accounting

F. Hoffmann-La Roche Ltd 4070 Basel, Switzerland

© 2018

All trademarks are legally protected.

www.roche.com

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Finance Report 2017

F. Hoffmann-La Roche Ltd 4070 Basel, Switzerland

© 2019

All trademarks are legally protected.

www.roche.com

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018 P A T I E N T S In cancer, modern care helps where no effective treatments were avai lable prev iously. Innovative therapies allow this woman on the  cover picture to carry on with her life. See back cover for more.

I N N O V A T I O N Advanced analytics enable us to create a wealth of new data insights and opportunities across the entire  product lifecycle and R&D value chain to ultimately improve outcomes for patients.

P A R T N E R S Roche is expanding its colla b- orations, combining its own strengths with the unique tools of its partners to elevate personalised healthcare to a new level for many more patients.

HER JOURNE Y TO RECOVERY The woman shown on the cover of  the Roche Finance Report this year appeared on the cover of our 2017 report as well. Last year she was in the midst of receiving treatment for her breast cancer when photographed and this came through powerfully on the cover.

Now, a year later, she is enjoying life again.

Finance Report 2018

Finance in Brief

Pharmaceuticals + 7.2 +5.3

+ 7.0

+5.0

+ 7.1

+5.2

2018

2017

Key results

Sales CER growth %

43.1

42.7

15.9

15.8

36.1

35.7

Core operating profit margin % of sales

Diagnostics

Group

2018

2017

2018

2017

2018 2017 % change % of sales (CHF m) (CHF m) (CHF ) (CER) 2018 2017

IFRS results Sales 56,846 53,299 +7 +7

Operating profit 14,769 13,003 +14 +15 26.0 24.4

Net income 10,865 8,825 +23 +24 19.1 16.6

Net income attributable to Roche shareholders 10,500 8,633 +22 +23 18.5 16.2

Diluted EPS (CHF ) 12.21 10.04 +22 +23

Dividend per share (CHF ) 8.701) 8.30 +5

Core results Research and development 11,047 10,392 +6 +6 19.4 19.5

Core operating profit 20,505 19,012 +8 +9 36.1 35.7

Core EPS (CHF ) 18.14 15.34 +18 +19

Free cash flow Operating free cash flow 18,741 17,827 +5 +5 33.0 33.4

Free cash flow 14,811 13,420 +10 +11 26.1 25.2

2018 2017 % change (CHF m) (CHF m) (CHF ) (CER)

Net debt (5,652) (6,963) –19 –19

Capitalisation 49,136 47,967 +2 +4

– Debt 18,770 18,960 –1 –1

– Equity 30,366 29,007 +5 +6

1) Proposed by the Board of Directors.

CER (Constant E xchange Rates): The percentage changes at constant exchange rates are calculated using simulations by reconsolidating both the 2018 and 2017 results at constant exchange rates (the average rates for the year ended 31 December 2017). For the definition of CER see page 162.

Core results and Core EPS (earnings per share): These exclude non-core items such as global restructuring plans and amor tisation and impairment of goodwill and intangible assets. This allows an assessment of both the actual results and the underlying per formance of the business. A full income statement for the Group and the operating results of the divisions are shown on both an IFRS and core basis. The core concept is fully described on pages 155–158 and reconciliations between the IFRS and core results are given there.

Free cash flow is used to assess the Group’s ability to generate the cash required to conduct and maintain its operations. It also indicates the Group’s ability to generate cash to finance dividend payments, repay debt and to under take merger and acquisition activities. The free cash flow concept is used in the internal management of the business. The free cash flow concept is fully described on pages 158–160 and reconciliations between the IFRS cash flow and free cash flow are given there.

Finance – 2018 in Brief

Roche in 2018

The Roche Group reported very strong overall results in 2018. Sales grew by 7% at constant exchange rates (CER). IFRS net income increased by 24% (CER) and core earnings per share increased by 19% (CER). A major driver was the US tax reform and, excluding this, core earnings per share grew by 8%.

Sales

Group sales increased by 7% (CER) to CHF 56.8 billion (7% growth in CHF terms). Pharmaceuticals sales growth was 7% (CER) due to the new medicines Ocrevus, Perjeta, Tecentriq, Alecensa and Hemlibra. In oncology there was continued growth in the HER2 franchise and Avastin. MabThera/Rituxan sales fell following biosimilar launches in Europe while biosimilar entry in the US was delayed. Immunology sales increased, led by Actemra/RoActemra and Xolair. Diagnostics sales showed growth of 7% (CER) with the immunodiagnostics business being the major contributor.

Operating results

Core operating profit increased by 9% (CER) to CHF 20.5 billion (8% increase in CHF terms). Research and development expenditure grew by 6% (CER) to CHF 11.0 billion on a core basis, with focus on the oncology, neuroscience and immunology therapeutic areas. Research and development costs represented 19.4% of Group sales. IFRS operating results include non-core expenses (pre-tax) of CHF 5.7 billion. The major factors were CHF 3.3 billion for the impairment of goodwill and intangible assets, notably CHF 1.8 billion relating to the InterMune acquisition.

Non-operating results

Financing costs (IFRS) decreased by 8% to CHF 0.8 billion due to the base effect of 2017 debt redemption losses. Income tax expenses (IFRS) decreased by 3% at CER to CHF 3.3 billion. The effective core tax rate for 2018 was 19.7%, with the US tax reform decreasing this rate by more than 7 percentage points.

Net income

IFRS net income increased by 24% at CER to CHF 10.9 billion (23% increase in CHF terms). Core earnings per share increased by 19% at CER (+18% in CHF terms).

Cash flows

Operating free cash flow increased to CHF 18.7 billion. The underlying cash generation in both divisions led to an increase of operating free cash flow of 5% at CER and in CHF terms. Free cash flow increased by 11% at CER (+10% in CHF terms) to CHF 14.8 billion, driven by the higher operating free cash flow and lower income tax payments.

Financial position

Net working capital decreased by 10% (CER), driven by lower inventories in the Pharmaceuticals Division. Net debt decreased to CHF 5.7 billion, the free cash flow more than covered the dividends and payments for mergers and acquisitions. Net debt as a percentage of total assets was 7.2%. Credit ratings strong: Moody’s at Aa3 and Standard & Poor’s at A A.

Shareholder return

Dividends. A proposal will be made to increase dividends by 5% to CHF 8.70 per share. This will represent the 32nd consecutive year of dividend growth and will result in a pay-out ratio of 48.0%, subject to AGM approval. Total Shareholder Return (TSR) was 2% representing the combined performance of share and non-voting equity security.

Roche Group

Finance in Brief Inside cover

Finance – 2018 in Brief 1 Financial Review 3 Roche Group Consolidated Financial Statements 40 Notes to the Roche Group Consolidated Financial Statements 46

1. General accounting principles 46 2. Operating segment information 48 3. Revenue 51 4. Net financial expense 54 5. Income taxes 55 6. Mergers and acquisitions 58 7. Global restructuring plans 62 8. Property, plant and equipment 65 9. Goodwill 68

10. Intangible assets 72 11. Inventories 75 12. Accounts receivable 76 13. Marketable securities 76 14. Cash and cash equivalents 77 15. Other non-current assets 77 16. Other current assets 78 17. Accounts payable 78

18. Other non-current liabilities 79 19. Other current liabilities 79 20. Provisions and contingent liabilities 80 21. Debt 85 22. Equity attributable to Roche shareholders 89 23. Subsidiaries and associates 92 24. Non-controlling interests 95 25. Employee benefits 96 26. Pensions and other post-employment benefits 96 27. Equity compensation plans 103 28. Earnings per share and non-voting equity security 106 29. Statement of cash flows 107 30. Risk management 109 31. Related parties 120 32. List of subsidiaries and associates 122 33. Significant accounting policies 127

Report of Roche Management on Internal Control over Financial Reporting 141 Statutory Auditor’s Report to the General Meeting of Roche Holding Ltd, Basel 142 Independent Reasonable Assurance Report on Internal Control over Financial Reporting 150 Multi-Year Overview and Supplementary Information 152 Roche Securities 163

Roche Holding Ltd, Basel Financial Statements 166 Notes to the Financial Statements 168 Appropriation of Available Earnings 173 Statutory Auditor’s Report to the General Meeting of Roche Holding Ltd, Basel 174

Roche Finance Repor t 2018 | 3

Financial Review | Roche Group

Financial Review

Roche Group results

2018

2017

2016

+ 7.1

+ 5.2

+ 4.0

Sales in billions of CHF

% CER growth

0 10 20 30 40 50

Core operating profit in billions of CHF

36.1

35.7

36.4

% of sales

0 5 10 15 20

2018

2017

2016

10.5

8.6

9.6

Net income attributable to Roche shareholders in billions of CHF

0 42 86 1210 0 15105

18.14

15.34

14.53

Core EPS in CHF

In 2018 the Roche Group reported sales growth of 7% at constant exchange rates (CER) and core operating profit growth of 9%. IFRS net income increased by 24% and Core EPS increased by 19% due to the growth of the business and the impact of the 2017 US tax reform. The sales growth was driven by the new Pharmaceuticals medicines, which more than compensated for the growing impacts of biosimilar competition in Europe, and by the immunodiagnostics business in the Diagnostics Division. The Group improved its operating profitability through various productivity initiatives, while supporting the launch of new products and continuing its investments in research and development. Operating free cash flow was CHF 18.7 billion, an increase of 5%, due to higher cash generated by the business partly offset by higher capital expenditure.

Divisional operating results for 2018

Pharmaceuticals

(CHF m) Diagnostics

(CHF m) Corporate

(CHF m) Group

(CHF m)

Sales 43,967 12,879 – 56,846

Core operating profit 18,942 2,046 (483) 20,505

– margin, % of sales 43.1 15.9 – 36.1

Operating profit 14,788 617 (636) 14,769

– margin, % of sales 33.6 4.8 – 26.0

Operating free cash flow 17,851 1,416 (526) 18,741

– margin, % of sales 40.6 11.0 – 33.0

Divisional operating results – Development of results compared to 2017

Pharmaceuticals Diagnostics Corporate Group

Sales

– % increase at CER +7 +7 – +7

Core operating profit

– % increase at CER +8 +9 –4 +9

– margin: percentage point increase +0.5 +0.3 – +0.5

Operating profit

– % increase at CER +13 +115 +16 +15

– margin: percentage point increase +1.6 +2.6 – +1.7

Operating free cash flow

– % increase at CER +6 –8 –3 +5

– margin: percentage point increase –0.3 –1.8 – –0.5

4 | Roche Finance Repor t 2018

Roche Group | Financial Review

Sales in the Pharmaceuticals Division were CHF 44.0 billion (2017: 41.2 billion). New products were the major growth driver, with Ocrevus, Perjeta, Tecentriq, Alecensa and Hemlibra together contributing an additional CHF 2.9 billion (CER) of new sales. Ocrevus in particular continued its strong performance with total sales now reaching CHF 2.4 billion due to continuing growth in the US and launches in most major European markets in 2018. Perjeta sales were CHF 2.8 billion, an increase of 27%, with higher demand in early-stage adjuvant settings in the US. New product sales more than compensated for the initial impacts of biosimilar entry in Europe and Japan, where sales of MabThera/Rituxan and Herceptin fell by CHF 1.3 billion (CER) during 2018. The first biosimilar versions of MabThera/Rituxan were anticipated to come to market in the US in mid- to end-2018. The first biosimilar versions of MabThera/Rituxan, Herceptin and Avastin are now anticipated to come to market in the US in the second half of 2019. Avastin sales were 3% higher mainly due to growth in China. Sales growth in immunology was 8%, with sales of Actemra/RoActemra, Xolair and Esbriet all increasing by over 10%. Lucentis sales grew 18% in the US with increased market share across all indications. Competitive pressure in the US led to a 36% fall in Tarceva sales.

The Diagnostics Division reported sales of CHF 12.9 billion, an increase of 7% at CER. The major growth area was Centralised and Point of Care Solutions, which represented more than half of the division’s sales and which grew by 8%, led by the immunodiagnostics business. Molecular Diagnostics sales increased by 5%, with growth from the cobas Liat system, blood screening and virology businesses, while Diabetes Care sales increased by 2%.

IFRS operating profit increased by 13% in the Pharmaceuticals Division and by 115% in the Diagnostics Division, with the results of both divisions impacted by impairments of goodwill and intangible assets in both the current year and the comparative period. The 2018 results include CHF 3.3 billion for the impairment of goodwill and intangible assets, with the largest items being CHF 1.8 billion relating to the InterMune acquisition. Impairments of goodwill and intangible assets in 2017 were CHF 3.5 billion. Amortisation of intangible assets was CHF 1.3 billion and there were CHF 0.9 billion of expenses from global restructuring plans.

The Pharmaceuticals Division’s core operating profit increased by 8% at CER, which was above the 7% sales increase. Cost of sales increased by 10%, due to volume-driven growth in manufacturing costs and increased royalty expenses, notably for Ocrevus. Marketing and distribution grew by 4% due to product launches including Ocrevus and Tecentriq. Research and development costs grew by 6%, especially in the oncology, neuroscience and immunology therapeutic areas. Operating profitability benefited from various productivity initiatives. IFRS operating profit grew ahead of the core operating profit due to lower restructuring charges and also due to lower amortisation charges for intangible assets. Operating free cash flow grew with the underlying business partly offset by higher capital expenditure, notably at Chugai.

In the Diagnostics Division core operating profit increased by 9% at CER, which was also above the increase in sales of 7%. Cost of sales grew by 6% due to increased sales volumes partially offset by favourable instrument and reagent mixes. Research and development increased by 7% due to higher spending on high/mid-volume systems in Centralised and Point of Care Solutions and development of digital clinical decision support products. IFRS operating profit grew by more than core operating profit as a result of lower amortisation charges for intangible assets. Operating free cash flow was 11% of sales, but decreased due to the higher net working capital.

The Group’s operating free cash flow was CHF 18.7 billion, an increase of 5% at CER, due to the high cash generation of the business, partly offset by higher capital expenditure. The free cash flow was CHF 14.8 billion, an increase of CHF 1.4 billion, due to the higher operating free cash flow and lower income tax payments.

Financing costs were 8% lower on an IFRS basis at CHF 0.8 billion due to the base impact of the losses on debt redemption in the prior year. Income tax expenses were lower, with the Group’s effective core tax rate at 19.7% compared to 26.6% in 2017. This was largely due to the impact from the US tax reform which decreased the effective core tax rate by more than 7 percentage points.

Net income increased by 24% at CER on an IFRS basis and by 20% on a core basis, driven in both cases by the operating results and the impact of the US tax reform. Excluding the impact of the US tax reform Core EPS increased by 8%.

The results expressed in Swiss francs were negatively impacted by the appreciation of the Swiss franc against the US dollar and the Brazilian real, partly offset by the depreciation of the Swiss franc against the euro. The net impact on the results expressed in Swiss francs compared to constant exchange rates was negligible on sales and a 1 percentage point impact on core operating profit and on Core EPS.

Roche Finance Repor t 2018 | 5

Financial Review | Roche Group

Income statement

2018 (CHF m)

2017 (CHF m)

% change (CHF )

% change (CER)

IFRS results Sales 56,846 53,299 +7 +7

Royalties and other operating income 2,651 2,447 +8 +9

Revenue 59,497 55,746 +7 +7 Cost of sales (17,269) (18,179) –5 –5

Marketing and distribution (10,109) (9,847) +3 +3

Research and development (12,092) (11,292) +7 +7

General and administration (5,258) (3,425) +54 +54

Operating profit 14,769 13,003 +14 +15

Financing costs (770) (839) –8 –8

Other financial income (expense) 149 84 +77 +73

Profit before taxes 14,148 12,248 +16 +17

Income taxes (3,283) (3,423) –4 –3

Net income 10,865 8,825 +23 +24

Attributable to

– Roche shareholders 10,500 8,633 +22 +23

– Non-controlling interests 365 192 +90 +88

EPS – Basic (CHF ) 12.29 10.12 +21 +23

EPS – Diluted (CHF ) 12.21 10.04 +22 +23

Core results 1) Sales 56,846 53,299 +7 +7

Royalties and other operating income 2,635 2,447 +8 +8

Revenue 59,481 55,746 +7 +7 Cost of sales (15,464) (14,366) +8 +8

Marketing and distribution (9,905) (9,512) +4 +4

Research and development (11,047) (10,392) +6 +6

General and administration (2,560) (2,464) +4 +4

Operating profit 20,505 19,012 +8 +9

Financing costs (744) (819) –9 –9

Other financial income (expense) 149 75 +99 +94

Profit before taxes 19,910 18,268 +9 +10

Income taxes (3,929) (4,864) –19 –18

Net income 15,981 13,404 +19 +20

Attributable to

– Roche shareholders 15,593 13,192 +18 +19

– Non-controlling interests 388 212 +83 +82

Core EPS – Basic (CHF ) 18.25 15.47 +18 +19

Core EPS – Diluted (CHF ) 18.14 15.34 +18 +19

1) See pages 155–158 for the definition of core results and Core EPS.

6 | Roche Finance Repor t 2018

Roche Group | Financial Review

Mergers and acquisitions

The Group has implemented the amendments to IFRS 3 ‘Business Combinations’ issued in October 2018. The amendments further clarify the definition of a business. The effect of the amendments is particularly applicable for many of the acquisitions carried out by the Roche Group, since the value in the acquired companies often consists of the rights to a single product or technology. From 2018 such transactions will be accounted for as asset acquisitions rather than as business combinations. As a result the acquisition of Ignyta has been reassessed and accounted for as an asset acquisition in the 2018 Annual Financial Statements rather than as a business combination as disclosed in the 2018 Interim Financial Statements. Further details are given in Note 6 to the Annual Financial Statements.

Business combinations. On 5 April 2018 the Pharmaceuticals Division acquired a 100% controlling interest in Flatiron Health, Inc. (‘Flatiron Health’) for CHF 1.6 billion. Flatiron Health is a market leader in the curation and development of real-world evidence for cancer research as well as oncology-specific electronic health record software.

Asset acquisitions. On 8 February 2018 the Pharmaceuticals Division acquired a 100% controlling interest in Ignyta, Inc. (‘Ignyta’) for CHF 1.8 billion. With the acquisition, the Group obtained rights to Ignyta’s lead product candidate, entrectinib, an orally bioavailable, CNS-active tyrosine kinase inhibitor for patients who have tumours that harbour ROS1 or NTRK fusions. The Pharmaceuticals Division also completed the acquisitions of Tusk Therapeutics Ltd and Jecure Therapeutics, Inc. for a total cash consideration of CHF 0.2 billion.

Other transactions. On 18 June 2018 the Group entered into a merger agreement with Foundation Medicine, Inc. (‘FMI’) to acquire the outstanding shares of FMI’s common stock not already owned by the Group at a price of USD 137.00 per share in cash. FMI has been a fully consolidated subsidiary of the Group since 2015. On 31 July 2018 the transaction closed and FMI became a 100% owned subsidiary of the Group. The cash consideration for the purchase of all public shares, including shares issuable on FMI’s outstanding stock incentive plans and payment of related fees and expenses, amounted to CHF 2.3 billion. These amounts have been recorded to equity as a change in ownership interest in subsidiaries.

Further details are given in Notes 6 and 30 to the Annual Financial Statements.

Global restructuring plans

During 2018 the Group continued with the implementation of various resourcing flexibility plans in its Pharmaceuticals Division to address various future challenges including biosimilar competition. The focus areas of the plans include biologics manufacturing, commercial operations and product development/strategy. The Group also continued with the implementation of several major global restructuring plans initiated in prior years, notably the strategic realignment of the Pharmaceuticals Division’s manufacturing network, and programmes to address long-term strategy in the Diagnostics Division.

Global restructuring plans: costs incurred in 2018 in millions of CHF

Diagnostics1) Site consolidation2) Other plans3) Total

Global restructuring costs

– Employee-related costs 105 153 202 460

– Site closure costs 49 173 5 227

– Divestment of products and businesses 8 0 0 8

– Other reorganisation expenses 73 1 138 212

Total global restructuring costs 235 327 345 907

Additional costs

– Impairment of goodwill 0 0 0 0

– Impairment of intangible assets 0 0 0 0

– Legal and environmental cases 7 12 0 19

Total costs 242 339 345 926

1) Includes strategy plans in the Diagnostics Division. 2) Includes the Pharmaceuticals Division’s strategic realignment of its manufacturing network and resourcing flexibility in biologics manufacturing network. 3) Includes plans for outsourcing of IT and other functions to shared ser vice centres and external providers and for resourcing flexibility in the Pharmaceuticals Division’s

commercial operations and global product development /strategy organisations.

Roche Finance Repor t 2018 | 7

Financial Review | Roche Group

Diagnostics Division. Strategy plans in the Diagnostics Division incurred costs of CHF 87 million mainly for employee-related matters. Costs of CHF 36 million are included for the divestment of subsidiary in Germany and costs related to a reorganisation in the Molecular Diagnostics business were CHF 27 million. Spending on other plans within the division was CHF 92 million.

Site consolidation. Costs from the Pharmaceuticals Division’s strategic realignment of its manufacturing network were CHF 117 million and mainly related to the exit from the manufacturing site at Clarecastle, Ireland. The resourcing flexibility plan in the biologics manufacturing network incurred costs of CHF 215 million, mainly relating to asset impairment and severance costs. Integration costs following the Ignyta acquisition were CHF 46 million.

Other global restructuring plans. Resourcing flexibility initiatives in the Pharmaceuticals Division incurred costs of CHF 146 million, mainly employee-related. The other major item was CHF 111 million for plans for outsourcing to shared service centres and external providers. Other plans include IT plans totalling CHF 88 million.

In 2017 total global restructuring costs were CHF 1.2 billion. Further details are given in Note 7 to the Annual Financial Statements.

Impairment of goodwill and intangible assets

Pharmaceuticals Division. There were impairment charges of CHF 2.4 billion, with the major item being net expenses of CHF 1.8 billion relating to the goodwill and intangible assets from the InterMune acquisition in 2014.

During 2018 the Group made a comprehensive reassessment of the cash-generating units used for allocating goodwill in the Pharmaceuticals Division, as detailed in Note 9 to the Annual Financial Statements. This reassessment was made in light of the following factors:

• Ongoing business transformations within the Pharmaceuticals Division during 2018. • The acquisition of Flatiron Health effective April 2018 and the transaction to fully acquire Foundation Medicine effective July 2018. • The early adoption of the amendments to IFRS 3 ‘Business Combinations’ that were issued in October 2018. These amendments further clarify the definition of a business and whether a transaction represents in substance the purchase of a business or a single asset or group of similar assets.

The Group reviewed the assets and liabilities that were acquired in 2014 from the InterMune transaction in detail including the initial valuations, the reports made for the purposes of the acquisition accounting and subsequent integration process. The conclusion of this review was that, apart from the intangible asset representing the acquired rights to Esbriet and the related deferred taxation liabilities, there were no other assets or liabilities recorded on the Group’s balance sheet, no other revenue streams and no other parts of the acquired company that had any synergistic benefits for the continued operations of the Roche Group.

In substance, as at 31 December 2018, the remaining value to the Group from the InterMune acquisition is estimated at CHF 2.4 billion. This solely relates to the acquired rights to Esbriet and should be reported in the Group’s balance sheet as a product intangible asset in use. Therefore the previously recorded impairment on the Esbriet product intangible asset in use was partially reversed and the asset concerned was written up to its estimated recoverable value of CHF 2.4 billion. An income of CHF 0.3 billion was recorded for this. The main factor leading to this was an increase in forecasted cash flows relative to the previous year’s long-term forecast due to an improvement in sales expectations.

A full impairment of CHF 2.0 billion was recorded for the goodwill from the InterMune acquisition. There is no surplus from Esbriet revenues to support the carrying value of the goodwill, neither are there any synergistic benefits to other products in the same therapeutic area. Accordingly the separable recoverable value of this goodwill is estimated to be zero and it has been fully impaired.

This reassessment of the cash-generating units used for allocating goodwill in the Pharmaceuticals Division, and the resulting impairment entries recorded, aligns historic transactions with transactions from 2018 onwards, which will use the revised IFRS 3 definition of a business that was detailed above in the section on ‘Mergers and acquisitions’.

Other impairments in the Pharmaceuticals Division totalled CHF 0.6 billion, of which the largest were impairment charges of CHF 0.2 billion related to the Trophos acquisition from 2015. This follows from the decision to stop the development of the compound acquired. There was a decrease in the contingent consideration provisions, mainly due to the reversal of the remaining provision related to the Trophos acquisition, which contributed to the income of CHF 0.1 billion.

8 | Roche Finance Repor t 2018

Roche Group | Financial Review

Diagnostics Division. The Diagnostics Division recorded impairment charges of CHF 1.0 billion. The major part of this was in the sequencing business with impairment charges of CHF 0.6 billion. These impairments are due to a change in the commercialisation strategy for related products, a change in timelines for future product development and a decrease in forecasted cash flows from revised sales assumptions. In addition, in the Centralised and Point of Care Solutions business, a full impairment of CHF 0.4 billion was recorded against the goodwill and product intangible assets acquired as part of the Constitution Medical Investors acquisition from 2013. This was due to a decision to change the commercialisation strategy for diagnostics instruments used in haematology testing.

In 2017 there were impairment charges of CHF 2.6 billion in the Pharmaceuticals Division. The largest item was a charge of CHF 1.7 billion for the partial impairment of the Esbriet product intangible acquired as part of the InterMune acquisition. The Diagnostics Division recorded impairment charges of CHF 0.9 billion. The major part of this was in the sequencing business.

Further details are given in Notes 9 and 10 to the Annual Financial Statements.

Legal and environmental cases

There were no significant developments in 2018. In 2017, based on the development of the various litigations, notably the Accutane case, some of the provisions previously held were released, resulting in income of CHF 219 million in 2017. Further details are given in Note 20 to the Annual Financial Statements.

Net income and earnings per share

IFRS net income increased by 23% in CHF terms and by 24% at CER, while the diluted EPS increased by 22% in CHF terms and by 23% at CER. Core net income increased by 20% at CER and Core EPS increased by 19%. The core basis excludes non-core items such as global restructuring costs, amortisation and impairment of goodwill and intangible assets, and income and impacts from the accounting for merger and acquisition transactions and alliance arrangements. Core EPS increased by 8% at CER when excluding the impact of the 2017 changes to the US tax rates effective from 1 January 2018.

Net income

2018

(CHF m) 2017

(CHF m) % change

(CHF ) % change

(CER)

IFRS net income 10,865 8,825 +23 +24

Reconciling items (net of tax)

– Global restructuring plans 759 962 –21 –22

– Intangible asset amortisation 1,110 1,178 –6 –6

– Goodwill and intangible asset impairment 3,107 2,651 +17 +18

– Mergers and acquisitions and alliance transactions 21 (347) – –

– Legal and environmental cases 131 (30) – –

– Pension plan settlements 4 18 –78 –79

– Transitional effect of changes in US tax rates (35) 116 – –

– Normalisation of equity compensation plan tax benefit 19 31 –39 –38

Core net income 15,981 13,404 +19 +20

Supplementary net income and EPS information is given on pages 155 to 158. This includes calculations of Core EPS and reconciles the core results to the Group’s published IFRS results.

Roche Finance Repor t 2018 | 9

Financial Review | Roche Group

Financial position

Financial position

2018

(CHF m) 2017

(CHF m) % change

(CHF ) % change

(CER)

Pharmaceuticals Net working capital 2,472 3,420 –28 –23

Long-term net operating assets 25,215 23,539 +7 +7

Diagnostics Net working capital 2,697 2,594 +4 +12

Long-term net operating assets 11,625 12,849 –10 –8

Corporate Net working capital (214) (119) +80 +79

Long-term net operating assets (44) (178) –75 –76

Net operating assets 41,751 42,105 –1 0 Net debt (5,652) (6,963) –19 –19

Pensions (6,140) (6,620) –7 –5

Income taxes (89) 21 – –

Other non-operating assets, net 496 464 +7 +6

Total net assets 30,366 29,007 +5 +6

Compared to the start of the year the Swiss franc appreciated against many currencies, notably the euro and, to a lesser extent, the Brazilian real. This was partly offset by the depreciation of the Swiss franc against the Japanese yen and the US dollar. Overall this had a negative translation impact on total net assets. The exchange rates used are given on page 29.

In the Pharmaceuticals Division net working capital decreased by 23% at CER. This mainly arose from lower inventories due to write- offs, lower inventory levels for certain mature products and strong sales. Long-term net operating assets increased by 7% mainly as a result of the Ignyta and Flatiron Health acquisitions, which more than offset goodwill impairment charges. In the Diagnostics Division the increase in net working capital of 12% at CER was driven by increases in trade receivables, due to business growth especially in China and Japan, and an increase in inventories of instruments pending installation. Long-term net operating assets in the Diagnostics Division decreased by 8% following impairment charges to goodwill and intangible assets.

The decrease in net debt was due to the free cash flow of CHF 14.8 billion, partly offset by the dividend payments of CHF 7.3 billion. In addition there were payments of CHF 3.4 billion for mergers and acquisitions and payments of CHF 2.3 billion for acquiring full ownership of Foundation Medicine. The net pension liability was 7% lower at CHF 6.1 billion due to an increase in discount rates partially offset by changes in the fair value of plan assets. The net tax liabilities increased mainly due to the deferred tax effects from the change in net pension liabilities.

Free cash flow

Free cash flow

2018

(CHF m) 2017

(CHF m) % change

(CHF ) % change

(CER)

Pharmaceuticals 17,851 16,817 +6 +6

Diagnostics 1,416 1,553 –9 –8

Corporate (526) (543) –3 –3

Operating free cash flow 18,741 17,827 +5 +5 Treasury activities (642) (498) +29 +32

Taxes paid (3,288) (3,909) –16 –16

Free cash flow 14,811 13,420 +10 +11

See pages 158–160 for the definition of free cash flow and a detailed breakdown.

The Group’s operating free cash flow for 2018 was CHF 18.7 billion, an increase of 5% at CER. This was due to the high cash generation of the business, with sales growth exceeding the increases in cash expenses. This was partly offset by higher capital expenditure. The free cash flow was CHF 14.8 billion, an increase of 11% at CER compared to 2017. This arose from the higher operating free cash flow and lower income tax payments in 2018.

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Pharmaceuticals Division operating results

Pharmaceuticals Division operating results

2018

(CHF m) 2017

(CHF m) % change

(CHF ) % change

(CER)

IFRS results Sales 43,967 41,220 +7 +7

Royalties and other operating income 2,553 2,284 +12 +12

Revenue 46,520 43,504 +7 +7 Cost of sales (10,491) (11,978) –12 –12

Marketing and distribution (7,068) (6,960) +2 +2

Research and development (10,299) (9,704) +6 +6

General and administration (3,874) (1,620) +139 +140

Operating profit 14,788 13,242 +12 +13 – margin, % of sales 33.6 32.1 +1.5 +1.6

Core results 1) Sales 43,967 41,220 +7 +7

Royalties and other operating income 2,553 2,284 +12 +12

Revenue 46,520 43,504 +7 +7 Cost of sales (9,504) (8,707) +9 +10

Marketing and distribution (6,939) (6,720) +3 +4

Research and development (9,586) (9,036) +6 +6

General and administration (1,549) (1,440) +8 +8

Core operating profit 18,942 17,601 +8 +8 – margin, % of sales 43.1 42.7 +0.4 +0.5

Financial position Net working capital 2,472 3,420 –28 –23

Long-term net operating assets 25,215 23,539 +7 +7

Net operating assets 27,687 26,959 +3 +3

Free cash flow 2) Operating free cash flow 17,851 16,817 +6 +6

– margin, % of sales 40.6 40.8 –0.2 –0.3

1) See pages 155–158 for the definition of core results. 2) See pages 158–160 for the definition of free cash flow.

Roche Finance Repor t 2018 | 11

Financial Review | Roche Group

Sales overview

Pharmaceuticals Division – Sales by therapeutic area

2018 (CHF m)

2017 (CHF m)

% change (CER)

% of sales (2018)

% of sales (2017)

Oncology 26,183 25,743 +2 59.6 62.5

Immunology 8,160 7,611 +8 18.6 18.5

Neuroscience 3,005 1,542 +96 6.8 3.7

Ophthalmology 1,659 1,414 +18 3.8 3.4

Infectious diseases 1,084 1,357 –20 2.5 3.3

Other therapeutic areas 3,876 3,553 +9 8.7 8.6

Total sales 43,967 41,220 +7 100 100

Sales in the Pharmaceuticals Division were CHF 44.0 billion, an increase of 7% at CER. New product sales more than compensated for the growing impacts of biosimilar competition for MabThera/Rituxan and Herceptin in Europe.

The sales growth was driven by the continuing rollout of the new products Ocrevus, Perjeta, Tecentriq, Alecensa and Hemlibra, which together contributed an additional CHF 2.9 billion (CER) of new sales. Ocrevus in particular continued its strong performance with total sales now reaching CHF 2.4 billion (2017: 0.9 billion) due to continuing growth in the US and strong initial uptake in other markets, notably in Germany. Perjeta sales were up by 27% to CHF 2.8 billion due to increased demand in early-stage adjuvant settings in the US and continued growth in neoadjuvant and metastatic settings in Europe.

Biosimilar competition had a negative impact, with continuing erosion for MabThera/Rituxan in Europe and the first biosimilar launches of Herceptin in Europe and MabThera/Rituxan and Herceptin in Japan. Sales of these two products fell by CHF 1.3 billion (CER) in Europe and Japan in 2018. The first biosimilar versions of MabThera/Rituxan had been expected to come to market in the US in mid- to end-2018. The first biosimilar versions of MabThera/Rituxan, Herceptin and Avastin are now anticipated to come to market in the US in the second half of 2019. In total, MabThera/Rituxan, Herceptin and Avastin sales in 2018 were CHF 20.6 billion, a decrease of 2%.

