Serono 6-K 7-19-2005
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934

For the month of July, 2005

                   Serono S.A.                   
(Registrant’s Name)

15 bis, Chemin des Mines
Case Postale 54
CH-1211 Geneva 20
                                    Switzerland                                       
(Address of Principal Executive Offices)

                                                                   1-15096                                                                         
(Commission File No.)

(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.)

Form 20-Fü   Form 40-F ____

(Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101 (b)(1).) ______

(Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101 (b)(7).) ______
 
(Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.)

Yes ____ Noü 

(If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-______)

 
Media Release
Corporate Logo 
 
FOR RELEASE July 19, 2005, 4.01 pm Eastern Time
 
 
SERONO DELIVERS STRONG SECOND QUARTER RESULTS

- Excellent Rebif® performance with sales up 26.6% to $326 million -
 


Rockland, MA, July 19, 2005 - Serono (virt-x: SEO and NYSE: SRA), the third largest biotechnology company in the world, today reported its second quarter results for the period ended June 30, 2005.


Key Points for Second Quarter 2005
 
 
l
Total revenues up 15.2% to $676.8m (up 12.5% in local currencies) and product sales up 13.5% to $611.5m (up 10.9% in local currencies)
 
l
Reported net income up 32.5% to $175.1m (up 31.5% in local currencies) with underlying net income*  up 13.7% to $150.3m
 
l
Basic EPS up 41.1% to $12.02 per bearer share and $0.30 per ADS with underlying EPS* up 21.1% to $10.32 per bearer share and $0.26 per ADS
 
l
Very strong Rebif® performance with global sales up 26.6% to $326 million and record US market share (TRx of 19.0% and NRx of 22.8%)
 
l
Strategic alliance with Priority Healthcare in Reproductive Health in the USA
 
l
Mylinax® in a strong position in the race for the first marketed oral MS therapy
 
l
New R&D collaborations - PhenoptinTM from BioMarin, HuMax-TAC from Genmab, anti-CD3 and anti-IFN gamma from NovImmune
 
l
Positive credit ratings issued by Moody’s: A3 and Standard & Poor’s: A-
 
“In the US, Rebif®’s market share gains are accelerating with latest data showing record levels, and our strategic alliance in the Reproductive Health area is very exciting,” said Ernesto Bertarelli, Chief Executive Officer of Serono. “Given recent newsflow regarding several other potential oral MS therapies, Mylinax® is clearly in a strong position in the race to be the first marketed oral MS treatment.”

“We had a fruitful quarter with respect to R&D collaborations, with the conclusion of three new agreements,” said Stuart Grant, Chief Financial Officer of Serono. “Rebif®’s continued strong performance, coupled with improvements in operating leverage, give us confidence to deliver our guidance**  for the full year.”

___________________________________
 
* Q2 2005 non-IFRS earnings measure excludes a $30.0m ($28.5m after-tax) gain on sale of investment in Celgene and a $3.7m write-down of investment in CancerVax and is provided in order to permit assessment of the performance of the company's underlying business for the quarter
 
** Full year 2005 “adjusted” earnings guidance excludes an exceptional charge of $725.0m ($660.5m after-tax) related to previously reported US Attorney’s Office investigation of Serostim®, a $30m ($28.5m after-tax) gain on sale of investment in Celgene and a $8.4m write-down of investment in CancerVax

-more-

Financial Performance

Total revenues increased by 15.2% to $676.8m in the second quarter of 2005 (Q2 2004: $587.6m), or 12.5% in local currencies. Product sales grew 13.5% to $611.5m (Q2 2004: $538.6m), or 10.9% in local currencies. Royalty and license income increased by 33.3% to $65.3m (Q2 2004: $49.0m), continuing to provide a substantial revenue stream derived from Serono’s extensive and diverse intellectual property portfolio.

Total operating expenses increased by 14.3% to $509.5m in the second quarter of 2005 (Q2 2004: $445.7m), or 11.3% in local currencies. This slower growth rate of operating expenses represents an improvement over the previous two quarters and reflects ongoing enhancements of operational efficiencies.

Gross margin increased to 87.8% of product sales (Q2 2004: 86.6%), as a result of continuing manufacturing improvements. Serono’s ability to optimize cost of product sales over the years has resulted in one of the highest gross margins in the biotechnology sector.

Selling, General and Administrative expenses were $222.5m, in line with the first quarter of 2005, an increase of 15.2% (Q2 2004: $193.1m). This increase is primarily related to the Rebif® share of voice expansion program and the ongoing launch of Raptiva®.

Research and Development expenses were $145.8m (Q2 2004: $123.2m). R&D expenses increased by 18.4% from the second quarter of 2004 reflecting the company’s expansion into oncology projects, including Canvaxin™ and adecatumumab currently in Phase III and Phase II trials respectively as well as the roll-out of a Phase III trial with Mylinax® in relapsing forms of multiple sclerosis.

Other operating expenses were $66.7m (Q2 2004: $57.3m), incorporating expenses of $4.8m related to stock options in accordance with the IFRS 2 accounting change. The increase in operating expenses was primarily driven by increases in royalty expenses.

Operating income increased by 17.9% to $167.3m, leading to an improved operating leverage with a margin of 24.7% of total revenues (Q2 2004: $141.9m or 24.1% of total revenues).

Net financial income was $9.1m (Q2 2004: $15.3m).

An exceptional gain of $30.0m was recorded in the second quarter resulting from the sale of an equity holding in Celgene, Inc. Additionally, an unrealized loss of $3.7m was recorded in accordance with IAS 38 revised to reflect the impairment in value of our equity stake in CancerVax.

Net income was up 32.5% to $175.1m (Q2 2004: $132.2m), or 31.5% in local currencies. Underlying net income*  was up 13.7% to $150.3m.

Basic earnings per share were up 41.1% to $12.02 per bearer share and $0.30 per ADS. Underlying EPS*  were up 21.1% to $10.32 per bearer share and $0.26 per ADS.
 
_________________________
 
* Q2 2005 non-IFRS earnings measure excludes a $30.0m ($28.5m after-tax) gain on sale of investment in Celgene and a $3.7m write-down of investment in CancerVax and is provided in order to permit assessment of the performance of the company's underlying business for the quarter
 
-more-
 
For the first six months, net cash flow from operating activities before change in working capital was $354.1m (H1 2004: $338.9m), or $177.1m after change in working capital (H1 2004: $252.1m), reflecting milestone payments made in the first quarter of 2005 relating to agreements signed in 2004 with CancerVax and Micromet and timing of tax payments.

As of June 30, 2005, there were 14,569,355 outstanding equivalent bearer shares of Serono SA, net of treasury shares.

Serono recently received positive credit ratings issued by Moody’s and Standard & Poor’s, of A3 and A- respectively. These positive external credit ratings confirm the company’s underlying strength and business prospects, positions Serono well against its peer group, and demonstrates the company’s low risk profile with a stable outlook.

Full Year 2005 Outlook

In 2005, Serono continues to expect that product sales will grow between 10% and 15%, leading to total revenues of at least $2.6 billion, based on currency exchange rates prevailing on February 1st 2005, when guidance was issued.

