	0.2	100
Estonia	Roche Eesti OÜ	Tallinn	EEK	2.0	100
Finland	Roche Diagnostics Oy	Espoo	EUR	0.2	100
	Roche Oy	Espoo	EUR	(-)	100
France	Roche Diagnostics S.A.	Meylan	EUR	16.0	100
	Roche S.A.S.	Neuilly-sur-Seine	EUR	38.2	100
	Ventana Medical Systems S.A.	Illkirch	EUR	0.9	100
Germany	Galenus Mannheim GmbH	Mannheim	EUR	1.7	100
	NimbleGen Systems GmbH	Pleiskirchen	EUR	(-)	100
	Roche Beteiligungs GmbH	Grenzach-Wyhlen	EUR	3.6	100
	Roche Deutschland Holding GmbH	Grenzach-Wyhlen	DEM	10.0	100
	Roche Diagnostics GmbH	Mannheim	EUR	94.6	100
	Roche Kulmbach GmbH	Kulmbach	EUR	(-)	100
	Roche Pharma AG	Grenzach-Wyhlen	EUR	61.4	100
	Swisslab GmbH	Berlin	EUR	(-)	100
Greece	Roche (Hellas) S.A.	Athens	EUR	19.8	100
	Roche Diagnostics (Hellas) S.A.	Athens	EUR	23.7	100
Guatemala	Productos Roche Guatemala S.A.	Guatemala	GTQ	0.6	100
Honduras	Productos Roche (Honduras), S.A.	Tegucigalpa	HNL	(-)	100
Hungary	Roche (Hungary) Ltd.	Budapest	HUF	30.0	100
	Roche Services (Europe) Ltd.	Budapest	HUF	3.0	100
India	Roche Diagnostics (India) Pvt. Ltd.	Mumbai	INR	69.1	100
	Roche Scientific Company (India) Pvt. Ltd.	Mumbai	INR	10.0	100
Indonesia	P. T. Roche Indonesia	Jakarta	IDR	1,323.0	98.3
Ireland	Roche Ireland Limited	Clarecastle	EUR	1.9	100
	Roche Products (Ireland) Limited	Dublin	EUR	(-)	100
Italy	Roche Diagnostics S.p.A.	Milan	EUR	18.1	100
	Roche S.p.A.	Milan	EUR	34.1	100
Japan	Roche Diagnostics K. K.	Tokyo	JPY	2,500.0	100
Latvia	Roche Latvija SIA	Riga	LVL	0.2	100
Lithuania	UAB Roche Lietuva	Vilnius	LIT	0.8	100
Luxembourg	Pharminvest S.A.	Luxembourg	EUR	28.0	100
Malaysia	Roche (Malaysia) Sdn Bhd.	Kuala Lumpur	MYR	4.0	100
	Roche Diagnostics (Malaysia) Sdn Bhd.	Kuala Lumpur	MYR	0.9	100
Mexico	Grupo Roche Syntex de México, S.A. de C.V.	Mexico City	MXN	3.5	100
	Lakeside de México, S.A. de C.V.	Mexico City	MXN	48.0	100
	Productos Roche S.A. de C.V.	Mexico City	MXN	2.2	100
	Syntex S.A. de C.V.	Mexico City	MXN	80.4	100
Morocco	Roche S.A.	Casablanca	MAD	9.5	100

117

			Share capital		Equity interest
Country	Company	City		(in millions)	(in %)
Netherlands	Roche Diagnostics Nederland B.V.	Almere	EUR	2.3	100
	Roche Finance Europe B.V.	Woerden	EUR	2.0	100
	Roche Nederland B.V.	Woerden	EUR	10.9	100
	Roche Pharmholding B.V.	Woerden	EUR	467.8	100
New Zealand	Roche Diagnostics NZ Limited	Auckland	NZD	3.0	100
	Roche Products (New Zealand) Limited	Auckland	NZD	13.5	100
Nicaragua	Productos Roche (Nicaragua) S.A.	Managua	NIO	(-)	100
Norway	Roche Diagnostics Norge A/S	Oslo	NOK	5.8	100
	Roche Norge A/S	Oslo	NOK	6.2	100
Pakistan	Roche Pakistan Limited	Karachi	PKR	38.3	100
Panama	Productos Roche Interamericana S.A.	Panama City	USD	0.1	100
	Productos Roche Panamá S.A.	Panama City	PAB	(-)	100
	Syntex Corporation	Panama City	USD	1.0	100
	Syntex Puerto Rico Inc.	Panama City	USD	(-)	100
	Technical Development Corp.	Panama City	CHF	0.8	100
Peru	Productos Roche Química Farmacéutica S.A.	Lima	PEN	11.1	100
Philippines	Roche (Philippines) Inc.	Makati	PHP	125.0	100
Poland	Roche Diagnostics Polska Sp. z o.o.	Warsaw	PLN	2.0	100
	Roche Polska Sp. z o.o.	Warsaw	PLN	2.0	100
Portugal	Roche Farmacêutica Química Lda.	Amadora	EUR	1.1	100
	Roche Sistemas de Diagnósticos
	Sociedade Unipessoal Lda.	Amadora	EUR	2.6	100
Puerto Rico	Roche Operations Ltd., Puerto Rico Branch	Ponce	USD	(-)	100
Romania	Roche Romania S. R. L.	Bucharest	RON	297.2	100
Russian Federation	Roche — Moscow Ltd.	Moscow	RUB	2.6	100
Serbia	Roche D.O.O. Beograd	Belgrade	EUR	1.9	100
Singapore	Roche Diagnostics Asia Pacific Pte. Ltd.	Singapore	SGD	7.4	100
	Roche Singapore Pte. Ltd.	Singapore	SGD	4.0	100
Slovakia	Roche Slovensko, S.R.O.	Bratislava	SKK	10.0	100
Slovenia	Roche D.O.O. Pharmaceutical Company	Ljubljana	EUR	0.2	100
South Africa	Roche Products (Proprietary) Limited	Johannesburg	ZAR	60.0	100
South Korea	Roche Diagnostics Korea Co., Ltd.	Seoul	KRW	22,969.0	100
	Roche Korea Company Ltd.	Seoul	KRW	13,375.0	100
Spain	Andreu Roche S.A.	Madrid	EUR	0.1	100
	Roche Diagnostics S.L.	Barcelona	EUR	18.0	100
	Roche Farma S.A.	Madrid	EUR	54.1	100
	Syntex Roche S.A.	Madrid	EUR	0.1	100
Sweden	Roche AB	Stockholm	SEK	20.0	100
	Roche Diagnostics Scandinavia AB	Bromma	SEK	9.0	100
Switzerland	Disetronic Handels AG	Burgdorf	CHF	0.1	100
	Disetronic Holding AG	Burgdorf	CHF	9.7	100
	Disetronic Licensing AG	Burgdorf	CHF	0.1	100
	Disetronic Medical Systems AG	Burgdorf	CHF	0.9	100
	F. Hoffmann-La Roche Ltd	Basel	CHF	150.0	100
	GlycArt Biotechnology Ltd.	Schlieren	CHF	0.3	100
	Hoffmann-La Roche Ltd.	Basel	CHF	0.5	100
	IMIB Institute for Medical Informatics
	and Biostatistics Ltd.	Basel	CHF	0.1	100
	Rabbit-Air Ltd.	Zurich-Kloten	CHF	3.0	100
	Roche Capital Market Ltd.	Basel	CHF	1.0	100
	Roche Diagnostics (Switzerland) Ltd.	Rotkreuz	CHF	1.0	100
	Roche Diagnostics AG	Rotkreuz	CHF	5.0	100
	Roche Diagnostics International Ltd.	Steinhausen	CHF	20.0	100
	Roche Finance Ltd.	Basel	CHF	409.2	100
	Roche Long Term Foundation	Basel	CHF	0.5	100
	Roche Pharma (Switzerland) Ltd.	Reinach	CHF	2.0	100
	Syntex Corporation	Basel	CHF	0.2	100
Taiwan	Roche Diagnostics Ltd.	Taipei	TWD	80.0	100
	Roche Products Ltd.	Taipei	TWD	100.0	100
Thailand	Roche Diagnostics (Thailand) Limited	Bangkok	THB	103.0	100
	Roche Thailand Limited	Bangkok	THB	12.0	100
Turkey	Roche Diagnostik Sistemleri Ticaret A.S.	Istanbul	TRY	30.0	100
	Roche Müstahzarlari Sanayi Anonim Sirketi	Istanbul	TRY	249.5	100
United Kingdom	Piramed Limited	Berkshire	GBP	12.8	100
	Roche Diagnostics Ltd.	Lewes	GBP	32.6	100
	Roche Holding (UK) Limited	Welwyn Garden City	GBP	100.0	100
	Roche Products Limited	Welwyn Garden City	GBP	98.3	100
	Roche Registration Limited	Welwyn Garden City	GBP	(-)	100