Oncology remains the Division’s largest therapeutic area with total growth of 2% with the new products Perjeta, Tecentriq and Alecensa being major contributors. Avastin sales increased by 3%, mainly due to growth in China. Herceptin sales were 1% higher, with growth in the US offsetting the initial impact from the biosimilar competition in Europe. MabThera/Rituxan sales fell following biosimilar launches in Europe. In Japan, the recent biosimilar launches had a limited impact on MabThera/Rituxan and Herceptin sales, with the main factor of the sales decline being government price cuts. Tecentriq (increase of 59%) and Alecensa (increase of 76%) both reported continuing post-launch uptake. Sales of Tarceva fell by 36% due to competitive pressure in the US.

Sales in immunology grew, with Actemra/RoActemra, Xolair and Esbriet all increasing by over 10%. Lucentis sales grew 18% in the US driven by increased market share across all indications. Infectious diseases sales were 20% lower due mainly to the patent expiry of Tamiflu in the US and other major markets in 2016. The new influenza medicine Xofluza was launched in the US in late 2018 and initial sales were CHF 13 million. In other therapeutic areas, sales of Activase/TNKase were 6% higher in the US. The launch and rollout of Hemlibra, a medicine for haemophilia A, continued and sales in 2018 were CHF 224 million, mostly in the US, major EU markets and Japan.

12 | Roche Finance Repor t 2018

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Product sales

Pharmaceuticals Division – Sales

2018

(CHF m) 2017

(CHF m) % change

(CER) % of sales

(2018) % of sales

(2017)

Oncology Herceptin 6,982 7,014 +1 15.9 17.0

Avastin 6,849 6,688 +3 15.6 16.2

MabThera/Rituxan 1) 5,191 5,832 –10 11.8 14.1

Perjeta 2,773 2,196 +27 6.3 5.3

Kadcyla 979 914 +8 2.2 2.2

Tecentriq 772 487 +59 1.8 1.2

Alecensa 637 362 +76 1.4 0.9

Tarceva 538 843 –36 1.2 2.0

Xeloda 427 453 –6 1.0 1.1

Gazyva/Gazyvaro 390 278 +40 0.9 0.7

Others 645 676 –2 1.5 1.8

Total Oncology 26,183 25,743 +2 59.6 62.5 Immunology Actemra/RoActemra 2,160 1,926 +12 4.9 4.7

Xolair 1,912 1,742 +11 4.3 4.2

MabThera/Rituxan 1) 1,561 1,556 +1 3.6 3.8

Esbriet 1,031 869 +19 2.3 2.1

Pulmozyme 739 730 +2 1.7 1.8

CellCept 669 697 –4 1.5 1.7

Others 88 91 –13 0.3 0.2

Total Immunology 8,160 7,611 +8 18.6 18.5

Neuroscience Ocrevus 2,353 869 +172 5.3 2.1

Madopar 341 334 +3 0.8 0.8

Others 311 339 –7 0.7 0.8

Total Neuroscience 3,005 1,542 +96 6.8 3.7

Ophthalmology Lucentis 1,659 1,414 +18 3.8 3.4

Total Ophthalmology 1,659 1,414 +18 3.8 3.4

Infectious diseases Tamiflu 378 535 –29 0.9 1.3

Rocephin 305 299 +1 0.7 0.7

Others 401 523 –23 0.9 1.3

Total Infectious diseases 1,084 1,357 –20 2.5 3.3

Other therapeutic areas Activase/ TNKase 1,284 1,219 +6 2.9 3.0

Mircera 532 505 +5 1.2 1.2

NeoRecormon/Epogin 288 312 –9 0.7 0.8

Others 1,772 1,517 +17 3.9 3.6

Total other therapeutic areas 3,876 3,553 +9 8.7 8.6

Total sales 43,967 41,220 +7 100 100

1) Total MabThera/Rituxan sales of CHF 6,752 million (2017: CHF 7,388 million) split between oncology and immunology therapeutic areas.

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Financial Review | Roche Group

MabThera/Rituxan. For non-Hodgkin lymphoma (NHL), chronic lymphocytic leukaemia (CLL), follicular lymphoma (FL) and rheumatoid arthritis (RA) as well as certain types of antineutrophil cytoplasmic antibody (ANCA)-associated vasculitis.

MabThera/Rituxan regional sales

2018

(CHF m) 2017

(CHF m) % change

(CER) % of sales

(2018) % of sales

(2017)

United States 4,290 4,133 +4 63.5 55.9

Europe 916 1,690 –47 13.6 22.9

Japan 188 293 –36 2.8 4.0

International 1,358 1,272 +11 20.1 17.2

Total sales 6,752 7,388 –8 100 100

Sales were 8% lower, driven by Europe where sales fell by 47% due to the launch of biosimilars in most EU markets. In the US, where MabThera/Rituxan is widely used across nearly all approved indications, sales increased by 4%. There was growth in both the immunology and oncology segments, also driven by the subcutaneous formulation. The first biosimilar launches had been expected in the US in mid- to end-2018, but now could come to market in the second half of 2019. Sales were also higher in the International region, particularly in China (+40%) due to broader market penetration. In Japan sales were adversely affected by government price cuts and, to a limited extent, by the first biosimilar versions which were launched in 2018.

HER2 franchise (Herceptin, Perjeta and Kadcyla). For HER2-positive breast cancer and HER2-positive metastatic (advanced) gastric cancer (Herceptin only).

Herceptin regional sales

2018

(CHF m) 2017

(CHF m) % change

(CER) % of sales

(2018) % of sales

(2017)

United States 2,908 2,697 +9 41.6 38.5

Europe 1,849 2,123 –16 26.5 30.3

Japan 249 295 –16 3.6 4.2

International 1,976 1,899 +10 28.3 27.0

Total sales 6,982 7,014 +1 100 100

Perjeta regional sales

2018

(CHF m) 2017

(CHF m) % change

(CER) % of sales

(2018) % of sales

(2017)

United States 1,325 1,013 +32 47.8 46.1

Europe 915 767 +15 33.0 34.9

Japan 143 120 +18 5.2 5.5

International 390 296 +45 14.0 13.5

Total sales 2,773 2,196 +27 100 100

Kadcyla regional sales

2018

(CHF m) 2017

(CHF m) % change

(CER) % of sales

(2018) % of sales

(2017)

United States 359 343 +5 36.7 37.5

Europe 376 347 +5 38.4 38.0

Japan 75 70 +6 7.7 7.7

International 169 154 +22 17.2 16.8

Total sales 979 914 +8 100 100

Sales in the HER2 franchise grew by 7% to CHF 10.7 billion of sales. Herceptin sales were 1% higher overall, driven by growth in the US and in the International region largely offset by falls in Europe and Japan. Factors in the US growth of 9% include the rollout of the new formulation launched in 2017 and longer duration of treatment in combination with Perjeta. In the International region, growth of 10% was driven by China due to broader market penetration. Herceptin sales in Europe were 16% lower due to the first biosimilar launches from mid-2018. Biosimilar launches also had an impact on Herceptin sales in Japan. Sales of Perjeta grew by 27% with increased demand in all regions, notably in the early breast cancer adjuvant setting in the US, Europe, Japan and Brazil. Kadcyla sales increased in particular in the International region (+22%).

14 | Roche Finance Repor t 2018

Roche Group | Financial Review

Avastin. For advanced colorectal, breast, lung, kidney, cervical and ovarian cancer, and relapsed glioblastoma (a type of brain tumour).

Avastin regional sales

2018

(CHF m) 2017

(CHF m) % change

(CER) % of sales

(2018) % of sales

(2017)

United States 2,904 2,894 +1 42.4 43.3

Europe 1,820 1,776 –1 26.6 26.6

Japan 847 817 +3 12.4 12.2

International 1,278 1,201 +12 18.6 17.9

Total sales 6,849 6,688 +3 100 100

Overall sales increased by 3% compared to prior year. In the International region, sales grew by 12%, in particular with broader market penetration in China. US sales increased by 1% due to growth in front-line ovarian cancer (following FDA approval in June 2018) and colorectal cancer. In Japan sales increased by 3% due to steady growth for ovarian cancer. In Europe sales declined by 1%, with France being the largest factor.

Actemra/RoActemra. For rheumatoid arthritis (RA), systemic juvenile idiopathic arthritis, polyarticular juvenile idiopathic arthritis and giant cell arteritis.

Actemra/RoActemra regional sales

2018

(CHF m) 2017

(CHF m) % change

(CER) % of sales

(2018) % of sales

(2017)

United States 857 756 +14 39.7 39.3

Europe 701 631 +7 32.5 32.8

Japan 354 304 +15 16.4 15.8

International 248 235 +15 11.4 12.1

Total sales 2,160 1,926 +12 100 100

Sales increased by 12%, with growth in all regions, driven by continued uptake of the subcutaneous formulation, notably in the recently approved giant cell arteritis indication. The US and Japan were the major contributors to the sales increase, along with major EU markets, Brazil and Australia.

Xolair. For moderate to severe persistent allergic asthma (A A) and chronic idiopathic urticaria (CIU).

Xolair regional sales

2018

(CHF m) 2017

(CHF m) % change

(CER) % of sales

(2018) % of sales

(2017)

United States 1,912 1,742 +11 100 100

Total sales 1,912 1,742 +11 100 100

Sales grew by 11%, driven by demand growth in chronic idiopathic urticaria and expansion of the overall asthma market. Xolair remains the market leader in the larger allergic asthma indication.

Ocrevus. For relapsing forms of multiple sclerosis (RMS) and primary progressive multiple sclerosis (PPMS).

Ocrevus regional sales

2018

(CHF m) 2017

(CHF m) % change

(CER) % of sales

(2018) % of sales

(2017)

United States 2,080 860 +144 88.4 99.0

Europe 206 4 Over +500 8.8 0.5

International 67 5 Over +500 2.8 0.5

Total sales 2,353 869 +172 100 100

There was continuously growing demand in both indications in the US in 2018, with growth driven both by new patients and by returning patients. Ocrevus was launched in the US in April 2017 so the comparative period includes only 9 months of sales during the initial launch phase. Elsewhere Ocrevus is showing strong initial uptake where launched, notably in Germany.

Roche Finance Repor t 2018 | 15

Financial Review | Roche Group

Lucentis. For wet age-related macular degeneration (wet AMD), macular oedema following retinal vein occlusion (RVO), diabetic macular oedema (DME) and diabetic retinopathy (DR).

Lucentis regional sales

2018

(CHF m) 2017

(CHF m) % change

(CER) % of sales

(2018) % of sales

(2017)

United States 1,659 1,414 +18 100 100

Total sales 1,659 1,414 +18 100 100

US sales grew 18% driven by increased market share across all indications and the ongoing rollout of prefilled syringes.

Activase/TNKase. For acute ischaemic stroke (AIS) and acute myocardial infarction (AMI).

Activase/ TNKase regional sales

2018

(CHF m) 2017

(CHF m) % change

(CER) % of sales

(2018) % of sales

(2017)

United States 1,231 1,168 +6 96.0 95.8

International 53 51 +5 4.0 4.2

Total sales 1,284 1,219 +6 100 100

Sales were 6% higher, led by the US, and mainly driven by broader use in hospitals and a higher number of patients being treated.

Esbriet. For idiopathic pulmonary fibrosis (IPF ).

Esbriet regional sales

2018

(CHF m) 2017

(CHF m) % change

(CER) % of sales

(2018) % of sales

(2017)

United States 754 640 +19 73.1 73.6

Europe 230 190 +17 22.3 21.9

International 47 39 +29 4.6 4.5

Total sales 1,031 869 +19 100 100

Sales grew by 19%, with growth in both the US and Europe, in part driven by the launch of a new tablet formulation.

Tecentriq. For advanced bladder cancer, advanced lung cancer and initial therapy of non-squamous non-small cell lung cancer (NSCLC). Sales grew by 59% to CHF 772 million due to the post-launch uptake in Europe, notably in Germany, and also due to the launch in Japan in 2018.

Alecensa. For ALK-positive non-small cell lung cancer. The global uptake continued with a 76% increase in sales to CHF 637 million, with growth across all regions, notably in the US which reported a 65% sales growth.

Pharmaceuticals Division – Sales by region

2018 (CHF m)

2017 (CHF m)

% change (CER)

% of sales (2018)

% of sales (2017)

United States 23,233 20,496 +14 52.8 49.7

Europe 8,693 9,051 –7 19.8 22.0

Japan 3,701 3,713 –1 8.4 9.0

International 8,340 7,960 +10 19.0 19.3

– EEMEA 1) 1,416 1,524 –1 3.2 3.7

– Latin America 2,004 2,121 +9 4.6 5.1

– Asia-Pacific 3,931 3,397 +15 8.9 8.2

– Other regions 989 918 +9 2.3 2.3

Total sales 43,967 41,220 +7 100 100

1) Eastern Europe, Middle East and Africa.

United States. Sales grew by 14% led by the continued uptake of Ocrevus, which was launched in April 2017. The HER2 franchise grew 14%, with sales increase of Perjeta in particular in the early breast cancer adjuvant setting as well as sales growth for Herceptin. Lucentis sales increased by 18% due to the ongoing rollout of prefilled syringes, with increased market share in all approved indications. Hemlibra and Alecensa sales showed a strong initial uptake. Sales of Tarceva fell 49% due to competitive pressure. Mandatory discounts to hospitals under the 340B Drug Discount Program increased due to higher sales, notably for Ocrevus and oncology products.

16 | Roche Finance Repor t 2018

Roche Group | Financial Review

Europe. Sales declined 7% due to increasing biosimilar penetration of MabThera/Rituxan in most EU markets, notably in Germany, France and the UK. Herceptin sales declined by 16% due to biosimilar launches in major EU markets from mid-2018. This negative impact on sales was partly offset by the launches of Ocrevus, Tecentriq, Perjeta as well as Alecensa and Gazyva/Gazyvaro, in particular in Germany. Actemra/RoActemra sales increased due to continued uptake of the subcutaneous formulation.

Japan. Sales decreased by 1% due to the 2018 government price cuts which had an annualised negative effect on sales of approximately 5.9%. In particular, MabThera/Rituxan (–36%) and Herceptin (–16%) sales were both negatively affected. Tamiflu (–37%) sales decreased due to lower government stockpiles. This was partially offset by higher sales of Tecentriq, which was launched in 2018, Actemra/ RoActemra (+15%) and Alecensa (+27%).

International. Sales increased by 10% driven by the Asia-Pacific and Latin America subregions. Sales in China grew due to broader market penetration for Avastin, MabThera/Rituxan and Herceptin. Sales in Brazil increased mainly due to higher sales of Perjeta, MabThera/Rituxan and Actemra/RoActemra. In Turkey the main drivers of growth were Avastin and MabThera/Rituxan, while in Russia sales growth was driven by higher sales across the HER2 franchise.

Pharmaceuticals Division – Sales for E7 leading emerging markets

2018 (CHF m)

2017 (CHF m)

% change (CER)

% of sales (2018)

% of sales (2017)

Brazil 909 958 +9 2.1 2.3

China 2,307 1,799 +27 5.2 4.3

India 62 63 +4 0.1 0.2

Mexico 260 280 –5 0.6 0.7

Russia 127 98 +37 0.3 0.2

South Korea 340 319 +4 0.8 0.8

Turkey 257 286 +19 0.6 0.7

Total sales 4,262 3,803 +18 9.7 9.2

Competition from generic medicines and biosimilars

The Group’s pharmaceutical products are generally protected by patent rights which are intended to provide the Group with exclusive marketing rights in various countries. However, patent rights are of varying scope and duration, and the Group may be required to enter into costly litigation to enforce its patent and other intellectual property rights. Loss of market exclusivity for one or more major products – either due to patent expiration, challenges from generic medicines, biosimilars and non-comparable biologics or other reasons – could have a material adverse effect on the Group’s business, results of operations or financial condition. The introduction of a generic, biosimilar or non-comparable biologic version of the same or a similar medicine typically results in a significant reduction in net sales for the relevant product, as other manufacturers typically offer their versions at lower prices.

Patents and their expiry are, and always have been, an integral part of the Group’s business model and future growth will remain driven by innovation. The latest information from clinical studies is included in the Annual Report on pages 40 to 55 and details of the Group’s Product Development Portfolio are available for download at: http://www.roche.com/research_and_development/who_we_are_how_we_work /pipeline.htm

2018 product sales affected by recent patent expiry

2018 (CHF m)

2017 (CHF m)

% change (CER) Comment

Tamiflu 378 535 –29 Patent expir y in US and other major markets in 2016

The intellectual property for biologics can involve multiple patents and patent timelines for each individual product and therefore it is more difficult to give an exact date for patent expiry for biologic medicines. The Group currently estimates that some basic, primary patents for its major biologic medicines will begin to expire as follows:

• MabThera/Rituxan: from around mid-2018 in the US. • Herceptin: from mid-2019 in the US. • Avastin: from mid-2019 in the US and from around 2020 in the EU. • Subcutaneous formulations of MabThera/Rituxan and Herceptin: beyond 2025 (secondary patent rights).

Roche Finance Repor t 2018 | 17

Financial Review | Roche Group

The ‘composition of matter’ patents for MabThera/Rituxan and Herceptin in the EU have expired. The first biosimilar versions of MabThera/ Rituxan were launched in Europe from mid-2017. They are now marketed in most EU countries and were the major factor in the sales decline of this product in Europe in 2018. The first biosimilar versions of Herceptin have been launched in major EU markets from mid-2018. In Japan, the first biosimilar versions of MabThera/Rituxan and Herceptin were launched in 2018 and sales were also adversely affected by government price cuts. In total, sales of MabThera/Rituxan and Herceptin fell by CHF 1.3 billion (CER) in Europe and Japan during 2018. The Group had anticipated the first biosimilar versions of MabThera/Rituxan in the US in mid- to end-2018, but these could now come to market in the second half of 2019.

2018 product sales affected by biosimilar launches

2018

(CHF m) 2017

(CHF m) % change

(CER) Comment

MabThera/Rituxan – Europe 916 1,690 –47 First biosimilar launches from mid-2017

Herceptin – Europe 1,849 2,123 –16 First biosimilar launches from mid-2018

MabThera/Rituxan – Japan 188 293 –36 First biosimilar launches from early 2018

Herceptin – Japan 249 295 –16 First biosimilar launches from mid-2018

Based on publicly available information from competitor companies, the Group currently anticipates the following potential developments in 2019:

• In the US, there are still many uncertainties about when specific biosimilar versions of the Group’s biologic medicines will be approved by the Food and Drug Administration. The first biosimilar versions of MabThera/Rituxan, Herceptin and Avastin could come to market in the US in the second half of 2019.

Sales in 2018 for MabThera/Rituxan, Herceptin and Avastin are disclosed above in the previous sections, including regional breakdowns. These are summarised in the table below. As noted in the previous sections, the year-on-year movements are also driven by regular price and volume changes. Biosimilar competition is only one factor in the overall picture.

Total MabThera/Rituxan, Herceptin and Avastin sales

2018 (CHF m)

2017 (CHF m)

% change (CER)

% of sales (2018)

% of sales (2017)

United States 10,102 9,724 +5 23.0 23.6

Europe 4,585 5,589 –21 10.4 13.6

Japan 1,284 1,405 –9 2.9 3.4

International 4,612 4,372 +11 10.5 10.6

Total sales 20,583 21,090 –2 46.8 51.2

The Group derives royalty income from US Patent No. 6,331,415 (known as the Cabilly patent). This patent expired in December 2018 and therefore, while there will be certain residual income after the expiry, the Group expects that royalty income in 2019 will be significantly lower than in 2018. Annual royalty income in 2018 from the Cabilly patent was CHF 929 million.

Operating results

Pharmaceuticals Division – Royalties and other operating income

2018

(CHF m) 2017

(CHF m) % change

(CER)

Royalty income 1,670 1,551 +8

Income from out-licensing agreements 267 122 +119

Income from disposal of products and other 616 611 +1

Total – IFRS and Core basis 2,553 2,284 +12

Royalties and other operating income increased by 12% at CER. Royalty income was 8% higher due to a net increase in sales across the royalty portfolio. Out-licensing income increased due to higher milestone income. There was income of CHF 87 million from the sales of the worldwide rights for Konakion and Valcyte/Cymevene (excluding Brazil) and in Japan there was CHF 240 million of other operating income, mainly from the sale of the rights for established products by Chugai.

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Roche Group | Financial Review

Pharmaceuticals Division – Cost of sales

2018

(CHF m) 2017

(CHF m) % change

(CER)

Manufacturing cost of goods sold and period costs (5,961) (5,562) +8

Royalty expenses (1,099) (852) +30

Collaboration and profit-sharing agreements (2,390) (2,271) +6

Impairment of property, plant and equipment (54) (22) +142

Cost of sales – Core basis (9,504) (8,707) +10 Global restructuring plans (292) (377) –24

Amortisation of intangible assets (969) (1,230) –21

Impairment of intangible assets 274 (1,664) –

Total – IFRS basis (10,491) (11,978) –12

Core costs increased by 10% at CER. As a percentage of sales, cost of sales increased by 0.5 percentage points to 21.6%. Manufacturing cost of sales grew by 8%, ahead of the sales growth of 7%, due to volume growth and higher inventory write-offs, partially offset by a favourable product mix. Royalty expenses were 30% higher due to increased sales for certain products, notably Ocrevus. Non-core costs include the amortisation and impairment of intangible assets mainly related to the Esbriet product intangibles. The 2017 results included CHF 1,664 million of impairment of these intangible assets and consequently the amortisation charges in 2018 were lower. At the end of 2018, based on an improved future sales outlook, the previous impairment was partly reversed and CHF 274 million was written back.

Pharmaceuticals Division – Marketing and distribution

2018

(CHF m) 2017

(CHF m) % change

(CER)

Marketing and distribution – Core basis (6,939) (6,720) +4 Global restructuring plans (97) (234) –58

Amortisation of intangible assets (32) (6) +453

Total – IFRS basis (7,068) (6,960) +2

Core costs increased by 4% at CER. As a percentage of sales, they decreased to 15.8% from 16.3% in the comparative period. This relative decrease resulted from various resourcing flexibility initiatives and other transformation activities. In 2018 costs were incurred to ensure increased patient access and for the launches of Ocrevus, Tecentriq and other products. Restructuring costs are related to the resourcing flexibility initiatives in sales affiliates, mainly in 2017. Amortisation of intangible assets includes the Flatiron Health marketing intangibles since April 2018.

Pharmaceuticals Division – Research and development

2018

(CHF m) 2017

(CHF m) % change

(CER)

Research and development – Core basis (9,586) (9,036) +6 Global restructuring plans (76) (21) +289

Amortisation of intangible assets (130) (123) +6

Impairment of intangible assets (507) (524) –3

Total – IFRS basis (10,299) (9,704) +6

Core costs increased by 6% at CER and, as a percentage of sales, decreased by 0.1 percentage points to 21.8%. The oncology therapeutic area remained the primary area of research and development with Tecentriq and the cancer immunotherapy portfolio being a key driver. Neuroscience and immunology also represent significant areas of spending. In addition, the Pharmaceuticals Division in-licensed pipeline compounds and technologies with a total value of CHF 803 million, which are capitalised as intangible assets. The impairment charges of CHF 507 million in 2018 include an impairment of CHF 100 million due to the decision to stop the development of the compound acquired as part of the Trophos acquisition. The other impairment charges relate to various portfolio decisions around the development of compounds with different alliance partners.

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Pharmaceuticals Division – General and administration

2018

(CHF m) 2017

(CHF m) % change

(CER)

Administration (1,422) (1,234) +16

Pensions – past service costs 43 31 +39

Gains (losses) on disposal of property, plant and equipment (14) 17 –

Business taxes and capital taxes (173) (293) –41

Other general items 17 39 –57

General and administration – Core basis (1,549) (1,440) +8 Global restructuring plans (58) (245) –77

Impairment of goodwill and intangible assets (2,147) (384) +461

Mergers and acquisitions and alliance transactions (91) 324 –

Legal and environmental cases (24) 143 –

Pensions – settlement gains (losses) (5) (18) –70

Total – IFRS basis (3,874) (1,620) +140

Core costs increased by 8% at CER and, as a percentage of sales, they remained stable at 3.5%. Administration costs increased mainly due to higher legal service costs. Business taxes and capital taxes fell due to decreased costs for the US Branded Prescription Drug Fee. Restructuring costs in 2017 relate to site divestments. The impairment charges in 2018 relate to the full write-off of goodwill from the InterMune and Trophos acquisitions. The mergers and acquisitions and alliance transactions expenses includes costs related to the Flatiron Health acquisition in 2018, partially offset by the reversal of the remaining contingent consideration provisions for the Trophos acquisition. In 2017 income of CHF 143 million arose from the release of legal provisions, notably the Accutane case.

Roche Pharmaceuticals and Chugai subdivisional operating results

Pharmaceuticals subdivisional operating results in millions of CHF

Roche Pharmaceuticals Chugai

Pharmaceuticals Division

2018 2017 2018 2017 2018 2017

Sales

– External customers 40,266 37,507 3,701 3,713 43,967 41,220

– Within division 1,340 1,222 974 670 2,314 1,892

Core operating profit 17,806 16,729 1,186 881 18,942 17,601

– margin, % of sales to external customers 44.2 44.6 32.0 23.7 43.1 42.7

Operating profit 13,702 12,395 1,136 856 14,788 13,242

– margin, % of sales to external customers 34.0 33.0 30.7 23.1 33.6 32.1

Operating free cash flow 17,193 16,056 658 761 17,851 16,817

– margin, % of sales to external customers 42.7 42.8 17.8 20.5 40.6 40.8

Pharmaceuticals Division total core operating profit and operating profit both include the elimination of CHF minus 50 million of unrealised intercompany gains between Roche Pharmaceuticals and Chugai (2017: CHF minus 9 million).

The increase in the exchange rate of the Japanese yen has a positive impact of approximately 1% on the Chugai results when expressed in Swiss francs for the Group’s consolidated results. At CER (as reported in Japanese yen), sales by Chugai to external customers were 1% lower compared to 2017 driven by the 2018 government price cuts which had an annualised negative effect on sales of approximately 5.9%. Sales within the division increased by 44% due to increased sales of Actemra/RoActemra and Alecensa to Roche Pharmaceuticals. Chugai’s core operating profit increased by 33% due to the income from the divestment of established products and the higher gross profit from sales with Roche Pharmaceuticals. This was partially offset by increased research and development spending. Operating free cash flow at Chugai decreased due to the capital expenditure for the new research facilities being constructed at Yokohama.

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Financial position

Pharmaceuticals Division – Net operating assets

2018

(CHF m) 2017

(CHF m) % change

(CHF ) % change

(CER)

Movement: Transactions

(CHF m)

Movement: CTA

(CHF m)

Trade receivables 6,746 6,569 +3 +6 325 (148)

Inventories 4,284 5,126 –16 –16 (817) (25)

Trade payables (1,642) (1,765) –7 –6 107 16

Net trade working capital 9,388 9,930 –5 –4 (385) (157) Other receivables (payables) (6,916) (6,510) +6 +7 (441) 35

Net working capital 2,472 3,420 –28 –23 (826) (122)

Property, plant and equipment 15,123 14,358 +5 +5 784 (19)

Goodwill and intangible assets 12,180 11,196 +9 +8 840 144

Provisions (2,508) (2,449) +2 +4 (81) 22

Other long-term assets, net 420 434 –3 –3 (15) 1

Long-term net operating assets 25,215 23,539 +7 +7 1,528 148

Net operating assets 27,687 26,959 +3 +3 702 26

The absolute amount of the movement between the 2018 and 2017 consolidated balances repor ted in Swiss francs is split between actual 2018 transactions (translated at average rates for 2017) and the currency translation adjustment (CTA) that arises on consolidation. The 2018 transactions include non-cash movements and therefore the movements in this table are not the same as the amounts shown in the operating free cash flow (which only includes the cash movements). A full consolidated balance sheet is given on page 43 of the Annual Financial Statements, and a reconciliation between that balance sheet and the information given above is on page 161.

Currency translation effects on balance sheet amounts. Compared to the start of the year the Swiss franc depreciated significantly against the US dollar and the Japanese yen, resulting in a positive translation impact on net operating assets which was partly offset by the appreciation of the Swiss franc against the Brazilian real and the euro. The exchange rates used are given on page 29.

Net working capital. Net working capital decreased by 23%, mainly due to lower inventories and a higher net liability for other receivables/ payables. Trade receivables were higher as a result of higher sales and extended payment terms for Ocrevus in the US. Inventories decreased due to higher inventory write-offs, lower inventory levels for certain mature products as well as due to strong sales. Trade payables were lower following the settlement of year-end positions. The net liability for other receivables/payables increased due to higher accruals for rebates and chargebacks.

Long-term net operating assets. Overall long-term net operating assets increased by 7%. Goodwill and intangible assets increased due to the acquisitions of Ignyta and Flatiron Health, partly offset by the impairments from the InterMune and Trophos assets. The major item in capital expenditure was Chugai’s continued development of their new research facilities in Yokohama in Japan. At Roche, there were investments in site development at the Basel and Kaiseraugst sites in Switzerland and at the South San Francisco campus in the US as well as manufacturing investments in Switzerland, Germany and the US.

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Free cash flow

Pharmaceuticals Division – Operating free cash flow

2018 (CHF m)

2017 (CHF m)

% change (CHF )

% change (CER)

Operating profit 14,788 13,242 +12 +13

– Depreciation, amortisation and impairment 4,777 5,280 –10 –9

– Provisions 113 (303) – –

– Equity compensation plans 392 388 +1 +1

– Other 624 625 0 –9

Operating profit cash adjustments 5,906 5,990 –1 –2

Operating profit, net of operating cash adjustments 20,694 19,232 +8 +8 (Increase) decrease in net working capital 617 297 +108 +94

Investments in property, plant and equipment (2,584) (2,061) +25 +25

Investments in intangible assets (876) (651) +35 +35

Operating free cash flow 17,851 16,817 +6 +6 – as % of sales 40.6 40.8 –0.2 –0.3

See pages 158–160 for the definition of free cash flow and a detailed breakdown.

The Pharmaceuticals Division’s operating free cash flow increased by 6% at CER to CHF 17.9 billion. The main contribution came from the underlying business, with operating profit, net of operating cash adjustments showing an increase of 8%. Net working capital was lower due to the increase in accruals for rebates and chargebacks and lower inventories. Capital expenditure was higher due to the land purchase in Yokohama, Japan, for Chugai’s new research facilities and the final payment of the Genentech property lease option exercise. Investments in intangible assets were CHF 0.2 billion higher than in 2017.

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Diagnostics Division operating results

Diagnostics Division operating results

2018

(CHF m) 2017

(CHF m) % change

(CHF ) % change

(CER)

IFRS results Sales 12,879 12,079 +7 +7

Royalties and other operating income 98 163 –40 –40

Revenue 12,977 12,242 +6 +6 Cost of sales (6,778) (6,201) +9 +10

Marketing and distribution (3,041) (2,887) +5 +5

Research and development (1,793) (1,588) +13 +12

General and administration (748) (1,262) –41 –41

Operating profit 617 304 +103 +115 – margin, % of sales 4.8 2.5 +2.3 +2.6

Core results 1) Sales 12,879 12,079 +7 +7

Royalties and other operating income 82 163 –50 –50

Revenue 12,961 12,242 +6 +6 Cost of sales (5,960) (5,659) +5 +6

Marketing and distribution (2,966) (2,792) +6 +6

Research and development (1,461) (1,356) +8 +7

General and administration (528) (526) 0 0

Core operating profit 2,046 1,909 +7 +9 – margin, % of sales 15.9 15.8 +0.1 +0.3

Financial position Net working capital 2,697 2,594 +4 +12

Long-term net operating assets 11,625 12,849 –10 –8

Net operating assets 14,322 15,443 –7 –5

Free cash flow 2) Operating free cash flow 1,416 1,553 –9 –8

– margin, % of sales 11.0 12.9 –1.9 –1.8

1) See pages 155–158 for the definition of core results. 2) See pages 158–160 for the definition of free cash flow.

Sales

The Diagnostics Division reported sales growth of 7% at CER to CHF 12.9 billion. The main contributor was Centralised and Point of Care Solutions, led by its immunodiagnostics business, with 11% sales growth. Molecular Diagnostics sales increased by 5%, with growth of 6% in the underlying molecular business. The main growth factors were the cobas Liat system, blood screening and virology businesses. Diabetes Care sales increased by 2% driven by growth in North America and Latin America, offset by lower sales in Europe. The advanced staining product portfolio was the main driver in the 10% sales growth in Tissue Diagnostics.

Diagnostics Division – Sales by business area

2018 (CHF m)

2017 (CHF m)

% change (CER)

% of sales (2018)

% of sales (2017)

Centralised and Point of Care Solutions 7,768 7,179 +8 60.3 59.4

Molecular Diagnostics 2,019 1,920 +5 15.7 15.9

Diabetes Care 1,980 1,965 +2 15.4 16.3

Tissue Diagnostics 1,112 1,015 +10 8.6 8.4

Total sales 12,879 12,079 +7 100 100

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Centralised and Point of Care Solutions. This business area was the major contributor to the overall divisional results. The 8% sales growth was primarily driven by the immunodiagnostics business (+11%), which accounts for 33% of the division’s sales. The clinical chemistry business (+7%) also was a factor in the sales development. The business is growing especially in Asia-Pacific (+15%) due to China, as well as in Europe, Middle East and Africa (EMEA) with 4% growth.

Centralised and Point of Care Solutions regional sales

2018

(CHF m) 2017

(CHF m) % change

(CER) % of sales

(2018) % of sales

(2017)

Europe, Middle East and Africa (EME A) 2,723 2,577 +4 35.1 35.9

North America 1,541 1,465 +6 19.8 20.4

Rest of the World 3,504 3,137 +13 45.1 43.7

Total sales 7,768 7,179 +8 100 100

Molecular Diagnostics. Overall sales rose by 5%, with the underlying molecular business reporting 6% growth. Sales in the sequencing business increased by 4%. The growth in the molecular business sales came from the cobas Liat system, blood screening and virology businesses. Regional growth was led by EMEA (+7%), notably in South Africa, due to order timing, and also by North America (+6%).