“Adjusted” net income is expected to be between $520m and $540m, as first communicated on February 1st 2005, based on currency exchange rates prevailing when guidance was issued. This outlook does not include expenses related to any new business development transactions or other exceptional items in 2005. To date known adjustments include an exceptional charge of $725.0m ($660.5m after-tax) related to previously reported US Attorney’s Office investigation of Serostim®, a $30m ($28.5m after-tax) gain on sale of investment in Celgene, and an $8.4m write-down of investment in CancerVax. Therefore the 2005 IFRS earnings guidance is a net loss of between $100m and $120m.

Therapeutic Areas Review

In the second quarter of 2005, sales of Rebif® were up 26.6% (22.9% in local currencies) to $326.0m (Q2 2004: $257.5m). Rebif® leads the MS market outside the US with sales increasing by 22.3% to $229.8m (Q2 2004: $187.9m), or 17.5% in local currencies. Sales in the US were up 38.3% to $96.2m in the second quarter and Rebif® ended the quarter with record market share. US rolling 4-week total prescription share of Rebif® was 19.0%, with new prescription share of 22.8%.

Gonal-f® sales were stable (-0.7% or -2.8% in local currencies) at $149.9m (Q2 2004: $150.9m). Gonal-f® delivered double-digit growth outside of the US due to successful roll-out of the Gonal-f® FbM pre-filled pen, but sales continued to be impacted by pricing pressure from a competitor in the US. On June 14, Serono and Priority Healthcare Corporation announced the formation of a strategic alliance, under which both companies offer the US fertility marketplace expanded and unprecedented services and support to consumers, patients, healthcare providers and managed care organizations.

Growth hormone sales increased by 8.1% (6.1% in local currencies) to $71.1m (Q2 2004: $65.8m). Saizen® sales increased by 21.2% (17.8% in local currencies) to $53.6m (Q2 2004: $44.2m), due to the devices and services provided to patients and physicians. As a result of continued reimbursement constraints, Serostim® sales decreased by 19.5% to $17.3m (Q2 2004: $21.5m).
 
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Sales of Raptiva®, the first-to-market biological treatment for psoriasis in the European Union, were $7.4m in the second quarter (Q2 2004: $0.2m). Reimbursement negotiations in the major European markets have been concluded in only nine months since its approval in the EU. Raptiva® was launched in Spain in June, and is planned to be introduced in France and Italy in the third quarter.

Regional Sales

European sales increased by 23.6% (18.3% in local currencies) to $277.6m (Q2 2004: $224.6m). North American sales grew by 3.7% to $216.6m (Q2 2004: $208.8m). In the rest of the world, sales grew by 11.4% (9.5% in local currencies) to $117.3m (Q2 2004: $105.3m).

R&D News

In the second quarter Serono made good progress with respect to its strategy of strengthening its pipeline through R&D collaborations with the conclusion of in-licensing agreements with Genmab, BioMarin and NovImmune in May 2005.

Serono signed a worldwide agreement with GenMab A/S to develop and commercialize HuMax-TAC, a fully human monoclonal antibody targeting the TAC antigen (CD25, the interleukin-2 receptor alpha subunit (IL-2Ra)) which is overexpressed by activated T-cells. By binding the TAC antigen, HuMax-TAC inhibits the proliferation of T-cells and so may have therapeutic potential in the treatment of T-cell mediated diseases, such as autoimmune disorders, inflammatory and hyperproliferative skin disorders, as well as transplant rejection.

Serono entered a strategic alliance with BioMarin Pharmaceutical Inc. to develop and commercialize Phenoptin and Phenylase in all territories outside the United States and Japan. Both products have shown potential in the treatment of phenylketonuria, a rare inherited metabolic disease with detrimental neurological effects for patients. This collaboration has the potential to leverage Serono’s existing metabolic endocrinology sales and marketing infrastructure.

Serono commenced an exclusive worldwide collaboration to develop and commercialize two of NovImmune’s fully human monoclonal antibodies, NI-0401 (anti-CD3), and NI-0501 (anti-IFN-gamma), which may have therapeutic potential in a broad range of autoimmune diseases.

Conference Call and Webcast

Serono will hold a conference call on July 20th, 2005, starting at 11:00 am US Eastern Time (17:00 Central European Time) during which Serono Management will present the Company's Second Quarter 2005 Results. To join the telephone conference please dial 1 866 291 4166 (from the US), 091 610 5600 (from Switzerland), 0207 107 0611 (from the UK) and +41 91 610 5600 (from elsewhere). The event will also be relayed by live audio webcast, which interested parties may access via Serono's Corporate home page, www.serono.com. A link to the webcast will be provided immediately prior to the event and will be available for replay following the event.
 
-more-

###

Some of the statements in this press release are forward looking. Such statements are inherently subject to known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of Serono and affiliates to be materially different from those expected or anticipated in the forward-looking statements. Forward-looking statements are based on Serono’s current expectations and assumptions, which may be affected by a number of factors, including those discussed in this press release and more fully described in Serono’s Annual Report on Form 20-F filed with the US Securities and Exchange Commission on March 16, 2005. These factors include any failure or delay in Serono’s ability to develop new products, any failure to receive anticipated regulatory approvals, any problems in commercializing current products as a result of competition or other factors, our ability to obtain reimbursement coverage for our products, the outcome of government investigations and litigation and government regulations limiting our ability to sell our products. Serono has no responsibility to update the forward-looking statements contained in this press release to reflect events or circumstances occurring after the date of this press release.

###

About Serono
Serono is a global biotechnology leader. The Company has eight biotechnology products, Rebif®, Gonal-f®, Luveris®, Ovidrel®/Ovitrelle®, Serostim®, Saizen®, Zorbtive™ and Raptiva®. In addition to being the world leader in reproductive health, Serono has strong market positions in neurology, metabolism and growth and has recently entered the psoriasis area. The Company's research programs are focused on growing these businesses and on establishing new therapeutic areas, including oncology. Currently, there are approximately 30 ongoing development projects.

In 2004, Serono achieved worldwide revenues of US$2,458.1 million, and a net income of US$494.2 million, making it the third largest biotech company in the world. Its products are sold in over 90 countries. Bearer shares of Serono S.A., the holding company, are traded on the virt-x (SEO) and its American Depositary Shares are traded on the New York Stock Exchange (SRA).


For more information, please contact:
 
Serono in Geneva, Switzerland:
Media Relations:
Investor Relations:
  
Tel: +41-22-739 36 00
Tel: +41-22-739 36 01
  
Fax: +41-22-739 30 85
Fax: +41-22-739 30 22
  
http://www.serono.com
Reuters: SEO.VX / SRA
  
 
Bloomberg: SEO VX / SRA US
  
Serono, Inc., Rockland, MA
    
Media Relations:
Investor Relations:
  
Tel. +1 781 681 2340
Tel. +1 781 681 2552
  
Fax: +1 781 681 2935
Fax: +1 781 681 2912
  
http://www.seronousa.com
    
 
On the following pages, there are:
 
w
Tables detailing sales in dollars by therapeutic area, geographic region and the top 10 products for the 3 and 6 months ended June 30, 2005 and 2004.
 
w
Consolidated statements of income for the 3 and 6 months ended June 30, 2005 and 2004; the consolidated balance sheets as of June 30, 2005 and December 31, 2004; the consolidated statements of equity as of June 30, 2005 and 2004; the consolidated statements of cash flows for the 6 months ended June 30, 2005 and 2004; the selected explanatory notes to the consolidated financial statements; and a reconciliation of "adjusted" earnings guidance to IFRS earnings guidance for the year ended December 31, 2005. These consolidated financial statements have been prepared on the basis of International Financial Reporting Standards.
 