118           Roche Finance Report 2008      |      Roche Group – Notes to the Roche Group Consolidated Financial Statements

			Share capital		Equity interest
Country	Company	City		(in millions)	(in %)
United States	454 Life Sciences Corporation	Branford	USD	(-)	100
	BioVeris Corporation	Gaithersburg	USD	(-)	100
	Disetronic Medical Systems Inc.	Fishers	USD	(-)	100
	Hoffmann-La Roche Inc.	Nutley	USD	3.0	100
	IGEN International, Inc.	Wilmington	USD	(-)	100
	Roche Carolina Inc.	Florence	USD	(-)	100
	Roche Colorado Corporation	Boulder	USD	(-)	100
	Roche Diagnostics Corporation	Indianapolis	USD	(-)	100
	Roche Diagnostics Operations, Inc.	Indianapolis	USD	(-)	100
	Roche Finance America Inc.	Little Falls	USD	(-)	100
	Roche Finance USA Inc.	Little Falls	USD	(-)	100
	Roche Holdings, Inc.	Wilmington	USD	1.0	100
	Roche Laboratories Inc.	Nutley	USD	(-)	100
	Roche Madison Inc.	Madison	USD	(-)	100
	Roche Molecular Systems, Inc.	Pleasanton	USD	(-)	100
	Roche NimbleGen, Inc.	Madison	USD	(-)	100
	Roche Palo Alto LLC	Palo Alto	USD	(-)	100
	Spring Bioscience Corp.	Fremont	USD	(-)	100
	Therapeutic Human Polyclonals, Inc.	Palo Alto	USD	(-)	100
	Ventana Medical Systems, Inc.	Tucson	USD	(-)	100
Uruguay	Roche International Ltd. –
	Montevideo Branch	Montevideo	UYU	(-)	100
Venezuela	Productos Roche S.A.	Caracas	VEF	0.2	100

(-) = share capital of less than 100,000 local currency units.

Roche Group – Report of Roche Management on Internal Control over Financial Reporting      |      Roche Finance Report 2008       119

Report of Roche Management on
Internal Control over Financial Reporting

Report of Roche Management on Internal Control over Financial Reporting

The Board of Directors and management of Roche Holding Ltd are responsible for establishing and maintaining adequate control over financial reporting. The internal control system was designed to provide reasonable assurance over the reliability of financial reporting and the preparation and fair presentation of consolidated financial statements in accordance with International Financial Reporting Standards.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of its system of internal control over financial reporting as of 31 December 2008 based on the criteria for effective internal control over financial reporting described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded that the system of internal control ov

Franz B. Humer	Erich Hunziker
Chairman of the Board of Directors	Chief Financial Officer and Deputy Head
	of the Corporate Executive Committee
Basel, 29 January 2009

er financial reporting was effective as of 31 December 2008.

The Statutory Auditor KPMG Klynveld Peat Marwick Goerdeler SA, have audited the consolidated financial statements of Roche Holding Ltd for the year ended 31 December 2008, in accordance with Swiss Auditing Standards and with the International Standards on Auditing (ISA). They have also issued a report on the effectiveness of the Group’s system of internal control over financial reporting. This report is set out on pages 122–123.