Molecular Diagnostics regional sales

2018

(CHF m) 2017

(CHF m) % change

(CER) % of sales

(2018) % of sales

(2017)

Europe, Middle East and Africa (EME A) 770 708 +7 38.1 36.9

North America 766 726 +6 37.9 37.8

Rest of the World 483 486 +1 24.0 25.3

Total sales 2,019 1,920 +5 100 100

Diabetes Care. Sales increased by 2%, driven by North America (+20%) and Latin America (+14%). Sales growth mainly came from Accu-Chek Guide and Accu-Chek Instant. Sales decreased by 4% in the EMEA region, mainly resulting from the market dynamics in France.

Diabetes Care regional sales

2018

(CHF m) 2017

(CHF m) % change

(CER) % of sales

(2018) % of sales

(2017)

Europe, Middle East and Africa (EME A) 1,212 1,236 –4 61.2 62.9

North America 265 221 +20 13.4 11.2

Rest of the World 503 508 +8 25.4 25.9

Total sales 1,980 1,965 +2 100 100

Tissue Diagnostics. Sales rose by 10%, with the advanced staining portfolio (+10%) contributing the majority of the growth. In addition, sales increased by 9% in the companion diagnostics and 13% in the primary staining business. Regionally, growth was led by North America (+8%) and EMEA (+10%). Asia-Pacific sales increased by 18%, with China as the main growth market.

Tissue Diagnostics regional sales

2018

(CHF m) 2017

(CHF m) % change

(CER) % of sales

(2018) % of sales

(2017)

Europe, Middle East and Africa (EME A) 281 252 +10 25.3 24.8

North America 641 599 +8 57.6 59.0

Rest of the World 190 164 +17 17.1 16.2

Total sales 1,112 1,015 +10 100 100

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Diagnostics Division – Sales by region

2018 (CHF m)

2017 (CHF m)

% change (CER)

% of sales (2018)

% of sales (2017)

Europe, Middle East and Africa (EME A) 4,986 4,773 +3 38.7 39.5

Asia-Pacific 3,334 2,939 +13 25.9 24.4

North America 3,213 3,011 +7 24.9 24.9

Latin America 844 884 +9 6.6 7.3

Japan 502 472 +6 3.9 3.9

Total sales 12,879 12,079 +7 100 100

Centralised and Point of Care Solutions and Molecular Diagnostics were the main sales driver in the EMEA region, the division’s largest market. In North America, the sales increase was spread over all business areas. The sales increase in Asia-Pacific was mainly in China, which grew by 16% driven by Centralised and Point of Care Solutions. Sales in Latin America rose by 9% again mainly driven by Centralised and Point of Care solutions, with Diabetes Care also contributing. Centralised and Point of Care Solutions also was the main factor in the 6% sales increase in Japan.

Diagnostics Division – Sales for E7 leading emerging markets

2018 (CHF m)

2017 (CHF m)

% change (CER)

% of sales (2018)

% of sales (2017)

Brazil 245 283 0 1.9 2.3

China 2,208 1,882 +16 17.2 15.7

India 177 163 +15 1.4 1.3

Mexico 132 124 +10 1.0 1.0

Russia 159 147 +18 1.2 1.2

South Korea 223 203 +8 1.7 1.7

Turkey 120 131 +23 0.9 1.1

Total sales 3,264 2,933 +14 25.3 24.3

Operating results

Diagnostics Division – Royalties and other operating income

2018

(CHF m) 2017

(CHF m) % change

(CER)

Royalty income 58 111 –49

Income from out-licensing agreements 2 27 –92

Income from disposal of products and other 22 25 –9

Royalties and other operating income – Core basis 82 163 –50 Global restructuring plans 16 0 –

Total – IFRS basis 98 163 –40

The expiry in late 2017 of royalty-bearing patents in Polymerase Chain Reaction (PCR) technology was the main factor behind the lower royalty income. The 2017 results for out-licensing income included the settlement of a patent dispute in that year. The global restructuring income related to a licensing deal from a portfolio prioritisation initiative.

Diagnostics Division – Cost of sales

2018

(CHF m) 2017

(CHF m) % change

(CER)

Manufacturing cost of goods sold and period costs (5,790) (5,494) +6

Royalty expenses (169) (165) +2

Impairment of property, plant and equipment (1) – –

Cost of sales – Core basis (5,960) (5,659) +6 Global restructuring plans (108) (107) –1

Amortisation of intangible assets (142) (315) –55

Impairment of intangible assets (568) (120) +376

Total – IFRS basis (6,778) (6,201) +10

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Core costs increased by 6% at CER, below the sales growth of 7%. The increase was due to higher sales volumes partially offset by favourable instruments and reagent mixes. The core cost of sales ratio decreased by 0.5 percentage points to 46.3%. Global restructuring costs were mainly due to Diagnostics strategy plans. Amortisation expenses were lower due to the product intangible assets from the Corange/Boehringer-Mannheim acquisition from 1997 which were fully amortised by the end of 2017. Impairment charges related to the impairment of the intangible assets in the sequencing business and from the Constitution Medical Investors acquisition from 2013.

Diagnostics Division – Marketing and distribution

2018

(CHF m) 2017

(CHF m) % change

(CER)

Marketing and distribution – Core basis (2,966) (2,792) +6 Global restructuring plans (71) (92) –25

Amortisation of intangible assets (4) (3) +51

Total – IFRS basis (3,041) (2,887) +5

The increase in core costs was primarily due to higher spending in emerging markets in the Asia-Pacific and EMEA regions. Additionally, the increase also results from marketing software and the launch of new digital solutions. On a core basis, marketing and distribution costs as a percentage of sales decreased to 23.0% from 23.1% in 2017. Global restructuring costs consisted of organisational changes.

Diagnostics Division – Research and development

2018

(CHF m) 2017

(CHF m) % change

(CER)

Research and development – Core basis (1,461) (1,356) +7 Global restructuring plans (34) (66) –50

Amortisation of intangible assets (17) (14) +21

Impairment of intangible assets (281) (152) +86

Total – IFRS basis (1,793) (1,588) +12

Core costs increased due to higher spending in the Centralised and Point of Care Solutions portfolio in high/mid-volume systems. There was also increased spending to develop digital clinical decision support products and for the GE Healthcare collaboration. Spending in the sequencing business was also higher. As a percentage of sales, research and development core costs increased to 11.3% from 11.2% in 2017. Impairment charges relate to intangible assets of the sequencing business.

Diagnostics Division – General and administration

2018

(CHF m) 2017

(CHF m) % change

(CER)

Administration (549) (532) +3

Pensions – past service costs 11 6 +83

Gains (losses) on disposal of property, plant and equipment 0 (2) –83

Business taxes and capital taxes (8) (1) +415

Other general items 18 3 Over +500

General and administration – Core basis (528) (526) 0 Global restructuring plans (38) (27) +39

Impairment of goodwill and intangible assets (107) (674) –84

Mergers and acquisitions and alliance transactions 56 27 +107

Legal and environmental cases (131) (58) +126

Pensions – settlement gains (losses) 0 (4) –100

Total – IFRS basis (748) (1,262) –41

Core costs remained stable compared to 2017, while there was a 3% increase in administration costs. The main drivers were higher personnel costs and integration expenses of recently acquired businesses, such as Viewics and mySugr. Business taxes in 2017 included an income from a settlement agreement for the Medical Device Excise Tax in the US. As a percentage of sales, core costs were 4.1%, a decrease of 0.3 percentage points. The impairment charges in 2017 were for the goodwill in the sequencing business. Legal expenses mainly arose from increasing litigation costs in the sequencing business.

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Financial position

Diagnostics Division – Net operating assets

2018

(CHF m) 2017

(CHF m) % change

(CHF ) % change

(CER)

Movement: Transactions

(CHF m)

Movement: CTA

(CHF m)

Trade receivables 3,154 3,137 +1 +5 164 (147)

Inventories 2,336 2,280 +2 +7 142 (86)

Trade payables (1,108) (1,007) +10 +13 (125) 24

Net trade working capital 4,382 4,410 –1 +5 181 (209) Other receivables (payables) (1,685) (1,816) –7 –6 107 24

Net working capital 2,697 2,594 +4 +12 288 (185)

Property, plant and equipment 6,413 6,431 0 +3 186 (204)

Goodwill and intangible assets 6,114 7,249 –16 –15 (1,107) (28)

Provisions (948) (842) +13 +14 (117) 11

Other long-term assets, net 46 11 +318 +294 35 0

Long-term net operating assets 11,625 12,849 –10 –8 (1,003) (221)

Net operating assets 14,322 15,443 –7 –5 (715) (406)

The absolute amount of the movement between the 2018 and 2017 consolidated balances repor ted in Swiss francs is split between actual 2018 transactions (translated at average rates for 2017) and the currency translation adjustment (CTA) that arises on consolidation. The 2018 transactions include non-cash movements and therefore the movements in this table are not the same as the amounts shown in the operating free cash flow (which only includes the cash movements). A full consolidated balance sheet is given on page 43 of the Annual Financial Statements, and a reconciliation between that balance sheet and the information given above is on page 161.

Currency translation effects on balance sheet amounts. Compared to the start of the year the Swiss franc appreciated against the euro, resulting in a negative translation impact on net operating assets. This was partly offset by the depreciation of the Swiss franc against the US dollar. The Diagnostics Division does not have a significant net asset position in Japanese yen and so the depreciation of the Swiss franc against the Japanese yen had only a minor impact. The exchange rates used are given on page 29.

Net working capital. Net working capital increased by 12% at CER. Trade receivables increased by 5% due to the growth in sales, notably in China and Japan. Inventories increased by 7% following the high demand in emerging markets driving higher purchases of instruments that are held in inventories prior to installation. Trade payables increased by 13% as a result of optimisation measures, including extending payment terms. The decrease in net liability for other receivables/payables was due to increases in prepayments and settlement of significant year-end accounts payable and accruals.

Long-term net operating assets. Overall long-term net operating assets decreased by 8% at CER, mainly triggered by the 15% decrease in goodwill and intangible assets as a result of the impairment charges. There was an increase of provisions for restructuring and litigation cases. Capital expenditure related to instrument placements and manufacturing site developments in China and Germany.

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Free cash flow

Diagnostics Division – Operating free cash flow

2018

(CHF m) 2017

(CHF m) % change

(CHF ) % change

(CER)

Operating profit 617 304 +103 +115

– Depreciation, amortisation and impairment 2,217 2,339 –5 –5

– Provisions 116 12 Over +500 Over +500

– Equity compensation plans 78 73 +7 +7

– Other 281 204 +38 +37

Operating profit cash adjustments 2,692 2,628 +2 +2

Operating profit, net of operating cash adjustments 3,309 2,932 +13 +14 (Increase) decrease in net working capital (511) 118 – –

Investments in property, plant and equipment (1,379) (1,444) –5 –5

Investments in intangible assets (3) (53) –94 –95

Operating free cash flow 1,416 1,553 –9 –8 – as % of sales 11.0 12.9 –1.9 –1.8

For the definition of free cash flow and a detailed breakdown see pages 158–160.

The operating free cash flow of the Diagnostics Division was a net cash inflow of CHF 1,416 million, a decrease of 8% at CER compared to 2017. The cash generation of the business, measured by the operating profit, net of operating cash adjustments, increased by 14% compared with the core operating profit growth of 9%. This difference was in part due to higher cash proceeds from disposals and higher non-cash depreciation expenses in 2018. Net working capital increased and absorbed CHF 511 million of cash in 2018, which is due to the increases in trade receivables and inventories mentioned above in the ‘Financial position’ comments. Capital expenditure of CHF 1.4 billion was mainly due to instrument placements, notably in China and the US, and the manufacturing site development in China and Germany.

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Corporate operating results

Corporate operating results summary

2018

(CHF m) 2017

(CHF m) % change

(CER)

Administration (454) (454) –1

Pensions – past service costs 1 0 –

Business taxes and capital taxes (16) (17) –4

Other general items (14) (27) –67

General and administration costs – Core basis 1) (483) (498) –4 Global restructuring plans (149) (39) +292

Mergers and acquisitions and alliance transactions 0 (1) –69

Legal and environmental cases (4) (5) –26

Total costs – IFRS basis (636) (543) +16

Financial position Net working capital (214) (119) +79

Long-term net operating assets (44) (178) –76

Net operating assets (258) (297) –12

Free cash flow 2) Operating free cash flow (526) (543) –3

1) See pages 155–158 for the definition of core results. 2) See pages 158–160 for the definition of free cash flow and a detailed breakdown.

General and administration costs decreased by 4% at CER on a core basis due to lower project costs. Total costs on IFRS basis have increased by 16% due to restructuring in procurement, IT and several corporate functions. The change in net operating assets was mainly driven by organisational changes in IT resulting in a transfer of CHF 145 million of assets, mainly property, plant and equipment, from the Pharmaceuticals Division at the beginning of 2018. Net working capital was lower due to increased notes and accounts payable from the above-mentioned IT transfer. Corporate operating free cash flow includes restructuring activities and capital expenditure.

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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.

Growth (reported at CER and in CHF)

% change (CER) % change (CHF ) 2018 2017 2018 2017

Pharmaceuticals Division Sales +7 +5 +7 +5

Core operating profit +8 +4 +8 +4

Diagnostics Division Sales +7 +5 +7 +5

Core operating profit +9 0 +7 –1

Group Sales +7 +5 +7 +5

Core operating profit +9 +3 +8 +3

Exchange rates against the Swiss franc

31 December 2018 Average 2018 31 December 2017 Average 2017

1 USD 0.98 0.98 0.98 0.98

1 EUR 1.13 1.15 1.17 1.11

100 JPY 0.89 0.89 0.87 0.88

The results expressed in Swiss francs were negatively impacted by the appreciation of the Swiss franc against the US dollar and the Brazilian real, partly offset by the depreciation of the Swiss franc against the euro. The net impact on the results expressed in Swiss francs compared to constant exchange rates was negligible on sales and a 1 percentage point impact on core operating profit and on Core EPS. The sensitivity of Group sales and core operating profit to a 1% change in average foreign currency exchange rates against the Swiss franc during 2018 is shown in the table below.

Currency sensitivities

Impact of 1% increase in average exchange rate versus the Swiss franc

Sales (CHF m)

Core operating profit (CHF m)

US dollar 270 116

Euro 95 39

Japanese yen 42 28

All other currencies 145 77

The Group’s revenues are primarily generated from sales of products to customers. Such revenues are mainly received in the local currency of the customer’s home market, although in certain emerging markets invoicing is made in major international currencies such as the US dollar and euro. The costs of sales and marketing and also some administration costs follow the same currency pattern as sales. The majority of research and development activities are incurred at the Group’s global research facilities, and therefore the costs are mainly concentrated in US dollars, Swiss francs and euros. General and administration costs tend to be incurred mainly at central locations in the US, Switzerland and Germany. Chugai’s revenues and costs are denominated in Japanese yen.

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Treasury and taxation results

Treasury and taxation results

2018

(CHF m) 2017

(CHF m) % change

(CHF ) % change

(CER)

IFRS results Operating profit 14,769 13,003 +14 +15

Financing costs (770) (839) –8 –8

Other financial income (expense) 149 84 +77 +73

Profit before taxes 14,148 12,248 +16 +17 Income taxes (3,283) (3,423) –4 –3

Net income 10,865 8,825 +23 +24 Attributable to

– Roche shareholders 10,500 8,633 +22 +23

– Non-controlling interests 365 192 +90 +88

Core results 1) Operating profit 20,505 19,012 +8 +9

Financing costs (744) (819) –9 –9

Other financial income (expense) 149 75 +99 +94

Profit before taxes 19,910 18,268 +9 +10 Income taxes (3,929) (4,864) –19 –18

Net income 15,981 13,404 +19 +20 Attributable to

– Roche shareholders 15,593 13,192 +18 +19

– Non-controlling interests 388 212 +83 +82

Financial position Net debt (5,652) (6,963) –19 –19

Pensions (6,140) (6,620) –7 –5

Income taxes (89) 21 – –

Financial non-current assets 570 557 +2 +2

Derivatives, net (15) (22) –32 –28

Collateral, net 6 39 –85 –85

Interest payable (221) (218) +1 +1

Other non-operating assets, net 156 108 +44 +45

Total net assets (liabilities) (11,385) (13,098) –13 –13

Free cash flow 2) Treasury activities (642) (498) +29 +32

Taxes paid (3,288) (3,909) –16 –16

Total (3,930) (4,407) –11 –10

1) See pages 155–158 for the definition of core results. 2) See pages 158–160 for the definition of free cash flow.

Financing costs

Core financing costs were CHF 744 million, a decrease of 9% at CER compared to 2017, with the decrease being mainly due to the base effect of losses on debt redemption of CHF 74 million in 2017. Interest expenses (including amortisation of debt discounts and issue costs) increased by 2% at CER to CHF 605 million due to increasing US interest rates. The net interest cost of defined benefit pension plans decreased by 7% at CER to CHF 139 million due to lower discount rates in the US at the end of 2017. A full analysis of financing costs is given in Note 4 to the Annual Financial Statements and details of the debt repayments and redemptions are given in Note 21.

Roche Finance Repor t 2018 | 31

Financial Review | Roche Group

Other financial income (expense)

Core other financial income (expense) was a net income of CHF 149 million compared to a net income of CHF 75 million in 2017. Net income from equity investments was CHF 311 million, with higher gains on equity investments in 2018. The net foreign exchange results, which reflect hedging costs and losses on unhedged positions, were losses of CHF 160 million compared to net losses of CHF 115 million in 2017. A full analysis of other financial income (expense) is given in Note 4 to the Annual Financial Statements.

Income taxes

The Group’s effective core tax rate decreased by 6.9 percentage points to 19.7% in 2018. This was largely due to the impact from the US tax reform which reduced the effective core tax rate by more than 7 percentage points.

The IFRS results show a decrease in the effective tax rate of 4.7 percentage points to 23.2%. The US tax reform had a transitional impact on the 2017 results from the initial estimate of the effect on deferred tax balances of the tax rate changes. A true-up adjustment of this transitional effect was included in the 2018 non-core results. The IFRS results also included the impairment of goodwill, which was not tax deductible, hence the net effect in the ‘Goodwill and intangible assets’ line in the table below.

Further details of the Group’s income tax expenses and related balance sheet positions are given in Note 5 to the Annual Financial Statements.

Analysis of the Group’s effective tax rate

2018 2017

Profit before tax

(CHF m)

Income taxes

(CHF m) Tax rate

(%)

Profit before tax

(CHF m)

Income taxes

(CHF m) Tax rate

(%)

Group’s effective tax rate – Core basis 19,910 (3,929) 19.7 18,268 (4,864) 26.6 Global restructuring plans (909) 150 16.5 (1,210) 248 20.5

Goodwill and intangible assets (4,630) 413 8.9 (5,209) 1,380 26.5

Mergers and acquisitions and alliance transactions (50) 29 58.0 345 2 –0.6

Legal and environmental cases (168) 37 22.0 76 (46) 60.5

Pension plan settlements (5) 1 20.0 (22) 4 18.2

Transitional effect of changes in US tax rates – 35 – – (116) –

Normalisation of equity compensation plan tax benefit – (19) – – (31) –

Group’s effective tax rate – IFRS basis 14,148 (3,283) 23.2 12,248 (3,423) 27.9

Financial position

The decrease in net debt was due to the free cash flow of CHF 14.8 billion, partly offset by the dividend payments of CHF 7.3 billion, the payments for mergers and acquisitions of CHF 3.4 billion and the buy-out of the minority owners of Foundation Medicine of CHF 2.3 billion. The net pension liability decreased by CHF 0.5 billion to CHF 6.1 billion due to an increase in discount rates in the US, Switzerland and Germany, partially offset by a decrease in the fair value of plan assets in Switzerland and the US. The net tax liabilities increased mainly due to the deferred tax effects from the net pension liabilities. At 31 December 2018 the Group held financial long-term assets with a market value of CHF 0.7 billion, which consist mostly of holdings in biotechnology and other pharmaceuticals companies which were acquired as part of licensing transactions or scientific collaborations.

Free cash flow

The cash outflow from treasury activities increased to CHF 0.6 billion due to higher pension contributions in 2018, partly offset by higher proceeds from sales of equity investments. Total taxes paid decreased by 16% to CHF 3.3 billion due to lower income tax payments in the US following the US tax reform partly offset by the timing of tax payments.

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Roche Group | Financial Review

Cash f lows and net debt

2018

2017

2016

18.7

17.8

14.1

Operating free cash flow in billions of CHF

0 15105 0 15105

Free cash flow in billions of CHF

14.8

13.4

9.1

Free cash flow in millions of CHF

Pharmaceuticals Diagnostics Corporate Group

2018 Operating profit – IFRS basis 14,788 617 (636) 14,769

Operating profit cash adjustments 5,906 2,692 120 8,718

Operating profit, net of operating cash adjustments 20,694 3,309 (516) 23,487 (Increase) decrease in net working capital 617 (511) 70 176

Investments in property, plant and equipment (2,584) (1,379) (80) (4,043)

Investments in intangible assets (876) (3) 0 (879)

Operating free cash flow 17,851 1,416 (526) 18,741 Treasury activities (642)

Taxes paid (3,288)

Free cash flow 14,811

2017 Operating profit – IFRS basis 13,242 304 (543) 13,003

Operating profit cash adjustments 5,990 2,628 (8) 8,610

Operating profit, net of operating cash adjustments 19,232 2,932 (551) 21,613 (Increase) decrease in net working capital 297 118 12 427

Investments in property, plant and equipment (2,061) (1,444) (4) (3,509)

Investments in intangible assets (651) (53) 0 (704)

Operating free cash flow 16,817 1,553 (543) 17,827 Treasury activities (498)

Taxes paid (3,909)

Free cash flow 13,420

For the definition of free cash flow and a detailed breakdown see pages 158–160.

Operating free cash flow increased by 5% at CER to CHF 18.7 billion. The major factor in this increase was the growth in the underlying cash generated from operations, which was CHF 23.5 billion, as cash revenues grew more than cash expenses. There was a smaller decrease in net working capital compared to 2017. This was mainly due to the lower increase in accounts payable in 2018. Capital expenditure was CHF 4.0 billion, driven by site development in Basel and South San Francisco, as well as the land purchase in Yokohama, Japan, for new research facilities. Investments in intangible assets were CHF 0.9 billion, an increase of CHF 0.2 billion compared to 2017 coming from increased in-licensing activities in the Pharmaceuticals Division.

The net cash outflow from treasury activities increased to CHF 0.6 billion due to higher pension contributions. This was partly offset by higher proceeds from sales of equity investments in 2018. Taxes paid were 16% lower at CHF 3.3 billion due to lower tax payments in the US following the US tax reform, partially offset by the timing of tax payments. The free cash flow of CHF 14.8 billion was 11% higher than in 2017, as a result of the higher operating free cash flow and lower income tax payments.

Roche Finance Repor t 2018 | 33

Financial Review | Roche Group

Net debt in millions of CHF

At 1 January 2018 Cash and cash equivalents 4,719

Marketable securities 7,278

Long-term debt (15,839)

Short-term debt (3,121)

Net debt at beginning of period (6,963)

Change in net debt during 2018 Free cash flow 14,811

Dividend payments (7,253)

Transactions in own equity instruments (448)

Mergers and acquisitions, net of divestments of subsidiaries (3,420)

Hedging and collateral arrangements 12

Changes in ownership interests in subsidiaries (2,287)

Currency translation, fair value and other movements (104)

Change in net debt 1,311

At 31 December 2018 Cash and cash equivalents 6,681

Marketable securities 6,437

Long-term debt (16,077)

Short-term debt (2,693)

Net debt at end of period (5,652)

For the definition of net debt see page 162.

Net debt – currency profile in millions of CHF

Cash and marketable securities Debt 2018 2017 2018 2017

US dollar 1) 2,598 1,935 (14,169) (12,973)

Euro 4,553 4,422 (1,855) (3,109)

Swiss franc 3,106 2,751 (2,504) (2,599)

Japanese yen 2,214 2,057 (2) (3)

Pound sterling 140 278 (95) (100)

Other 507 554 (145) (176)

Total 13,118 11,997 (18,770) (18,960)

1) US dollar-denominated debt includes those bonds and notes denominated in euros that were swapped into US dollars, and therefore in the consolidated results they have economic characteristics equivalent to US dollar-denominated bonds and notes.

The net debt position of the Group at 31 December 2018 was CHF 5.7 billion, a decrease of CHF 1.3 billion from 31 December 2017. The decrease in 2018 was due to the strong free cash flow of CHF 14.8 billion, partly offset by the annual dividend payments of CHF 7.3 billion, the payments for the Ignyta and Flatiron Health and other acquisitions of CHF 3.4 billion, as well as the payments of CHF 2.3 billion for taking full ownership of Foundation Medicine.

The issuance, redemption and repurchase of bonds and notes during 2018 (see Note 21 to the Annual Financial Statements) had an impact on liquid funds, but had no impact on the net debt position.

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Roche Group | Financial Review

Contractual obligations and commitments

The Group has obligations and commitments, as set out in the table below. Carrying values are as shown in the consolidated balance sheet. The potential obligations shown are not discounted and are not risk-adjusted. Any amounts denominated in foreign currencies are translated into Swiss francs at the 31 December 2018 exchange rates.

Contractual obligations and commitments as at 31 December 2018 in millions of CHF

Potential obligation (undiscounted)

Less than

1 year 1–2

years 2–5

years Over 5 years Total

Carr ying value

On-balance sheet Debt 21

– Bonds and notes 2,469 1,068 6,402 12,750 22,689 18,041

– Other debt 726 1 2 0 729 729

Contingent consideration provisions 20, 30 287 30 401 291 1,009 511

Accounts payable 17 3,526 0 0 0 3,526 3,526

Derivative financial instruments 19 64 11 78 0 153 153

Unfunded defined benefit plans 26 172 174 562 6,399 7,307 5,020

Total on-balance sheet commitments 7,244 1,284 7,445 19,440 35,413 27,980

Off-balance sheet Capital commitments for property, plant and equipment 8 839 183 322 5 1,349 0

Operating leases 8 364 286 464 216 1,330 0

Contract manufacturing commitments 30 345 306 626 166 1,443 0

Alliance collaboration commitments 10 398 585 778 262 2,023 0

Total off-balance sheet commitments 1,946 1,360 2,190 649 6,145 0

Total contractual commitments 9,190 2,644 9,635 20,089 41,558 27,980

References are to the Notes in the Annual Financial Statements.

Debt. This consists mainly of bonds and notes and includes the principal and interest on the Group’s debt instruments. Other debt is mainly commercial paper. The carrying values are discounted based on the interest rates inherent in the instruments.

Contingent consideration provisions. These are potential payments arising from mergers and acquisitions. The carrying values are risk- adjusted and discounted.

Unfunded defined benefit plans. These are mainly the pension plans in the Group’s German affiliates, where the fully reserved pension obligations are used for self-financing of the local affiliates’ operations. The carrying values are discounted. Future company contributions to the Group’s funded plans are not shown in the above table.

Capital commitments for property, plant and equipment. These are non-cancellable commitments for the purchase and construction mainly at the Roche sites in Basel (Switzerland) and South San Francisco (US).

Operating leases. These are the future obligations under non-cancellable lease contracts. In 2019 the Group will implement IFRS 16 ‘Leases’ and at that point these obligations will be reported in the balance sheet.

Contract manufacturing commitments. These are the future minimum take-or-pay commitments to purchase inventories arising from the Group’s major long-term agreements with external Contract Manufacturing Organisations (‘CMOs’).

Alliance collaboration commitments. These are potential upfront and milestone payments that may become due from the Group’s in-licensing arrangements. Potential payments to alliance partners and for asset deals within the next three years are included assuming all projects currently in development are successful. Potential payments beyond three years are only included for asset deals.

Provisions for legal and environmental matters. These are not included in the above table as the timing and amount of any cash outflow is uncertain and contingent on the development of the matters in question.

Roche Finance Repor t 2018 | 35

Financial Review | Roche Group

Pensions and other post-employment benefits

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. In 2018 expenses for the Group’s defined contribution plans were CHF 419 million (2017: CHF 482 million). All other plans are classified as ‘defined benefit plans’, even if the Group’s potential obligation is minor or has a relatively remote possibility of arising. Plans are usually established as trusts which are 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. In 2018 expenses for the Group’s defined benefit plans were CHF 657 million (2017: CHF 658 million).

Defined benefit plans

Funding status and balance sheet position

2018

(CHF m) 2017

(CHF m)

Funded plans

– Fair value of plan assets 15,264 14,356

– Defined benefit obligation (16,500) (15,705)

Over (under) funding (1,236) (1,349)

Unfunded plans

– Defined benefit obligation (5,020) (5,411)

Total funding status (6,256) (6,760)

Limit on asset recognition (2) 0

Reimbursement rights 118 140

Net recognised asset (liability) (6,140) (6,620)

Overall the funding status on an IFRS basis of the Group’s funded defined benefit plans increased to 93% compared to 91% at the start of the year. This came from the plans in the US and Switzerland, with an increase in the discount rates being partially offset by decreases in the fair value of plan assets since the end of 2017. In addition both plan assets and defined benefit obligation of funded plans increased by CHF 1.1 billion following a plan change in Switzerland. The funded status of the pension funds is monitored by the local pension fund governance bodies as well as being closely reviewed at a Group level. The total cash outflow from the Group’s defined benefit plans in 2018 was CHF 0.8 billion compared to CHF 0.5 billion in 2017. There were higher additional contributions paid into the Group’s pension plans in the US in 2018.

The unfunded plans are mainly those in the Group’s German affiliates, where the fully reserved pension obligations are used for self- financing of the local affiliates’ operations. The unfunded liabilities for these plans decreased during 2018 mainly due to a higher discount rate in Germany.

Full details of the Group’s pensions and other post-employment benefits are given in Note 26 to the Annual Financial Statements.

36 | Roche Finance Repor t 2018

Roche Group | Financial Review

Roche shares

Share price and market capitalisation (at 31 December)

2018 2017 % change

(CHF )

Share price (CHF ) 239.40 246.20 –3

Non-voting equity security (Genussschein) price (CHF ) 243.40 246.50 –1

Market capitalisation (billions of CHF ) 207 210 –1

In 2018 Roche ranked number 11 among a peer group consisting of Roche and 15 other healthcare companies1) for Total Shareholder Return ( TSR), defined as share price growth plus dividends, measured in Swiss francs at actual exchange rates. At constant exchange rates (CER) Roche ranked number 10, with the year-end return being +1% for Roche shares and +2% for Roche non-voting equity securities. The combined performance of share and non-voting equity security was +2% compared to a weighted average return for the peer group of +11% in CHF terms and at CER.

In 2018 the healthcare sector outperformed world equity markets, which were characterised by increased volatility in the second half of the year. Although the Swiss Market Index (SMI) posted losses in 2018, performance was mixed relative to other major global indices, with the SMI underperforming major US indices but outperforming European indices. The Roche share performance continued to be impacted by uncertainty over the impact of biosimilars in the US and concerns around US pricing reforms, despite the positive news flow over the year and a strong late-stage pipeline.

1) Peer group for 2018: Abbott, AbbVie, Amgen, Astellas, AstraZeneca, Bayer, Bristol-Myers Squibb, GlaxoSmithKline, Johnson & Johnson, Lilly, Merck & Co., Novar tis, P fizer, Roche, Sanofi and Takeda.

105

110

115

120

125

100

95

90

85

80

Roche share Roche non-voting equity security Peer Set Index

Total Shareholder Return development

31 Dec. 1831 Dec. 17 31 Mar. 18 30 June 18 30 Sept. 18

Source: Datastream. Data for Roche and the peer index has been re-based to 100 at 1 Januar y 2018. The Peer Index was conver ted into Swiss francs at daily actual exchange rates. Currency fluctuations have an influence on the representation of the relative per formance of Roche versus the peer index.

Proposed dividend

The Board of Directors is proposing an increase of 5% in the dividend for 2018 to CHF 8.70 per share and non-voting equity security (2017: CHF 8.30) for approval at the Annual General Meeting. This would be the 32nd consecutive increase in the dividend. If the dividend proposal is approved by shareholders, dividend payments on the total shares and non-voting equity securities will amount to CHF 7.5 billion (2017: CHF 7.2 billion), resulting in a pay-out ratio (based on core net income) of 48.0% (2017: 54.1%). Based on the prices at year-end 2018, the dividend yield on the Roche share was 3.6% (2017: 3.4%) and the yield on the non-voting equity security was also 3.6% (2017: 3.4%). Further information on the Roche securities is given on pages 163 to 164.

Roche Finance Repor t 2018 | 37

Financial Review | Roche Group

Information per share and non-voting equity security

2018

(CHF ) 2017

(CHF ) % change

(CHF )

EPS – Basic 12.29 10.12 +21

EPS – Diluted 12.21 10.04 +22

Core EPS – Basic 18.25 15.47 +18

Core EPS – Diluted 18.14 15.34 +18

Equity attributable to Roche shareholders per share 32.33 30.97 +4

Dividend per share 8.70 8.30 +5

For further details please refer to Notes 22 and 28 of the Annual Financial Statements and page 158. The pay-out ratio is calculated as dividend per share divided by core earnings per share.

Debt

Debt redemptions. During 2018 there were the following redemptions: • On the due date of 25 June 2018 of EUR 1.0 billion of bonds. • On the due date of 21 September 2018 of CHF 0.6 billion of bonds. • On the due date of 23 September 2018 of CHF 0.4 billion of bonds.

Debt issuances. During 2018 there were the following issuances: • On 17 September 2018 the Group issued USD 750 million of bonds due on 17 September 2023 and USD 650 million of bonds due on 17 September 2028.