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Sales by theraputic area 
 
   
Three Months Ended
June 30, 2005
      
Three Month Ended
June 30,2004
  
   
$ million
  
% of sales
  
% change $
  
$ million
  
% of sales
  
Neurology 
    
331.6
    
54.2
%
  
24.4
%
  
266.6
    
49.5
%
Reproductive Health 
    
179.8
    
29.4
%
  
(0.6
%)
  
180.8
    
33.6
%
Growth & Metabolism 
    
71.1
    
1 1 .6
%
  
8.1
%
  
65.8
    
12.2
%
Dermatology 
    
7.4
    
1 .2
%
  
4739.2
%
  
0.2
    
0.0
%
Others 
    
21.6
    
3.6
%
  
(14.4
%)
  
25.2
    
4.7
%
                                 
Total sales (US$ million) 
    
$611.5
    
100
%
  
13.5
%
  
$538.6
    
100
%

 
Sales by geographic region 

   
Three Months Ended
June 30, 2005
      
Three Months Ended
June 30, 2004
  
   
$ million
  
% of sales
  
% change $
  
$ million
  
% of sales
  
Europe 
    
277.6
    
45.4
%
  
23.6
%
  
224.6
    
41 .7
%
North America 
    
216.6
    
35.4
%
  
3.7
%
  
208.8
    
38.8
%
Latin America 
    
32.4
    
5.3
%
  
12.7
%
  
28.7
    
5.3
%
Others 
    
84.9
    
13.9
%
  
10.9
%
  
76.5
    
14.2
%
                                 
Total sales (US$ million) 
    
$611.5
    
100
%
  
13.5
%
  
$538.6
    
100
%

 
Sales by theraputic area 

   
Six Months Ended
 June 30, 2005
      
Six Months Ended
June 30, 2004
  
   
$ million
  
% of sales
  
% change $
  
$ million
  
% of sales
  
Neurology 
    
629.4
    
54.1
%
  
18.3
%
  
532.1
    
50.4
%
Reproductive Health 
    
345.3
    
29.7
%
  
(1 .6
%)
  
351.0
    
33.3
%
Growth & Metabolism 
    
137.5
    
1 1 .8
%
  
7.4
%
  
128.0
    
12.1
%
Dermatology 
    
11.8
    
1 .0
%
  
41 71 .9
%
  
0.3
   
0.0
%
Others 
    
38.9
    
3.4
%
  
(11.4
%)
  
43.9
    
4.2
%
                                 
Total sales (US$ million) 
    
$1,162.9
   
100
%
  
10.2
%
  
$1,055.3
   
100
%

 
Sales by geographic region 
 
   
Six Months Ended 
June 30, 2005
      
Six Months Ended
June 30, 2004
  
   
$ million
  
% of sales
  
% change $
  
$ million
  
% of sales
  
Europe 
    
542.5
    
46.6
%
  
17.0
%
  
463.5
    
43.9
%
North America 
    
401.4
    
34.5
%
  
3.1
%
  
389.3
    
36.9
%
Latin America 
    
61.9
    
5.3
%
  
12.4
%
  
55.1
    
5.2
%
Others 
    
157.1
    
13.6
%
  
6.6
%
  
147.4
    
14.0
%
                                      
Total sales (US$ million) 
    
$1,162.9
    
100
%
  
10.2
%
  
$1,055.3
    
100
%
 
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TOP TEN PRODUCTS

   
Three Months Ended 
June 30, 2005
  
Three Months Ended
June 30, 2004
             
 
*TA
$ million 
% of sales 
% change $ 
$ million 
% of sales 
             
Rebif®
MS
326.0
53.3% 
26.6% 
257.5
47.8% 
Gonal-f®
RH
149.9
24.5% 
(0.7%) 
150.9
28.0% 
Saizen®
Growth 
53.6
8.8% 
21.2% 
44.2
8.2% 
Novantrone®
MS/Oncology 
18.3
3.0% 
(22.4%) 
23.6
4.4% 
Serostim®
Wasting 
17.3
2.8% 
(19.5%) 
21.5
4.0% 
Raptiva®
Dermatology 
7.4
1.2% 
4739.2% 
0.2
0.0% 
Crinone®
RH
6.5
1.1% 
43.3% 
4.5
0.8% 
Ovidrel®
RH
6.3
1.0% 
45.5% 
4.4
0.8% 
Cetrotide®
RH
6.2
1.0% 
(3.5%) 
6.4
1.2% 
Metrodin-HP®
RH
4.1
0.7% 
(7.9%) 
4.5
0.8% 

 
   
Six Months Ended 
June 30, 2005 
  
Six Months Ended
June 30, 2004 
             
 
*TA
$ million 
% of sales 
% change $ 
$ million 
% of sales 
             
             
Rebif®
MS
618.8
53.2% 
19.7% 
517.1
49.0% 
Gonal-f®
RH
287.9
24.8% 
(0.1%) 
288.3
27.3% 
Saizen®
Growth 
101.4
8.7% 
19.5% 
84.8
8.0% 
Serostim®
Wasting 
35.5
3.1% 
(17.3%) 
43.0
4.1% 
Novantrone®
MS/Oncology 
34.3
2.9% 
(11.8%) 
38.9
3.7% 
Cetrotide®
RH
12.4
1.1% 
(2.3%) 
12.7
1.2% 
Crinone®
RH
12.1
1.0% 
34.0% 
9.0
0.9% 
Ovidrel®
RH
12.1
1.0% 
45.9% 
8.3
0.8% 
Raptiva®
Dermatology 
11.8
1.0% 
4171.9% 
0.3
0.0% 
Metrodin-HP®
RH
7.3
0.6% 
(1.6%) 
7.4
0.7% 

 
 
* Therapeutic Areas 
  
       
RH
= Reproductive Health 
Wasting 
= AIDS Wasting 
MS
= Multiple Sclerosis 
Growth 
= Growth Retardation 
Oncology 
= Oncology 
Dermatology 
= Dermatology 
 
-more-

Consolidated Income Statements
Six months ended June 30 
  
2005*
 US$'000
  
% of
Revenues 
  
% change 
  
2004*
US$'000
 
% of
Revenues
  
                       
Revenues                      
Product sales 
    
1,162,900
          
10.2
%
  
1,055,335
        
Royalty and license income     
115,237
          29.0
% 
   89,360        
Total Revenues 
    
1,278,137
    
100.0
%
  
11.7
%
  
1,144,695
    
100.0
%
Operating Expenses 
                                
Cost of product sales 
    
133,995
               
147,851
        
% of Sales
   
11.5
%
              
14.0
%
      
Selling, general and administrative 
    
437,115
    
34.2
%
  
15.9
%
  
377,253
    
33.0
%
Research and development 
    
302,059
    
23.6
%
  
21.1
%
  
249,379
   
21.8
%
Exceptional litigation expense and related costs 
    
725,000
    
56.7
%
  
-
   
-
   
-
 
Other operating expense, net 
    
130,512
    
10.2
%
  
15.2
%
  
113,251
    
9.9
%
Total Operating Expenses 
    
1,728,681
    
135.3
%
  
94.7
%
  
887,734
    
77.6
%
Operating (Loss) / Income 
    
(450,544
)
  