124           Roche Finance Report 2008      |      Roche Group – Multi-Year Overview and Supplementary Information

Multi-Year Overview and
Supplementary Information

Multi-year overview

Statistics, as reported

	1999			2000			2001
Statement of income | in millions of CHF
Sales		27,567			28,672			29,163
EBITDA		8,874			11,126			6,438
Operating profit		6,421			7,131			3,247
Net income attributable to Roche shareholders		5,764			8,647			3,697
Research and development		3,782			3,950			3,893
Balance sheet | in millions of CHF
Non-current assets		35,800			34,798			36,411
Current assets		34,631			34,737			38,875
Total assets		70,431			69,535			75,286
Non-current liabilities		(25,574	)		(23,642	)		(25,772	)
Current liabilities		(14,856	)		(13,857	)		(15,647	)
Total liabilities		(40,430	)		(37,499	)		(41,419	)
Net assets		30,001			32,036			33,867
Capital and reserves attributable to Roche shareholders		26,954			27,608			28,973
Equity attributable to non-controlling interests		3,047			4,428			4,894
Additions to property, plant and equipment		2,150			2,183			1,931
Personnel
Number of employees at end of year		67,695			64,758			63,717
Key ratios
Net income attributable to Roche shareholders as % of sales		21			30			13
Net income as % of equity, attributable to Roche shareholders		21			31			13
Research and development as % of sales		14			14			13
Current ratio %		233			251			248
Equity and non-controlling interests as % of total assets		43			46			45
Sales per employee in thousands of CHF		407			443			458
Data on shares and non-voting equity securities
Number of shares		1,600,000			1,600,000			160,000,000
Number of non-voting equity securities (Genussscheine)		7,025,627			7,025,627			702,562,700
Total shares and non-voting equity securities		8,625,627			8,625,627			862,562,700
Total dividend in millions of CHF		863	a)		992			1,121
Earnings per share and non-voting equity security (diluted) in CHF		668			1,024			4.37
Dividend per share and non-voting equity security in CHF		100	a)		115			1.30

Information in this table is stated as reported. Changes in accounting policies arising from changes in International Financial Reporting Standards and the 100 for 1 stock split in 2001 are not applied retrospectively.

125

2002			2003			2004			2005			2006			2007			2008
	29,453			31,220			31,273			35,511			42,041			46,133			45,617
	7,993			8,609			9,566			11,404			14,436			17,068			16,637
	1,335			5,592			8,979			8,669			11,730			14,468			13,896
	(4,026	)		3,069			6,641			5,787			7,880			9,761			8,969
	4,257			4,766			5,093			5,705			6,589			8,385			8,845
	33,143			29,820			28,670			33,739			33,519			35,349			37,485
	30,852			29,666			29,406			35,626			40,895			42,834			38,604
	63,995			59,486			58,076			69,365			74,414			78,183			76,089
	(22,850	)		(18,658	)		(14,882	)		(18,130	)		(14,908	)		(10,422	)		(10,163	)
	(15,372	)		(11,664	)		(9,901	)		(9,492	)		(12,692	)		(14,454	)		(12,104	)
	(38,222	)		(30,322	)		(24,783	)		(27,622	)		(27,600	)		(24,876	)		(22,267	)
	25,773			29,164			33,293			41,743			46,814			53,307			53,822
	20,810			23,570			28,223			34,922			39,444			45,347			44,479
	4,963			5,594			5,070			6,821			7,370			7,960			9,343
	2,044			2,265			2,357			3,428			3,878			3,648			3,187
	69,659			65,357			64,703			68,218			74,372			78,604			80,080
	–14			10			21			16			19			21			20
	–19			13			24			17			20			22			20
	14			15			16			16			16			18			19
	201			254			297			375			322			296			319
	40			49			57			60			63			68			71
	427			482			483			521			565			587			570
	160,000,000			160,000,000			160,000,000			160,000,000			160,000,000			160,000,000			160,000,000
	702,562,700			702,562,700			702,562,700			702,562,700			702,562,700			702,562,700			702,562,700
	862,562,700			862,562,700			862,562,700			862,562,700			862,562,700			862,562,700			862,562,700
	1,251			1,423			1,725			2,156			2,933			3,968			4,313	b)
	(4.80	)		3.61			7.81			6.71			9.05			11.16			10.23
	1.45			1.65			2.00			2.50			3.40			4.60			5.00	b)

a) Dividend 1999 does not include the special dividend relating to the spin-off of the Fragrances and Flavours Division.

b) Dividend 2008 as proposed by the Board of Directors.

126           Roche Finance Report 2008      |      Roche Group – Multi-Year Overview and Supplementary Information

Sales by division | in millions of CHF

	2004		2005		2006		2007		2008
Pharmaceuticals		21,695		27,268		33,294		36,783		35,961
Diagnostics		7,827		8,243		8,747		9,350		9,656
Consumer Health (OTC)		1,751		–		–		–		–
Total		31,273		35,511		42,041		46,133		45,617

Sales by geographical area | in millions of CHF

	2004		2005		2006		2007		2008
Switzerland		442		501		471		489		509
European Union		10,660		11,715		13,823		15,465		15,601
– of which Germany		2,288		2,624		2,993		3,277		3,200
Rest of Europe		896		1,061		1,307		1,620		1,521
Europe		11,998		13,277		15,601		17,574		17,631
United States		10,430		12,667		15,685		17,069		16,362
Rest of North America		595		812		985		1,004		932
North America		11,025		13,479		16,670		18,073		17,294
Latin America		1,825		2,033		2,539		2,784		2,975
Japan		3,875		3,948		3,713		3,562		3,532
Rest of Asia		1,553		1,803		2,384		2,681		2,920
Asia		5,428		5,751		6,097		6,243		6,452
Africa, Australia and Oceania		997		971		1,134		1,459		1,265
Total		31,273		35,511		42,041		46,133		45,617

127

Additions to property, plant and equipment by division | in millions of CHF

	2004		2005		2006		2007		2008
Pharmaceuticals		1,572		2,613		3,030		2,588		1,940
Diagnostics		778		813		846		1,058		1,245
Consumer Health (OTC)		6		–		–		–		–
Corporate		1		2		2		2		2
Total		2,357		3,428		3,878		3,648		3,187

Additions to property, plant and equipment by geographical area | in millions of CHF

	2004		2005		2006		2007		2008
Switzerland		232		376		350		418		421
European Union		808		910		995		993		960
— of which Germany		480		545		661		660		591
Rest of Europe		17		25		15		30		17
Europe		1,057		1,311		1,360		1,441		1,398
United States		1,022		1,739		2,061		1,679		1,212
Rest of North America		8		13		47		34		21
North America		1,030		1,752		2,108		1,713		1,233
Latin America		74		63		101		133		127
Japan		128		197		201		230		292
Rest of Asia		46		75		69		103		116
Asia		174		272		270		333		408
Africa, Australia and Oceania		22		30		39		28		21
Total		2,357		3,428		3,878		3,648		3,187

European Union information is based on members of the EU as at 31 December 2008. The comparative information has been restated to include new EU members for the whole five-year period.