• On 24 September 2018 the Group issued CHF 500 million of bonds due on 24 September 2025 and CHF 400 million of bonds due on 24 September 2030.

All the above transactions are further described in Note 21 to the Annual Financial Statements.

The maturity schedule of the Group’s bonds and notes outstanding at 31 December 2018 is shown in the table below.

Bonds and notes: nominal amounts at 31 December 2018 by contractual maturity

US dollar (USD m)

Euro (EUR m)

Pound sterling (GBP m)

Swiss franc (CHF m)

Total1) (USD m)

Total1) (CHF m)

2019 2,000 – – – 2,000 1,969

2020 600 – – – 600 591

2021 1,300 1,1402) – – 2,604 2,563

2022 650 – – 500 1,158 1,140

2023 750 650 77 – 1,591 1,566

2024–2028 5,150 1,000 – 1,250 7,564 7,445

2029 and beyond 2,164 – – 750 2,926 2,880

Total 12,614 2,790 77 2,500 18,443 18,154

1) Total translated at 31 December 2018 exchange rates. 2) Of the proceeds from these bonds and notes, EUR 850 million has been swapped into US dollars, and therefore in the consolidated results these bonds and notes have economic

characteristics equivalent to US dollar-denominated bonds and notes.

The Group plans to meet its debt obligations using existing liquid funds as well as cash generated from business operations. In 2018 the free cash flow was CHF 14.8 billion, which included the cash generated from operations, as well as payment of interest and tax.

For short-term financing requirements, the Group has a commercial paper program in the US under which it can issue up to USD 7.5 billion of unsecured commercial paper notes and has committed credit lines of USD 7.5 billion available as back-stop lines. Commercial paper notes totalling USD 0.6 billion were outstanding as of 31 December 2018 (2017: USD 0.8 billion). For longer-term financing the Group maintains strong long-term investment-grade credit ratings of A A by Standard & Poor’s and Aa3 by Moody’s which should facilitate efficient access to international capital markets.

Further information on the Group’s debt is given in Note 21 to the Annual Financial Statements.

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Roche Group | Financial Review

Financial risks

At 31 December 2018 the Group has a net debt position of CHF 5.7 billion (2017: CHF 7.0 billion). The financial assets of the Group are managed in a conservative way with the objective to meet the Group’s financial obligations at all times.

Asset allocation. A considerable portion of the cash and marketable securities the Group currently holds is being used for debt redemptions. Liquid funds are either held as cash or are invested in high-quality, investment-grade fixed income securities with an investment horizon to meet those liquidity requirements.

Cash and marketable securities

(CHF m) 2018

(% of total) (CHF m) 2017

(% of total)

Cash and cash equivalents 6,681 51 4,719 39

Money market instruments 5,381 41 6,107 51

Debt securities 1,047 8 1,161 10

Equity securities 9 0 10 0

Total cash and marketable securities 13,118 100 11,997 100

Credit risk. Credit risk arises from the possibility that counterparties to transactions may default on their obligations causing financial losses for the Group. The rating profile of the Group’s CHF 13.1 billion of cash and fixed income marketable securities remained strong with 93% being invested in the A-A A A range. The Group has signed netting and collateral agreements with the counterparties in order to mitigate counterparty risk on derivative positions.

The Group has trade receivables of CHF 10.7 billion. Since the beginning of 2010 there have been financial difficulties in Southern European countries, notably Spain, Italy, Greece and Portugal. The Group is a leading supplier to the healthcare sectors in these countries and at 31 December 2018 has trade receivables of EUR 0.5 billion (CHF 0.5 billion) with public customers in these countries. This is a decrease of 11% compared to 31 December 2017 in euro terms. The Group uses different measures to improve collections in these countries, including intense communication with customers, factoring, negotiations of payment plans, charging of interest for late payments, and legal actions. Since 2011 the Group’s trade receivables balance in Southern Europe has decreased by 64% in euro terms.

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. In addition to the current liquidity position, the Group has strong cash generation ability. Those future cash flows will be used to repay debt instruments in the coming years.

Roche enjoys strong long-term investment-grade credit ratings of A A by Standard & Poor’s and Aa3 by Moody’s. At the same time Roche is rated at the highest available short-term ratings by those agencies. On 8 February 2018 Moody’s upgraded Roche’s rating from A1 to Aa3. In the event of financing requirements, the ratings and the strong credit of Roche should permit efficient access to international capital markets, including the commercial paper market. The Group has committed credit lines with various financial institutions totalling USD 7.5 billion available as back-stop lines for the commercial paper program. As at 31 December 2018 no debt has been drawn under these credit lines.

Market risk. Market risk arises from changing market prices of the Group’s financial assets or financial liabilities. The exposures are predominantly related to changes in interest rates, foreign exchange 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 Group’s VaR remained stable during 2018.

Interest rate risk. Interest rate risk arises from movements in interest rates which could affect the Group’s financial result or the value of the Group equity. The Group may use interest rate derivatives to manage its interest rate-related exposure and financial result.

Further information on financial risk management and financial risks and the VaR methodology is included in Note 30 to the Annual Financial Statements.

Roche Finance Repor t 2018 | 39

Financial Review | Roche Group

International Financial Reporting Standards

The Roche Group has been using International Financial Reporting Standards (IFRS) to report its consolidated results since 1990. In 2018 the Group implemented IFRS 9 ‘Financial Instruments’ and IFRS 15 ‘Revenues from Contracts with Customers’, including any consequential amendments to other standards. The Group has also implemented various minor amendments to existing standards and interpretations, which have no material impact on the Group’s overall results and financial position.

New and revised standards applied in 2018

IFRS 9 ‘Financial Instruments’. The Group has implemented the new standard effective 1 January 2018 and has applied the exemption from full retrospective application for the classification and measurement requirements, including impairment, meaning that the comparative 2017 results have not been restated. The standard deals with the classification, recognition and measurement (including impairment) of financial instruments, the impairment of financial assets, including trade and lease receivables, and also introduces a new hedge accounting model.

IFRS 15 ‘Revenues from Contracts with Customers’. The Group has implemented the new standard effective 1 January 2018 and has applied the full retrospective method for the transition. Since the new standard does not change the amounts of revenue recognised for 2017, no restatements of the comparative 2017 results were necessary. The new standard contains a new set of principles on when and how to recognise and measure revenue as well as new requirements related to presentation. The core principle in that framework is that revenue should be recognised dependent on the transfer of promised goods or services to the customer for an amount that reflects the consideration which should be received in exchange for those goods or services.

IFRS 3 ‘Business Combinations’. In October 2018 the International Accounting Standards Board issued amendments to IFRS 3 ‘Business Combinations’. The amendments further clarify the definition of a business and add a ‘concentration test’ to aid the assessment of whether a transaction represents a business combination or simply in substance the purchase of a single asset or group of similar assets. These amendments are mandatory from 2020 and may be early adopted. The effect of the amendments is particularly applicable for many of the acquisitions carried out by the Roche Group, since the value in the acquired companies often consists of the rights to a single product or technology. Therefore, effective 1 January 2018, the Group has early implemented these amendments, with prospective application and with no restatement of comparative period information. The reassessment of the cash-generating units used for allocating goodwill in the Pharmaceuticals Division that was detailed above in the section on ‘Impairment of goodwill and intangible assets’, and the resulting impairment entries recorded, aligns historic transactions with transactions from 2018 onwards, which will use the revised IFRS 3 definition of a business.

As a result of the amendments to IFRS 3, the acquisition of Ignyta has been reassessed and accounted for as an asset acquisition in the 2018 Annual Financial Statements rather than as a business combination as disclosed in the 2018 Interim Financial Statements. This led to a decrease in goodwill of CHF 0.3 billion, a decrease in intangible assets of CHF 0.1 billion and a decrease in deferred tax liabilities of CHF 0.4 billion. Apart from this, none of these new standards have a material impact on the Group’s overall results and financial position. As a result of implementing IFRS 15, the Group has also made a presentational change to the income statement to include a subtotal ‘Revenue’, and has created a new note for ‘Revenue’ as Note 3.

See Note 33 to the Annual Financial Statements for further details of these matters.

New and revised standards that will be applied in 2019 and beyond

IFRS 16 ‘Leases’. The Group will implement the new standard effective 1 January 2019 and will apply the cumulative catch-up method option for the transition, meaning that the comparative 2018 results will not be restated when the new standard is applied. The main impact of the new standard will be to bring operating leases on-balance sheet. The Group currently anticipates that the new standard will result in the carrying value of leased assets being increased by approximately CHF 1.2 billion, with lease liabilities increased by a similar amount at the date of implementation. The application of the new standard will result in part of what is currently reported as operating lease costs being recorded as interest expenses. Given the leases involved and the prevailing low interest rate environment the Group does not currently expect this effect to be material.

See Note 33 to the Annual Financial Statements for further details.

40 | Roche Finance Repor t 2018

Roche Group | Roche Group Consolidated Financial Statements

Roche Group Consolidated Financial Statements

Roche Group consolidated income statement for the year ended 31 December 2018 in millions of CHF

Pharmaceuticals Diagnostics Corporate Group

Sales 2, 3 43,967 12,879 – 56,846

Royalties and other operating income 2, 3 2,553 98 – 2,651

Revenue 2, 3 46,520 12,977 – 59,497

Cost of sales (10,491) (6,778) – (17,269)

Marketing and distribution (7,068) (3,041) – (10,109)

Research and development 2 (10,299) (1,793) – (12,092)

General and administration (3,874) (748) (636) (5,258)

Operating profit 2 14,788 617 (636) 14,769

Financing costs 4 (770)

Other financial income (expense) 4 149

Profit before taxes 14,148

Income taxes 5 (3,283)

Net income 10,865

Attributable to

– Roche shareholders 22 10,500

– Non-controlling interests 24 365

Earnings per share and non-voting equity security 28 Basic (CHF ) 12.29

Diluted (CHF ) 12.21

Roche Finance Repor t 2018 | 41

Roche Group Consolidated Financial Statements | Roche Group

Roche Group consolidated income statement for the year ended 31 December 2017 in millions of CHF

Pharmaceuticals Diagnostics Corporate Group

Sales 2, 3 41,220 12,079 – 53,299

Royalties and other operating income 2, 3 2,284 163 – 2,447

Revenue 2, 3 43,504 12,242 – 55,746

Cost of sales (11,978) (6,201) – (18,179)

Marketing and distribution (6,960) (2,887) – (9,847)

Research and development 2 (9,704) (1,588) – (11,292)

General and administration (1,620) (1,262) (543) (3,425)

Operating profit 2 13,242 304 (543) 13,003

Financing costs 4 (839)

Other financial income (expense) 4 84

Profit before taxes 12,248

Income taxes 5 (3,423)

Net income 8,825

Attributable to

– Roche shareholders 22 8,633

– Non-controlling interests 24 192

Earnings per share and non-voting equity security 28 Basic (CHF ) 10.12

Diluted (CHF ) 10.04

42 | Roche Finance Repor t 2018

Roche Group | Roche Group Consolidated Financial Statements

Roche Group consolidated statement of comprehensive income in millions of CHF

Year ended 31 December 2018 2017

Net income recognised in income statement 10,865 8,825

Other comprehensive income (OCI) Remeasurements of defined benefit plans 22 134 404

Fair value changes on equity investments at fair value through OCI 22 87 n/a

Items that will never be reclassified to the income statement 221 404

Available-for-sale investments 22 n/a (22)

Fair value changes on debt securities at fair value through OCI 22 (7) n/a

Cash flow hedges 22 (15) (11)

Currency translation of foreign operations 22 (290) 362

Items that are or may be reclassified to the income statement (312) 329

Other comprehensive income, net of tax (91) 733

Total comprehensive income 10,774 9,558

Attributable to

– Roche shareholders 22 10,364 9,390

– Non-controlling interests 24 410 168

Total 10,774 9,558

The statement of comprehensive income has been adjusted to reflect the presentational changes required as a result from implementing IFRS 9 ‘Financial Instruments’ as described in Note 33.

Roche Finance Repor t 2018 | 43

Roche Group Consolidated Financial Statements | Roche Group

Roche Group consolidated balance sheet in millions of CHF

31 December 2018 31 December 2017 31 December 2016

Non-current assets Property, plant and equipment 8 21,818 20,912 19,957

Goodwill 9 8,948 10,077 11,282

Intangible assets 10 9,346 8,368 12,046

Deferred tax assets 5 3,895 3,576 2,826

Defined benefit plan assets 26 877 801 738

Other non-current assets 15 1,389 1,370 1,300

Total non-current assets 46,273 45,104 48,149

Current assets Inventories 11 6,621 7,407 7,928

Accounts receivable 12 9,776 9,577 8,760

Current income tax assets 5 208 348 335

Other current assets 16 2,521 2,243 2,540

Marketable securities 13 6,437 7,278 4,944

Cash and cash equivalents 14 6,681 4,719 4,163

Total current assets 32,244 31,572 28,670

Total assets 78,517 76,676 76,819

Non-current liabilities Long-term debt 21 (16,077) (15,839) (16,992)

Deferred tax liabilities 5 (384) (495) (838)

Defined benefit plan liabilities 26 (7,017) (7,421) (7,678)

Provisions 20 (1,452) (1,548) (1,777)

Other non-current liabilities 18 (188) (206) (532)

Total non-current liabilities (25,118) (25,509) (27,817)

Current liabilities Short-term debt 21 (2,693) (3,121) (5,363)

Current income tax liabilities 5 (3,808) (3,408) (2,713)

Provisions 20 (2,329) (2,042) (2,271)

Accounts payable 17 (3,526) (3,454) (3,375)

Other current liabilities 19 (10,677) (10,135) (8,878)

Total current liabilities (23,033) (22,160) (22,600)

Total liabilities (48,151) (47,669) (50,417)

Total net assets 30,366 29,007 26,402

Equity Capital and reserves attributable to Roche shareholders 22 27,622 26,441 23,911

Equity attributable to non-controlling interests 24 2,744 2,566 2,491

Total equity 30,366 29,007 26,402

44 | Roche Finance Repor t 2018

Roche Group | Roche Group Consolidated Financial Statements

Roche Group consolidated statement of cash flows in millions of CHF

Year ended 31 December 2018 2017

Cash flows from operating activities Cash generated from operations 29 24,424 22,256

(Increase) decrease in net working capital 176 427

Payments made for defined benefit plans 26 (785) (538)

Utilisation of provisions 20 (883) (621)

Disposal of products 335 410

Other operating cash flows 0 (1)

Income taxes paid (3,288) (3,909)

Total cash flows from operating activities 19,979 18,024

Cash flows from investing activities Purchase of property, plant and equipment (4,043) (3,509)

Purchase of intangible assets (879) (704)

Disposal of property, plant and equipment 146 100

Disposal of intangible assets 0 0

Business combinations 6 (1,550) (280)

Asset acquisitions 6 (1,824) –

Divestment of subsidiaries 23 1 11

Interest and dividends received 29 24 30

Sales of equity securities and debt securities 566 762

Purchases of equity securities and debt securities (412) (319)

Sales (purchases) of money market instruments and time accounts over three months, net 672 (2,612)

Other investing cash flows 104 62

Total cash flows from investing activities (7,195) (6,459)

Cash flows from financing activities Proceeds from issue of bonds and notes 21 2,252 1,502

Redemption and repurchase of bonds and notes 21 (2,152) (3,068)

Increase (decrease) in commercial paper 21 (199) (1,258)

Increase (decrease) in other debt 21 (23) (385)

Hedging and collateral arrangements 12 235

Changes in ownership interest in subsidiaries 6 (2,287) –

Equity contribution by non-controlling interests 0 5

Interest paid (593) (648)

Dividends paid 29 (7,253) (7,140)

Equity-settled equity compensation plans, net of transactions in own equity 27 (448) (358)

Other financing cash flows 0 0

Total cash flows from financing activities (10,691) (11,115)

Net effect of currency translation on cash and cash equivalents (131) 106

Increase (decrease) in cash and cash equivalents 1,962 556

Cash and cash equivalents at 1 January 4,719 4,163

Cash and cash equivalents at 31 December 14 6,681 4,719

Roche Finance Repor t 2018 | 45

Roche Group Consolidated Financial Statements | Roche Group

Roche Group consolidated statement of changes in equity in millions of CHF

Share capital

Retained earnings

Fair value reser ves

Hedging reser ves

Translation reser ves Total

Non- controlling

interests Total

equity

Year ended 31 December 2017 At 1 Januar y 2017 160 31,092 185 63 (7,589) 23,911 2,491 26,402

Net income recognised in income statement – 8,633 – – – 8,633 192 8,825

Available-for-sale investments – – (26) – – (26) 4 (22)

Cash flow hedges – – – – – – (11) (11)

Currency translation of foreign operations – – (1) (2) 385 382 (20) 362

Remeasurements of defined benefit plans – 401 – – – 401 3 404

Total comprehensive income – 9,034 (27) (2) 385 9,390 168 9,558 Dividends – (6,998) – – – (6,998) (121) (7,119)

Equity compensation plans, net of transactions

in own equity – 146 – – – 146 15 161

Changes in non-controlling interests 24 – (8) – – – (8) 8 –

Equity contribution by non-controlling interests 24 – – – – – – 5 5

At 31 December 2017 160 33,266 158 61 (7,204) 26,441 2,566 29,007

Year ended 31 December 2018 At 1 January 2018 160 33,266 158 61 (7,204) 26,441 2,566 29,007

Implementation of IFRS 9 ‘Financial Instruments’ 33 – 105 (110) – – (5) 0 (5)

At 1 Januar y 2018 (revised) 160 33,371 48 61 (7,204) 26,436 2,566 29,002

Net income recognised in income statement – 10,500 – – – 10,500 365 10,865

Net change in fair value – financial assets at

fair value through OCI – 100 (21) – – 79 1 80

Cash flow hedges – – – (14) – (14) (1) (15)

Currency translation of foreign operations – – 1 – (344) (343) 53 (290)

Remeasurements of defined benefit plans – 142 – – – 142 (8) 134

Total comprehensive income – 10,742 (20) (14) (344) 10,364 410 10,774

Dividends – (7,094) – – – (7,094) (136) (7,230)

Equity compensation plans, net of transactions

in own equity – 51 – – – 51 10 61

Changes in ownership interest in subsidiaries 6 – (2,129) – – – (2,129) (112) (2,241)

Changes in non-controlling interests 24 – (6) – – – (6) 6 –

Equity contribution by non-controlling interests 24 – – – – – – 0 0

At 31 December 2018 160 34,935 28 47 (7,548) 27,622 2,744 30,366

Equity as at 1 Januar y 2018 has been revised following the implementation of IFRS 9 ‘Financial Instruments’ as described in Note 33. In addition, the statement of changes in equity has been adjusted to reflect the presentational changes required by the implementation of this new standard.

46 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Notes to the Roche Group Consolidated Financial Statements

1. General accounting principles

Basis of preparation

The consolidated financial statements (hereafter ‘the Annual 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 for items that are required to be accounted for at fair value. They were approved for issue by the Board of Directors on 28 January 2019 and are subject to approval by the Annual General Meeting of shareholders on 5 March 2019.

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

The Group’s significant accounting policies and changes in accounting policies are disclosed in Note 33.

Key accounting judgements, estimates and assumptions

The preparation of the Annual Financial Statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities and contingent amounts. Actual outcomes could differ from those management estimates. The estimates and underlying assumptions are reviewed on an ongoing basis and are based on historical experience and various other factors. Revisions to estimates are recognised in the period in which the estimate is revised. The following are considered to be the key accounting judgements, estimates and assumptions made and are believed to be appropriate based upon currently available information.

Revenue. The nature of the Group’s business is such that many sales transactions do not have a simple structure and may consist of various performance obligations that are satisfied at different times. Contracts entered into in the Diagnostics Division typically include performance obligations for instruments (including those provided under leasing arrangements), reagents and other consumables, and services. Instruments may be sold in cash sales transactions at discounted prices. Where instruments are provided under operating lease arrangements, some or the entire lease revenue may be variable and subject to subsequent reagents sales. Sales, net of discounts, are based on estimates regarding the related obligations, including their stand-alone selling prices or fair values. It requires judgement to determine when different obligations are satisfied, including whether enforceable purchase commitments for further obligations exist and when they arise. Out-licensing agreements may be entered into with no further obligation or may include commitments to conduct research, late-stage development, regulatory approval, co-marketing or manufacturing. These may be settled by a combination of upfront payments, milestone payments, other licensing fees, and reimbursements for services provided. Whether to consider these commitments as a single performance obligation or separate ones, or even being in scope of IFRS 15 ‘Revenues from Contracts with Customers’, is not straightforward and requires some judgement. Depending on the conclusion, this may result in all revenue being calculated at inception and either being recognised at once or spread over the term of a longer performance obligation.

Sales are recorded net of allowances for estimated rebates, chargebacks, cash discounts and estimates of product returns, all of which are established at the time of sale. All product sales allowances are based on estimates of the amounts earned or to be claimed on the related sales. At 31 December 2018 the Group had CHF 3,785 million in provisions and accruals for expected sales returns, chargebacks and other rebates, including Medicaid in the US and similar rebates in other countries. The provisions and accruals relating to the US Pharmaceuticals business amounted to CHF 1,896 million, of which CHF 455 million were associated with expected sales returns. These estimates take into consideration historical experience, current contractual and statutory requirements, specific known market events and trends such as competitive pricing and new product introductions, estimated inventory levels, and the shelf life of products. If actual future results vary, these estimates need to be adjusted, with an effect on sales and earnings in the period of the adjustment.

Business combinations. The Group initially recognises the fair value of identifiable assets acquired, the liabilities assumed, any non- controlling interest and the consideration transferred in a business combination. Management judgement is particularly involved in the assessment of whether or not the net assets acquired constitute a business and in the recognition and fair value measurement of

Roche Finance Repor t 2018 | 47

Notes to the Roche Group Consolidated Financial Statements | Roche Group

intellectual property, inventories, contingent liabilities and contingent consideration. In making this assessment, management considers the underlying economic substance of the items concerned in addition to the contractual terms. Management also applies as it considers appropriate the optional ‘concentration test’ as set out in the amendments to IFRS 3 ‘Business Combinations’ published in October 2018 to aid the assessment of whether a transaction represents a business combination or is simply in substance the purchase of a single asset or group of similar assets.

Impairment of property, plant and equipment, goodwill and intangible assets. At 31 December 2018 the Group had CHF 21,818 million in property, plant and equipment (see Note 8), CHF 8,948 million in goodwill (see Note 9) and CHF 9,346 million in intangible assets (see Note 10). Goodwill and intangible assets not yet available for use are reviewed annually for impairment. Property, plant and equipment and intangible assets in use are assessed for impairment when there is a triggering event that provides evidence that an asset may be impaired. To assess whether any impairment exists, estimates of expected future cash flows are used. Actual outcomes could vary significantly from such estimates. Factors such as changes in discount rates, the planned use of buildings, machinery or equipment or closure of facilities, the presence of competition, technical obsolescence and lower-than-anticipated product sales could lead to shorter useful lives or impairment.

Impairment of financial assets. At 31 December 2018 the Group had CHF 540 million in allowance for doubtful accounts for trade and lease receivables (see Note 12). The allowance for doubtful accounts is based on assumptions about risk of default and expected loss rates. The Group uses judgement in making these assumptions and selecting the inputs to the calculation of the allowance for doubtful accounts, based on the company’s past experience, existing market conditions as well as forward-looking estimates at the end of each reporting period.

Pensions and other post-employment benefits. The Group operates a number of defined benefit plans and the fair values of the recognised plan assets and liabilities are based upon statistical and actuarial calculations. The measurement of the net defined benefit obligation is particularly sensitive to changes in the discount rate, inflation rate, expected mortality and medical cost trend rate assumptions. At 31 December 2018 the present value of the Group’s defined benefit obligation is CHF 21,520 million (see Note 26). The actuarial assumptions used may differ materially from actual results due to changes in market and economic conditions, longer or shorter lifespans of participants, and other changes in the factors being assessed. These differences could impact the defined benefit plan assets and liabilities recognised in the balance sheet in future periods.

Legal provisions. The Group provides for anticipated legal settlement costs when there is a probable outflow of resources that can be reliably estimated. Where no reliable estimate can be made, no provision is recorded and contingent liabilities are disclosed where material. At 31 December 2018 the Group had CHF 578 million in legal provisions. The status of significant legal cases is disclosed in Note 20. These estimates consider the specific circumstances of each legal case, relevant legal advice and are inherently judgemental due to the highly complex nature of legal cases. The estimates could change substantially over time as new facts emerge and each legal case progresses.

Environmental provisions. The Group provides for anticipated environmental remediation costs when there is a probable outflow of resources that can be reasonably estimated. At 31 December 2018 the Group had CHF 491 million in environmental provisions (see Note 20). Environmental provisions consist primarily of costs to fully clean and refurbish contaminated sites, including landfills, and to treat and contain contamination at certain other sites. These estimates are inherently judgemental due to uncertainties related to the detection of previously unknown contamination, the method and extent of remediation, the percentage of the problematic materials attributable to the Group at the remediation sites, and the financial capabilities of other potentially responsible parties. The estimates could change substantially over time as new facts emerge and each environmental remediation progresses.

Contingent consideration provisions. The Group makes provision for the estimated fair value of contingent consideration arrangements arising from business combinations. At 31 December 2018 the Group had CHF 511 million in contingent consideration provisions (see Note 20) and the total potential payments under contingent consideration arrangements from business combinations could be up to CHF 1,009 million (see Note 30). The estimated amounts provided are the expected payments, determined by considering the possible scenarios of forecast sales and other performance criteria, the amount to be paid under each scenario, and the probability of each scenario, which is then discounted to a net present value. The estimates could change substantially over time as new facts emerge and each scenario develops.

Income taxes. At 31 December 2018 the Group had a current income tax net liability of CHF 3,600 million and a deferred tax net asset of CHF 3,511 million (see Note 5). Significant estimates are required to determine the current and deferred tax assets and liabilities. Some of these estimates are based on interpretations of existing tax laws or regulations. Where tax positions are uncertain, accruals are recorded within income tax liabilities for management’s best estimate of the ultimate liability that is expected to arise based on the specific circumstances and the Group’s historical experience. Factors that may have an impact on current and deferred taxes include changes in tax laws, regulations or rates, changing interpretations of existing tax laws or regulations, future levels of research and development spending and changes in pre-tax earnings.

48 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Leases. The treatment of leasing transactions is mainly determined by whether the lease is considered to be an operating or 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.

Consolidation. The Group periodically undertakes transactions that may involve obtaining control or significant influence over other companies. These transactions include equity acquisitions, asset purchases and alliance agreements. In all such cases management makes an assessment as to whether the Group has control or significant influence over the other company, and whether it should be consolidated as a subsidiary or accounted for as an associated company. In making this assessment, management considers the underlying economic substance of the transaction in addition to the contractual terms.

2. Operating segment information

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 revenues from the sale or licensing of products or technology to third parties. Residual operating activities from divested businesses and certain global activities are reported as ‘Corporate’. These include the Corporate Executive Committee and global group functions for communications, human resources, finance (including treasury and taxes), legal, safety and environmental services. Subdivisional information is also presented for the Roche Pharmaceuticals and Chugai operating segments within the Pharmaceuticals Division.

Divisional information in millions of CHF

Pharmaceuticals Diagnostics Corporate Group 2018 2017 2018 2017 2018 2017 2018 2017

Revenues from external customers Sales 43,967 41,220 12,879 12,079 – – 56,846 53,299

Royalties and other operating income 2,553 2,284 98 163 – – 2,651 2,447

Total 46,520 43,504 12,977 12,242 – – 59,497 55,746

Revenues from other operating segments Sales – – 12 14 – – 12 14

Royalties and other operating income – – – – – – – –

Elimination of interdivisional revenue (12) (14)

Total – – 12 14 – – – –

Segment results Operating profit 14,788 13,242 617 304 (636) (543) 14,769 13,003

Capital expenditure Business combinations 1,826 – – 193 – – 1,826 193

Asset acquisitions 1,725 – – – – – 1,725 –

Additions to property, plant and equipment 2,340 2,030 1,376 1,443 80 4 3,796 3,477

Additions to intangible assets 802 736 18 33 – – 820 769

Total 6,693 2,766 1,394 1,669 80 4 8,167 4,439

Research and development Research and development costs 10,299 9,704 1,793 1,588 – – 12,092 11,292

Other segment information Depreciation of property, plant and equipment 1,129 1,165 1,097 1,024 66 7 2,292 2,196

Amortisation of intangible assets 1,131 1,359 163 332 – – 1,294 1,691

Impairment of property, plant and equipment 137 184 1 37 3 12 141 233

Impairment of goodwill 2,147 384 107 674 – – 2,254 1,058

Impairment of intangible assets 233 2,188 849 272 – – 1,082 2,460

Equity compensation plan expenses 392 388 78 73 38 34 508 495

Roche Finance Repor t 2018 | 49

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Pharmaceuticals subdivisional information in millions of CHF

Roche Pharmaceuticals Chugai Pharmaceuticals Division 2018 2017 2018 2017 2018 2017

Revenues from external customers Sales 40,266 37,507 3,701 3,713 43,967 41,220

Royalties and other operating income 2,239 2,231 314 53 2,553 2,284

Total 42,505 39,738 4,015 3,766 46,520 43,504

Revenues from other operating segments Sales 1,340 1,222 974 670 2,314 1,892

Royalties and other operating income 104 82 215 257 319 339

Elimination of income within division (2,633) (2,231)

Total 1,444 1,304 1,189 927 – –

Segment results Operating profit 13,702 12,395 1,136 856 14,838 13,251

Elimination of results within division (50) (9)

Operating profit 13,702 12,395 1,136 856 14,788 13,242

Capital expenditure Business combinations 1,826 – – – 1,826 –

Asset acquisitions 1,725 – – – 1,725 –

Additions to property, plant and equipment 1,704 1,732 636 298 2,340 2,030

Additions to intangible assets 777 700 25 36 802 736

Total 6,032 2,432 661 334 6,693 2,766

Research and development Research and development costs 9,434 9,012 919 834 10,353 9,846

Elimination of costs within division (54) (142)

Total 9,434 9,012 919 834 10,299 9,704

Other segment information Depreciation of property, plant and equipment 1,001 1,039 128 126 1,129 1,165

Amortisation of intangible assets 1,118 1,344 13 15 1,131 1,359

Impairment of property, plant and equipment 136 184 1 0 137 184

Impairment of goodwill 2,147 384 0 0 2,147 384

Impairment of intangible assets 196 2,168 37 20 233 2,188

Equity compensation plan expenses 389 384 3 4 392 388

Net operating assets in millions of CHF

Assets Liabilities Net assets At 31 December 2018 2017 2016 2018 2017 2016 2018 2017 2016

Pharmaceuticals 40,246 39,174 42,212 (12,559) (12,215) (11,456) 27,687 26,959 30,756

Diagnostics 18,898 19,833 20,329 (4,576) (4,390) (4,141) 14,322 15,443 16,188

Corporate 322 133 146 (580) (430) (463) (258) (297) (317)

Total operating 59,466 59,140 62,687 (17,715) (17,035) (16,060) 41,751 42,105 46,627

Non-operating 19,051 17,536 14,132 (30,436) (30,634) (34,357) (11,385) (13,098) (20,225)

Group 78,517 76,676 76,819 (48,151) (47,669) (50,417) 30,366 29,007 26,402

Net operating assets – Pharmaceuticals subdivisional information in millions of CHF

Assets Liabilities Net assets At 31 December 2018 2017 2016 2018 2017 2016 2018 2017 2016

Roche Pharmaceuticals 36,421 35,690 38,783 (12,524) (11,930) (11,175) 23,897 23,760 27,608

Chugai 5,627 4,900 4,897 (1,042) (974) (1,025) 4,585 3,926 3,872

Elimination within division (1,802) (1,416) (1,468) 1,007 689 744 (795) (727) (724)

Pharmaceuticals Division 40,246 39,174 42,212 (12,559) (12,215) (11,456) 27,687 26,959 30,756

50 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Information by geographical area in millions of CHF

Revenues from external customers Non-current assets

Sales Royalties and other

operating income Proper ty, plant and equipment

Goodwill and intangible assets

2018 Switzerland 627 297 5,658 2,485

Germany 3,147 32 4,030 995

Rest of Europe 9,828 14 962 434

Europe 13,602 343 10,650 3,914

United States 26,105 1,976 6,953 13,808

Rest of North America 931 1 68 373

North America 27,036 1,977 7,021 14,181

Latin America 2,870 0 308 8

Japan 4,175 315 2,114 189

Rest of Asia 7,689 16 1,628 1

Asia 11,864 331 3,742 190

Africa, Australia and Oceania 1,474 0 97 1

Total 56,846 2,651 21,818 18,294

2017 Switzerland 574 480 5,411 2,723

Germany 3,041 29 4,038 1,042

Rest of Europe 10,135 17 982 482

Europe 13,750 526 10,431 4,247

United States 23,122 1,853 6,685 13,956

Rest of North America 897 1 74 21

North America 24,019 1,854 6,759 13,977

Latin America 3,024 0 328 9

Japan 4,214 53 1,611 208

Rest of Asia 6,824 14 1,671 2

Asia 11,038 67 3,282 210

Africa, Australia and Oceania 1,468 0 112 2

Total 53,299 2,447 20,912 18,445

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.

Major customers

In total three US national wholesale distributors represent approximately a third of the Group’s revenues in 2018. The three US national wholesale distributors are McKesson Corp. with CHF 9 billion (2017: CHF 7 billion), AmerisourceBergen Corp. with CHF 7 billion (2017: CHF 6 billion) and Cardinal Health, Inc. with CHF 5 billion (2017: CHF 5 billion). Approximately 95% of these revenues were in the Pharmaceuticals operating segment, with the residual in the Diagnostics segment.