(35.3
%)
  
(275.3
%)
  
256,961
    
22.4
%
Financial income, net
   
15,964
         
(34.5
%)
  
24,380
        
Other income, net     
22,280
                
64
        
Total Non Operating Income, net    
38,244
                
24,444
        
(Loss) / Income Before Taxes and Minority Interests 
    
(412,300
)
  
(32.3
%)
  
(246.5
%)
  
281,405
    
24.6
%
Taxes     
(20,434
)
              
45,772
        
(Loss) / Income Before Minority Interests 
    
(391,866
)
              
235,633
       
Minority interests      
759
               
(1,611
)
      
Net (Loss) / Income 
    
(392,625
)
  
(30.7
%)
  
(265.5
%)
  
237,244
    
20.7
%

The accompanying selected explanatory notes form an integral part of these financial statements.
 
* Unaudited
 
   
2005
 
* * Proforma
2005 
 
% Change
 
2004
 
* * Proforma
2005
 % Change 
  
Basic (Loss) / Earnings per Share (in U.S. dollars)
                      
- Bearer shares
    
(26.96
)
  
17.01
    
(277.8
%)
  
15.16
    
12.2
%
- Registered shares
    
(10.78
)
  
6.81
    
(277.8
%)
  
6.07
    
12.2
%
- American depositary shares
    
(0.67
)
  
0.43
    
(277.8
%)
  
0.38
    
12.2
%
                                 
Diluted (Loss) / Earnings per Share (in U.S. dollars)
                                
- Bearer shares
    
(26.96
)
  
16.99
    
(278.1
%)
  
15.13
    
12.2
%
- Registered shares
    
(10.78
)
  
6.79
   
(278.1
%)
  
6.05
    
12.2
%
- American depositary shares
    
(0.67
)
  
0.42
    
(278.1
%)
  
0.38
    
12.2
%
 
 
Proforma net income excluding exceptional litigation expense, gain on sale of investment in Celgene and write down of investment in CancerVax**;
Net (Loss) / Income 
    
(392,625
)
  
(30.7
%)
  
(265.5
%)
  
237,244
   
20.7
%
Litigation expense and related costs 
    
725,000
                
-
       
Tax impact on litigation expense and related costs 
    
(64,525
)
              
-
       
Gain on sale of investment in Celgene 
    
(29,963
)
              
-
       
Tax impact on gain on sale of investment in Celgene 
    
1,439
                
-
       
Impairment loss on investment in CancerVax    
8,440
               
-
       
Net Income without exceptional items 
    
247,766
    
19.4
%
  
4.4
%
  
237,244
    
20.7
%
 
** Non-IFRS financial measure included in order to permit assessment of the performance of the company's underlying business for the period.
 
-more-

Consolidated Income Statements
 
Three months ended June 30 
  
2005*
US$'000
  
% of
Revenues
  
%
change
  
2004*
US$'000
  
% of
Revenues
 
                       
                       
Revenues
                     
Product sales 
    
611,487
          
13.5
%
  
538,622
        
Royalty and license income
    
65,269
         
33.3
%
  
48,981
        
Total Revenues 
    
676,756
    
100.0
%
  
15.2
%
  
587,603
    
100.0
%
Operating Expenses 
                                
Cost of product sales 
    
74,525
          
3.2
%
  
72,182
       
% of Sales 
    
12.2
%
              
13.4
%
      
Selling, general and administrative 
    
222,466
    
32.9
%
  
15.2
%
  
193,050
   
32.9
%
Research and development 
    
145,785
   
21.5
%
  
18.4
%
  
123,180
   
21.0
%
Other operating expense, net 
    
66,688
    
9.9
%
  
16.4
%
  
57,293
    
9.8
%
Total Operating Expenses 
    
509,464
    
75.3
%
  
14.3
%
  
445,705
    
75.9
%
Operating Income 
    
167,292
   
24.7
%
  
17.9
%
  
141,898
    
24.1
%
Financial income, net 
    
9,077
          
(40.9
%)
  
15,346
       
Other income, net
    
26,568
               
60
        
Total Non Operating Income, net     
35,645
                
15,406
        
Income Before Taxes and Minority Interests 
    
202,937
    
30.0
%
  
29.0
%
  
157,304
    
26.8
%
Taxes
    
27,626
                
25,742
        
Income Before Minority Interests 
    
175,311
                
131,562
        
Minority Interests 
    
187
               
(637
)
      
Net Income 
    
175,124
    
25.9
%
  
32.5
%
  
132,199
    
22.5
%
 
The accompanying selected explanatory notes form an intergral part of these financial statements.
 
* Unaudited
 
  
2005
  
* * Proforma
2005
  
% Change
  
2004
  
* * Proforma
2005
% Change
  
Basic Earnings per Share (in U.S. dollars)
                      
- Bearer shares
    
12.02
   
10.32
    
41.1
%
  
8.52
    
21.1
%
- Registered shares
    
4.81
    
4.13
    
41.1
%
  
3.41
    
21.1
%
- American depositary shares
    
0.30
    
0.26
    
41.1
%
  
0.21
    
21.1
%
                                 
Diluted Earnings per Share (in U.S. dollars)
                                
- Bearer shares
    
11.90
   
10.25
    
40.2
%
  
8.49
    
20.8
%
- Registered shares
    
4.76
    
4.10
   
40.2
%
  
3.40
    
20.8
%
- American depositary shares
    
0.30
    
0.26
    
40.2
%
  
0.21
    
20.8
%

Proforma net income excluding exceptional gain on sale of investment in Celgene and write down of investment in CancerVax**:
Net Income 
    
175,124
    
25.9
%
  
32.5
%
  
132,199
   
22.5
%
Gain on sale of investment in Celgene 
    
(29,963
)
              
-
       
Tax impact on gain on sale of investment in Celgene 
    
1,439
                
-
       
Impairment loss on investment in CancerVax    
3,740
                  -        
Net Income without exceptional items 
    
150,340
    
22.2
%
  
13.7
%
  
132,199
    
22.5
%
 
** Non-IFRS financial measure included in order to permit assessment of the performance of the company's underlying business for the period.
 