128           Roche Finance Report 2008      |      Roche Group — Multi-Year Overview and Supplementary Information

Supplementary Net Income and EPS Information

The Group’s basic and diluted earnings per share information is given in Note 29 to the Consolidated Financial Statements on pages 103–104.

Supplementary EPS information is given below on net income before exceptional items and also on core net income, which additionally excludes amortisation of intangible assets and the related impacts on income taxes and non-controlling interests.

Profit from continuing businesses before exceptional items and Core net income | in millions of CHF

				2008							2007
Net income					10,844							11,437
Major legal cases		(271	)					–
— income taxes		105						–
					(166	)						–
Changes in Group organisation		243						–
— income taxes		(93	)					–
					150							–
Profit from continuing businesses before exceptional items					10,828							11,437
Non-controlling interests
— net income		(1,875	)					(1,676	)
— exceptional items (major legal cases)		73						–
— exceptional items (changes in Group organisation)		(25	)					–
					(1,827	)						(1,676	)
Net income attributable to Roche shareholders (before exceptional items)					9,001							9,761
Amortisation and impairment of intangible assets		1,073						1,034
— income taxes		(356	)					(374	)
— non-controlling interests		(52	)					(60	)
					665							600
Core net income					9,666							10,361
EPS (continuing businesses before exceptional items) and Core EPS
	EPS (continuing businesses
	before exceptional items)												Core EPS
	2008				2007			2008					2007
Net income attributable to Roche shareholders (millions of CHF)		9,001				9,761			9,666					10,361
Elimination of interest expense, net of tax, of convertible debt instruments, where dilutive		–				4			–					4
Increase in non-controlling share of net income, net of tax, assuming all outstanding Genentech and Chugai stock options exercised		(154	)			(141	)		(159	)				(146	)
Net income used to calculate diluted earnings per share		8,847				9,624			9,507					10,219
Per share information (millions of shares and non-voting equity securities)
Weighted average number of shares and non-voting equity securities in issue		860				859			860					859
Adjustment for assumed conversion of convertible debt instruments, where dilutive		–				1			–					1
Adjustment for assumed exercise of equity compensation plans, where dilutive		1				2			1					2
Weighted average number of shares and non-voting equity securities in issue used to calculate diluted earnings per share		861				862			861					862
Earnings per share (diluted) (CHF)		10.28				11.16			11.04					11.85

129

Supplementary Operating Free Cash Flow Information

Divisional operating free cash flow information | in millions of CHF

	Pharmaceuticals						Diagnostics
	Division						Division						Corporate						Group
	2008			2007			2008			2007			2008			2007			2008			2007
Depreciation, amortisation and impairments
Depreciation of property, plant and equipment		1,022			957			649			599			5			4			1,676			1,560
Amortisation of intangible assets		511			645			458			331			–			–			969			976
Impairment of property, plant and equipment		20			4			8			2			–			–			28			6
Impairment of intangible assets		99			58			5			–			–			–			104			58
Total		1,652			1,664			1,120			932			5			4			2,777			2,600
Other adjustments
Add back
— Expenses for equity-settled equity compensation plans		476			560			36			29			14			14			526			603
— Net (income)/expense for provisions		304			403			128			226			(15	)		4			417			633
— Net gain from disposals		(397	)		(309	)		13			8			(5	)		–			(389	)		(301	)
Deduct
— Net cash flow from equity compensation plans		(174	)		(1,210	)		(21	)		(41	)		(5	)		(17	)		(200	)		(1,268	)
— Utilisation of provisions		(864	)		(574	)		(179	)		(101	)		(18	)		(21	)		(1,061	)		(696	)
— Proceeds from disposals		499			295			25			68			17			–			541			363
Total		(156	)		(835	)		2			189			(12	)		(20	)		(166	)		(666	)
Operating profit cash adjustments		1,496			829			1,122			1,121			(7	)		(16	)		2,611			1,934
EBITDA
Operating profit before exceptional items		12,974			13,042			1,187			1,648			(265	)		(222	)		13,896			14,468
Depreciation, amortisation and impairments
— Total Group		1,652			1,664			1,120			932			5			4			2,777			2,600
— Add back exceptional item		(36	)		–			–			–			–			–			(36	)		–
EBITDA		14,590			14,706			2,307			2,580			(260	)		(218	)		16,637			17,068
— margin, % of sales		40.6			40.0			23.9			27.6			–			–			36.5			37.0

130           Roche Finance Report 2008      |      Roche Group – Multi-Year Overview and Supplementary Information

Pharmaceutical sub-divisional operating free cash flow information | in millions of CHF

	Roche																		Pharmaceuticals
	Pharmaceuticals						Genentech						Chugai						Division
	2008			2007			2008			2007			2008			2007			2008			2007
Depreciation, amortisation and impairments
Depreciation of property, plant and equipment		594			530			336			337			92			90			1,022			957
Amortisation of intangible assets		252			398			190			179			69			68			511			645
Impairment of property, plant and equipment		11			2			–			–			9			2			20			4
Impairment of intangible assets		99			16			–			42			–			–			99			58
Total		956			946			526			558			170			160			1,652			1,664
Other adjustments
Add back
— Expenses for equity-settled equity compensation plans		105			92			369			465			2			3			476			560
— Net (income)/expense for provisions		507			331			(227	)		73			24			(1	)		304			403
— Net gain from disposals		(412	)		(251	)		13			(63	)		2			5			(397	)		(309	)
Deduct
— Net cash flow from equity compensation plans		(65	)		(139	)		(109	)		(1,071	)		–			–			(174	)		(1,210	)
— Utilisation of provisions		(294	)		(550	)		(569	)		(23	)		(1	)		(1	)		(864	)		(574	)
— Proceeds from disposals		493			295			(1	)		–			7			–			499			295
Total		334			(222	)		(524	)		(619	)		34			6			(156	)		(835	)
Operating profit cash adjustments		1,290			724			2			(61	)		204			166			1,496			829
EBITDA
Operating profit before exceptional items		6,795			7,225			5,821			5,298			591			610			13,207			13,133
Elimination within division1)																				(233	)		(91	)
Total		6,795			7,225			5,821			5,298			591			610			12,974			13,042
Depreciation, amortisation and impairments
— Total Group		956			946			526			558			170			160			1,652			1,664
— Add back exceptional item		(36	)		–			–			–			–			–			(36	)		–
EBITDA		7,715			8,171			6,347			5,856			761			770			14,590			14,706
— margin, % of sales		34.8			35.6			60.7			56.2			22.8			22.7			40.6			40.0

1) Unrealised internal profits on inventories that have been sold from one sub-division to another, but which have not yet been sold on to external customers at the balance sheet date are eliminated as a consolidation entry.