Roche Finance Repor t 2018 | 51

Notes to the Roche Group Consolidated Financial Statements | Roche Group

3. Revenue

Disaggregated revenue information

Disaggregation of revenue in millions of CHF

2018 2017 Revenue from

contracts with customers

Revenue from other sources Total

Revenue from contracts with

customers Revenue from other sources Total

Pharmaceuticals Division Sales by therapeutic area Oncology 26,183 – 26,183 25,743 – 25,743

Immunology 8,160 – 8,160 7,611 – 7,611

Neuroscience 3,005 – 3,005 1,542 – 1,542

Ophthalmology 1,659 – 1,659 1,414 – 1,414

Infectious diseases 1,084 – 1,084 1,357 – 1,357

Other therapeutic areas 3,876 – 3,876 3,553 – 3,553

Sales 43,967 – 43,967 41,220 – 41,220

Royalty income 1,670 – 1,670 1,551 – 1,551

Income from out-licensing agreements 267 – 267 122 – 122

Income from disposal of products and other 333 283 616 417 194 611

Royalties and other operating income 2,270 283 2,553 2,090 194 2,284

Diagnostics Division Sales by business area Centralised and Point of Care Solutions 7,099 669 7,768 6,542 637 7,179

Diabetes Care 1,977 3 1,980 1,960 5 1,965

Molecular Diagnostics 1,912 107 2,019 1,831 89 1,920

Tissue Diagnostics 1,047 65 1,112 946 69 1,015

Sales 12,035 844 12,879 11,279 800 12,079

Royalty income 58 – 58 111 – 111

Income from out-licensing agreements 2 – 2 27 – 27

Income from disposal of products and other 15 23 38 4 21 25

Royalties and other operating income 75 23 98 142 21 163

Total 58,347 1,150 59,497 54,731 1,015 55,746

Revenue from other sources primarily relates to lease revenue and collaboration income for which the counterparty is not considered a customer, such as income from profit-sharing arrangements.

52 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Gross-to-net sales reconciliation for the Pharmaceuticals Division

The gross-to-net sales reconciliation for the Pharmaceuticals Division is shown in the table below. The companies in the Diagnostics Division have similar reconciling items, but at much lower amounts.

Pharmaceuticals Division sales gross-to-net reconciliation in millions of CHF

2018 2017

Gross sales 53,334 49,502

Government and regulatory mandatory price reductions (6,064) (5,490)

Contractual price reductions (2,423) (2,078)

Cash discounts (476) (432)

Customer returns reserves (326) (133)

Others (78) (149)

Net sales 43,967 41,220

Government and regulatory mandatory price reductions. These consist of mandatory price reductions. The major elements are 340B Drug Discount Program, Medicaid, and other plans in the US, which totalled USD 5.5 billion, equivalent to CHF 5.4 billion (2017: USD 4.7 billion, equivalent to CHF 4.7 billion).

Contractual price reductions. These include rebates and chargebacks that are the result of contractual agreements that are primarily volume-based and performance-based.

Cash discounts. These include credits offered to wholesalers for remitting payment on their purchases within contractually defined incentive periods.

Customer returns reserves. These are allowances established for expected product returns.

Sales reductions that are expected to be withheld by the customer upon settlement, such as contractual price reductions and cash discounts, are recorded in the balance sheet as a deduction from trade receivables (see Note 12). Sales reductions that are separately payable to customers, governmental health authorities or healthcare regulatory authorities are recorded in the balance sheet as accrued liabilities (see Note 19). Provisions for sales returns are recorded in the balance sheet as other provisions (see Note 20).

Contract balances

Receivables in millions of CHF

2018 2017 2016

Accounts receivable 12 9,776 9,577 8,760

Other current receivables – contracts from customers 16 604 628 749

Other non-current receivables – contracts from customers 15 25 38 27

Total receivables 10,405 10,243 9,536

Other current receivables mainly include royalty and licensing receivables. At 31 December 2018 total receivables include lease receivables of 2% which are not considered receivables from contracts with customers.

Contract assets in millions of CHF

2018 2017 2016

Accrued income 73 25 0

Total contract assets 73 25 0

Roche Finance Repor t 2018 | 53

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Contract liabilities in millions of CHF

2018 2017 2016

Deferred income – non-current 21 77 82

Deferred income – current 290 372 184

Total contract liabilities 311 449 266

Movement in contract liabilities in millions of CHF

2018 2017

At 1 January 449 266

Business combinations 22 3

Revenue recognised that was included in the contract liability balance at the beginning of the year (314) (145)

Increases due to cash received or receivable, excluding amounts recognised as revenue during the year 162 319

Divestment of subsidiaries (1) 0

Currency translation effects (7) 6

At 31 December 311 449

Revenue recognised in relation to performance obligations satisfied in previous years

In 2018 there was an increase in revenue recognised of CHF 30 million (2017: increase of CHF 123 million) relating to performance obligations that were satisfied in previous periods, mainly due to adjustments of sales deduction provisions and accruals for expected sales returns, chargebacks and other allowances in respect of previous years.

Remaining performance obligations in (partially) unsatisfied long-term contracts

Remaining performance obligations in (partially) unsatisfied long-term contracts are either included in deferred income or are related to amounts the Group expects to receive for goods and services that have not yet been transferred to customers under existing, non-cancellable or otherwise enforceable contracts. These are mainly associated with contracts in the Diagnostics Division that have minimum purchase commitments related to reagents and consumables for previously sold instruments as well as monitoring and maintenance services. For contracts that have an original duration of one year or less, the Group has elected the practical expedient to not disclose the transaction price for remaining performance obligations at the end of each reporting period and at which point in time the Group expects to recognise these sales.

Transaction price allocated to contracts with (partially) unsatisfied performance obligations in millions of CHF

2018

No contract liability held 2,730

Contract liability held 311

Total 3,041

Thereof expected to be recognised as revenue

– Within one year 1,130

– Between one and five years 1,804

– More than five years 107

Total 3,041

54 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

4. Net financial expense

Upon transition to IFRS 9 (see Note 33) the Group elected not to restate comparative information. As a result the information provided below for the current period is on the IFRS 9 basis and the comparative information is on the IAS 39 basis.

Financing costs in millions of CHF

2018 2017

Interest expense (594) (585)

Amortisation of debt discount 21 (11) (13)

Net gains (losses) on redemption and repurchase of bonds and notes 0 (74)

Discount unwind 20 (26) (20)

Net interest cost of defined benefit plans 26 (139) (147)

Total financing costs (770) (839)

Other financial income (expense) in millions of CHF

2018 2017

Net gains (losses) on sale of equity securities (IAS 39) n/a 186

Dividend income (available-for-sale equity securities – IAS 39) n/a 2

Write-downs and impairments of equity securities (IAS 39) n/a (17)

Net gains (losses) on equity investments / securities at fair value through profit or loss (IFRS 9) 310 n/a

Dividend income from equity investments / securities at fair value through profit or loss (IFRS 9) 0 n/a

Dividend income from equity investments / securities at fair value through OCI (IFRS 9) 1 n/a

Net income from equity securities 311 171

Interest income (available-for-sale debt securities and amortised cost – IAS 39) n/a 30

Net gains (losses) on sale of debt securities (available-for-sale securities and amortised costs – IAS 39) n/a 3

Interest income (fair value through OCI debt securities and amortised cost – IFRS 9) 30 n/a

Net gains (losses) on sale of debt securities (fair value through OCI – IFRS 9) 6 n/a

Net interest income and income from debt securities 36 33

Net foreign exchange gains (losses) (208) (238)

Net gains (losses) on foreign currency derivatives 48 123

Foreign exchange gains (losses) (160) (115)

Gains (losses) on net monetary position in hyperinflationary economies (18) 0

Net other financial income (expense) (26) (3)

Associates 23 6 (2)

Total other financial income (expense) 149 84

Other financial income (expense) has been adjusted to reflect the presentational changes required as a result from implementing IFRS 9 ‘Financial Instruments’ as described in Note 33.

Roche Finance Repor t 2018 | 55

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Net financial expense in millions of CHF

2018 2017

Financing costs (770) (839)

Other financial income (expense) 149 84

Net financial expense (621) (755)

Financial result from Treasury management (488) (606)

Financial result from Pension management (139) (147)

Associates 23 6 (2)

Net financial expense (621) (755)

Hyperinflationary economies

Since 1 July 2018 the Group has considered Argentina to be a hyperinflationary economy, in the context of IAS 29 ‘Financial Reporting in Hyperinflationary Economies’. The cumulative inflation index over the last three years exceeds 100%, as measured by the National Wholesaler Price Index (Sistema de Índices de Precios Mayoristas).

Accordingly the Group has reviewed the reporting from its affiliates in Argentina, and where necessary restated them in line with IAS 29. The potential adjustments resulting from the application of IAS 29 do not have a significant impact on the Group’s operating results and balance sheet. An adjustment is recorded for the gains (losses) on the net monetary position, which is a loss of CHF 18 million resulting from the loss in purchasing power of the positive net monetary position during 2018 of the Group’s Argentinian affiliates.

5. Income taxes

Income tax expenses in millions of CHF

2018 2017

Current income taxes (3,881) (4,846)

Deferred taxes 598 1,423

Total income tax (expense) (3,283) (3,423)

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 Group’s average expected tax rate decreased to 17.8% in 2018 (2017: 21.5%). This was largely due to a decrease in the US Federal tax rate from 35% to 21% which was enacted in December 2017 and effective from 1 January 2018.

The Group’s effective tax rate decreased to 23.2% in 2018 (2017: 27.9%). The main driver for the decrease was the impact from the US tax reform which lowered the average expected tax rate mentioned above. In addition the US tax reform had a transitional impact on the 2017 results from the initial estimate of the effect on deferred tax balances of the tax rate changes which resulted in an expense of CHF 116 million increasing the 2017 Group effective tax rate. A true-up adjustment of this transitional effect was included in 2018 and resulted in an income of CHF 35 million.

56 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

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

2018 2017

Average expected tax rate 17.8% 21.5%

Tax effect of

– Non-taxable income/non-deductible expenses +4.5% +4.8%

– Equity compensation plans +0.1% +0.2%

– Research and development tax credits and other deductions –2.0% –2.9%

– US state tax impacts +0.4% +0.5%

– Tax on unremitted earnings +1.2% +1.7%

– Transitional effect of changes in US tax rates –0.2% +0.9%

– Prior year and other differences +1.4% +1.2%

Group’s effective tax rate 23.2% 27.9%

The income tax benefit recorded in respect of equity compensation plans, which varies according to the price of the underlying equity, was CHF 59 million (2017: CHF 87 million). Had the income tax benefits been recorded solely on the basis of the IFRS 2 expense multiplied by the applicable tax rate, then a benefit of approximately CHF 78 million (2017: CHF 118 million) would have been recorded.

Tax effects of other comprehensive income in millions of CHF

2018 2017

Pre-tax amount Tax

Af ter-tax amount

Pre-tax amount Tax

Af ter-tax amount

Remeasurements of defined benefit plans 197 (63) 134 732 (328) 404

Available-for-sale investments (IAS 39) n/a n/a n/a (37) 15 (22)

Equity investments at fair value through OCI (IFRS 9) 89 (2) 87 n/a n/a n/a

Debt securities at fair value through OCI (IFRS 9) (8) 1 (7) n/a n/a n/a

Cash flow hedges (19) 4 (15) (31) 20 (11)

Currency translation of foreign operations (290) – (290) 362 – 362

Other comprehensive income (31) (60) (91) 1,026 (293) 733

Income tax assets (liabilities) in millions of CHF

2018 2017 2016

Current income taxes

– Assets 208 348 335

– Liabilities (3,808) (3,408) (2,713)

Net current income tax assets (liabilities) (3,600) (3,060) (2,378)

Deferred taxes

– Assets 3,895 3,576 2,826

– Liabilities (384) (495) (838)

Net deferred tax assets (liabilities) 3,511 3,081 1,988

Current income tax liabilities include accruals for uncertain tax positions.

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

2018 2017

Net current income tax asset (liability) at 1 January (3,060) (2,378)

Income taxes paid 3,288 3,909

Business combinations 6 0

(Charged) credited to the income statement (3,881) (4,846)

(Charged) credited to equity from equity compensation plans and other transactions with shareholders 53 152

Currency translation effects and other movements (6) 103

Net current income tax asset (liability) at 31 December (3,600) (3,060)

Roche Finance Repor t 2018 | 57

Notes to the Roche Group Consolidated Financial Statements | Roche Group

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

Proper ty, plant and

equipment Intangible

assets

Defined benefit

plans

Other temporar y

dif ferences Total

Year ended 31 December 2017 At 1 January 2017 (862) (2,648) 1,570 3,928 1,988

Business combinations 6 0 (28) 0 0 (28)

(Charged) credited to the income statement 198 1,812 (98) (489) 1,423

(Charged) credited to other comprehensive income 22 – – (328) 35 (293)

(Charged) credited to equity from equity compensation plans and

other transactions with shareholders – – – (128) (128)

Currency translation effects and other movements 6 119 37 (43) 119

At 31 December 2017 (658) (745) 1,181 3,303 3,081 Year ended 31 December 2018 At 1 January 2018 (658) (745) 1,181 3,303 3,081

Implementation of IFRS 9 ‘Financial Instruments’ 33 – – – 1 1

At 1 January 2018 (revised) (658) (745) 1,181 3,304 3,082

Business combinations 6 0 (160) 0 33 (127)

Asset acquisitions 6 0 0 0 112 112

(Charged) credited to the income statement (38) 332 9 295 598

(Charged) credited to other comprehensive income 22 – – (63) 3 (60)

(Charged) credited to equity from equity compensation plans and

other transactions with shareholders – 21 – (28) (7)

Currency translation effects and other movements (1) (38) (26) (22) (87)

At 31 December 2018 (697) (590) 1,101 3,697 3,511

The deferred tax net assets for other temporary differences mainly relate to accrued and other liabilities, provisions and unrealised profit in inventory.

Deferred tax assets are recognised for tax losses carried forward 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

2018 2017

Amount (CHF m)

Applicable tax rate

Amount (CHF m)

Applicable tax rate

Within one year 183 12% 0 –

Between one and five years 2,150 12% 2,358 12%

More than five years 10,893 5% 9,103 5%

Total unrecognised tax losses 13,226 6% 11,461 6%

The ‘More than five years’ category includes losses that cannot be used for US state income tax purposes in those states which only permit tax reporting on a separate entity basis.

Deferred tax liabilities have not been established for the withholding tax and other taxes that would be payable on the remittance of earnings of foreign subsidiaries, where such amounts are currently regarded as permanently reinvested for the purpose of these financial statements. The total unremitted earnings of the Group, regarded as permanently reinvested for the purpose of these financial statements, were CHF 33.9 billion at 31 December 2018 (2017: CHF 29.1 billion).

58 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

6. Mergers and acquisitions

The Group has implemented the amendments to IFRS 3 ‘Business Combinations’ issued in October 2018. The amendments further clarify the definition of a business. The effect of the amendments is particularly applicable for many of the acquisitions carried out by the Group, since the value in the acquired companies often largely consists of the rights to a single product or technology. From 2018 such transactions will be accounted for as asset acquisitions rather than business combinations.

This note has been expanded and renamed as ‘Mergers and acquisitions’ to include both transactions accounted for as business combinations and asset acquisitions. Asset acquisitions are acquisitions of legal entities that do not qualify as business combinations under IFRS 3. Cash consideration paid for asset acquisitions at the transaction date and subsequent additional contingent payments made upon the achievement of performance-related development milestones are now presented in the line ‘Asset acquisitions’ as disclosed separately below. Subsequent consideration for performance-related development milestones for transactions treated as asset acquisitions is recognised as intangible assets when the specific milestones have been achieved. Previously intangible assets acquired in asset acquisitions were included in the line items ‘Purchase of intangible assets’ in the statement of cash flows and ‘Additions’ in Note 10 ‘Intangible assets’.

As a result of the amendments to IFRS 3 (see Note 33) the acquisition of Ignyta, Inc. has been reassessed and accounted for as an asset acquisition in these Annual Financial Statements rather than as a business combination as disclosed in the 2018 Interim Financial Statements. This led to a decrease in goodwill of CHF 267 million, a decrease in intangible assets of CHF 103 million and a decrease in deferred tax liabilities of CHF 370 million.

Business combinations – 2018

Flatiron Health, Inc. On 5 April 2018 the Group acquired a 100% controlling interest in Flatiron Health, Inc. (‘Flatiron Health’), a privately owned US company based in New York City. Flatiron Health is a market leader in the curation and development of real-world evidence for cancer research as well as in oncology-specific electronic health record software. Flatiron Health is reported in the Pharmaceuticals Division. The total consideration was USD 1,616 million, which was paid in cash.

The identifiable assets acquired and liabilities assumed are set out in the table below.

Business combinations – 2018: net assets acquired in millions of CHF

Flatiron Health

Intangible assets

– Product intangibles: in use 10 608

– Marketing intangibles: in use 10 87

Deferred tax assets 5 33

Cash and cash equivalents 21

Deferred tax liabilities 5 (160)

Other net assets (liabilities) 76

Net identifiable assets 665 Fair value of previously held interest (240)

Goodwill 9 1,128

Total consideration 1,553

Cash 1,553

Total consideration 1,553

The fair value of Flatiron Health’s technology platform was determined using an excess earning method that is based on management forecasts and observable market data for discount rates, tax rates and foreign exchange rates. The present value was calculated using a risk-adjusted discount rate of 10.4% for Flatiron Health. The valuation was performed by an independent valuer.

The Flatiron Health accounts receivable is comprised of gross contractual amounts due of CHF 30 million which were all expected to be collectable at the date of the acquisition.

Goodwill represents the value of accelerating progress towards data-driven personalised healthcare in cancer and to advance the use of real-world evidence to set new industry standards for oncology research and development. It also represents a control premium, the acquired work force and expected synergies. None of the goodwill is expected to be deductible for income tax purposes.

Roche Finance Repor t 2018 | 59

Notes to the Roche Group Consolidated Financial Statements | Roche Group

The Group recognised a financial gain of CHF 78 million for fair valuing the 12% interest in Flatiron Health held by the Group prior to the transaction. This gain is included in the statement of changes in equity within the line item ‘Net change in fair value – financial assets at fair value through OCI’ in 2018 and has been transferred to ‘Retained earnings’ upon obtaining control.

Directly attributable transaction costs of CHF 3 million were reported in the Pharmaceuticals operating segment within general and administration expenses.

In the nine months to 31 December 2018 Flatiron Health contributed revenue of CHF 56 million and a net loss (after tax) of CHF 175 million to the results reported for the Pharmaceuticals Division and the Group. If the acquisition had occurred on 1 January 2018 management estimates that Flatiron Health would have contributed revenue of CHF 78 million and a net loss (after tax) of CHF 187 million in 2018. This information is provided for illustrative purposes only and is not necessarily indicative of the results of the combined Group that would have occurred had Flatiron Health actually been acquired at the beginning of the year, or indicative of the future results of the combined Group.

Business combinations – 2017

mySugr GmbH. On 29 June 2017 the Group acquired a 100% controlling interest in mySugr GmbH (‘mySugr’), a private company based in Vienna, Austria. mySugr is reported in the Diagnostics operating segment as part of the Diabetes Care business. The total cash consideration was EUR 64 million.

Viewics, Inc. On 27 November 2017 the Group acquired a 100% controlling interest in Viewics, Inc. (‘Viewics’), a privately owned US company based in San Jose, California. Viewics is reported in the Diagnostics operating segment. The total consideration was USD 81 million, of which USD 62 million was paid in cash, USD 9 million was deferred consideration which is being paid over the period from the date of control to 2021 and USD 10 million arose from a contingent consideration arrangement. The contingent payments are based on the achievement of performance-related milestones and the range of undiscounted outcomes is between zero and USD 10 million.

The identifiable assets acquired and liabilities assumed are set out in the table below.

Business combinations – 2017: net assets acquired in millions of CHF

mySugr Viewics Total

Intangible assets

– Product intangibles: in use 10 20 40 60

– Marketing intangibles: in use 10 29 0 29

Cash and cash equivalents 1 4 5

Deferred tax liabilities 5 (12) (16) (28)

Other net assets (liabilities) (2) 1 (1)

Net identifiable assets 36 29 65 Fair value of previously held interest (11) (8) (19)

Goodwill 9 45 59 104

Total consideration 70 80 150

Cash 70 62 132

Deferred consideration 20 0 8 8

Contingent consideration 20 0 10 10

Total consideration 70 80 150

The fair value of the product intangible asset for mySugr is determined using a replacement cost method. The fair value of the other intangible assets is determined using an excess earning method that is based on management forecasts and observable market data for discount rates, tax rates and foreign exchange rates. The present value is calculated using a risk-adjusted discount rate of 13.0% for mySugr and 9.5% for Viewics. The valuations were performed by independent valuers.

Goodwill represents a control premium, the acquired work force and the synergies that can be expected from integrating the acquired companies into the Group’s existing business. None of the goodwill is expected to be deductible for income tax purposes.

The Group recognised a financial gain of CHF 7 million and CHF 2 million respectively for fair valuing the 12% interest in mySugr and the 10% interest in Viewics held by the Group prior to the transaction. This gain is included in other financial income (expense) for 2017.

60 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Directly attributable transaction costs of CHF 2 million were reported in the Diagnostics operating segment within general and administration expenses.

The impact of the mySugr and Viewics acquisitions on the 2017 results for the Diagnostics Division and the Group were not material.

Cash flows from business combinations

Business combinations: net cash outflow in millions of CHF

2018 2017 Pharmaceuticals Diagnostics Total Pharmaceuticals Diagnostics Total

Cash consideration paid (1,553) 0 (1,553) 0 (132) (132)

Deferred consideration paid 0 (4) (4) 0 (5) (5)

Contingent consideration paid 20 (9) (5) (14) (5) (141) (146)

Cash in acquired company 21 0 21 0 5 5

Transaction costs 1) n/a n/a n/a 0 (2) (2)

Total net cash outflow (1,541) (9) (1,550) (5) (275) (280)

1) In 2018 directly attributable transaction costs for business combinations amounted to CHF 3 million and are included in the cash flow from operating activities.

Asset acquisitions – 2018

Ignyta, Inc. On 8 February 2018 the Group acquired a 100% controlling interest in Ignyta, Inc. (‘Ignyta’), a publicly owned US company based in San Diego, California, that had been listed on Nasdaq. With the acquisition, the Group obtained rights to Ignyta’s lead product candidate, entrectinib, an orally bioavailable, CNS-active tyrosine kinase inhibitor for patients who have tumours that harbour ROS1 or NTRK fusions. Ignyta is reported in the Pharmaceuticals Division. The total consideration was USD 1,949 million, which was paid in cash.

Other acquisitions. On 27 September 2018 the Group acquired a 100% controlling interest in Tusk Therapeutics Ltd (‘Tusk ’), a private company based in Stevenage, United Kingdom. Tusk has developed an antibody with a novel mode of action aimed at depleting regulatory T-cells which suppress immune responses, including those against cancer cells. Tusk is reported in the Pharmaceuticals Division.

On 20 November 2018 the Group acquired a 100% controlling interest in Jecure Therapeutics, Inc. (‘Jecure’), a privately owned US company based in San Diego, California. With the acquisition, the Group obtained rights to Jecure’s preclinical portfolio of NLRP3 inhibitors. Jecure is reported in the Pharmaceuticals Division.

The total cash consideration paid at the acquisition date for both acquisitions was CHF 150 million. Additional contingent payments may be made based upon the achievement of performance-related milestones.

Asset acquisitions – 2018: net assets acquired in millions of CHF

Igny ta Other

acquisitions Total

Intangible assets

– Product intangibles: not available for use 10 1,581 144 1,725

Deferred tax assets 5 112 0 112

Cash and cash equivalents 164 1 165

Other net assets (liabilities) (18) 5 (13)

Net identifiable assets 1,839 150 1,989

Cash 1,839 150 1,989

Total cash consideration 1,839 150 1,989

Roche Finance Repor t 2018 | 61

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Cash flows from asset acquisitions

Asset acquisitions: net cash outflow in millions of CHF

Pharmaceuticals Diagnostics 2018 Total

Cash consideration paid (1,989) 0 (1,989)

Cash in acquired company 165 0 165

Total net cash outflow (1,824) 0 (1,824)

In 2018 directly attributable transaction costs for acquisitions other than business combinations amounted to CHF 9 million and are included in the cash flow from operating activities.

Foundation Medicine transaction

On 7 April 2015 the Group acquired a 61.3% controlling interest in Foundation Medicine, Inc. (‘FMI’), which has been treated as a fully consolidated subsidiary of the Group since that date. The common stock of FMI was publicly traded and was listed on the Nasdaq under the stock code ‘FMI’. At 31 December 2017 the Group’s interest in FMI was 57.5%.

On 18 June 2018 the Group entered into a merger agreement with FMI to acquire the outstanding shares of FMI’s common stock not already owned by the Group at a price of USD 137.00 per share in cash. The merger agreement was approved by the Board of Roche and a special committee of the independent directors of FMI and by its full board of directors. A tender offer was launched on 2 July 2018. On 31 July 2018 the transaction closed and FMI became a 100% owned subsidiary of the Group. It has been accounted for in full as an equity transaction. The cash consideration for the purchase of all public shares, including shares issuable on FMI’s outstanding stock incentive plans and payment of related fees and expenses, amounted to USD 2.3 billion, as set out in the table below. These amounts have been recorded to equity as a change in ownership interest in subsidiaries.

Foundation Medicine transaction

USD million CHF million

Purchase of publicly held shares 2,222 2,196

Settlement of outstanding stock options and vested restricted stock awards 51 50

Directly attributable transaction costs 41 41

Total cash consideration 2,314 2,287

Income tax effects (46) (46)

Change in ownership interest in subsidiaries 2,268 2,241

62 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

7. Global restructuring plans

During 2018 the Group continued with the implementation of various resourcing flexibility plans initiated in 2017 in its Pharmaceuticals Division to address various future challenges including biosimilar competition. The focus areas of the plans include biologics manufacturing, commercial operations and product development/strategy. The Group also continued with the implementation of several major global restructuring plans initiated in prior years, notably the strategic realignment of the Pharmaceuticals Division’s manufacturing network, and programmes to address long-term strategy in the Diagnostics Division.

Global restructuring plans: costs incurred in millions of CHF

Diagnostics1) Site consolidation2) Other plans3) Total

Year ended 31 December 2018 Global restructuring costs

– Employee-related costs 105 153 202 460

– Site closure costs 49 173 5 227

– Divestment of products and businesses 8 0 0 8

– Other reorganisation expenses 73 1 138 212

Total global restructuring costs 235 327 345 907

Additional costs – Impairment of goodwill 0 0 0 0

– Impairment of intangible assets 0 0 0 0

– Legal and environmental cases 7 12 0 19

Total costs 242 339 345 926

Year ended 31 December 2017 Global restructuring costs

– Employee-related costs 152 13 258 423

– Site closure costs 48 245 2 295

– Divestment of products and businesses 0 166 0 166

– Other reorganisation expenses 92 160 72 324

Total global restructuring costs 292 584 332 1,208

Additional costs – Impairment of goodwill 0 0 0 0

– Impairment of intangible assets 0 0 0 0

– Legal and environmental cases 0 46 0 46

Total costs 292 630 332 1,254

1) Includes strategy plans in the Diagnostics Division. 2) Includes the Pharmaceuticals Division’s strategic realignment of its manufacturing network and resourcing flexibility in biologics manufacturing network. 3) Includes plans for outsourcing of IT and other functions to shared ser vice centres and external providers and for resourcing flexibility in the Pharmaceuticals Division’s

commercial operations and global product development /strategy organisations.

Diagnostics Division

In 2018 strategy plans in the Diagnostics Division incurred costs of CHF 87 million mainly for employee-related matters (2017: CHF 212 million). Costs of CHF 36 million are included for the divestment of a subsidiary in Germany and costs related to a reorganisation in the Molecular Diagnostics business were CHF 27 million. Spending on other smaller plans within the division was CHF 92 million (2017: CHF 80 million).

Roche Finance Repor t 2018 | 63

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Site consolidation

In 2018 costs from the Pharmaceuticals Division’s strategic realignment of its manufacturing network were CHF 117 million (2017: CHF 480 million) and mainly related to the exit from the manufacturing site at Clarecastle, Ireland. The resourcing flexibility in biologics manufacturing network incurred costs of CHF 215 million, mainly relating to asset impairment and severance costs (2017: CHF 74 million). Integration costs following the Ignyta acquisition were CHF 46 million.

Other global restructuring plans

In 2018 resourcing flexibility initiatives in the Pharmaceuticals Division incurred costs of CHF 146 million (2017: CHF 247 million), mainly employee-related. The other major item was CHF 111 million for plans for outsourcing to shared service centres and external providers (2017: CHF 51 million). Other plans include IT plans totalling CHF 88 million (2017: CHF 34 million).

Global restructuring plans: summary of costs incurred in millions of CHF

2018 2017

Employee-related costs

– Termination costs 401 378

– Defined benefit plans (14) (7)

– Other employee-related costs 73 52

Total employee-related costs 460 423

Site closure costs

– Impairment of property, plant and equipment 74 192

– Accelerated depreciation of property, plant and equipment 39 48

– (Gains) losses on disposal of property, plant and equipment (18) 0

– Other site closure costs 132 55

Total site closure costs 227 295

Divestment of products and businesses

– (Gains) losses on divestment of subsidiaries 23 24 126

– Other (gains) losses on divestment of products and businesses (16) 40

Total costs on divestment of products and businesses 8 166

Other reorganisation expenses 212 324

Total global restructuring costs 907 1,208

Additional costs – Impairment of goodwill 0 0

– Impairment of intangible assets 0 0

– Legal and environmental cases 19 46

Total costs 926 1,254

64 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Global restructuring plans: classification of costs in millions of CHF

2018 2017 Depreciation, amor tisation

and impairment Other costs Total

Depreciation, amor tisation

and impairment Other costs Total

Royalties and other operating income

– Pharmaceuticals – 0 0 – 0 0

– Diagnostics – (16) (16) – 0 0

Cost of sales

– Pharmaceuticals 107 185 292 203 174 377

– Diagnostics 8 100 108 32 75 107

Marketing and distribution

– Pharmaceuticals 0 97 97 1 233 234

– Diagnostics 0 71 71 1 91 92

Research and development

– Pharmaceuticals 1 75 76 0 21 21

– Diagnostics (4) 38 34 0 66 66

General and administration

– Pharmaceuticals 0 70 70 0 291 291

– Diagnostics 1 44 45 3 24 27

– Corporate 0 149 149 0 39 39

Total 113 813 926 240 1,014 1,254

Total by operating segment

– Roche Pharmaceuticals 108 427 535 204 719 923

– Chugai – – – – – –

– Diagnostics 5 237 242 36 256 292

– Corporate 0 149 149 0 39 39

Total 113 813 926 240 1,014 1,254

Roche Finance Repor t 2018 | 65

Notes to the Roche Group Consolidated Financial Statements | Roche Group

8. Property, plant and equipment

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

Land

Buildings and land

improvements Machiner y

and equipment Construction

in progress Total

At 1 January 2017 Cost 981 14,772 19,723 3,671 39,147

Accumulated depreciation and impairment (3) (6,212) (12,946) (29) (19,190)

Net book value 978 8,560 6,777 3,642 19,957

Year ended 31 December 2017 At 1 January 2017 978 8,560 6,777 3,642 19,957

Additions 0 272 1,135 2,070 3,477

Disposals (3) (26) (73) (4) (106)

Divestment of subsidiaries 23 (3) 0 0 0 (3)

Transfers 24 1,322 975 (2,321) –

Depreciation charge – (645) (1,551) – (2,196)

Impairment charge (1) (46) (178) (8) (233)

Other 0 0 (57) 0 (57)

Currency translation effects (15) (28) 65 51 73

At 31 December 2017 980 9,409 7,093 3,430 20,912

Cost 980 15,602 19,982 3,445 40,009

Accumulated depreciation and impairment 0 (6,193) (12,889) (15) (19,097)

Net book value 980 9,409 7,093 3,430 20,912

Year ended 31 December 2018 At 1 January 2018 980 9,409 7,093 3,430 20,912

Business combinations 0 0 3 0 3

Additions 358 91 1,072 2,275 3,796

Disposals (2) (14) (118) (2) (136)

Divestment of subsidiaries 23 0 0 0 0 0

Transfers 44 1,298 1,018 (2,360) –

Depreciation charge – (697) (1,595) – (2,292)

Impairment charge 0 (12) (115) (14) (141)

Other 0 0 (92) (11) (103)

Currency translation effects 4 (62) (132) (31) (221)

At 31 December 2018 1,384 10,013 7,134 3,287 21,818

Cost 1,384 16,707 20,437 3,294 41,822

Accumulated depreciation and impairment 0 (6,694) (13,303) (7) (20,004)

Net book value 1,384 10,013 7,134 3,287 21,818

Classification of impairment of property, plant and equipment in millions of CHF

2018 2017

Cost of sales (130) (210)

Marketing and distribution 0 (1)

Research and development 1 (1)

General and administration (12) (21)

Total impairment charge (141) (233)

Impairment charges for property, plant and equipment were mainly related to global restructuring plans (see Note 7).

In 2018 no reimbursements were received from insurance companies in respect of impairments to property, plant and equipment (2017: none). In 2018 no borrowing costs were capitalised as property, plant and equipment (2017: none).