-more-
 
Consolidated Balance Sheets
 
As of 
  
June 30, 2005 *
  
December 31 , 2004
  
   
US$'000
  
US$'000
  
Assets 
          
Current Assets 
          
Cash and cash equivalents 
    
747,744
    
275,979
  
Short-term financial assets 
    
582,328
    
784,999
  
Trade accounts receivable 
    
410,211
    
427,935
  
Inventories 
    
275,029
    
326,937
  
Prepaid expenses and other current assets
    
223,284
    
237,205
  
Total Current Assets
    
2,238,596
    
2,053,055
  
               
Non-Current Assets 
              
Tangible fixed assets 
    
728,502
    
799,878
  
Intangible assets 
    
311,938
    
290,558
  
Deferred tax assets 
    
254,628
    
201,023
  
Long-term financial assets 
    
657,557
    
929,030
  
Other long-term assets 
    
122,178
    
133,302
  
Total Non-Current Assets
    
2,074,803
    
2,353,791
  
Total Assets 
    
4,313,399
    
4,406,846
  
               
Liabilities 
              
Current Liabilities 
              
Trade and other payables 
    
329,381
    
426,616
  
Short-term financial debts 
    
29,338
    
34,527
  
Income taxes 
    
119,234
    
166,861
  
Deferred income - current 
    
32,663
    
33,128
  
Other current liabilities
    
924,745
    
225,143
  
Total Current Liabilities
    
1,435,361
    
886,275
  
               
Non-Current Liabilities 
              
Long-term financial debts 
    
602,179
    
640,892
  
Deferred tax liabilities 
    
19,292
    
24,242
  
Deferred income - non current 
    
140,928
    
157,004
  
Provisions and other long-term liabilities
    
259,490
    
261,728
  
Total Non-Current Liabilities
    
1,021,889
    
1,083,866
  
Total Liabilities
    
2,457,250
    
1,970,141
  
               
Minority Interests
    
953
    
3,343
  
               
Shareholders' Equity 
              
Share capital 
    
255,058
    
254,420
  
Share premium 
    
1,050,758
    
1,023,332
  
Treasury shares 
    
(984,426
)
  
(987,489
)
Retained earnings 
    
1,517,512
    
2,020,425
  
Fair value and other reserves 
    
7,657
    
56,829
  
Cumulative foreign currency translation adjustments
    
8,637
    
65,845
  
Total Shareholders' Equity
    
1,855,196
    
2,433,362
  
               
Total Liabilities, Minority Interests and Shareholders' Equity
    
4,313,399
    
4,406,846
  
 
The accompanying selected explanatory notes form an intergral part of these financial statements.
 
* Unaudited
 
-more-
 
Consolidated Statement of Changes in Equity
   
Share
capital
US$'000
 
Share
premium US$'000
 
Treasury shares US$'000
 
Retained earnings US$'000
 
Fair value
and other
reserves
US$'000
 
Cumulative
foreign
currency
translation
adjustments
US$'000
 
Total
shareholders'
equity
US$'000
  
Balance as of January 1, 2004: 
                              
As previously reported
    
253,895
    
1,002,991
    
(157,642
)
  
1,669,700
   
22,711
   
88,535
   
2,880,190
  
 Effect of revisions to IAS 39 Financial Instruments: Recognition and Measurement 
                      
(26,649
)
  
33,137
   
(2,035
)
  
4,453
 
Effect of IFRS 2 Share Based Payments
                       (2,947
)
         (258
)
   (3,205
)
As restated * 
    
253,895
    
1,002,991
    
(157,642
)
  
1,640,104
    
55,848
    
86,242
    
2,881,438
  
Acquisition of treasury shares 
                
(258,974
)
                    
(258,974
)
Issue of share capital 
     464    
18,311
    
3,189
                      
21,964
  
Net income 
                      
237,244
                
237,244
  
Dividend - bearer shares 
                      
(71,096
)
              
(71,096
)
Dividend - registered shares
                     
(28,258
)
              
(28,258
)
Fair value adjustments on available-for sales investments
                           
(10,320
)
        
(10,320
)
Translation effects                                    (29,507 )   (29,507
) 
Balance as of  June 30, 2004 *
     254,359     1,021,302     (413,427 )  
1,777,994
     45,528     56,735     2,742,491  
                                             
Balance as of January 1, 2005: 
                                            
As previously reported 
    
254,420
    
1,023,125
   
(987,489
)
  
2,064,499
    
23,482
   
69,841
    
2,447,878
  
Effect of revisions to IAS 39 Financial Instruments: Recognition and Measurement
                     
(28,546
)
  
33,347
    
(2,246
)
  
2,555
  
Effect of IFRS 2 Share Based Payments 
          
207
         
(15,528
)
        
(1,750
)
  
(17,071
)
As restated * 
    
254,420
    
1,023,332
    
(987,489
)
  
2,020,425
    
56,829
    
65,845
    
2,433,362
  
Issue of share capital
   
638
   
19,036
   
3,063
                      
22,737
  
Issue of call options on Serono shares
                     
94
               
94
 
Fair value of stock options on Serono shares that have vested
         
8,390
                            
8,390
  
Net loss 
                      
(392,625
)
              
(392,625
)
Dividend - bearer shares 
                      
(76,992
)
              
(76,992
)
Dividend - registered shares
                     
(33,390
)
              
(33,390
)
Recognition of unrealized loss on available-for-sale investment
                           
8,440
          
8,440
  
Fair value adjustments on available-for sales investments
                           
(51,898
)
        
(51,898
)
Fair value adjustments on financial instruments 
                            
(5,714
)
        
(5,714
)
Translation effects
                                 
(57,208
)
  
(57,208
)
Balance as of June 30, 2005 * 
    
255,058
    
1,050,758
    
(984,426
)
  
1,517,512
    
7,657
    
8,637
    
1,855,196
  
 
The accompanying selected explanatory notes form an intergral part of these financial statements.
 
* Unaudited 
 
-more-
 
Consolidated Cash Flow Statments
 
Six months ended June 30 
  
2005*
US$'000 
  
2004*
US$'000 
  
           
(Loss) / Income before taxes and minority interests 
    
(412,300
)
  
281,405
  
Reversal of non-cash items 
              
Depreciation and amortization 
    
68,093
    
65,905
  
Financial income 
    
(25,828
)
  
(32,029
)
Financial expense 
    
16,010
    
12,361
  
Legal provision 
    
725,000
    
--
 
Other non-cash items
    
(16,925
)
   11,281  
Cash Flows From Operating Activities Before Working Capital Changes 
    
354,050
    
338,923
  
               
Working Capital Changes 
              
Trade accounts payable, other current liabilities and deferred income 
    
(73,180
)
  
(2,802
)
Trade accounts receivable and other receivables 
    
(18,180
)
  
(26,532
)
Inventories 
    
4,739
    
5,942
  
Prepaid expenses and other current assets 
    
(14,289
)
  
(13,858
)
Taxes paid
    
(76,029
)
   (49,532
)
Total working capital changes    
(176,939
)
   (86,782
)
Net Cash Flows From Operating Activities 
    
177,111
     252,141  
               
Investment in tangible fixed assets 
    
(76,267
)
  
(85,810
)
Proceeds from disposal of tangible fixed assets 
    
2,203
    
3,159
  
Purchase of intangible and other long-term assets 
    
(47,686
)
  
(9,936
)
Purchase of available-for-sale investments 
    
(171,825
)
  
(837,588
)
Proceeds from sale of available-for-sale investments 
    
607,453
    
302,126
  
Interest received
    
59,084
    
53,363
  
Net Cash Flows From Investing Activities 
    
372,962
     (574,686
)
               
Acquisition of treasury shares 
    
--
   
(258,974
)
Proceeds from issue of Serono shares 
    
11,055
    
10,333
  
Proceeds from exercise of options on Serono shares 
    
4,534
    
677
 
Proceeds from issue of options on Serono shares 
    
263
   
--
 
Increase in long-term financial debt 
    
32,694
    
17,339
  
Repayment of long-term financial debt 
    
--
   
(5,436
)
Change in short-term financial debt 
    
(4,728
)
  
2,301
  
Other non-current liabilities 
    
(7,942
)
  
(5,319
)
Interest paid 
    
(2,062
)
  
(2,591
)
Dividends paid
    
(110,382
)
  
(99,354
)
Net Cash Flows From Financing Activities 
    
(76,568
)
   (341,024
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
    
(1,740
)
  
(1,444
)
Net lncrease/(Decrease) in Cash and Cash Equivalents 
    
471,765
     (665,013
)
               
Cash and cash equivalents at the beginning of period 
    
275,979
    
1,003,972
  
Cash and cash equivalents at the end of period 
    
747,744
     338,959  
 
The accompanying selected explanatory notes form an intergral part of these financial statements.
 