Roche Group – Roche Securities      |     Roche Finance Report 2008           131

Roche Securities

Price Development of Share | in CHF

Price Development of non-voting equity security (Genussschein) in CHF

Price Development of American Depositary Receipt (ADR) in USD

Four Roche American Depositary Receipts (ADRs) are equivalent to one non-voting equity security (Genussschein). ADRs have been traded in the United States over-the-counter market since July 1992.

Information in these tables is restated for the 100 for 1 stock split of Roche shares and non-voting equity securities (Genussscheine) effective 4 May 2001, the change in the ratio for the ADRs from 1:1 to 2:1 effective 24 January 2005 and the change in the ratio for the ADRs from 2:1 to 4:1 effective 9 January 2009.

132          Roche Finance Report 2008     |      Roche Group – Roche Securities

Number of shares and non-voting equity securities ^a)

	2004		2005		2006		2007		2008
Number of shares
(nominal value: CHF 1.00)		160,000,000		160,000,000		160,000,000		160,000,000		160,000,000
Number of non-voting equity securities
(Genussscheine) (no nominal value)		702,562,700		702,562,700		702,562,700		702,562,700		702,562,700
Total		862,562,700		862,562,700		862,562,700		862,562,700		862,562,700

Data per share and non-voting equity security | in CHF

		2004		2005		2006		2007		2008
Net income			7.81		6.71		9.05		11.16		10.23
Equity			32.72		40.49		45.73		52.57		51.57
Dividend			2.00		2.50		3.40		4.60		5.00	c)
Stock price of shareb)	Opening		171.50		150.00		219.20		247.50		213.00
	High		193.00		230.00		252.50		266.25		229.50
	Low		137.20		139.00		198.00		209.70		155.20
	Year-end		150.00		219.20		247.50		213.00		168.70
Stock price of non-voting equity security (Genussschein)b)	Opening		124.75		130.90		197.30		218.50		195.60
	High		140.25		206.90		227.00		240.10		208.60
	Low		118.75		120.60		185.80		190.30		148.20
	Year-end		130.90		197.30		218.50		195.60		162.50

Market capitalisation | in millions of CHF

	2004		2005		2006		2007		2008
Year end		113,195		170,879		191,575		171,060		140,678

Key ratios (year-end)

	2004		2005		2006		2007		2008
Net income as % of equity		24		17		20		21		20
Dividend yield of shares in %		1.3		1.1		1.4		2.2		3.0
Dividend yield of non-voting equity securities (Genussscheine) in %		1.5		1.3		1.6		2.4		3.1
Price/earnings of shares		19		33		27		19		16
Price/earnings of non-voting equity securities (Genussscheine)		17		29		24		18		16

a)	Each non-voting equity security (Genussschein) confers the same rights as any of the shares to participate in the available earnings and any remaining proceeds from liquidation following repayment of the nominal value of the shares and the participation certificate capital (if any). Shares and non-voting equity securities are listed on the Swiss Exchange. Roche Holding Ltd has no restrictions as to ownership of its shares or non-voting equity securities.
b)	All stock price data reflect daily closing prices.
c)	Dividend 2008 as proposed by the Board of Directors.

Ticker symbols

	Share	Non-voting equity security	American Depositary Receipt
Reuters	RO.S	ROG.VX	RHHBY.PK
Bloomberg	RO SW	ROG VX	RHHBY US
SIX Swiss Exchange	RO	ROG	–

Roche Holding Ltd, Basel – Financial Statements      |      Roche Finance Report 2008      133

Roche Holding Ltd, Basel

Financial Statements

Income statement | in millions of CHF

	2008			2007
Income
Income from participations		3,390			4,121
Interest income from loans to Group companies		227			121
Interest and investment income		23			72
Other income		19			18
Total income		3,659			4,332
Expenses
Financial expenses		(88	)		(24	)
Administration expenses		(33	)		(31	)
Other expenses		(21	)		(22	)
Total expenses		(142	)		(77	)
Profit for the year before taxes		3,517			4,255
Taxes		(18	)		(17	)
Net profit for the year		3,499			4,238

134            Roche Finance Report 2008      |      Roche Holding Ltd, Basel – Financial Statements

Balance sheet at 31 December | in millions of CHF

	2008		2007
Non-current assets
Participations		4,580		4,558
Long-term loans to Group companies		4,509		4,571
Total non-current assets		9,089		9,129
Current assets
Short-term loans to Group companies		3,000		–
Accounts receivable from Group companies		67		11
Other accounts receivable		1		1
Marketable securities		91		3,609
Liquid funds		–		–
Total current assets		3,159		3,621
Total assets		12,248		12,750
Equity
Share capital		160		160
Non-voting equity securities (Genussscheine)		p.m.		p.m.
General legal reserve		300		300
Free reserve		5,519		5,251
Special reserve		2,152		2,152
Available earnings:
— Balance brought forward from previous year		2		–
— Net profit for the year		3,499		4,238
Total equity		11,632		12,101
Non-current liabilities
Provisions		35		35
Total non-current liabilities		35		35
Current liabilities
Accounts payable to Group companies		559		588
Unrealised foreign currency gains		–		4
Other liabilities		22		22
Total current liabilities		581		614
Total liabilities		616		649
Total equity and liabilities		12,248		12,750

p.m. = pro memoria. Non-voting equity securities have no nominal value.

Roche Holding Ltd, Basel – Notes to the Financial Statements      |      Roche Finance Report 2008            135

Notes to the Financial Statements

1. Summary of significant accounting policies

Basis of preparation of the financial statements

The financial statements of Roche Holding Ltd, Basel, are prepared in accordance with the provisions of Swiss law.

Participations

The major participations of the company are listed in Note 34 to the Roche Group Consolidated Financial Statements.

Valuation methods and translation of foreign currencies

Marketable securities are reported at the lower of cost or market value. All other assets, including participations, are reported at cost less appropriate write-downs. Assets and liabilities denominated in foreign currencies are translated into Swiss francs using year-end rates of exchange, except participations which are translated at historical rates. Transactions during the year which are denominated in foreign currencies are translated at the exchange rates effective at the relevant transaction dates. Resulting exchange gains and losses are recognised in the income statement with the exception of unrealised gains which are deferred.