66 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Genentech property purchase option exercise in 2015

In 2004 Genentech entered into a Master Lease Agreement (‘MLA’) with Slough SSF LLC (‘Slough’), which was subsequently acquired by Health Care Properties, for the lease of property adjacent to Genentech’s South San Francisco site, which was to be developed by Slough. The development included a total of eight buildings and construction was completed during 2008, at which time Genentech fully occupied the property. The property lease was until 2020 with extension options to 2030. On 1 November 2015 Genentech exercised a purchase option contained in the MLA to acquire the eight buildings and land. At 31 December 2015 the Group recorded an addition to ‘land’ and ‘buildings and land improvements’ and corresponding liabilities for the cash outflows in 2016 and 2018. The Group also reclassified the finance lease accounting balances that previously applied to these buildings. In November 2016 the first closing payment of USD 311 million was made. The final closing payment of USD 269 million was made in June 2018 (see Note 19).

Leasing arrangements where the Group is the lessee

Finance leases. At 31 December 2018 the capitalised cost of property, plant and equipment under finance leases was CHF 12 million (2017: CHF 11 million) and the net book value of these assets was CHF 5 million (2017: CHF 5 million). The carrying value of the leasing obligation was CHF 4 million (2017: CHF 5 million), which is reported as part of Debt (see Note 21).

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

Future minimum lease

payments Present value of minimum lease

payments 2018 2017 2018 2017

Within one year 2 1 2 1

Between one and five years 2 4 2 4

More than five years 0 0 0 0

Total 4 5 4 5 Future finance charges 0 0 0 0

Total future minimum lease payments (undiscounted) 4 5 4 5

Operating leases. Group companies are party to a number of operating leases, mainly for property rentals and motor vehicles. The arrangements do not impose any significant restrictions on the Group. Total operating lease rental expense was CHF 494 million (2017: CHF 461 million).

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

2018 2017

Within one year 364 366

Between one and five years 750 752

More than five years 216 228

Total minimum payments 1,330 1,346

Roche Finance Repor t 2018 | 67

Notes to the Roche Group Consolidated Financial Statements | Roche Group

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.

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

Gross investment in lease Present value of minimum

lease receipts 2018 2017 2018 2017

Within one year 45 40 38 36

Between one and five years 101 93 95 84

More than five years 3 5 3 5

Total 149 138 136 125 Unearned finance income (13) (12) n/a n/a

Unguaranteed residual value n/a n/a 0 1

Net investment in lease 136 126 136 126

The accumulated allowance for uncollectible minimum lease payments was nil (2017: CHF 1 million).

Operating leases. Certain assets, mainly 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.

At 31 December 2018 machinery and equipment with an original cost of CHF 5.2 billion (2017: CHF 4.8 billion) and a net book value of CHF 1.7 billion (2017: CHF 1.7 billion) was being leased to third parties.

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

2018 2017

Within one year 127 57

Between one and five years 239 94

More than five years 11 3

Total minimum receipts 377 154

Implementation of IFRS 16 ‘Leases’

The Group will implement the new standard effective 1 January 2019. IFRS 16 will replace existing leases guidance, including IAS 17 ‘Leases’, and sets out the principles for recognition and measurement of leases. See Note 33 for further details.

Capital commitments

The Group has non-cancellable capital commitments for the purchase or construction of property, plant and equipment totalling CHF 1.3 billion (2017: CHF 1.2 billion).

68 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

9. Goodwill

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

2018 2017

At 1 January Cost 12,461 12,655

Accumulated impairment (2,384) (1,373)

Net book value 10,077 11,282

Year ended 31 December At 1 January 10,077 11,282

Business combinations 6 1,128 104

Divestment of subsidiaries 23 (5) 0

Impairment charge (2,254) (1,058)

Currency translation effects 2 (251)

At 31 December 8,948 10,077

Cost 12,836 12,461

Accumulated impairment (3,888) (2,384)

Net book value 8,948 10,077

Allocated to the following cash-generating units Roche Pharmaceuticals 3,421 4,677

Foundation Medicine – 97

Pharmaceuticals product transactions 363 –

Chugai 99 96

Total Pharmaceuticals Division 3,883 4,870

Diabetes Care 876 880

Centralised and Point of Care Solutions 1,618 1,730

Molecular Diagnostics 381 379

Tissue Diagnostics 0 0

Sequencing 0 0

Divisional goodwill 2,190 2,218

Total Diagnostics Division 5,065 5,207

Cash-generating units used for allocating goodwill

Pharmaceuticals Division. During 2018 the Group made a comprehensive reassessment of the cash-generating units used for allocating goodwill in the Pharmaceuticals Division. This reassessment was made in light of the following factors: • Ongoing business transformations within the Pharmaceuticals Division during 2018. • The acquisition of Flatiron Health effective April 2018 and the transaction to fully acquire Foundation Medicine effective July 2018. • The early adoption of the amendments to IFRS 3 ‘Business Combinations’ that were issued in October 2018. These amendments further clarify the definition of a business and whether a transaction represents in substance the purchase of a business or a single asset or group of similar assets.

Roche Finance Repor t 2018 | 69

Notes to the Roche Group Consolidated Financial Statements | Roche Group

The conclusions of this reassessment were as follows: • Within the Roche Pharmaceuticals operating segment, goodwill arises from three broad types of transactions: ɶ – Strategic transactions that have a transformative effect across the whole division. ɶ – Technology transactions, where the acquired technologies can have a range of areas of applications. ɶ – Product transactions, where the acquired products typically have more limited synergistic benefits outside of the immediate product

therapeutic area. • The cash-generating unit for the goodwill arising from strategic transactions will be the Roche Pharmaceuticals operating segment. • The cash-generating unit for the goodwill arising from technology transactions will also be the Roche Pharmaceuticals operating segment. However, if the acquired technologies permanently cease to operate then this will be treated as a disposal of the business; in such cases the goodwill will be deemed to have been disposed of and will be fully impaired.

• The cash-generating unit for the goodwill arising from product transactions will be the smallest identifiable group of assets related to the revenues and related costs that arise from the development and commercialisation of the product(s) in question. Where there are synergistic benefits to other products in the same therapeutic area, then the revenues, costs and corresponding assets of these other products will also be taken into account. If the acquired products permanently cease to generate economic benefits then this will be treated as a disposal of the business; in such cases the goodwill will be deemed to have been disposed of and will be fully impaired.

• Chugai remains as a separate operating segment in the Group’s financial reporting and remains a separate cash-generating unit to which goodwill is allocated.

Based on the above reassessment the Group allocated the remaining goodwill in the Roche Pharmaceuticals operating segment as listed below. The basis for the reallocation were the historical amounts of goodwill that arose from the individual transactions. • Strategic transactions consist of Genentech (1990/1999), Foundation Medicine (2015) and Flatiron Health (2018). • Technology transactions consist of Therapeutic Human Polyclonals (2007), Dutalys (2014) and Santaris (2014). • Product transactions consist of GlycArt (2005), Tanox (2007), InterMune (2014) and Trophos (2015).

Diagnostics Division. The division’s business areas and the sequencing business 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 goodwill arising from the Viewics acquisition is monitored at the divisional level. The recoverable amount used in the impairment testing is based on value in use.

Impairment charge – 2018

Pharmaceuticals Division. The assessment for the potential impairment of goodwill in the Pharmaceuticals Division was carried out using the cash generating units as set out above. During 2018 impairment charges totalling CHF 2,147 million were recorded in the Pharmaceuticals Division.

InterMune acquisition. A charge of CHF 2,040 million was recorded for the full write-off of goodwill from the InterMune acquisition made in 2014. The main product acquired in the original transaction was InterMune’s medicine for idiopathic pulmonary fibrosis, Esbriet. Idiopathic pulmonary fibrosis is a progressive disease, which causes scarring of the lungs and has a survival rate of two to three years from diagnosis.

During 2017 the Group recorded an impairment charge of CHF 1,664 million for the partial impairment of the Esbriet product intangible in use. The main factor leading to this was a decrease in forecasted cash flows relative to the previous year’s long-term forecast due to a reduction in sales expectations. During 2018 the Group reviewed the assets and liabilities that were acquired in 2014 from the InterMune transaction in detail including the initial valuations, the reports made for the purposes of the acquisition accounting and subsequent integration process. The conclusion of this review was that, apart from the intangible asset representing the acquired rights to Esbriet and the related deferred taxation liabilities, there were no other assets or liabilities recorded on the Group’s balance sheet, no other revenue streams and no other parts of the acquired company that had any synergistic benefits for the continued operations of the Roche Group.

70 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

During 2018 the Group made the required assessment for the potential impairment of goodwill that arose from the InterMune acquisition using as the cash-generating unit the identifiable group of assets related to the revenues and related costs that arose from the development and commercialisation of Esbriet. As part of the Group’s regular process the value in use of the intangible asset representing the acquired rights to Esbriet was first tested for impairment (see Note 10). As a second step the goodwill from the InterMune acquisition was then tested for impairment. The conclusion of these impairment tests were: • In substance the remaining value to the Group from the InterMune acquisition is estimated at CHF 2,413 million. This solely relates to the acquired rights to Esbriet and should be reported in the Group’s balance sheet as a product intangible asset in use.

• The previously recorded impairment on the Esbriet product intangible asset in use was therefore partially reversed and an income of CHF 274 million was recorded for this. The asset concerned was written up to its estimated recoverable value of CHF 2,413 million. The main factor leading to this was an increase in forecasted cash flows relative to the previous year’s long-term forecast due to an improvement in sales expectations. The intangible asset continues to be amortised over its remaining estimated useful life of three years (see also Note 10).

• A full impairment of CHF 2,040 million was recorded for the goodwill from the InterMune acquisition. The revenues and related costs arising from the development and commercialisation of Esbriet are fully utilised in the impairment testing process to support the value in use of the Esbriet product intangible asset in use. There is no surplus from Esbriet revenues to support the carrying value of the goodwill, neither are there any synergistic benefits to other products in the same therapeutic area. Accordingly the separable recoverable value of this goodwill is estimated to be zero and it has been fully impaired.

Trophos acquisition. A charge of CHF 107 million was recorded for the full write-off of goodwill from the Trophos acquisition made in 2015. The main product acquired in the original transaction was Trophos’ proprietary screening platform-generated olesoxime ( TRO19622), which was being developed for spinal muscular atrophy (SMA), a rare and debilitating genetic neuromuscular disease that is most commonly diagnosed in children. During 2018 the Group decided to stop development of this compound. Therefore there are no potential future revenues to support the carrying value of the goodwill, neither are there any synergistic benefits to other products in the same franchise. Accordingly the intangible assets relating to this product were fully impaired (see Note 10) and the goodwill is deemed to have been disposed of and has also been fully impaired.

Diagnostics Division. A charge of CHF 107 million was recorded in the Centralised and Point of Care business area for the full write- off of goodwill from the CMI acquisition made in 2013. During 2018 the Group decided to change the commercialisation strategy for diagnostic instruments used in haematology testing. This led to a full impairment of the product intangibles in use acquired as part of the CMI acquisition (see Note 10). Therefore the goodwill is deemed to have been disposed of and has also been fully impaired.

Impairment charge – 2017

During 2017 impairment charges totalling CHF 1,058 million were recorded which related to: • A charge of CHF 674 million in the Diagnostics Division for the full write-off of the sequencing business goodwill. The factors leading to this impairment were: (i) a decrease in forecasted cash flows relative to the previous year’s long-term forecast due to changed assumptions around market penetration, pricing and reimbursement; and (ii) a revised time to market of the single molecule sequencing technology. In addition impairment charges of CHF 120 million were recorded for sequencing business product intangibles in use acquired as part of the Ariosa acquisition (see Note 10).

• A charge of CHF 384 million in the Pharmaceuticals Division for the full write-off of the goodwill relating to the Seragon acquisition due to the decision to stop development of the back-up compound acquired.

Roche Finance Repor t 2018 | 71

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Value in use

Value in use is calculated using a discounted expected cash flow approach, with a post-tax discount rate applied to the projected risk- adjusted post-tax cash flows and terminal value. The discount rate is the Group’s weighted average cost of capital as the cash-generating units have integrated operations across large parts of the Group. It is derived from a capital asset pricing model using data from capital markets, including government twenty-year bonds. For assessing value in use, the cash flow projections are based on the most recent long-term forecasts approved by management. The long-term forecasts include management’s latest estimates on sales volume and pricing, as well as production and other operating costs and assume no significant changes in the organisation. Other key assumptions used in the calculations are the period of cash flow projections included in the long-term forecasts, the terminal value growth rate and the discount rate.

Key assumptions used in value-in-use calculations

2018 2017

Period of cash flow

projections

Terminal value

grow th rate Discount rate

(af ter tax)

Period of cash flow

projections

Terminal value

grow th rate Discount rate

(af ter tax)

Pharmaceuticals Division 5 years n/a 7.5% 5 years n/a 6.8%

Diagnostics Division 5 years 1.5% 7.5% 5 years 1.5% 6.8%

For cash-generating units with a terminal value growth, the respective rate does not exceed the long-term projected growth rate for the relevant market.

Fair value less costs of disposal

For goodwill arising from the Chugai acquisition, the fair value less costs of disposal is determined with reference to the publicly quoted price of Chugai shares.

Sensitivity analysis

Management has performed sensitivity analyses for Roche Pharmaceuticals and the Diagnostics Division, which increased the discount rate by 1% combined with decreasing the forecast cash flows by 5%, and for Chugai, which decreased the publicly quoted share prices by 5%. The results of the sensitivity analyses demonstrated that the above changes in the key assumptions would not cause the carrying values of goodwill to exceed the recoverable amounts at 31 December 2018.

72 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

10. Intangible assets

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

Product intangibles:

in use

Product intangibles:

not available for use

Marketing intangibles:

in use

Technology intangibles:

in use Total

At 1 January 2017 Cost 23,579 5,795 66 1,057 30,497

Accumulated amortisation and impairment (15,119) (2,476) (29) (827) (18,451)

Net book value 8,460 3,319 37 230 12,046

Year ended 31 December 2017 At 1 January 2017 8,460 3,319 37 230 12,046

Business combinations 6 60 0 29 0 89

Additions 75 644 12 38 769

Disposals 0 0 0 0 0

Transfers 467 (501) 0 34 –

Amortisation charge (1,592) – (9) (90) (1,691)

Impairment charge (1,784) (676) 0 0 (2,460)

Currency translation effects (267) (114) 1 (5) (385)

At 31 December 2017 5,419 2,672 70 207 8,368

Cost 22,425 5,626 109 1,094 29,254

Accumulated amortisation and impairment (17,006) (2,954) (39) (887) (20,886)

Net book value 5,419 2,672 70 207 8,368

Allocated by operating segment Roche Pharmaceuticals 4,047 2,025 2 140 6,214

Chugai 27 58 27 0 112

Diagnostics 1,345 589 41 67 2,042

Total Group 5,419 2,672 70 207 8,368 Year ended 31 December 2018 At 1 January 2018 5,419 2,672 70 207 8,368

Business combinations 6 608 0 87 0 695

Asset acquisitions 6 0 1,725 0 0 1,725

Additions 156 504 23 137 820

Disposals 0 0 0 0 0

Transfers 442 (442) 0 0 –

Amortisation charge (1,174) – (36) (84) (1,294)

Impairment charge (303) (763) 0 (16) (1,082)

Currency translation effects 32 80 2 0 114

At 31 December 2018 5,180 3,776 146 244 9,346

Cost 23,594 5,871 220 1,235 30,920

Accumulated amortisation and impairment (18,414) (2,095) (74) (991) (21,574)

Net book value 5,180 3,776 146 244 9,346

Allocated by operating segment Roche Pharmaceuticals 4,449 3,482 67 209 8,207

Chugai 22 24 44 0 90

Diagnostics 709 270 35 35 1,049

Total Group 5,180 3,776 146 244 9,346

Roche Finance Repor t 2018 | 73

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Significant intangible assets at 31 December 2018 in millions of CHF

Operating segment Net book value Remaining

amor tisation period

Product intangibles in use Esbriet (InterMune acquisition) Roche Pharmaceuticals 2,413 3 years

Flatiron Health acquisition Roche Pharmaceuticals 585 14 years

Shionogi licence transaction Roche Pharmaceuticals 356 17 years

Foundation Medicine acquisition Roche Pharmaceuticals 334 6 years

Kapa acquisition Diagnostics 245 12 years

IQuum acquisition Diagnostics 180 15 years

Product intangibles not available for use Entrectinib (Ignyta acquisition) Roche Pharmaceuticals 1,664 n/a

BioNTech licence transaction Roche Pharmaceuticals 305 n/a

GeneWeave acquisition Diagnostics 269 n/a

Technology intangibles in use Dutalys acquisition Roche Pharmaceuticals 43 2 years

Classification of intangible asset amortisation and impairment expenses in millions of CHF

Amor tisation Impairment 2018 2017 2018 2017

Cost of sales

– Pharmaceuticals (969) (1,230) 274 (1,664)

– Diagnostics (142) (315) (568) (120)

Marketing and distribution

– Pharmaceuticals (32) (6) 0 0

– Diagnostics (4) (3) 0 0

Research and development

– Pharmaceuticals (130) (123) (507) (524)

– Diagnostics (17) (14) (281) (152)

Total (1,294) (1,691) (1,082) (2,460)

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.

Intangible assets not available for use

These mostly represent in-process research and development assets acquired either through in-licensing arrangements, business combinations, asset acquisitions or separate purchases. At 31 December 2018 approximately 71% (2017: 68%) of the projects in the Pharmaceuticals Division have known 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 processes, intangible assets not available for use are particularly at risk of impairment if the project is not expected to result in a commercialised product.

74 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Intangible asset impairment

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.

Impairment charges – 2018

Pharmaceuticals Division. Impairment charges totalling CHF 233 million, net of impairment reversals, were recorded which related to: • A charge of CHF 197 million due to the decision to stop the development of five different compounds with five different alliance partners. The assets concerned, which were not yet being amortised, were fully written down.

• A charge of CHF 122 million due to the decision to stop the development of a compound purchased separately. The asset concerned, which was not yet being amortised, was fully written down.

• A charge of CHF 100 million due to the decision to stop the development of the compound acquired as part of the Trophos acquisition. The asset concerned, which was not yet being amortised, was fully written down.

• A charge of CHF 66 million for the partial impairment of a compound purchased separately due to a delayed timeline. The asset concerned, which was not yet being amortised, was partially written down.

• A charge of CHF 13 million following a clinical data assessment. The asset concerned, which was not yet being amortised, was fully written down.

• A charge of CHF 9 million for other impairments. The assets concerned, which were not yet being amortised, were fully written down. • The previously recorded impairment on the Esbriet product intangible asset in use was partially reversed and an income of CHF 274 million was recorded for this. The asset concerned was written up to its estimated recoverable value of CHF 2,413 million. The main factor leading to this was an increase in forecasted cash flows relative to the previous year’s long-term forecast due to an improvement in sales expectations. The intangible asset continues to be amortised over its remaining estimated useful life of three years. Goodwill impairment charges related to the InterMune acquisition are discussed in Note 9.

Diagnostics Division. Impairment charges totalling CHF 849 million were recorded which related to: • A charge of CHF 400 million for the full impairment of intangibles both in use and not available for use related to the sequencing business mainly acquired as part of the Genia, CAPP and Signature acquisitions. The factors leading to this impairment were a change in the commercialisation strategy for related products and a change in timelines for future product development. The assets concerned, which were partly being amortised and partly not yet being amortised, were fully written down.

• A charge of CHF 206 million for the partial impairment of sequencing business product intangibles in use acquired as part of the Ariosa acquisition. The factor leading to this impairment was a decrease in forecasted cash flows following revised sales assumptions. The asset concerned, which was being amortised, was written down to its estimated recoverable value of CHF 89 million.

• A charge of CHF 243 million for the full impairment of Centralised and Point of Care Solutions’ product intangibles in use acquired as part of the CMI acquisition as a result of a decision to change the commercialisation strategy for diagnostic instruments used in haematology testing. The asset concerned, which was being amortised, was fully written down.

Impairment charges – 2017

Pharmaceuticals Division. Impairment charges totalling CHF 2,188 million were recorded which related to: • A charge of CHF 1,664 million for the partial impairment of the Esbriet product intangible in use acquired as part of the InterMune acquisition. The asset concerned was written down to its estimated recoverable value of CHF 2,878 million. The main factor leading to this was a decrease in forecasted cash flows relative to the previous year’s long-term forecast due to a reduction in sales expectations. The intangible asset continues to be amortised over its remaining estimated useful life of four years.

• A charge of CHF 195 million due to the launch of a competitor product for the compound acquired as part of the Trophos acquisition. The asset concerned, which was not yet being amortised, was written down to its estimated recoverable value of CHF 101 million.

• A charge of CHF 149 million due to the decision to stop development of one compound with an alliance partner following an assessment of clinical and non-clinical data. The asset concerned, which was not yet being amortised, was fully written down.

• A charge of CHF 74 million due to the decision to stop development of one compound acquired as part of the Dutalys acquisition. The asset concerned, which was not yet being amortised, was fully written down.

• A charge of CHF 47 million due to the decision to stop development of one compound acquired as part of the Santaris acquisition following a clinical data assessment. The asset concerned, which was not yet being amortised, was fully written down.

• A charge of CHF 39 million due to the decision to stop development of two compounds with two different alliance partners. The assets concerned, which were not yet being amortised, were fully written down.

• A charge of CHF 20 million following clinical data assessments. The assets concerned, which were not yet being amortised, were fully written down.

Roche Finance Repor t 2018 | 75

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Diagnostics Division. Impairment charges totalling CHF 272 million were recorded which related to: • A charge of CHF 152 million for the partial impairment of Molecular Diagnostics product intangibles not available for use acquired as part of the GeneWeave acquisition. The factor leading to this partial impairment was a decrease in forecasted cash flows following a change in the timelines for future product development, pricing and penetration rate due to updated market size assumptions. The asset concerned, which was not yet being amortised, was written down to its estimated recoverable value of CHF 268 million.

• A charge of CHF 120 million for the partial impairment of sequencing business product intangibles in use acquired as part of the Ariosa acquisition. The factor leading to this impairment was a decrease in forecasted cash flows following revised assumptions on pricing and penetration rate due to market dynamics. The asset concerned, which was being amortised, was written down to its estimated recoverable value of CHF 312 million.

Potential commitments from alliance collaborations and purchase agreements within the next three years

The Group is party to in-licensing and similar arrangements with its alliance partners and intangible asset purchase agreements with third parties. These arrangements and purchase agreements 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 and purchase agreements.

The Group’s current estimate of future third-party commitments for such payments within the next three years is set out in the table below. These figures are undiscounted and 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 and Chugai businesses.

Potential future third-party collaboration and purchase payments at 31 December 2018 in millions of CHF

Pharmaceuticals Diagnostics Group

Within one year 363 35 398

Between one and two years 579 6 585

Between two and three years 482 7 489

Total 1,424 48 1,472

11. Inventories

Inventories in millions of CHF

2018 2017 2016

Raw materials and supplies 1,206 1,182 1,194

Work in process 117 101 114

Intermediates 4,269 4,660 5,372

Finished goods 1,651 2,052 1,880

Provision for slow-moving and obsolete inventory (622) (588) (632)

Total inventories 6,621 7,407 7,928

Inventories expensed through cost of sales totalled CHF 12.1 billion (2017: CHF 11.3 billion). Inventory write-downs during the year resulted in an expense of CHF 751 million (2017: CHF 663 million).

76 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

12. Accounts receivable

Accounts receivable in millions of CHF

2018 2017 2016

Trade receivables 10,663 10,371 9,416

Notes receivable 96 102 83

Other receivables 38 36 34

Allowances for doubtful accounts (540) (517) (538)

Chargebacks and other allowances to be withheld upon settlement 3 (481) (415) (235)

Total accounts receivable 3 9,776 9,577 8,760

Allowances for doubtful accounts: movements in recognised allowance in millions of CHF

2018 2017

At 1 January (517) (538)

Implementation of IFRS 9 ‘Financial Instruments’ 33 (6) n/a

At 1 January (revised) (523) n/a

Additional allowances created (117) (91)

Unused amounts reversed 60 77

Utilised during the year 21 43

Currency translation effects 19 (8)

At 31 December (540) (517)

Bad debt expenses recorded as marketing and distribution costs totalled CHF 47 million (2017: expense of CHF 12 million).

13. Marketable securities

Upon transition to IFRS 9 (see Note 33) the Group elected not to restate comparative information. As a result the information provided below for the current period is on the IFRS 9 basis and the comparative information is on the IAS 39 basis.

Marketable securities in millions of CHF

2018

(IFRS 9) 2017

(IAS 39) 2016

(IAS 39)

Equity securities (available-for-sale IAS 39) n/a 10 69

Equity securities at fair value through profit or loss (IFRS 9) 9 n/a n/a

Debt securities (available-for-sale IAS 39) n/a 1,161 1,509

Debt securities at fair value through OCI (IFRS 9) 1,047 n/a n/a

Money market instruments and time accounts over three months

(available-for-sale IAS 39) n/a 6,107 3,366

Money market instruments at fair value through OCI (IFRS 9) 3,198 n/a n/a

Time accounts over three months at amortised costs (IFRS 9) 2,183 n/a n/a

Total marketable securities 6,437 7,278 4,944

Marketable securities are held for fund management purposes and are primarily denominated in US dollars, euros and in Swiss francs. Money market instruments are contracted to mature within one year of 31 December 2018.

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Notes to the Roche Group Consolidated Financial Statements | Roche Group

Debt securities – contracted maturity in millions of CHF

2018

(IFRS 9) 2017

(IAS 39) 2016

(IAS 39)

Within one year 170 217 364

Between one and five years 835 867 906

More than five years 42 77 239

Total debt securities 1,047 1,161 1,509

14. Cash and cash equivalents

Cash and cash equivalents in millions of CHF

2018 2017 2016

Cash – cash in hand and in current or call accounts 4,139 3,419 3,304

Cash equivalents – time accounts with a maturity of three months or less 2,542 1,300 859

Total cash and cash equivalents 6,681 4,719 4,163

15. Other non-current assets

Upon transition to IFRS 9 (see Note 33) the Group elected not to restate comparative information. As a result the information provided below for the current period is on the IFRS 9 basis and the comparative information is on the IAS 39 basis.

Other non-current assets in millions of CHF

2018 2017 2016

Available-for-sale investments – held at fair value (IAS 39) 30 n/a 294 249

Available-for-sale investments – held at cost (IAS 39) n/a 252 279

Equity investments at fair value through OCI (IFRS 9) 30 102 n/a n/a

Equity investments at fair value through profit or loss (IFRS 9) 30 458 n/a n/a

Loans receivable 8 8 7

Restricted cash 2 2 2

Other receivables – contracts with customers 3 25 38 27

Other receivables 99 91 88

Total financial non-current assets 694 685 652

Long-term employee benefits 225 249 254

Other assets 428 400 394

Total non-financial non-current assets 653 649 648

Associates 23 42 36 0

Total other non-current assets 1,389 1,370 1,300

Equity investments designated at fair value through OCI are mainly investments in private companies from the pharmaceutical sector, which are held as part of the Group’s strategic alliance efforts. Equity investments were classified as available-for-sale in 2017 and 2016.

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Roche Group | Notes to the Roche Group Consolidated Financial Statements

16. Other current assets

Other current assets in millions of CHF

2018 2017 2016

Accrued interest income 45 45 51

Derivative financial instruments 30 138 97 185

Restricted cash 10 0 8

Cash collateral receivables 86 50 337

Other receivables – contracts with customers 3 604 628 749

Other receivables 196 173 19

Total financial current assets 1,079 993 1,349

Prepaid expenses and accrued income 683 559 544

Other taxes recoverable 572 516 482

Other assets 187 175 165

Total non-financial current assets 1,442 1,250 1,191

Total other current assets 2,521 2,243 2,540

17. Accounts payable

Accounts payable in millions of CHF

2018 2017 2016

Trade payables 2,847 2,786 2,689

Other taxes payable 442 418 402

Dividends payable 2 2 2

Other payables 235 248 282

Total accounts payable 3,526 3,454 3,375

Roche Finance Repor t 2018 | 79

Notes to the Roche Group Consolidated Financial Statements | Roche Group

18. Other non-current liabilities

Other non-current liabilities in millions of CHF

2018 2017 2016

Deferred income 31 86 91

Other long-term liabilities 157 120 441

Total other non-current liabilities 188 206 532

Other long-term liabilities are mainly related to accrued employee benefits and included (in 2016) the Genentech property purchase option exercise obligation paid in June 2018 (see Note 8).

19. Other current liabilities

Other current liabilities in millions of CHF

2018 2017 2016

Deferred income 290 372 184

Accrued payroll and related items 3,085 2,853 2,356

Interest payable 221 218 289

Derivative financial instruments 30 153 119 447

Cash collateral payables 80 11 35

Accrued chargebacks and other allowances separately payable 3 2,807 2,242 1,704

Accrued royalties and commissions 1,135 1,148 974

Other accrued liabilities 2,906 3,172 2,889

Total other current liabilities 10,677 10,135 8,878

At 31 December 2017 other accrued liabilities included CHF 261 million for the short-term Genentech property purchase option exercise obligation, which was paid in June 2018 (see Note 8).

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Roche Group | Notes to the Roche Group Consolidated Financial Statements

20. Provisions and contingent liabilities

Provisions: movements in recognised liabilities in millions of CHF

Legal

provisions Environmental

provisions Restructuring

provisions

Contingent consideration

provisions Other

provisions Total

Year ended 31 December 2017 At 1 January 2017 705 518 674 1,089 1,062 4,048

Additional provisions created 60 68 543 13 523 1,207

Unused amounts reversed (219) (4) (167) (366) (181) (937)

Utilised (37) (81) (259) (146) (249) (772)

Discount unwind 4 0 4 0 14 2 20

Business combinations

– Acquired companies 0 0 0 0 0 0

– Deferred consideration 6 – – – – 8 8

– Contingent consideration 6 – – – 10 – 10

Currency translation effects (24) 18 31 (23) 4 6

At 31 December 2017 485 523 822 591 1,169 3,590

Current 471 119 450 182 820 2,042

Non-current 14 404 372 409 349 1,548

At 31 December 2017 485 523 822 591 1,169 3,590

Year ended 31 December 2018 At 1 January 2018 485 523 822 591 1,169 3,590

Additional provisions created 133 33 624 51 866 1,707

Unused amounts reversed (15) (3) (111) (130) (336) (595)

Utilised (24) (61) (451) (14) (351) (901)

Discount unwind 4 0 9 0 15 2 26

Business combinations

– Acquired companies 0 0 0 0 2 2

– Deferred consideration – – – – 0 0

– Contingent consideration – – – 0 – 0

Asset acquisitions 1 0 0 0 0 1

Divestment of subsidiaries 23 (1) 0 0 0 (10) (11)

Currency translation effects (1) (10) (16) (2) (9) (38)

At 31 December 2018 578 491 868 511 1,333 3,781

Current 570 83 535 180 961 2,329

Non-current 8 408 333 331 372 1,452

At 31 December 2018 578 491 868 511 1,333 3,781

Expected outflow of resources Within one year 570 83 535 180 961 2,329

Between one and two years 4 116 153 22 36 331

Between two and three years 1 106 112 144 67 430

More than three years 3 186 68 165 269 691

At 31 December 2018 578 491 868 511 1,333 3,781

In 2018 CHF 901 million of provisions were utilised (2017: CHF 772 million), of which CHF 883 million (2017: CHF 621 million) are included in the cash flows from operating activities and CHF 18 million (2017: CHF 151 million) are included in the cash flows from business combinations for payments made from deferred and contingent consideration arrangements (see Note 6).

Roche Finance Repor t 2018 | 81

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Legal provisions

Legal provisions consist of a number of separate legal matters, including claims arising from trade, in various Group companies. By their nature the amounts and timings of any outflows are difficult to predict.

As part of the regular review of litigation matters, management has reassessed the provisions recorded for certain litigation matters. Based on the development of the various litigations, there was a net increase in provisions of CHF 118 million which was a major element in the 2018 legal expenses of CHF 128 million (2017: net income of CHF 142 million). Details of the major legal cases outstanding are disclosed below.

Environmental provisions

Provisions for environmental matters include various separate environmental issues in a number of countries. By their nature the amounts and timings of any outflows are difficult to predict. Significant provisions are discounted by between 2% and 4% where the time value of money is material. The significant provisions relate to the US site in Nutley, New Jersey, which was divested in September 2016, the estimated remediation costs for a landfill site near Grenzach, Germany, that was used by manufacturing operations that were closed some years ago and the estimated remediation costs for the manufacturing site at Clarecastle, Ireland. In 2018 the expected costs of environmental remediation at the Clarecastle site and other matters were reassessed. Accordingly in 2018 environmental provisions increased by CHF 30 million, net. The net environmental expenses were CHF 31 million (2017: net expense of CHF 62 million).

The Group’s procedures on environmental protection are included in the Annual Report on pages 78 to 87. These include the actions taken by the Group with regard to climate change, notably the Group’s commitment to reduce greenhouse gas emissions.

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. These provisions are not discounted as the time value of money is not material in these matters.

In the Pharmaceuticals Division the significant provisions relate to the strategic realignment of the manufacturing network, the resourcing flexibility plans to address various future challenges including biosimilar competition, the research and development strategic alignment and the outsourcing of IT functions to shared service centres and external providers. In the Diagnostics Division the significant provisions are associated with programmes to address long-term strategy. Further details are given in Note 7.

Contingent consideration provisions

The Group is party to certain contingent consideration arrangements arising from business combinations. Significant provisions are discounted using an average discount rate of 3.6% (2017: 3.1%) where the time value of money is material. Additional details on measurement, on main movements of the provisions and on the total potential payments under these arrangements are provided in Note 30.

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Roche Group | Notes to the Roche Group Consolidated Financial Statements

Other provisions

Other provisions relate to the items shown in the table below. With the exception of employee provisions, the timing of cash outflows is by its nature uncertain.

Other provisions in millions of CHF

2018 2017 2016

Employee provisions 398 362 345

Sales returns 497 366 436

Other items 438 441 281

Total other provisions 1,333 1,169 1,062

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 10.