* Unaudited 
 
-more-

Selected explanatory notes to the interim consolidated financial statements (unaudited)

1. Accounting principles
The accompanying condensed unaudited interim consolidated financial statements have been prepared in accordance with International Accounting Standard 34 (Interim Financial Reporting). The accounting policies used in the preparation of the interim consolidated financial statements are consistent with those used by Serono in its annual consolidated financial statements for the year ended December 31, 2004. These interim consolidated financial statements should be read in conjunction with the 2004 annual consolidated financial statements. These consolidated financial statements were approved for issuance on July 14th, 2005 by Serono S.A.'s board of directors.

2. Adoption of International Accounting Standards
On January 1, 2005, the group adopted revisions that were made to International Accounting Standard 39 Financial Instruments: Recognition and Measurement ("IAS 39"). Under the revised version of IAS 39, the definition of objective evidence related to the impairment of available-for-sale investments has been expanded such that any significant or prolonged decline in the fair value of an available-for-sale investment below its cost is objective evidence of impairment. Management considers "significant" to mean at least 25% of the cost of an investment and "prolonged" to mean more than six months. Accordingly, several of the group's equity investments were impaired in prior years under the revised definition of objective evidence.

The revisions to IAS 39 must be applied retrospectively, and as a result, opening retained earnings as of January 1, 2004 and 2005 have been adjusted as if this standard had always been in use. Reported other expense for the twelve months ended December 31, 2000, 2001 and 2002 has been increased by $19.3 million, $7.2 million and $14.8 million respectively, while other expense for the twelve months ended December 31, 2003 has been decreased by $10.2 million. Net income for the twelve months ended December 31, 2000, 2001 and 2002 has been decreased by $18.5 million, $5.3 million and $12.8 million, respectively, while net income for the twelve months ended December 31, 2003 has been increased by $10.0 million.

Shareholders equity as of January 1, 2004 and 2005 has been updated to incorporate the impact of the revisions made to IAS 39. Retained earnings as of January 1, 2004 and 2005 have been reduced by $26.6 million and $28.5 million, which is net of income taxes in the amounts of $4.5 million and $2.6 million, respectively. Fair value and other reserves as of January 1, 2004 and 2005 have been increased by $33.1 million and $33.3 million, respectively.

The group also adopted International Financial Reporting Standard 2 Shares-Based Payment starting January 1, 2005, which must be applied to all grants of shares, stock option or other equity instruments that were granted after November 7, 2002 and had not yet vested at January 1, 2005. As a result, other operating expense reported for the twelve months ended December 31, 2003 and 2004 has been increased by $2.9 million and $12.6 million, respectively. Other operating expense for the six months ended June 30, 2004 has been increased by $4.7 million. Net income for the above periods has been decreased by the same amounts respectively.

Retained earnings as of January 1, 2004 and 2005 have been reduced by $2.9 million and $15.5 million, respectively.

3. Segment information - geographical segment
   
Europe
  
North
America
  
Middle East,
Africa and
Eastern
Europe
  
Asia-
Pacific,
Oceania
and Japan
  
Latin
America
  
Unallocated
  
Total
  
Six months ended June 30, 2005 
  
US$000
  
US$000
  
US$000
  
US$000
  
US$000
  
US$000
  
US$000
  
                               
Product sales 
    
542,476
    
401,430
    
93,680
    
63,447
   
61,867
   
-
   
1,162,900
  
Royalty and license income 
    
96,599
    
902
   
17,736
    
-
   
-
   
-
   
115,237
  
Total revenues 
    
639,075
    
402,332
    
111,416
    
63,447
   
61,867
   
-
   
1,278,137
  
                                             
Operating loss before unallocated expenses 
    
(441,596
)
  
206,292
    
24,638
   
17,681
    
33,574
   
(50,555
)
  
(209,966
)
Corporate research and development expenses 
    
-
   
-
   
-
   
-
   
-
   
(240,578
)
  
(240,578
)
Operating loss 
                                        
(450,544
)
 
-more-

Selected explanatory notes to the interim consolidated financial statements (unaudited)

   
Europe
  
North
America
 
Middle East, Africa and
Eastern
Europe
  
Asia-Pacific,
Oceania 
and Japan
  
Latin 
America
 
Unallocated
  
Total
  
Six months ended June 30, 2004 
  
US$000
  
US$000
  
US$000
  
US$000
  
US$000
  
US$000
  
US$000
  
 
                              
Product sales 
    
463,496
    
389,260
    
87,794
   
59,734
   
55,051
    
-
   
1,055,335
  
Royalty and license income 
    
78,324
   
606
   
10,430
    
-
   
-
   
-
   
89,360
  
Total revenues 
    
541,820
    
389,866
    
98,224
   
59,734
   
55,051
    
-
   
1,144,695
  
                                             
Operating income before unallocated expenses 
    
210,133
    
213,260
    
28,624
   
18,528
    
27,404
    
(46,921
)
  
451,028
  
Corporate research and development expenses 
    
-
   
-
   
-
   
-
   
-
   
(194,067
)
  
(194,067
)
Operating income
                                       
256,961
  
 
Unallocated items represent income, expenses or corporate coordination functions which are not directly attributable to specific geographical segments. Product sales are based on the country in which the customer is located while royalty and license income is based on the country that receives the royalty. There are no sales or other transactions between the business segments.

4. Available-for-sale investments
In the second quarter of 2005, the group has sold its investment in Celgene for total net proceeds of $37.1 million resulting in a gain on sale of $30.0 million which is reported as other income. The group originally paid $10.1 million for an investment in Signal Pharmaceuticals, a company which was eventually acquired by Celgene. The group received shares in Celgene in exchange for it shares in Signal, which at the time of exchange had a total value of $34.4 million. The adjusted cost of the group's investment in Celgene was $7.1 million after the recognition of $27.3 million in impairment losses that have been recognized in prior years as described in note 2.
 
The group has recognized total unrealized losses on its investment in CancerVax during the first six months of 2005 of $8.4 million reported as a reduction of other income. The total original cost of the investment in CancerVax was$12.0 million, which was acquired as part of an in-licensing agreement for the development and commercialization of Canvaxin™. Included within the original cost was a premium of $0.7 million that was reported as research and development expense in 2004. The adjusted cost of the investment after the recognition of losses is $2.8 million and corresponds to the closing share price of CancerVax as of June 30, 2005.