Taxes

The tax charge includes corporate income and capital taxes.

2. Equity

Share capital

As in the previous year, share capital amounts to 160 million Swiss francs. The share capital consists of 160,000,000 bearer shares with a nominal value of 1 Swiss franc each. Included in equity are 702,562,700 non-voting equity securities (Genussscheine). They are not part of the share capital and confer no voting rights. However each non-voting equity security (Genussschein) confers the same rights as any of the shares to participate in the available earnings and in any remaining proceeds from liquidation following repayment of the nominal value of the share capital and, if any, participation certificates.

136             Roche Finance Report 2008      |      Roche Holding Ltd, Basel – Notes to the Financial Statements

Movement in recognised amounts | in millions of CHF

			General
	Share		legal		Free		Special		Available			Total
	capital		reserve		reserve		reserve		earnings			equity
As at 1 January 2006		160		300		4,414		2,152		2,394			9,420
— Net income		–		–		–		–		3,533			3,533
— Dividends paid		–		–		–		–		(2,157	)		(2,157	)
— Transfer to free reserve		–		–		233		–		(233	)		–
As at 31 December 2006		160		300		4,647		2,152		3,537			10,796
— Net income		–		–		–		–		4,238			4,238
— Dividends paid		–		–		–		–		(2,933	)		(2,933	)
— Transfer to free reserve		–		–		604		–		(604	)		–
As at 31 December 2007		160		300		5,251		2,152		4,238			12,101
— Net income		–		–		–		–		3,499			3,499
— Dividends paid		–		–		–		–		(3,968	)		(3,968	)
— Transfer to free reserve		–		–		268		–		(268	)		–
As at 31 December 2008		160		300		5,519		2,152		3,501			11,632

3. Contingent liabilities

Guarantees
Within the framework of the European Medium Term Note (EMTN) programme the company has issued guarantees in favour of Group companies amounting to 420 million Swiss francs (2007: 1,987 million Swiss francs).

4. Significant shareholders

All shares in the Company are bearer shares, and for this reason the Company does not keep a register of shareholders. The following figures are based on information from shareholders, the shareholder validation check at the Annual General Meeting of 4 March 2008 and on other information available to the Company.

80,020,000 (2007: 80,020,000) shares: Shareholder group with pooled voting rights, comprising Ms Vera Michalski-Hoffmann, Ms Maja Hoffmann, Mr André Hoffmann, Dr Andreas Oeri, Ms Sabine Duschmalé-Oeri, Ms Catherine Oeri, Ms Beatrice Oeri and Ms Maja Oeri. ^{a), b)}

53,332,863 (2007: 53,332,863) shares (participation below 33¹/₃%): Novartis Ltd, Basel including affiliates thereof. ^c)

a)	Information supplied by the shareholders. This figure of 80,020,000 shares does not include shares without pooled voting rights held outside this group by individual members of the group.
b)	On 28 January 2009 the pool members announced that, effective 1 April 2009, Ms Beatrice Oeri would leave the pool and that Mr Jörg Duschmalé and Mr Lukas Duschmalé would join the pool. The group would continue to hold a total 80,020,000 shares with pooled voting rights as previously.
c)	Figures as of 31 December 2008 supplied by Novartis Ltd, Basel.

137

5. Risk management

The detailed disclosures regarding risk management that are required by Swiss law are included in the Roche Group Consolidated Financial Statements on pages 107—113.

6. Board and Executive remuneration

Board of Directors
Members of the Board of Directors of Roche Holding Ltd receive an annual remuneration and payment for their time and expenses related to their membership of Board committees.

Remuneration of members of the Board of Directors | in thousands of CHF

	2008		2007
B. Gehrig		409		450
A. Hoffmann		400		400
P. Baschera		330		277
J. I. Bell		330		593
P. Brabeck-Letmathe		300		300
L. J. R. de Vink		330		330
W. Frey		360		360
D. A. Julius		360		360
A. Oeri		360		360
W. Ruttenstorfer		330		277
H. Teltschik		391		392
B. Weder di Mauro		360		360
Total remuneration of Board of Directors		4,260		4,459

The Chairman of the Board of Directors, Dr Franz B. Humer, received remuneration in 2008 as shown in the table below.

Remuneration of the Chairman of the Board of Directors | in thousands of CHF

	2008
Annual salary, including bonuses and expenses		11,030
Pensions and other post-employment benefits		2,956
Equity compensation plans		983
Other employee benefits		260
Total remuneration received		15,229
Social security costs		1,521
Total		16,750

In 2007 Dr Humer received remuneration, indirect benefits and participated in certain equity compensation plans totalling 22 million Swiss francs.

Corporate Executive Committee
Members of the Corporate Executive Committee (‘CEC’) of Roche Holding Ltd receive remuneration, indirect benefits and participate in certain equity compensation plans as shown in the table below. On 4 March 2008 Dr Franz B. Humer handed over his executive function as CEO to Dr Severin Schwan. Since Dr Schwan was the member of the Corporate Executive Committee with the highest total remuneration in 2008 his remuneration is also disclosed. In 2007 Dr Humer was the member of the Corporate Executive Committee with the highest total remuneration in 2007.

138           Roche Finance Report 2008      |      Roche Holding Ltd, Basel – Notes to the Financial Statements

Remuneration of the members of the Corporate Executive Committee in 2008 | in thousands of CHF

			— of which
	Total CECa)		S. Schwan
Annual salary, including bonuses and expenses		21,384		5,313
Pensions and other post-employment benefits		2,422		202
Equity compensation plans		12,557		2,493
Other employee benefits		145		11
Total remuneration received		36,508		8,019
Social security costs		1,777		287
Total		38,285		8,306

a) Amounts for the total CEC for 2008 do not include Dr Humer.

In 2007 the total remuneration of the Corporate Executive Committee was 53 million Swiss francs. Dr Humer was the member of the Corporate Executive Committee with the highest total remuneration in 2007, with a total remuneration of 22 million Swiss francs.

Employer contribution to social security schemes and pension plans | The Group pays social insurance contributions in respect of the above remuneration and pays contributions to pension and other post-employment benefit plans for the Chairman of the Board of Directors and members of the Corporate Executive Committee.