Pharmaceuticals legal cases

At 31 December 2018 provisions for legal cases in the Pharmaceuticals Division were CHF 371 million (2017: CHF 369 million). Provisions have been recorded, and in some cases settled, mainly relating to the matters listed below.

Accutane. Hoffmann-La Roche Inc. (‘HLR’) and various other Roche affiliates have been named as defendants in numerous legal actions in the US 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. In 2009 HLR announced that, following a re-evaluation of the portfolio of medicines that are now available from generic manufacturers, rapidly declining brand sales in the US and high costs from personal-injury lawsuits that it continues to defend vigorously, it had decided to immediately discontinue the manufacture and distribution of the product in the US.

All of the actions pending in federal court alleging IBD were consolidated for pre-trial proceedings in a Multi-District Litigation (‘MDL’) in the US District Court for the Middle District of Florida, Tampa Division. In August 2015 the MDL was closed. During the pendency of the MDL the District Court granted summary judgment in favour of HLR for all of the federal IBD cases that had proceeded and all were affirmed by the US 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.

In February 2015 the Superior Court of New Jersey, Law Division, Atlantic County, held an eight-day evidentiary hearing on whether plaintiffs’ experts can testify that Accutane causes Crohn’s disease. On 20 February 2015 the Superior Court barred plaintiffs’ experts because their methods did not meet the requirements for scientific reliability. On 8 May 2015 the Superior Court entered an order dismissing with prejudice an agreed-upon list of 2,076 Crohn’s disease cases that were subject to the Superior Court’s February 2015 order. On 28 July 2017 the New Jersey Appellate Division reversed the order excluding plaintiffs’ experts from testifying that Accutane causes Crohn’s disease and reinstated the dismissed cases finding that the trial court wrongfully barred plaintiffs’ expert witnesses. HLR filed a petition for review to the New Jersey Supreme Court, which was granted on 8 December 2017. On 1 August 2018 the Supreme Court issued its decision on whether plaintiffs’ experts can testify that Accutane causes Crohn’s disease. The Supreme Court reversed the judgment of the New Jersey Appellate Division and concluded that the trial court properly had excluded the experts thereby dismissing 2,174 cases alleging that Accutane caused plaintiffs’ Crohn’s disease. Plaintiffs cannot further appeal. All 2,174 Crohn’s disease cases were permanently dismissed.

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Notes to the Roche Group Consolidated Financial Statements | Roche Group

On 12 May 2015 the Superior Court entered an order granting summary judgment and dismissing 18 cases filed by New Jersey residents on the basis that the drug label was adequate as a matter of law since 2002. In July 2015 the Superior Court granted HLR’s motion for summary judgment as to the adequacy of the label for post-2002 ingestion cases in 44 other jurisdictions. The Superior Court applied New Jersey law to all of the jurisdictions and granted HLR’s motion dismissing approximately 511 cases. In the alternative, the Superior Court applied the home state law and granted summary judgment in 24 jurisdictions and denied it in 20 jurisdictions; this would have resulted in 389 cases being dismissed. On 25 July 2017 the New Jersey Appellate Division affirmed the dismissal of 197 cases and reinstated judgments in 335 cases based on the strength of HLR’s warnings after 2002. HLR and the dismissed plaintiffs filed petitions for review to the New Jersey Supreme Court, which was granted on 8 December 2017. On 3 October 2018 the Supreme Court issued its decision on those cases and reversed the judgment of the New Jersey Appellate Division that had reinstated 335 cases on the basis that the drug label was adequate as a matter of law since 2002. Plaintiffs cannot further appeal. 532 cases were permanently dismissed.

In January and October 2016 the Superior Court entered orders granting summary judgment and dismissing 191 cases for failure to prove Accutane proximately caused their ulcerative colitis. The plaintiffs have appealed all of these decisions. During February and March 2017 the Superior Court of New Jersey, Law Division, Atlantic County, held an evidentiary hearing on whether plaintiffs’ experts can testify that Accutane causes ulcerative colitis. In April 2017 the Superior Court barred plaintiffs’ experts because their methods did not meet the requirements for scientific reliability. In May 2017 the Superior Court entered an order dismissing 3,231 ulcerative colitis cases that were subject to the Superior Court’s April 2017 order. The plaintiffs appealed these decisions. Oral argument is expected in 2019.

At 31 December 2018 HLR was defending no pending actions and there are approximately 3,422 cases on appeal. If any cases survive the appeals, additional trials may be scheduled. 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.

Avastin/Lucentis investigations. On 14 February 2013 the Italian Antitrust Authority (‘AGCM’) announced an investigation to determine whether Roche, Genentech and Novartis had entered into an agreement to restrict competition in the Italian market for drugs, with reference in particular to Avastin (marketed by Roche) and Lucentis (marketed by Novartis). Avastin and Lucentis are two different drugs that were developed and approved for different therapeutic purposes and contain different active pharmaceutical ingredients. On 5 March 2014 the AGCM issued a verdict that alleges that Roche and Novartis colluded to artificially differentiate Avastin and Lucentis in order to foster the sales of Lucentis in Italy. The AGCM fined Roche EUR 90.5 million and Novartis EUR 92 million. Roche appealed the AGCM verdict to the Tribunale Amministrativo Regionale del Lazio (‘TAR’). On 2 December 2014 the TAR upheld the decision by the AGCM. Roche strongly disagrees with the verdict of the TAR and has appealed to the Consiglio di Stato. On 30 May 2014 the Italian Ministry of Health notified Roche S.p.A. of its intention to seek damages related to this matter. In July 2014 Roche paid the EUR 90.5 million fine under protest to avoid additional penalty fees and recorded an expense within general and administration. The fine and related interest will be reimbursed if Roche wins the case. On 23 January 2018 the European Court of Justice rendered its decision on five questions which were referred to the European Court of Justice by the Consiglio di Stato. The principles defined in this decision will be used by the Consiglio di Stato to render their final verdict on the case. The outcome of these matters cannot be determined at this time.

PDL-1 inhibitor litigation. On 26 July 2017 Bristol-Myers Squibb Co. (‘BMS’) filed a lawsuit against Genentech, Inc. (‘Genentech’) in Delaware. BMS alleges that Genentech’s sale of Tecentriq infringes their US Patent No. 9,402,899. BMS is seeking judgment in its favour, a finding of wilfulness and monetary damages. On 4 October 2017 Genentech filed its answer and counterclaims, seeking a declaratory judgment of invalidity of the 9,402,899 patent. The trial date is scheduled for May 2020. The outcome of this matter cannot be determined at this time.

Average Wholesale Prices litigation. HLR and Roche Laboratories Inc. (‘RLI’), along with approximately 50 other brand and generic pharmaceutical companies, have been named as defendants in several legal actions in the US relating to the pricing of pharmaceutical drugs and State Medicaid reimbursement. The primary allegation in these litigations is that the pharmaceutical companies misrepresented or otherwise reported inaccurate Average Wholesale Prices (‘AWP’) and/or Wholesale Acquisition Costs (‘WAC’) for their drugs, which prices were allegedly relied upon by the states in calculating Medicaid reimbursements to entities such as retail pharmacies. The states, through their respective Attorney General, are seeking repayment of the amounts they claim were over-reimbursed. The time period associated with these cases is 1991 through 2005. At 31 December 2018 HLR and RLI are defending one AWP action filed in the state of New Jersey. HLR and RLI are vigorously defending themselves and no trial date has been set. The outcome of this matter cannot be determined at this time.

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Roche Group | Notes to the Roche Group Consolidated Financial Statements

Boniva litigation. HLR, Genentech and various other Roche affiliates (collectively ‘Roche’) have been named as defendants in numerous legal actions in the US and one now dismissed case in Canada relating to the post-menopausal osteoporosis medication Boniva. In these litigations, the plaintiffs allege that Boniva caused either osteonecrosis of the jaw or atypical femoral fractures. At 31 December 2018 Roche is defending approximately 259 actions involving approximately 300 plaintiffs brought in federal and state courts throughout the US for personal injuries allegedly resulting from the use of Boniva. All of these cases are in the early discovery stages of litigation. Individual trial results depend on a variety of factors, including many that are unique to the particular case. Roche is vigorously defending itself in these matters. The outcome of these matters cannot be determined at this time.

In addition, the matters listed below do not currently have provisions recorded, but there are potential future obligations which will be confirmed only by the occurrence or non-occurrence of uncertain future events or where the obligation cannot be measured with sufficient reliability.

Hemlibra (emicizumab) litigation. On 4 May 2017 Baxalta Inc. and Baxalta GmbH (both together ‘Baxalta’), subsidiaries of Shire plc., filed a patent infringement and declaratory judgment of patent infringement suit in the US District Court for the District of Delaware, alleging that Genentech and Chugai Pharmaceutical Co., Ltd. (‘Chugai’) currently or imminently would manufacture, use, sell, offer for sale, or import into the US Hemlibra (emicizumab), which would infringe Baxalta’s US Patent No. 7,033,590. Baxalta is seeking a judgment of infringement, injunctive and monetary relief, attorneys’ fees, costs and expenses. On 11 May 2017 Genentech was served with the complaint. Genentech’s response and counterclaims to the complaint were filed on 30 June 2017. On 19 June 2017 Chugai waived service. On 13 September 2017 Chugai filed a motion to dismiss the complaint for lack of personal jurisdiction. On 14 December 2017 Baxalta filed a request for a preliminary injunction against Genentech only, in which some inhibitor patients would not be subject to any injunction. A hearing was held in the US District Court for the District of Delaware on 13 and 14 June 2018 and during that hearing Baxalta withdrew its request for a preliminary injunction as to the inhibitor patients. On 25 June 2018 Baxalta submitted a new proposed preliminary injunction order, in which Genentech would be permitted to sell Hemlibra to all inhibitor patients, all non-inhibitor patients currently on Hemlibra whether through clinical trials or not, and selected non-inhibitor patients who have an additional ‘medically diagnosed condition’ which rendered factor VIII therapies impracticable. On 7 August 2018 the US District Court ruled against Baxalta, denying their request for an injunction. On 19 September 2018 Chugai was dismissed from this case. A trial is scheduled for September 2019.

On 28 March 2018, in the case brought by Baxalta against Chugai in Japan, the Tokyo District Court ruled in favour of Chugai, notably that Hemlibra does not infringe Baxalta’s patent. On 10 May 2018 Baxalta appealed this decision.

On 16 November 2017 the Food and Drug Administration (‘FDA’) approved Hemlibra for haemophilia A with inhibitors for use in the US. On 4 October 2018 the FDA approved the use of Hemlibra in the US for treatment in the non-inhibitor patient population. The outcome of this matter cannot be determined at this time.

Securities litigation. On 6 June 2017 a class action was filed in the US District Court for the District of New Jersey against Roche Holding Ltd and two of its current officers. The lawsuit brings claims under the federal securities laws in connection with the Group’s public disclosures, in particular with respect to matters relating to two of Roche’s drugs, Herceptin and Perjeta. On 24 September 2018 the District Court dismissed the case concluding that there was nothing misleading in those public disclosures. Subsequently plaintiffs filed a second amended complaint. The Group will vigorously defend itself in this matter. The outcome of this matter cannot be determined at this time.

Iraqi Ministry of Health. In October 2017 F. Hoffmann-La Roche Ltd (‘FHLR’), Hoffmann-La Roche Inc. (‘HLR’) and Genentech and certain other pharmaceutical and/or medical device companies were named as defendants in a complaint filed in the Federal District Court for the District of Columbia, US, on behalf of US service-members and their relatives who allege that they were killed or injured in Iraq between 2005 and 2009 (the ‘Iraq lawsuit’). The complaint alleges that the defendants violated the US Anti-Terrorism Act and various state laws by providing funding for terrorist organisations through their sales practices pursuant to pharmaceutical and/or medical device contracts with the Iraqi Ministry of Health. In addition FHLR received an inquiry in July 2018 from the US Department of Justice in connection with an anti-corruption investigation relating to activities in Iraq, including interactions with the Iraqi government and certain of the same matters alleged in the Iraq lawsuit. The Group will vigorously defend itself in this matter. The outcome of this matter cannot be determined at this time.

Arbitration against Chugai. In May 2017 Medical Research Council and LifeArc (formerly Medical Research Council Technology) requested arbitration against Chugai Pharmaceutical Co., Ltd. with an arbitrator being appointed on 9 August 2017. In April 2018 United Kingdom Research and Innovation (‘UKRI’) was established and became the successor in title to the Medical Research Council, and the current claimants in the arbitration are LifeArc and UKRI. Sums are sought from Chugai for alleged breach of obligations under a collaboration agreement dated 15 August 1990 in connection with the development of the humanised anti-human IL-6 receptor monoclonal antibody, Actemra/RoActemra. It is claimed that Chugai is obliged to pay royalties to the claimants pursuant to the collaboration agreement. Chugai considers that the claims are without merit and Chugai will vigorously defend itself in the arbitration. The outcome of this matter cannot be determined at this time.

Roche Finance Repor t 2018 | 85

Notes to the Roche Group Consolidated Financial Statements | Roche Group

21. Debt

Debt: movements in carrying value of recognised liabilities in millions of CHF

2018 2017

At 1 January 18,960 22,355

Proceeds from issue of bonds and notes 2,252 1,502

Redemption and repurchase of bonds and notes (2,152) (3,068)

Increase (decrease) in commercial paper (199) (1,258)

Increase (decrease) in other debt (23) (385)

Changes from financing cash flows (122) (3,209)

Net (gains) losses on redemption and repurchase of bonds and notes 0 84

Amortisation of debt discount 4 11 13

Financing costs 11 97

Business combinations 0 1

Net foreign currency transaction (gains) losses (58) 174

Currency translation effects (19) (430)

Changes in foreign exchange rates (77) (256)

Changes in fair values of hedging instruments (2) (28)

Other changes 0 0

At 31 December 18,770 18,960

Bonds and notes 18,041 17,986

Commercial paper 578 774

Amounts due to banks and other financial institutions 144 176

Finance lease obligations 8 4 5

Other borrowings 3 19

Total debt 18,770 18,960

Long-term debt 16,077 15,839

Short-term debt 2,693 3,121

Total debt 18,770 18,960

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

86 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Bonds and notes

Recognised liabilities and effective interest rates of bonds and notes in millions of CHF

Ef fective interest rate Underlying instrument

Including hedging 2018 2017 2016

US dollar notes – fixed rate 1.35% notes due 29 September 2017, principal USD 0.85 billion

(ISIN: US771196BC54) 1.41% 0.78% – – 869

2.25% notes due 30 September 2019, principal USD 1.5 billion (ISIN: US771196BA98) 2.34% 1.70% 1,467 1,466 1,545

2.875% notes due 29 September 2021, principal USD 1.3 billion

(ISIN: US771196BB71) 2.98% 2.96% 1,278 1,269 1,325

1.75% notes due 28 January 2022, principal USD 0.65 billion (ISIN: US771196BM37) 1.87% 1.96% 634 630 660

3.25% notes due 17 September 2023, principal USD 0.75 billion

(ISIN: US771196BN10) 3.32% n/a 737 – –

3.35% notes due 30 September 2024, principal USD 1.65 billion

(ISIN: US771196BE11) 3.40% n/a 1,622 1,612 1,685

3.0% notes due 10 November 2025, principal USD 1.0 billion (ISIN: US771196BJ08) 3.14% n/a 978 971 1,014

2.625% notes due 15 May 2026, principal USD 1.0 billion (ISIN: US771196BK70) 2.78% n/a 975 969 1,011

2.375% notes due 28 January 2027, principal USD 0.85 billion (ISIN: US771196BL53) 2.54% n/a 828 822 858

3.625% notes due 17 September 2028, principal USD 0.65 billion

(ISIN: US771196BP67) 3.69% n/a 638 – –

7.0% notes due 1 March 2039, principal USD 2.5 billion, outstanding USD 1.19 billion

(ISIN: USU75000AN65 and US771196AU61) 7.43% 7.39% 1,129 1,120 1,167

4.0% notes due 28 November 2044, principal USD 0.65 billion (ISIN: US771196BH42) 4.16% n/a 628 624 652

US dollar notes – floating rate Notes due 29 September 2017, principal USD 0.3 billion (ISIN: US771196BD38) 0.77% n/a – – 307

Notes due 30 September 2019, principal USD 0.5 billion (ISIN: US771196A Z58) 1.68% n/a 492 489 511

Euro Medium Term Note programme – fixed rate 2.0% notes due 25 June 2018, principal EUR 1.0 billion (ISIN: XS0760139773) 2.07% n/a – 1,168 1,072

2.0% notes due 13 March 2020, principal USD 0.6 billion (ISIN: XS1197832089) 2.12% 1.86% 583 581 613

6.5% notes due 4 March 2021, principal EUR 1.75 billion, outstanding EUR 1.14 billion

(ISIN: XS0415624716) 6.66% 6.96% 1,282 1,328 1,408

0.5% notes due 27 February 2023, principal EUR 0.65 billion (ISIN: XS1371715118) 0.63% n/a 728 755 692

5.375% notes due 29 August 2023, principal GBP 0.25 billion,

outstanding GBP 0.08 billion (ISIN: XS0175478873) 5.46% n/a 96 100 249

0.875% notes due 25 February 2025, principal EUR 1.0 billion (ISIN: XS1195056079) 0.93% n/a 1,122 1,165 1,069

Swiss franc bonds – fixed rate 4.5% bonds due 23 March 2017, principal CHF 1.5 billion (ISIN: CH0039139263) 4.77% n/a – – 1,499

1.0% bonds due 21 September 2018, principal CHF 0.6 billion (ISIN: CH0180513068) 1.04% 0.88% – 598 602

0.0% bonds due 23 September 2018, principal CHF 0.4 billion (ISIN: CH0358654967) –0.45% n/a – 401 –

1.625% bonds due 23 September 2022, principal CHF 0.5 billion

(ISIN: CH0180513183) 1.64% 1.37% 504 502 504

0.1% bonds due 23 September 2024, principal CHF 0.75 billion (ISIN: CH0358654975) 0.11% –0.09% 750 748 –

0.25% bonds due 24 September 2025, principal CHF 0.5 billion (ISIN: CH0433761308) 0.25% n/a 500 – –

0.45% bonds due 23 March 2029, principal CHF 0.35 billion (ISIN: CH0359915409) 0.46% n/a 350 350 –

0.75% bonds due 24 September 2030, principal CHF 0.4 billion (ISIN: CH0433761316) 0.74% n/a 400 – –

Genentech Senior Notes 5.25% Senior Notes due 15 July 2035, principal USD 0.5 billion,

outstanding USD 0.325 billion (ISIN: US368710AC32) 5.39% n/a 320 318 332

Total bonds and notes 18,041 17,986 19,644

Roche Finance Repor t 2018 | 87

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Bonds and notes maturity in millions of CHF

2018 2017 2016

Within one year 1,959 2,167 2,675

Between one and two years 583 1,955 1,674

Between two and three years 2,560 581 2,055

Between three and four years 1,138 2,597 613

Between four and five years 1,560 1,132 2,733

More than five years 10,241 9,554 9,894

Total bonds and notes 18,041 17,986 19,644

Unamortised discount included in carrying value of bonds and notes in millions of CHF

2018 2017 2016

US dollar notes 83 88 102

Euro notes 10 14 17

Swiss franc bonds 0 0 2

Pound sterling notes 1 1 2

Total unamortised discount 94 103 123

Issuance of bonds and notes – 2018

On 24 September 2018 the Group completed an offering of CHF 0.5 billion and CHF 0.4 billion fixed rate bonds with a coupon of 0.25% and 0.75%, respectively. The bonds will mature on 24 September 2025 and 24 September 2030, respectively. These bonds are listed at the SIX Swiss Exchange. The Group received CHF 901 million aggregate net proceeds from the issuance and sale of these fixed rate bonds.

On 17 September 2018 the Group completed an offering of USD 0.75 billion and USD 0.65 billion fixed rate notes with a coupon of 3.25% and 3.625%, respectively. The notes will mature on 17 September 2023 and 17 September 2028, respectively. The Group received CHF 1,351 million aggregate net proceeds from the issuance and sale of these fixed rate notes.

Issuance of bonds and notes – 2017

On 23 March 2017 the Group completed an offering of CHF 1.5 billion fixed rate bonds issued in three tranches, of which CHF 400 million for bonds with a zero coupon which matured on 23 September 2018, CHF 750 million for bonds with a 0.10% coupon which will mature on 23 September 2024, and CHF 350 million for bonds with a 0.45% coupon which will mature on 23 March 2029. These bonds were listed at the SIX Swiss Exchange. The Group received CHF 1,502 million aggregate net proceeds from the issuance and sale of these fixed rate bonds.

Redemption and repurchase of bonds and notes – 2018

Redemption of euro notes. On the due date of 25 June 2018 the Group redeemed the 2.00% fixed rate notes with a principal amount of EUR 1.0 billion. The cash outflow was CHF 1,152 million, plus accrued interest. The effective interest rate of these bonds was 2.07%.

Redemption of Swiss franc bonds. On the due date of 21 September 2018 the Group redeemed the 1.0% fixed rate bonds with a principal amount of CHF 0.6 billion. The cash outflow was CHF 600 million, plus accrued interest. The effective interest rate of these bonds was 1.04%.

On the due date of 23 September 2018 the Group redeemed the bonds with a zero coupon and a principal amount of CHF 0.4 billion. The cash outflow was CHF 400 million, plus accrued interest. The effective interest rate of these bonds was –0.45%.

88 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Redemption and repurchase of bonds and notes – 2017

Redemption of Swiss franc bonds. On the due date of 23 March 2017 the Group redeemed the 4.5% fixed rate bonds with a principal amount of CHF 1.5 billion. The cash outflow was CHF 1,500 million, plus accrued interest. The effective interest rate of these bonds was 4.77%.

Redemption of US dollar notes. On the due date of 29 September 2017 the Group redeemed the 1.35% fixed rate notes with a principal amount of USD 0.85 billion. The cash outflow was CHF 825 million, plus accrued interest. The effective interest rate of these notes was 1.41%.

On the due date of 29 September 2017 the Group redeemed floating rate notes with a principal amount of USD 0.3 billion. The cash outflow was CHF 291 million, plus accrued interest. The effective interest rate of these notes was 0.77%.

Redemption of pound sterling notes. On 17 November 2017 the Group completed a tender offer to repurchase GBP 123 million of the 5.375% fixed rate notes due 29 August 2023. The cash outflow was CHF 200 million, plus accrued interest and there was a loss on repurchase of CHF 37 million. The effective interest rate of these notes was 5.46%.

Redemption of euro notes. On 17 November 2017 the Group completed a tender offer to repurchase EUR 176 million of the 6.5% fixed rate notes due 4 March 2021. The cash outflow was CHF 252 million, plus accrued interest and there was a loss on repurchase of CHF 47 million. The effective interest rate of these notes was 6.66%.

There was an additional CHF 10 million gain recognised as part of net (gains) losses on redemption and repurchase of bonds and notes coming from a termination of a cross-currency swap used to hedge the tendered portion of the euro notes.

Cash flows from issuance, redemption and repurchase of bonds and notes

Cash inflows from issuance of bonds and notes in millions of CHF

2018 2017

US dollar notes 1,351 0

Swiss franc bonds 901 1,502

Total cash inflows from issuance of bonds and notes 2,252 1,502

Cash outflows from redemption and repurchase of bonds and notes in millions of CHF

2018 2017

Euro Medium Term Note programme – Pound sterling notes 0 (200)

Euro Medium Term Note programme – Euro notes (1,152) (252)

US dollar notes 0 (1,116)

Swiss franc bonds (1,000) (1,500)

Total cash outflows from redemption and repurchase of bonds and notes (2,152) (3,068)

Commercial paper

Roche Holdings, Inc. commercial paper program. Roche Holdings, Inc. has an established commercial paper program under which it can issue up to USD 7.5 billion of unsecured commercial paper notes guaranteed by Roche Holding Ltd. The total committed credit lines that are available as a back-stop supporting the commercial paper program are USD 7.5 billion at 31 December 2018. The maturity of the notes under the program cannot exceed 365 days from the date of issuance. At 31 December 2018 unsecured commercial paper notes with a principal amount of USD 0.6 billion and an average interest rate of 2.36% were outstanding.

Roche Finance Repor t 2018 | 89

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Movements in commercial paper obligations in millions of CHF

2018 2017

At 1 January 774 2,116

Net cash proceeds (payments) (199) (1,258)

Currency translation effects 3 (84)

At 31 December 578 774

Amounts due to banks and other financial institutions

These amounts are denominated in various currencies and the average interest rate was 6.3% (2017: 6.98%). At 31 December 2018 the amounts outstanding of CHF 144 million (2017: CHF 176 million) are due within one year.

22. Equity attributable to Roche shareholders

Changes in equity attributable to Roche shareholders in millions of CHF

Reser ves

Share capital Retained earnings Fair value Hedging Translation Total

Year ended 31 December 2017 At 1 January 2017 160 31,092 185 63 (7,589) 23,911

Net income recognised in income statement – 8,633 – – – 8,633

Available-for-sale investments

– Fair value gains (losses) taken to equity – – 68 – – 68

– Transferred to income statement – – (105) – – (105)

– Income taxes 5 – – 15 – – 15

– Non-controlling interests – – (4) – – (4)

Cash flow hedges

– Gains (losses) taken to equity – – – 129 – 129

– Transferred to income statement a) – – – (160) – (160)

– Income taxes 5 – – – 20 – 20

– Non-controlling interests – – – 11 – 11

Currency translation of foreign operations

– Exchange differences – – (1) (2) 265 262

– Accumulated differences transferred to income statement

on divestment of subsidiaries 23 – – – – 100 100

– Non-controlling interests – – – – 20 20

Defined benefit plans

– Remeasurement gains (losses) 26 – 732 – – – 732

– Limit on asset recognition 26 – 0 – – – 0

– Income taxes 5 – (328) – – – (328)

– Non-controlling interests – (3) – – – (3)

Other comprehensive income, net of tax – 401 (27) (2) 385 757

Total comprehensive income – 9,034 (27) (2) 385 9,390

Dividends – (6,998) – – – (6,998)

Equity compensation plans, net of transactions in own equity – 146 – – – 146

Changes in non-controlling interests – (8) – – – (8)

At 31 December 2017 160 33,266 158 61 (7,204) 26,441

a) The entire amount transferred to the income statement was repor ted in other financial income (expense).

90 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Changes in equity attributable to Roche shareholders in millions of CHF

Reser ves

Share capital Retained earnings Fair value Hedging Translation Total

Year ended 31 December 2018 At 1 January 2018 160 33,266 158 61 (7,204) 26,441

Implementation of IFRS 9 ‘Financial Instruments’ 33 – 105 (110) – – (5)

At 1 January 2018 (revised) 160 33,371 48 61 (7,204) 26,436

Net income recognised in income statement – 10,500 – – – 10,500

Financial assets at fair value through OCI

– Fair value gains (losses) – equity investments at fair value

through OCI – – 89 – – 89

– Fair value gains (losses) taken to retained earnings on

disposal of equity investments at fair value through OCI – 115 (115) – – –

– Fair value gains (losses) – debt securities at fair value

through OCI – – (3) – – (3)

– Fair value gains (losses) transferred to income statement –

debt securities at fair value through OCI – – (5) – – (5)

– Income taxes 5 – (10) 9 – – (1)

– Non-controlling interests – (5) 4 – – (1)

Cash flow hedges

– Gains (losses) taken to equity – – – (61) – (61)

– Transferred to income statement a) – – – 42 – 42

– Income taxes 5 – – – 4 – 4

– Non-controlling interests – – – 1 – 1

Currency translation of foreign operations

– Exchange differences – – 1 – (295) (294)

– Accumulated differences transferred to income statement on

divestment of subsidiaries 23 – – – – 4 4

– Non-controlling interests – – – – (53) (53)

Defined benefit plans

– Remeasurement gains (losses) 26 – 199 – – – 199

– Limit on asset recognition 26 – (2) – – – (2)

– Income taxes 5 – (63) – – – (63)

– Non-controlling interests – 8 – – – 8

Other comprehensive income, net of tax – 242 (20) (14) (344) (136)

Total comprehensive income – 10,742 (20) (14) (344) 10,364

Dividends – (7,094) – – – (7,094)

Equity compensation plans, net of transactions in own equity – 51 – – – 51

Changes in ownership interest in subsidiaries 6 – (2,129) – – – (2,129)

Changes in non-controlling interests – (6) – – – (6)

At 31 December 2018 160 34,935 28 47b) (7,548) 27,622

a) The entire amount transferred to the income statement was repor ted in other financial income (expense). b) Cost of hedging reser ve related to the EUR / USD cross-currency swap is included in the hedging reser ve and amounted to CHF 8 million, net of tax, at 31 December 2018.

Equity attributable to Roche shareholders as at 1 Januar y 2018 has been revised following the implementation of IFRS 9 ‘Financial Instruments’ as described in Note 33. In addition, the statement of changes in equity has been adjusted to reflect the presentational changes required by the implementation of this new standard.

Roche Finance Repor t 2018 | 91

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Genentech transaction

The Group completed the purchase of the non-controlling interests in Genentech effective 26 March 2009. Based on the International Accounting Standard 27 ‘Separate Financial Statements’ (IAS 27) and consistent with the International Financial Reporting Standard 10 ‘Consolidated Financial Statements’ (IFRS 10), which was adopted by the Group in 2013, this transaction was accounted for in full as an equity transaction. As a consequence, the carrying amount of the consolidated equity of the Group at that time was reduced by CHF 52.2 billion, of which CHF 8.5 billion was allocated to eliminate the book value of Genentech non-controlling interests. This accounting effect significantly impacted the Group’s net equity, but has no effect on the Group’s business or its dividend policy.

Share capital

At 31 December 2018 the authorised and issued share capital of Roche Holding Ltd, which is the Group’s parent company, consisted of 160 million shares with a nominal value of CHF 1.00 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 45.01% (2017: 45.01%) of the issued shares. On 24 March 2011 the shareholder group announced that it would continue the shareholder pooling agreement existing since 1948 with a modified shareholder composition. The shareholder group with pooled voting rights now holds 72,018,000 shares, corresponding to 45.01% of the shares issued. This figure does not include any shares without pooled voting rights that are held outside this group by individual members of the group. Ms Maja Oeri, formerly a member of the pool, now holds 8,091,900 shares representing 5.057% of the voting rights independently of the pool. This is further described in Note 31. Based on information supplied to the Group, Novartis Holding AG, Basel, owns 33.333% (participation below 331⁄3%) of the issued shares (2017: 33.333%).

Non-voting equity securities (Genussscheine)

At 31 December 2018 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 13 March 2018 the shareholders approved the distribution of a dividend of CHF 8.30 per share and non-voting equity security (2017: CHF 8.20) in respect of the 2017 business year. The distribution to holders of outstanding shares and non-voting equity securities totalled CHF 7,094 million (2017: CHF 6,998 million) and has been recorded against retained earnings in 2018. The Board of Directors has proposed dividends for the 2018 business year of CHF 8.70 per share and non-voting equity security which, if approved, would result in a total distribution to shareholders of CHF 7,504 million. This is subject to approval at the Annual General Meeting on 5 March 2019.

Own equity instruments

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

2018

(millions) 2017

(millions)

Shares 0 0.1

Non-voting equity securities 8.1 8.6

Total 8.1 8.7

Own equity instruments are recorded within equity at original purchase cost. At 31 December 2018 the fair value of shares was CHF 1.9 million and the fair value of non-voting equity securities was CHF 2.0 billion. Own equity instruments are held for the Group’s potential conversion obligations that may arise from the Group’s equity compensation plans (see Note 27).

92 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Reserves

Fair value reserve. At 31 December 2018 the fair value reserve represents the cumulative net change in the fair value of financial assets at fair value through OCI (previously 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.

23. Subsidiaries and associates

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 is known as Chugai.

Consolidated subsidiary. Chugai is a fully consolidated subsidiary of the Group. This is based on the Group’s interest in Chugai at 31 December 2018 of 61.3% (2017: 61.3%) and the Roche relationship with Chugai that is founded on the Basic Alliance, Licensing and Research Collaboration Agreements.

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 accordance with International Financial Reporting Standards (IFRS) that are filed on a quarterly basis with the Tokyo Stock Exchange. Due to certain consolidation entries there are minor differences between Chugai’s stand-alone IFRS results and the results of Chugai as consolidated by the Roche Group in accordance with IFRS.

Chugai summarised financial information in millions of CHF

2018 2017

Income statement Sales 2 4,675 4,383

Royalties and other operating income 2 529 310

Total revenues 5,204 4,693 Operating profit 2 1,136 856

Balance sheet Non-current assets 2,791 2,272

Current assets 5,522 5,182

Non-current liabilities (275) (280)

Current liabilities (1,202) (1,060)

Total net assets 6,836 6,114

Cash flows Cash flows from operating activities 1,054 945

Cash flows from investing activities (656) (322)

Cash flows from financing activities (310) (260)

Dividends. The dividends distributed to third parties holding Chugai shares during 2018 totalled CHF 120 million (2017: CHF 102 million) and have been recorded against non-controlling interests (see Note 24). Dividends paid by Chugai to Roche are eliminated on consolidation as intercompany items.

Roche Finance Repor t 2018 | 93

Notes to the Roche Group Consolidated Financial Statements | Roche Group

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

(1) 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%.

(2) 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 the right of first refusal on the development and marketing in Japan of all development compounds advanced by Roche.

The Rest of the World Umbrella Rights Agreement (excluding Japan and South Korea) signed in May 2002 was revised and the Amended and Restated Rest of the World Umbrella Rights Agreement (excluding Japan, South Korea and Taiwan) was signed in August 2014. Under this Agreement Roche has the right of first refusal on the development and marketing of Chugai’s development compounds in markets outside Japan, excluding South Korea and Taiwan.

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.

(3) 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.