5. Taxes
Tax income recognized for the six months ended June 30, 2005 includes $64.5million in deferred tax income from the recognition of exceptional litigation expense and related costs that was recorded during the period as disclosed in note 13 legal proceedings. The tax rate for the six months ended June 30, 2005, after removing the impact of the provision for exceptional litigation expense and related costs, is 14.1%.

6. Loss per share
Basic loss per share
Basic loss per share is calculated by dividing the net loss attributable to shareholders by the weighted average number of shares outstanding during the period presented. The number of outstanding shares is calculated by deducting the average number of shares purchased and held as treasury shares from the total number of issued shares.
 
   
Six months ended June 30
  
   
2005
  
2004
  
   
US$000
  
US$000
  
Net (loss) / income attributable to bearer shareholders 
    
(273,861
)
  
170,445
  
Net (loss) / income attributable to registered shareholders 
    
(118,764
)
  
66,799
  
Total net (loss) / income 
    
(392,625
)
  
237,244
  
               
Weighted average number of bearer shares outstanding 
    
10,158,113
    
11,240,537
  
Weighted average number of registered shares outstanding 
    
11,013,040
    
11,013,040
  
 
-more-
 
Selected explanatory notes to the interim consolidated financial statements (unaudited)
   
Six months ended June 30
  
   
2005 
  
2004 
  
   
US$
 
US$
 
Basic (loss) / earnings per share 
          
Bearer shares 
    
(26.96
)
  
15.16
  
Registered shares 
    
(10.78
)
  
6.07
  
American depositary shares 
    
(0.67
)
  
0.38
  
 
Basis earnings per share for the three months ended June 30, 2005 was $12.02 compared to $8.52 for the three months ended June 30, 2004, which includes the impact from the retrospective application of IFRS 2 Share-based Payment that resulted in a $3.6 million reduction of net income reported in 2004.

Diluted loss per share
For diluted loss per share, the weighted average number of bearer shares outstanding is adjusted to assume conversion of all potential dilutive shares arising from outstanding stock options and the convertible bond. The effect of outstanding stock options and the convertible bond are both anti-dilutive.

Fully diluted earnings per share for the three months ended June 30, 2005 was $11.90 compared to $8.49 for the three months ended June 30, 2004, which also includes the impact from the retrospective application of IFRS 2 Share-based Payment that resulted in a $3.6 million reduction of net income reported in 2004. Diluted earnings per share for the three months ended June 30, 2005 includes the dilutive impact of outstanding stock options that are in the money as well as the conversion of the convertible bond that would result in the issuance of an additional 448,595 bearer shares (2004: 449,409).

7. Share capital
   
As of June 30, 2005
  
Class of shares 
  
Number of shares
 
Nominal value
  
CHF000
  
US$000
  
Issued and fully paid share capital 
                  
Registered 
    
11,013,040
    
CHF10
    
110,130
    
68,785
  
Bearer 
    
11,768,819
    
CHF25
    
294,221
    
186,273
  
Total 
                
404,351
    
255,058
  
                           
Authorized share capital - bearer
   
1,400,000
    
CHF25
    
35,000
    
27,288
  
Conditional share capital - bearer for options and/or convertible bonds 
    
1,452,000
    
CHF25
    
36,300
    
28,302
  
Conditional share capital - bearer for stock options 
    
696,007
    
CHF25
    
17,400
    
13,566
  
                           
 
  
    As of December 31, 2004    
  
Class of shares 
    
Number of shares
    
Nominal value
    
CHF000
  
 
US$000
  
Issued and fully paid share capital 
                          
Registered 
    
11,013,040
    
CHF10
    
110,130
    
68,785
  
Bearer 
    
11,738,175
    
CHF25
    
293,455
    
185,635
  
Total 
                
403,585
    
254,420
  
                           
Authorized share capital - bearer
   
1,400,000
    
CHF25
    
35,000
    
30,905
  
Conditional share capital - bearer for option and/or convertible bonds 
    
1,452,000
    
CHF25
    
36,300
    
32,053
  
Conditional share capital - bearer for stock options 
    
726,651
    
CHF25
    
18,166
    
16,041
  
The authorized share capital may be used by Serono S.A. or its affiliates to finance research and development projects and acquire interests in other companies.
 
8. Treasury shares

There were 1,611,434 treasury shares held by the group as of January 1, 2005. During the first six months ended June 30, 2005 no additional treasury shares were acquired (2004: 410,259 treasury shares for a total consideration of CHF327.5 million or $259.0 million). During the first six months of 2005, 5,766 treasury shares were granted to employees (6,648 shares in 2004), as part of the employee share purchase plan whereby shares purchased under the plan that are held for one year after the purchase date entitle each participant to receive, on a one-time basis, one matching share for every three shares purchased and held. In addition, 988 treasury shares were issued upon the exercise of director stock options.
 
-more-

Selected explanatory notes to the interim consolidated financial statements (unaudited)

In May 2004, a new Share Buy Back Plan was authorized to acquire CHF750.0 million in bearer shares over a maximum period of five years. The shares acquired under this Share Buy Back Plan, 962,435 bearer shares, will be cancelled in July 2005. The total number of treasury shares held as of June 30, 2005 is 1,604,680.

9. Distribution of earnings

The proposed gross dividend in respect of 2004 of CHF3.60 gross (2003: CHF3.20) per registered share, CHF9.00 gross (2003: CHF8.00) per bearer share or CHF 0.23 gross (2003: CHF0.20) per American depositary share, was approved by shareholders at the Serono Annual General Meeting held on April 26, 2005. The dividend equivalent to $110.4 million was subsequently paid on April 29 and has been accounted for an appropriation of retained earnings in the six months ended June 30, 2005.

10. Stock option plan

Employee stock option plan
Stock options are granted to senior management of Serono S.A. and its affiliates. Each stock option gives the holder the right to purchase one bearer share or one American depositary share ("ADS") of Serono S.A. Stock options are granted every plan year and vest as follows: 25% one year after date of grant, 50% after two years, 75% after three years and 100% after four years. Options expire six years after the fourth and final vesting date such that each option has a 10-year duration. The exercise price is generally equal to the fair market value of the underlying Serono S.A. bearer share or American depositary shares on the date of grant.
 
Movements in the number of employee bearer stock options outstanding are as follows:
 
   
2005
  
2004
  
       
Weighted
      
Weighted
  
       
average
      
average
  
   
Bearer
  
exercise
  
Bearer
  
exercise
 
   
options
  
price CHF
  
options
  
price CHF
  
Outstanding as of January 1 
    
346,446
    
995
   
277,782
    
1,068
  
Granted 
    
91,465
    
859
   
93,920
    
792
 
Exercised 
    
(7,885
)
  
615
   
(1,480
)
  
578
 
Cancelled 
    
(12,450
)
  
1,110
    
(12,094
)
  
1,126
  
Outstanding as of June 30 
    
417,576
    
969
   
358,128
    
996
 
 
Movements in the number of employee ADS stock options outstanding are as follows:
 
   
2005
  
2004
  
       
Weighted
      
Weighted
  
       
average
      
average
  
   
ADS
 
exercise
  
ADS
 
exercise
  
   
options
  
price US$
  
options
  
price US$
  
Outstanding as of January 1 
    
1,066,800
    
15.54
    
20,000
    
16.51
  
Granted 
    
834,200
    
17.73
    
1,081,400
    
15.52
  
Exercised 
    
(5,550
)
  
15.55
    
-
   
-
 
Cancelled 
    
(143,800
)
  
15.82
    
(37,200
)
  
15.55
  
Outstanding as of June 30 
    
1,751,650
    
16.56
    
1,064,200
    
15.54
  

During the first six months ended June 30, 2005, 7,885 bearer stock options (2004: 1,480 bearer stock options) were exercised yielding proceeds of CHF4.9 million or $3.9 million (2004: CHF0.9 million or $0.7 million). Bearer and ADS stock options cancelled in all years since inception of the plan are the result of options forfeited by participants upon their departure from the group. The total number of bearer and ADS stock options available for grant as of June 30, 2005 is 211,320 options (2004: 326,516 options).
 