Equity Compensation Plans | The Chairman of the Board of Directors and members of the Corporate Executive Committee also participate in certain equity compensation plans as described below. The terms and vesting conditions of these awards are disclosed in Note 11 to the Consolidated Financial Statements. The fair values used in the Consolidated Financial Statements represent the cost to the company at grant date and reflect amongst other matters the observed exercise behaviour and exit rate for the whole population that receive them and initial simulations of any performance conditions. For the purposes of these remuneration disclosures the fair values are calculated based on the fair value that the employee receives taking into account the preliminary assessment of any completed performance conditions.

The Chairman of the Board of Directors and members of the Corporate Executive Committee are eligible to participate in Roche Connect, a programme that enables employees to make regular deductions from their salaries to purchase non-voting equity securities. The Group contributes to the programme, which allows the employees to purchase non-voting equity securities at a discount (usually 20%).

During 2008 members of the Corporate Executive Committee were granted 494,097 Stock-settled Stock Appreciation Rights (S-SARs). The individual awards relating to 2008 are shown in the table below. The fair value of these awards for the employee is 21.08 Swiss francs, which is calculated using the Black-Scholes formula, assuming holding until maturity, and deducting 11% for the average 2 year vesting period. The Chairman of the Board of Directors was not granted S-SARs during 2008.

Members of the Corporate Executive Committee and other members of senior management participate in the Roche Performance Share Plan (PSP). The Group has three overlapping three-year PSPs. The target awards for the three-year cycle are defined at the beginning of the cycle and the awards are considered to form part of the employee’s remuneration in three equal annual amounts over the three-year cycle. Each award will result in between zero and two non-voting equity securities (Genussscheine), depending upon the achievement of the performance targets, and the discretion of the Board of Directors. The individual awards relating to 2008 are shown in the table below. The number of the awards is calculated as follows:

• PSP 2006—2008: A preliminary allocation based on the actual performance for the period 2006 to 2008, which shows 0.75 non-voting equity security (Genussschein) per award.

• PSP 2007—2009: One non-voting equity security (Genussschein) per award.

• PSP 2008—2010: One non-voting equity security (Genussschein) per award.

139

• The resulting allocations are multiplied by the non-voting equity security (Genussschein) price at 31 December 2008 of 162.50 Swiss francs to give the fair value for the remuneration received by the employee.

The Chairman of the Board of Directors was not granted PSPs for the 2008—2010 cycle.

Remuneration from equity compensation plans in 2008 | in thousands of CHF

	Roche Connect				S-SAR awards								PSP awards
	Employer		S-SAR ’08		S-SAR ’08		PSP ’06—’08		PSP ’07—’09		PSP ’08—’10		PSP		Total
	contributions		(number)		fair value		(number)		(number)		(number)		fair value		fair value
Total CECa)		191		494,097		10,416		8,739		12,459		14,805		1,950		12,557
— of which S. Schwan		49		105,576		2,226		838		1,218		1,965		218		2,493

a) Amounts for the total CEC for 2008 do not include Dr Humer.

In 2007 the total remuneration of the Corporate Executive Committee from equity compensation plans was 22 million Swiss francs, of which 9 million Swiss was attributable to Dr Humer, the member of the Corporate Executive Committee with the highest total remuneration.

Other employee benefits | This includes tax advisory costs, and remuneration of Dr Hunziker, Mr Burns and Prof. Knowles for serving on the Chugai Board of Directors.

Transactions with former members of the Corporate Executive Committee | Pensions totalling 2 million Swiss francs were paid by the Group in 2008 to two other former Corporate Executive Committee members (2007: 2 million Swiss francs). In 2007 Mr Heino von Prondzynski, a former member of the Corporate Executive Committee, received a bonus of 0.4 million Swiss francs in respect of services rendered in 2006 and additionally received a total of 12,212 non-voting equity securities based on pro-rated Roche Performance Share Plan awards.

7. Board and Executive shareholdings

Board of Directors
Directors Mr André Hoffmann and Dr Andreas Oeri and other members of the founder’s families who are closely associated with them belong to a shareholder group with pooled voting rights. At the end of 2008 this group held 80,020,000 shares (50.01% of issued shares). Detailed information about this group is given in Note 4. In addition, as of 31 December 2008 the members of the Board of Directors and persons closely associated with them held shares and non-voting equity securities (Genussscheine) as shown in the table below.

140           Roche Finance Report 2008      |      Roche Holding Ltd, Basel – Notes to the Financial Statements

Shareholdings of members of the Board of Directors

										Non-voting
										equity securities
				Shares						(Genussscheine)		Other
	2008			2007			2008			2007
F. B. Humer		3			3			153,919			58,886		b	)
B. Gehrig		50			50			50			50
A. Hoffmann		–	a)		–	a)		365,200	c)		365,200		c), d	)
P. Baschera		1			1			–			–
J. I. Bell		300			300			1,647			1,647
P. Brabeck-Letmathe		800			800			2,195			2,195
L. J. R. de Vink		–			–			–			–		e	)
W. Frey		72,500			72,500			–			–
D. A. Julius		350			350			1,550			1,250
A. Oeri		90,000	a)		90,000	a)		1,640,460			1,640,460		d	)
W. Ruttenstorfer		1,000			1,000			–			–
H. Teltschik		385			385			–			–
B. Weder di Mauro		200			200			–			–
Total		165,589	a)		165,589	a)		2,165,021			2,069,688

a)	Figure does not include shares held in the shareholder group with pooled voting rights.
b)	Equity compensation awards: Roche Option Plan, S-SARs and Roche Performance Share Plan. See below.
c)	As reported to the Swiss Exchange on 21 August 2008, Mr Hoffmann entered into a call options agreement with UBS on 365,000 Roche non-voting equity securities for the period 21 August 2008—20 August 2010.
d)	Mr Hoffmann and Dr Oeri each hold 250,000 UBS Long/Short Certificates on Roche bearer shares (RO) versus Roche non-voting equity securities (ROG), (ISIN: CH0026480100).
e)	Mr de Vink holds 1,000 Roche American Depositary Receipts (ADRs) RHHBY (ISIN: US7711951043).

Corporate Executive Committee
Members of the Corporate Executive Committee and persons closely associated with them held shares and non-voting equity securities (Genussscheine) as shown in the table below.

Shareholdings of members of the Corporate Executive Committee

							Non-voting
							equity securities
			Shares				(Genussscheine)		Other
	2008		2007		2008		2007
S. Schwan		3		3		9,468		2,148		a),b	)
S. Ayyoubi		3		n/a		7,161		n/a		a	)
W. M. Burns		3		3		53,460		34,249		a	)
E. Hunziker		3		3		43,839		19,928		a	)
G. A. Keller		1,063		253		21,854		11,625		a),c	)
J. K. C. Knowles		3		3		33,065		27,366		a	)
J. Schwiezer		3		n/a		10,960		n/a		a	)
Total		1,081		265		179,807		95,316

a)	Equity compensation awards: Roche Option Plan, S-SARs and Roche Performance Share Plan. See below.
b)	Dr Schwan’s close relatives hold 270 Roche non-voting equity securities (Genussscheine) (2007: zero).
c)	Dr Keller’s close relatives hold 140 Roche non-voting equity securities (Genussscheine) (2007: 210).

At 31 December 2008 the Chairman of the Board of Directors and members of the Corporate Executive Committee held Stock-settled Stock Appreciation Rights (S-SARs, first issued in 2005) and Roche Option Plan awards (issued before 2005) as shown in the table below. Each option entitles the holder to purchase one Roche non-voting equity security (Genussscheine) at a specified strike price. The terms and vesting conditions of these awards are disclosed in Note 11 to the Consolidated Financial Statements and additional supplementary information is in the Remuneration Report, which is included in the Business Report on pages 75—85.

141

Roche Option Plan and S-SARs awards held at 31 December 2008

Year of issue	2008		2007		2006		2005		2004		2003		2002		Total
S. Schwan		105,576		29,190		15,696		4,983		1,864		1,635		–		158,944
S. Ayyoubi		21,117		3,243		2,517		3,957		2,360		2,324		1,900		37,418
W. M. Burns		105,576		48,651		26,160		34,074		14,874		17,353		–		246,688
E. Hunziker		92,907		48,651		26,160		34,074		20,915		–		–		222,707
G. A. Keller		63,345		24,327		15,696		3,150		4,000		–		–		110,518
J. K. C. Knowles		63,345		24,327		15,696		–		–		–		–		103,368
J. Schwiezer		42,231		9,819		5,565		8,871		5,610		3,065		–		75,161
Total CEC		494,097		188,208		107,490		89,109		49,623		24,377		1,900		954,804
F. B. Humer		–		48,651		52,317		85,179		55,775		–		–		241,922
Total		494,097		236,859		159,807		174,288		105,398		24,377		1,900		1,196,726
Strike price (CHF)		195.80		229.60		195.00		123.00		129.50		77.80		115.50
Expiry date	Jan. 2015		Feb. 2014		Feb. 2013		Feb. 2012		Feb. 2011		Feb. 2010		Feb. 2009

At 31 December 2008 the Chairman of the Board of Directors and members of the Corporate Executive Committee held PSP awards from the three PSP performance cycles 2006—2008, 2007—2009 and 2008—2010 as shown in the table below. The terms and vesting conditions of these awards are disclosed in Note 11 to the Consolidated Financial Statements and additional supplementary information is in the Remuneration Report on pages 75—85 of the Business Report. Each award will result in between zero and two non-voting equity securities (Genussscheine), depending upon the achievement of the performance targets and the discretion of the Board of Directors. The preliminary allocation ratio for the plan 2006—2008 and the total target number of awards for all cycles as at 31 December 2008 are shown in the table below.

Roche Performance Share Plan awards held at 31 December 2008

	PSP 2006—2008		PSP 2007—2009		PSP 2008—2010
S. Schwan		1,117		1,218		1,965
S. Ayyoubi		550		507		638
W. M. Burns		2,578		3,046		3,276
E. Hunziker		2,750		3,046		3,276
G. A. Keller		1,203		1,370		1,474
J. K. C. Knowles		2,148		2,056		2,211
J. Schwiezer		1,304		1,216		1,965
Total CEC		11,650		12,459		14,805
F. B. Humer		10,365		9,185		–
Total awards granted		22,015		21,644		14,805
Allocation date	Feb. 2009		Feb. 2010		Feb. 2011
Estimated allocation at 31 December 2008		0.75:1
Total estimated awards at 31 December 2008		16,513

At 31 December 2007 the Chairman of the Board of Directors and members of the Corporate Executive Committee at that time held a total of 684,061 Stock-settled Stock Appreciation Rights and Roche Option Plan awards, and had outstanding a total of 125,224 awards granted under the Roche Performance Share Plan.

142          Roche Finance Report 2008     |     Roche Holding Ltd, Basel — Appropriation of Available Earnings

Appropriation of Available Earnings

Proposals to the Annual General Meeting  |   in CHF

	2008			2007
Available earnings
Balance brought forward from previous year		1,832,184			520,281
Net profit for the year		3,498,521,585			4,237,700,323
Transfer from free reserve		813,050,000			—
Total available earnings		4,313,403,769			4,238,220,604
Appropriation of available earnings
Distribution of an ordinary dividend of CHF 5.00 gross per share and non-voting equity security (Genussschein) as against CHF 4.60 last year		(4,312,813,500	)		(3,967,788,420	)
Transfer to free reserve		—			(268,600,000	)
Total appropriation of available earnings		(4,312,813,500	)		(4,236,388,420	)
To be carried forward on this account		590,269			1,832,184

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Next Annual General Meeting: 10 March 2009

Cautionary statement regarding forward-looking statements

This Annual Report contains certain forward-looking statements. These forward-looking statements may be identified by words such as ‘believes’, ‘expects’, ‘anticipates’, ‘projects’, ‘intends’, ‘should’, ‘seeks’, ‘estimates’, ‘future’ or similar expressions or by discussion of, among other things, strategy, goals, plans or intentions. Various factors may cause actual results to differ materially in the future from those reflected in forward-looking statements contained in this Annual Report, among others: (1) pricing and product initiatives of competitors; (2) legislative and regulatory developments and economic conditions; (3) delay or inability in obtaining regulatory approvals or bringing products to market; (4) fluctuations in currency exchange rates and general financial market conditions; (5) uncertainties in the discovery, development or marketing of new products or new uses of existing products, including without limitation negative results of clinical trials or research projects, unexpected side effects of pipeline or marketed products; (6) increased government pricing pressures; (7) interruptions in production; (8) loss of or inability to obtain adequate protection for intellectual property rights; (9) litigation; (10) loss of key executives or other employees; and (11) adverse publicity and news coverage.

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