-more-

Selected explanatory notes to the interim consolidated financial statements (unaudited)

Director stock option plan
Stock options are granted to members of the Board of Directors of Serono S.A. Each stock option gives the holder the right to purchase one bearer share of Serono S.A. stock. Stock options are granted every plan year and vest beginning one year after their grant ratably over four years. Each option has a 10-year duration. The exercise price is equal to the fair market value of the underlying Serono S.A. bearer share on the date of grant. There were 5,200 options granted (2004: 5,200) to directors during the first six months ended June 30, 2004 and 2005. In addition, 1,320 options were exercised during 2005 yielding total proceeds of CHF0.7 million. No director stock options have been cancelled. There are 24,600 director stock options outstanding as of June 30, 2005 (2004: 20,720 director stock options) with a weighted average exercise price of CHF770 (2004: CHF755).

During the period, the group has recognized compensation expense related to the fair value of stock options granted to employees and directors in the amount of $8.8 million (2004: $4.7 million) as required under International Financial Reporting Standard 2 Share-based Payment. This compensation expense is reported as other operating expense.

11. Share purchase plans

Employee share purchase plan
The group has an employee share purchase plan ("ESPP") covering substantially all of its employees. The ESPP is designed to allow employees to purchase bearer shares or American depositary shares at 85% of the lower of the fair market value at the date of the beginning of the plan period and the purchase date. Purchases under the ESPP are subject to certain restrictions and may not exceed 15% of the employee's annual salary. During the first half 2005, 20,940 bearer shares (2004: 20,301 bearer shares) were issued to employees at a price of CHF630 per share (2004: CHF654 per share). As of June 30, 2005, a total of $5.6 million (2004: $5.3 million) in contributions was held by the group to be used to purchase bearer and American depositary shares on behalf of employees in January 2006. The accrued compensation cost from the discount to be offered to employees based on the contributions held as of June 30, 2005 was $1.7 million (2004: $0.5 million).
 
Shares purchased under the ESPP that are held for one year after the purchase date entitle each participant to receive, on a one-time basis, one matching share for every three shares purchased and held. In January 2005, 5,766 bearer shares (2004: 6,648 bearer shares) were distributed to employees. The accrued compensation cost for the six months ended June 30, 2005 related to the matching shares that will be distributed in January 2006 is $2.1 million (2004: $2.1 million) and is calculated based on the number of matching shares multiplied by the quarter-end share price.

Director share purchase plan
During 2003, the group initiated a share purchase plan reserved for its Board of Directors ("DSPP"). The DSPP allows board members to purchase Serono S.A. bearer shares through allocation of 50% or 100% of their gross yearly fees. Each cycle commences on the first business day following the Annual General Meeting of Shareholders ("AGM") and concludes on the day of the next AGM. Directors must elect to participate in the DSPP at the beginning of each cycle. The purchase price per share is 85% of the fair market value of the share on the fifth business day following the AGM. Shares are purchased at the end of each cycle. During the first six months ended June 30, 2005, 1,348 bearer shares (1,518 in 2004) were issued to the directors that participate in the plan.

12. Principal shareholders

As of June 30, 2005, Bertarelli & Cie, a partnership limited by shares with its principal offices at Chéserex (Vaud), Switzerland, held 53.87% of the capital and 67.18% of the voting rights in Serono S.A. Ernesto Bertarelli controls Bertarelli & Cie. On the same date, Maria-Iris Bertarelli, Ernesto Bertarelli and Donata Bertarelli Späth owned in the aggregate 4.51% of the capital and 8.61% of the voting rights of Serono S.A.
 
-more-

Selected explanatory notes to the interim consolidated financial statements (unaudited)

13. Legal proceedings
 
The group's principal U.S. subsidiary, Serono, Inc., received a subpoena in 2001 from the U.S. Attorney's office in Boston, Massachusetts requesting that it produce documents for the period from 1992 to the present relating to Serostim. During 2002, Serono, Inc. also received subpoenas from the states of California, Florida, Maryland and New York, which mirror the requests in the U.S. Attorney's subpoena. As part of an ongoing, industry-wide investigation by the states and the federal government into the setting of average wholesale prices and commercial practices, other pharmaceutical companies have received similar subpoenas. These investigations seek to determine whether such practices violated any laws, including the Federal False Claims Act or the U.S. Food, Drug and Cosmetic Act or constituted fraud in connection with Medicare and/or Medicaid reimbursement to third parties. Serono has cooperated fully with the investigation and continues to do so. Although no final agreement has been reached, the company's discussions with the US Attorney's office have advanced to a point where it is now appropriate to take a provision that management believes will be sufficient to cover resolution of the investigation related to Serostim. A provision in the amount of $725.0 million ($660.5 million after-tax) in connection with these investigations has been charged against the 2005 earnings. The company believes that the provision will be fully utilized before the end of the year.
 
-end-
 
Reconciliation of "Adjusted" Earnings Guidance to IFRS Earnings Guidance for the Year Ending December 31, 2005
(In thousands)
       
   
 Low
 
 High
  
"Adjusted" earnings guidance 
  
$
520,000
  
$
540,000
  
               
Known adjustments to arrive at IFRS earnings guidance 
              
Litigation expense and related costs (1) 
    
(725,000
)
  
(725,000
)
Tax impact on litigation expense and related costs (1) 
    
64,525
    
64,525
  
Gain on sale of investment (2) 
    
29,963
    
29,963
  
Tax impact on gain on sale of investment (2) 
    
(1,439
)
  
(1,439
)
Impairment loss on investment (3) 
    
(8,440
)
  
(8,440
)
               
IFRS earnings guidance 
  
$
(120,391
)
$
(100,391
)

(1)
To exclude the provision for the amount of $725.0 million ($660.5 million after-tax) from the investigation related to Serostim. The provision has been reported within operating expenses. 

(2)
To exclude the gain in the amount of $30.0 million ($28.5 million after-tax) from the sale of the investment in Celgene. The gain has been reported as other income. 

(3)
To exclude the impairment loss recognized for the amount of $8.4 million on the investment in CancerVax. The impairment loss has been reported against other income.
 
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
   
SERONO S.A.
   
a Swiss corporation
   
(Registrant)
     
     
July 20, 2005
By:
/s/ Stuart Grant
   
Name: Stuart Grant
   
Title: Chief Financial Officer