Foundation Medicine

On 7 April 2015 the Group acquired a 61.3% controlling interest in Foundation Medicine, Inc. (‘FMI’), a publicly owned US company based in Cambridge, Massachusetts, and entered into an Investor Rights Agreement, a Research and Development Collaboration Agreement and several Commercial Collaboration Agreements. FMI has been treated as a fully consolidated subsidiary of the Group since that date. At 31 December 2017 the Group’s interest in FMI was 57.5%. The common stock of FMI was publicly traded and was listed on the Nasdaq under the stock code ‘FMI’. FMI prepared financial statements in accordance with US GA AP that were filed on a quarterly basis with the SEC. Due to certain consolidation entries there have been differences between FMI’s stand-alone US GA AP results and the results of FMI as consolidated by the Roche Group in accordance with IFRS.

On 18 June 2018 the Group entered into a merger agreement with FMI to acquire the outstanding shares of FMI’s common stock not already owned by the Group at a price of USD 137.00 per share in cash. A tender offer was launched on 2 July 2018. On 31 July 2018 the transaction closed and FMI became a 100% owned subsidiary of the Group. It has been accounted for in full as an equity transaction (see Note 6).

Dividends. There were no dividends distributed to third parties holding FMI shares during 2018 and 2017.

94 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Associates

Senseonics Holding, Inc. (‘Senseonics’) has been treated as an associate of the Group and at 31 December 2018 the Group’s interest in Senseonics was 16.0% (31 December 2017: 20.7%). The Group is the exclusive distributor for Senseonics’ Eversense product solution in major markets outside the US. In the opinion of management this gives the Group the potential to exercise significant influence over the operations of the Senseonics business. The common stock of Senseonics is publicly traded and is listed on the New York Stock Exchange (NYSE-MKT ) under the stock code ‘SENS’. Senseonics prepares financial statements in accordance with US GA AP that are filed on a quarterly basis with the SEC. The Group accounts for Senseonics using the equity method based on Senseonics’ financial statements that are publicly available. The Group’s share of Senseonics’ results, a profit of CHF 6 million, is included in other financial income (expense) (see Note 4) and the carrying value of the Group’s share of Senseonics’ net assets at 31 December 2018, an asset of CHF 42 million, is included in other non-current assets (see Note 15).

Divestment of subsidiaries

Divestment of subsidiaries – 2018. On 30 November 2018 the Group sold its wholly owned subsidiary Roche Diagnostics IT Solutions GmbH in Berlin, Germany, to a third party. The total consideration was EUR 2 million, all of which was deferred consideration that will become due on 30 November 2021. A total loss on divestment of CHF 24 million was reported as global restructuring costs in the Diagnostics operating segment and included in general and administration.

During 2018 the Group received deferred consideration of EUR 4 million from the sale of the former subsidiary at the Segrate site, Italy, to a third party.

Divestment of subsidiaries – 2017. On 1 February 2017 the Group sold its wholly owned subsidiary Roche Carolina Inc. in Florence, US, to a third party as part of the previously announced Pharmaceuticals Division’s strategic realignment of its manufacturing network. On 1 September 2017 the Group sold its wholly owned subsidiary at the Segrate site, Italy, to a third party as part of the previously announced Pharmaceuticals Division’s strategic realignment of its manufacturing network.

The total gains (losses) on these divestments are shown in the table below.

Gains (losses) on divestment of subsidiaries in millions of CHF

2018 2017

Cash consideration 0 11

Deferred consideration 3 0

Total consideration 3 11

Property, plant and equipment 8 0 3

Goodwill 9 5 0

Cash and cash equivalents 3 0

Provisions 20 (11) 0

Other net assets (liabilities) 15 9

Currency translation of foreign operations transferred to income statement 22 4 100

Total net assets disposed 16 112

Provisions and accruals for residual obligations retained by the Group (11) (25)

Gains (losses) on divestment of subsidiaries 7 (24) (126)

Cash flow from divestment of subsidiaries in millions of CHF

2018 2017 Pharmaceuticals Diagnostics Total Pharmaceuticals Diagnostics Total

Cash consideration received 0 0 0 11 – 11

Deferred consideration received 4 0 4 0 – 0

Cash in divested company 0 (3) (3) 0 – 0

Total net cash inflow 4 (3) 1 11 – 11

Roche Finance Repor t 2018 | 95

Notes to the Roche Group Consolidated Financial Statements | Roche Group

24. Non-controlling interests

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

2018 2017

At 1 January 2,566 2,491

Net income recognised in income statement

– Chugai 343 244

– Other non-controlling interests 22 (52)

Total net income recognised in income statement 365 192

Available-for-sale investments (IAS 39) n/a 4

Equity investments at fair value through OCI (IFRS 9) 1 n/a

Debt securities at fair value through OCI (IFRS 9) 0 n/a

Cash flow hedges (1) (11)

Currency translation of foreign operations 53 (20)

Remeasurements of defined benefit plans (8) 3

Other comprehensive income, net of tax 45 (24)

Total comprehensive income 410 168

Business combinations 0 0

Dividends to non-controlling shareholders

– Chugai 23 (120) (102)

– Other non-controlling interests (16) (19)

Equity compensation plans, net of transactions in own equity 10 15

Changes in ownership interest in subsidiaries 6 (112) 0

Changes in non-controlling interests 6 8

Equity contribution by non-controlling interests 0 5

At 31 December 2,744 2,566

Chugai 2,585 2,302

Other non-controlling interests 159 264

Total non-controlling interests 2,744 2,566

96 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

25. Employee benefits

Employee remuneration in millions of CHF

2018 2017

Wages and salaries 11,173 10,629

Social security costs 1,102 1,075

Defined contribution plans 26 419 482

Operating expenses for defined benefit plans 26 518 511

Equity compensation plans 27 508 495

Termination costs 7 401 378

Other employee benefits 1,175 817

Employee remuneration included in operating results 15,296 14,387

Net interest cost of defined benefit plans 26 139 147

Total employee remuneration 15,435 14,534

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.

26. 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. 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’.

Defined contribution plans

Defined contribution plans are funded through payments by employees and by the Group to funds administered by third parties. The Group’s expenses for these plans were CHF 419 million (2017: CHF 482 million). 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. The Group’s major defined contribution plan is the US Roche 401(k) Savings Plan.

Defined benefit plans

Plans are usually established as trusts independent of the Group and are funded by payments from Group companies and by employees. In some cases, notably for the major defined benefit plans in Germany, the plans are unfunded and the Group pays pensions to retired employees directly from its own financial resources. Plans are usually governed by a senior governing body, such as a Board of Trustees, which is typically composed of both employee and employer representatives. Funding of these plans is determined by local regulations using independent actuarial valuations. Separate independent actuarial valuations are prepared in accordance with the requirements of IAS 19 for use in the Group’s financial statements. The Group’s major pension plans are located in Switzerland, the US and Germany, which in total account for 84% of the Group’s defined benefit obligation (2017: 82%).

Roche Finance Repor t 2018 | 97

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Pension plans in Switzerland. Current pension arrangements for employees in Switzerland are made through plans governed by the Swiss Federal Occupational Old Age, Survivors and Disability Pension Act (‘BVG’). The Group’s pension plans are administered by separate legal foundations, which are funded by regular employee and company contributions. The final benefit is contribution-based with certain minimum guarantees. Due to these minimum guarantees, the Swiss plans are treated as defined benefit plans for the purposes of these IFRS financial statements, although they have many of the characteristics of defined contribution plans. Where there is an under-funding, this may be remedied by various measures such as increasing employee and company contributions, lowering the interest rate on retirement account balances, reducing prospective benefits and a suspension of the early withdrawal facility.

Following a plan change in 2018 the Employee Profit-Sharing Plan (‘Mitarbeiter-Gewinnbeteiligung’) no longer qualifies as a defined contribution plan but as a defined benefit plan. This resulted in additions to plan assets and defined benefit obligation of approximately CHF 1.1 billion. In 2018 operating income of CHF 43 million was recorded for past service cost from this plan change in Switzerland. Of this amount, CHF 31 million was recorded in the Pharmaceuticals Division, CHF 7 million in the Diagnostics Division and CHF 5 million in Corporate. The past service income was recorded within general and administration.

Pension plans in the US. The Group’s major defined benefit plans in the US have been closed to new members since 2007. New employees in the US now join the defined contribution plan. The largest of the remaining defined benefit plans are funded pension plans together with smaller unfunded supplementary retirement plans. The benefits are based on the highest average annual rate of earnings during a specified period and length of employment. The plans are non-contributory for employees, with the Group making periodic payments to the plans. Where there is an under-funding, this would normally be remedied by additional company contributions. In 2018 payments made by the Group were USD 186 million (2017: USD 80 million). The increase in payments compared to 2017 is due to accelerated contributions to benefit from a higher tax deduction. In 2017 the Group entered into an annuity buyout agreement with an insurance company and paid USD 330 million from plan assets to settle the defined benefit obligation for some retired employees. This led to a settlement loss of USD 10 million in 2017.

Pension plans in Germany. The Group’s major pension arrangements in Germany are governed by the Occupational Pensions Act (‘BetrAVG’). These plans are unfunded and the Group pays pensions to retired employees directly from its own financial resources. These plans are non-contributory for employees. The benefits are based on final salary and length of employment. These plans have been closed to new members since 2007. They have been replaced by a new plan which is funded by regular employee and company contributions and administered through a contractual trust agreement. The final benefit is contribution-based with a minimum guarantee. Due to this minimum guarantee, this plan is treated as a defined benefit plan for the purposes of these IFRS financial statements, although it has many of the characteristics of a defined contribution plan.

Pension plans in the Rest of the World. These represent approximately 11% of the Group’s defined benefit obligation (2017: 12%) and consist of a number of smaller plans in various countries. Of these the largest are the pension plans at Chugai, which are independently managed by Chugai, and the main pension plan in the United Kingdom. The Chugai plans are fully described in Chugai’s own IFRS financial statements. The UK pension plan is funded by regular employee and company contributions, with benefits based on final salary and length of employment. This plan has been closed to new members since 2003 and has been replaced with a defined contribution plan. In relation to the restructuring of the manufacturing site at Clarecastle, Ireland, the Group entered into an annuity buyout agreement with an insurance company in 2017 and paid EUR 97 million from plan assets to settle the defined benefit obligation for all retired employees. In addition transfer value payments of EUR 14 million from plan assets were made to deferred employees to settle the defined benefit obligation. The Group recorded a settlement loss of EUR 11 million from these transactions in 2017.

Other post-employment benefit (‘OPEB’) plans. These represent approximately 5% of the Group’s defined benefit obligation (2017: 6%) and consist of post-employment healthcare and life insurance schemes, mainly in the US. These plans are mainly unfunded and/or are contributory for employees, with the Group reimbursing retired employees directly from its own financial resources. The Group’s major OPEB plans in the US have been closed to new members since 2011. Part of the costs of these plans is reimbursable under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. There is no statutory funding requirement for these plans. The Group is funding these plans to the extent that it is tax efficient. In 2018 payments made by the Group to these plans were USD 40 million (2017: none). At 31 December 2018 the IFRS funding status was 47% (2017: 43%), including reimbursement rights, for the funded OPEB plans in the US.

98 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Defined benefit plans: income statement in millions of CHF

2018 2017

Pension plans

Other post- employment

benefit plans Total

expense Pension

plans

Other post- employment

benefit plans Total

expense

Current service cost 567 15 582 516 16 532

Past service (income) cost (69) 0 (69) (43) 0 (43)

Settlement (gain) loss 5 0 5 22 0 22

Total operating expenses 503 15 518 495 16 511

Net interest cost of defined benefit plans 107 32 139 113 34 147

Total expense recognised in income statement 610 47 657 608 50 658

Funding status

The funding of the Group’s various defined benefit plans is the responsibility of the respective senior governing body, such as a Board of Trustees, and the sponsoring employer, and is managed based on local statutory valuations, which follow the legislation and requirements of the respective jurisdiction in which the plan is established. Qualified independent actuaries carry out statutory actuarial valuations on a regular basis. The actuarial assumptions determining the funding status on the statutory basis are regularly assessed by the local senior governing body. The funding status is closely monitored at a corporate level. The unfunded plans are mainly those in the Group’s German affiliates, where the fully reserved pension obligations are used for self-financing of the local affiliate’s operations.

In 2018 the IFRS funding status of the funded defined benefit plans improved to 93% (2017: 91%).

Reimbursement rights are linked to the post-employment medical plans in the US and represent the expected reimbursement of the medical expenditure provided under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.

Defined benefit plans: funding status in millions of CHF

2018 2017

Pension plans

Other post- employment

benefit plans Total Pension

plans

Other post- employment

benefit plans Total

Funded plans

– Fair value of plan assets 14,962 302 15,264 14,040 316 14,356

– Defined benefit obligation (15,611) (889) (16,500) (14,652) (1,053) (15,705)

Over (under) funding (649) (587) (1,236) (612) (737) (1,349) Unfunded plans

– Defined benefit obligation (4,757) (263) (5,020) (5,109) (302) (5,411)

Total funding status (5,406) (850) (6,256) (5,721) (1,039) (6,760) Limit on asset recognition (2) 0 (2) 0 0 0

Reimbursement rights – 118 118 – 140 140

Net recognised asset (liability) (5,408) (732) (6,140) (5,721) (899) (6,620)

Reported in balance sheet

– Defined benefit plan assets 759 118 877 661 140 801

– Defined benefit plan liabilities (6,167) (850) (7,017) (6,382) (1,039) (7,421)

Roche Finance Repor t 2018 | 99

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Plan assets

The responsibility for the investment strategies of funded plans is with the respective senior governance body, such as the Board of Trustees. Asset-liability studies are performed regularly for all major pension plans. These studies examine the obligations from post- employment benefit plans, and evaluate various investment strategies with respect to key financial measures such as expected returns, expected risks, expected contributions, and expected funded status of the plan in an interdependent way. The goal of an asset-liability study is to select an appropriate asset allocation for the funds held within the plan. The investment strategy is developed to optimise expected returns, to manage risks and to contain fluctuations in the statutory funded status. Asset-liability studies include strategies to match the cash flows of the assets with the plan obligations. The Group currently does not use longevity swaps to manage longevity risk.

Plan assets are managed using internal and external asset managers. The actual performance is continually monitored by the pension fund governance bodies as well as being closely monitored at a corporate level. In these financial statements the difference between the interest income and actual return on plan assets is a remeasurement that is recorded directly to other comprehensive income. During 2018 the actual return on plan assets was a loss of CHF 413 million (2017: gain of CHF 1,381 million).

The recognition of plan assets is limited to the present value of any economic benefits available from refunds from the plans or reductions in future contributions to the plans.

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

2018 2017

Pension plans

Other post- employment

benefit plans Total Pension

plans

Other post- employment

benefit plans Total

At 1 January 14,040 456 14,496 13,257 468 13,725

Additions 1,238 0 1,238 0 0 0

Interest income on plan assets 219 16 235 209 17 226

Remeasurements on plan assets (611) (60) (671) 1,119 32 1,151

Currency translation effects (48) 11 (37) (58) (19) (77)

Employer contributions 576 37 613 392 0 392

Employee contributions 147 7 154 137 10 147

Benefits paid – funded plans (590) (44) (634) (562) (50) (612)

Benefits paid – settlements (5) 0 (5) (449) 0 (449)

Administration costs (4) (3) (7) (5) (2) (7)

At 31 December 14,962 420 15,382 14,040 456 14,496

Defined benefit plans: composition of plan assets in millions of CHF

2018 2017

Equity securities 4,287 4,921

Debt securities 6,136 5,391

Property 2,120 1,896

Cash and money market instruments 525 216

Other investments 2,196 1,932

At 31 December 15,264 14,356

Assets are invested in a variety of different classes in order to maintain a balance between risk and return as follows: • Equity and debt securities which mainly have quoted market prices (Level 1 fair value hierarchy). • Property which is primarily in private and commercial property funds which mainly have other observable inputs (Level 2 fair value hierarchy).

• Cash and money market instruments which are mainly invested with financial institutions with a credit rating no lower than A. • Other investments which mainly consist of alternatives, mortgages, commodities and insurance contracts. These are used for risk management purposes and mainly have other observable inputs (Level 2 fair value hierarchy) and unobservable inputs (Level 3 fair value hierarchy).

Included within the fair value of plan assets are the Group’s shares and non-voting securities with a fair value of CHF 136 million (2017: CHF 121 million) and debt instruments issued by the Group with a fair value of CHF 5 million (2017: CHF 9 million).

100 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Defined benefit obligation

The defined benefit obligation is 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 mortality rates. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds or government bonds in countries where there is not a deep market in corporate bonds. The corporate or government bonds are denominated in the currency in which the benefits will be paid, and have maturity terms approximating to the terms of the related pension obligation.

The Group’s final salary-based defined benefit pension plans in the US, Germany and the United Kingdom have been closed to new participants. Active employees that had been members of these pension plans at the time these were closed to new participants continue to accrue benefits in the final salary-based defined benefit pension plans. New employees in the US and UK now join the Group’s defined contribution plans, while new employees in Germany join the contribution-based plan with a minimum guarantee. As a result, the proportion of the defined benefit obligation which relates to these closed plans is expected to decrease in the future. The defined benefit pension plans in Switzerland, where the final benefit is contribution-based with a minimum guarantee, remain open to new employees.

Defined benefit plans: defined benefit obligation in millions of CHF

2018 2017

Pension plans

Other post- employment

benefit plans Total Pension

plans

Other post- employment

benefit plans Total

At 1 January 19,761 1,355 21,116 19,297 1,368 20,665

Additions 1,239 0 1,239 0 0 0

Current service cost 567 15 582 516 16 532

Interest cost 326 48 374 322 51 373

Remeasurements:

– demographic assumptions (130) (42) (172) 62 (4) 58

– financial assumptions (766) (150) (916) 120 44 164

– experience adjustments 252 (32) 220 213 (16) 197

Currency translation effects (206) 4 (202) 263 (55) 208

Employee contributions 147 7 154 137 10 147

Benefits paid – funded plans (590) (44) (634) (562) (50) (612)

Benefits paid – unfunded plans (163) (9) (172) (137) (9) (146)

Benefits paid – settlements (5) 0 (5) (449) 0 (449)

Past service (income) cost (69) 0 (69) (43) 0 (43)

Settlement (gain) loss 5 0 5 22 0 22

At 31 December 20,368 1,152 21,520 19,761 1,355 21,116

Composition of plan Active members 10,454 290 10,744 9,545 365 9,910

Deferred vested members 1,593 10 1,603 1,770 15 1,785

Retired members 8,321 852 9,173 8,446 975 9,421

At 31 December 20,368 1,152 21,520 19,761 1,355 21,116

Plans by geography Switzerland 9,873 – 9,873 8,554 – 8,554

United States 3,805 1,116 4,921 4,028 1,318 5,346

Germany 4,331 – 4,331 4,661 – 4,661

Rest of the World 2,359 36 2,395 2,518 37 2,555

At 31 December 20,368 1,152 21,520 19,761 1,355 21,116

Duration in years 14.6 12.2 14.5 15.3 12.9 15.2

Roche Finance Repor t 2018 | 101

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Actuarial assumptions

The actuarial assumptions used in these financial statements are based on the requirements set out in IAS 19 ‘Employee Benefits’. They 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, based on advice from 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 interest rates, salary and benefit levels, inflation rates and costs of medical benefits. The actuarial assumptions vary based upon local economic and social conditions. The actuarial assumptions used in the various statutory valuations may differ from these based on local legal and regulatory requirements.

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. Rates of employee turnover, disability and early retirement are based on historical behaviour. The average life expectancy assumed now for an individual at the age of 65 is as follows:

Defined benefit plans: average life expectancy at the age of 65 for major schemes in years

Male Female Countr y Mor tality table 2018 2017 2018 2017

Switzerland BVG 2015 projected with CMI model 21.6 21.5 23.6 23.4

United States RP-2014 projected with MP-2017 1) 22.2 22.3 23.7 23.9

Germany Heubeck tables 2018G projected with CMI model 2) 19.4 19.3 22.7 23.3

1) For 2017 RP-2014 tables projected with MP-2014 data were used. 2) For 2017 Heubeck tables 2005G were used.

The mortality assumptions used for the pension plans in Switzerland were based on BVG 2015 applying the Continuous Mortality Investigation (‘CMI’) model. A long-term rate of 1.25% (2017: 1.25%) was used for longevity improvements.

At 31 December 2018 the Group used as mortality assumptions for the pension plans in Germany Heubeck tables 2018G applying the CMI model with a long-term rate of 1.25% for longevity improvements.

Financial assumptions. These are based on market expectations for the period over which the obligations are to be settled. The assumptions used in the actuarial valuations are shown below.

Defined benefit plans: financial actuarial assumptions

2018 2017 Weighted

average Range Weighted

average Range

Discount rates 1.98% 0.69%–8.10% 1.80% 0.60%–6.80%

Expected rates of salary increases 2.59% 0.00%–4.50% 2.52% 0.00%–4.50%

Expected rates of pension increases 0.58% 0.00%–3.00% 0.67% 0.00%–3.00%

Expected inflation rates 2.13% 1.75%–3.50% 2.14% 1.50%–3.50%

Immediate medical cost trend rate 6.13% 5.90%–6.30% 6.50% 6.30%–6.50%

Ultimate medical cost trend rate (in 2038) 4.37% 4.00%–4.50% 4.50% 4.50%

Discount rates are determined with reference to interest rates on high-quality corporate bonds or government bonds in countries where there is not a deep market in corporate bonds. Expected rates of salary increases are based on expected inflation rates with an adjustment to reflect the Group’s latest expectation of long-term real salary increases. Expected rates of pension increases are generally linked to the expected inflation rate or the funding status of the plan. Expected inflation rates are derived by looking at the level of inflation implied by the financial markets in conjunction with the economists’ price inflation forecasts, historic price inflation as well as other economic variables and circumstances. Medical cost trend rates 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 US.

102 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Sensitivity analysis. The measurement of the net defined benefit obligation is particularly sensitive to changes in the discount rate, inflation rate, expected mortality and medical cost trend rate assumptions. The following table summarises the impact of a change in those assumptions on the present value of the defined benefit obligation.

Defined benefit plans: sensitivity of defined benefit obligation to actuarial assumptions in millions of CHF

2018 2017

Increase (decrease) in defined benefit obligation Life expectancy

– 1 year increase 735 635

Discount rates

– 0.25% increase (731) (767)

– 0.25% decrease 777 816

Expected inflation rates

– 0.25% increase 220 255

– 0.25% decrease (209) (242)

Immediate medical cost trend rate

– 1.00% increase 139 156

– 1.00% decrease (97) (129)

Each sensitivity analysis considers the change in one assumption at a time leaving the other assumptions unchanged. This approach shows the isolated effect of changing one individual assumption but does not take into account that some assumptions are related. The method used to carry out the sensitivity analysis is the same as in the prior year.

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

2018 2017

Employer contributions, net of reimbursements – funded plans (613) (392)

Benefits paid – unfunded plans (172) (146)

Total cash inflow (outflow) (785) (538)

Based on the most recent actuarial valuations, the Group expects that employer contributions for funded plans in 2019 will be approximately CHF 401 million, which includes an estimated CHF 25 million of additional contributions related to the UK defined benefit plans. Benefits paid for unfunded plans in 2019 are estimated to be approximately CHF 182 million, which mostly relate to the German defined benefit plans.

Roche Finance Repor t 2018 | 103

Notes to the Roche Group Consolidated Financial Statements | Roche Group

27. Equity compensation plans

The Group operates several equity compensation plans, including separate plans at Chugai and Foundation Medicine. IFRS 2 ‘Share-based Payment’ 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.

Expenses for equity compensation plans in millions of CHF

2018 2017

Cost of sales 90 90

Marketing and distribution 114 112

Research and development 185 183

General and administration 119 110

Total operating expenses 508 495

Equity compensation plans Roche Stock-settled Stock Appreciation Rights 175 186

Roche Restricted Stock Unit Plan 281 240

Roche Performance Share Plan 8 11

Roche Connect 24 23

Roche Option Plan 3 3

Bonus Stock Awards 6 6

Chugai and Foundation Medicine plans 11 26

Total operating expenses 508 495

of which

– Equity-settled 508 495

– Cash-settled – –

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

2018 2017

Roche Option Plan exercises 19 36

Chugai and Foundation Medicine plans’ exercises 18 14

Roche Connect costs (24) (23)

Transactions in own equity (461) (385)

Total cash inflow (outflow) from equity-settled equity compensation plans, net of transactions in own equity (448) (358)

The net cash outflow from transactions in own equity mainly arises from sales and purchases of equity instruments which are held for the Group’s potential conversion obligations that may arise from the Group’s equity compensation plans (see Note 22).

Equity compensation plans

Roche Stock-settled Stock Appreciation Rights. The Group issues 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. Under the Roche S-SAR Plan 180 million S-SARs will be available for issuance over a ten-year period. The rights, which are non-tradable equity-settled awards, have a seven-year duration and vest on a phased basis over three years.

104 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Roche S-SARs – movement in number of rights outstanding

2018 2017

Number of rights

(thousands)

Weighted average exercise price

(CHF ) Number of rights

(thousands)

Weighted average exercise price

(CHF )

Outstanding at 1 January 43,545 235.31 42,178 220.22

Granted 13,068 221.40 11,412 251.42

Forfeited (3,808) 247.83 (1,848) 252.73

Exercised (5,565) 170.56 (8,168) 176.27

Expired (17) 140.29 (29) 151.92

Outstanding at 31 December 47,223 238.12 43,545 235.31 – of which exercisable 25,285 241.12 23,524 221.24

Roche S-SARs – terms of rights outstanding at 31 December 2018

Rights outstanding Rights exercisable

Year of grant

Number outstanding (thousands)

Weighted average years remaining contractual life

Weighted average exercise price

(CHF )

Number exercisable

(thousands)

Weighted average exercise price

(CHF )

2012 2,349 0.26 158.11 2,349 158.11

2013 3,399 1.26 214.85 3,399 214.85

2014 4,722 2.26 263.47 4,722 263.47

2015 5,939 3.27 256.70 5,939 256.70

2016 8,786 4.27 250.83 5,604 250.82

2017 9,763 5.27 251.42 3,206 251.50

2018 12,265 6.26 221.43 66 220.80

Total 47,223 4.25 238.12 25,285 241.12

Roche Restricted Stock Unit Plan. The Group issues Restricted Stock Units (RSUs) awards to certain directors, management and employees selected at the discretion of the Group. The RSUs, which are non-tradable, represent the right to receive non-voting equity securities which vest only after a three-year period, subject to performance conditions, if any. There are currently no performance conditions on outstanding RSUs at 31 December 2018. Under the Roche RSU Plan 20 million non-voting equity securities will be available for issuance over a ten-year period. The Roche RSU Plan also includes a value adjustment which will be an amount equivalent to the sum of shareholder distributions made by the Group during the vesting period attributable to the number of non-voting equity securities for which an individual award has been granted.

Roche RSUs – movement in number of awards outstanding

2018 2017

Number of awards

(thousands) Number of awards

(thousands)

Outstanding at 1 January 2,813 2,343

Granted 1,766 1,373

Forfeited (331) (209)

Transferred to participants (745) (694)

Outstanding at 31 December 3,503 2,813 – of which vested and transferable 1 1

Roche Performance Share Plan. The Group offers future share and non-voting equity security awards (or, at the discretion of the Board of Directors, their cash equivalent) to certain directors and key senior managers. These are non-tradable equity-settled awards. The programme currently operates in annual three-year cycles. The Roche Performance Share Plan (PSP) includes a value adjustment which will be an amount equivalent to the sum of shareholder distributions made by the Group during the vesting period attributable to the number of shares or non-voting equity securities for which an individual award has been granted. The amount of shares or 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. Each award will result in between zero and two shares or non- voting equity securities (before value adjustment), depending upon the achievement of the performance targets.

Roche Finance Repor t 2018 | 105

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Roche Performance Share Plan – terms of outstanding awards at 31 December 2018

2016–2018 2017–2019 2018–2020

Number of awards outstanding (thousands) 36 41 38

Vesting period 3 years 3 years 3 years

Allocated to recipients in Feb. 2019 Feb. 2020 Feb. 2021

Fair value per unit at grant (CHF ) 264.36 226.66 238.35

Total fair value at grant (CHF millions) 11 11 10

Roche Connect. This programme enables all employees worldwide, except for those in the US 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 2018 the administrator held 3.1 million non-voting equity securities (2017: 2.8 million). In 2018 the cost of the plan was CHF 24 million (2017: CHF 23 million).

Roche Option Plan. This programme is used in countries where S-SARs are not used. 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.

Roche Option Plan – movement in number of options outstanding

2018 2017

Number of options

(thousands)

Weighted average exercise price

(CHF ) Number of options

(thousands)

Weighted average exercise price

(CHF )

Outstanding at 1 January 754 231.82 834 216.02

Granted 207 221.94 156 250.90

Forfeited (53) 246.54 (31) 256.52

Exercised (114) 173.23 (205) 178.25

Expired 0 – 0 –

Outstanding at 31 December 794 236.63 754 231.82 – of which exercisable 474 238.66 459 219.10

Roche Option Plan – terms of options outstanding at 31 December 2018

Options outstanding Options exercisable

Year of grant Number outstanding

(thousands)

Weighted average years remaining contractual life

Weighted average exercise price

(CHF ) Number exercisable

(thousands)

Weighted average exercise price

(CHF )

2012 51 0.26 157.77 51 157.77

2013 76 1.25 214.00 76 214.00

2014 91 2.25 263.21 91 263.21

2015 123 3.26 256.88 123 256.88

2016 127 4.26 250.44 84 250.44

2017 134 5.28 250.89 47 250.95

2018 192 6.27 222.03 2 220.80

Total 794 3.99 236.63 474 238.66

The weighted average share price of Roche non-voting equity securities during the year was CHF 232.20 (2017: CHF 247.10).

Bonus Stock Awards. The Chairman of the Board of Directors and the Chief Executive Officer will be granted Bonus Stock Awards in lieu of their cash-settled bonus for the financial year 2018. These are subject to approval by the 2019 Annual General Meeting in March 2019 and will be issued in March 2019. The number of awards and fair value per award will be calculated at the grant date.

106 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Fair value measurement

The inputs used in the measurement of the fair values at grant date of the equity compensation plans were as follows:

Fair value measurement in 2018

Roche Stock-settled Stock Appreciation Rights

Roche Restricted

Stock Unit Plan

Roche Per formance

Share Plan Roche

Option Plan

Vesting period

Progressively

over 3 years

Cliff vesting after

3 years

Cliff vesting after

3 years

Progressively

over 3 years

Contractual life 7 years n/a n/a 7 years

Number granted during year (thousands) 13,068 1,766 42 207

Weighted average fair value (CHF ) 13 222 238 13

Model used Binomial Market pricea) Monte Carlob) Binomial

Inputs to option pricing model

– Share price at grant date (CHF ) 221 221 247 221

– Exercise price (CHF ) 221 – – 221

– Expected volatility c) 19.1% n/a n/a 19.1%

– Expected dividend yield 7.0% n/a n/a 7.0%

– Early exercise factor d) 1.31 n/a n/a 1.31

– Expected exit rate 9.7% n/a n/a 9.7%

a) The fair value of the Roche RSUs is equivalent to the share price on the date of grant. b) The input parameters were the covariance matrix between Roche and the other individual companies of the peer group based on a three-year histor y and a risk-free interest rate

of minus 0.800%. The valuation takes into account the defined rank and per formance structure which determines the pay-out of the plan. c) Volatility was determined primarily by reference to historically obser ved prices of the underlying equity. Risk-free interest rates are derived from zero coupon swap rates at

the grant date taken from Datastream. d) 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 obser ved behaviour.

28. Earnings per share and non-voting equity security

Basic earnings per share and non-voting equity security

2018 2017

Net income attributable to Roche shareholders (CHF millions) 10,500 8,633

Number of shares (millions) 22 160 160

Number of non-voting equity securities (millions) 22 703 703

Weighted average number of own shares and non-voting equity securities held (millions) (9) (10)

Weighted average number of shares and non-voting equity securities in issue (millions) 854 853

Basic earnings per share and non-voting equity security (CHF) 12.29 10.12

Roche Finance Repor t 2018 | 107

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Diluted earnings per share and non-voting equity security

2018 2017

Net income attributable to Roche shareholders (CHF millions) 10,500 8,633

Increase in non-controlling interests’ share of Group net income, assuming all outstanding Chugai stock

options exercised (CHF millions) (1) (1)

Net income used to calculate diluted earnings per share (CHF millions) 10,499 8,632

Weighted average number of shares and non-voting equity securities in issue (millions) 854 853

Adjustment for assumed exercise of equity compensation plans, where dilutive (millions) 6 7

Weighted average number of shares and non-voting equity securities in issue used to calculate diluted earnings per share (millions) 860 860

Diluted earnings per share and non-voting equity security (CHF) 12.21 10.04

29. Statement of cash f lows

Cash flows from operating activities

Cash flows from operating activities arise from the Group’s primary activities in the Pharmaceuticals and Diagnostics Divisions. These are calculated using 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 statement of cash flows. Operating cash flows also include income taxes paid on all activities.

Cash generated from operations in millions of CHF

2018 2017

Net income 10,865 8,825

Add back non-operating (income) expense

– Financing costs 4 770 839

– Other financial (income) expense 4 (149) (84)

– Income taxes 5 3,283 3,423

Operating profit 14,769 13,003

Depreciation of property, plant and equipment 8 2,292 2,196

Amortisation of intangible assets 10 1,294 1,691

Impairment of goodwill 9 2,254 1,058

Impairment of intangible assets 10 1,082 2,460

Impairment (reversal) of property, plant and equipment 8 141 233

Operating (income) expense for defined benefit plans 26 518 511

Operating expense for equity-settled equity compensation plans 27 508 495

Net (income) expense for provisions 20 1,104 270

Bad debt (reversal) expense 47 12

Inventory write-downs 751 663

Net (gain) loss on disposal of products (335) (410)

Other adjustments (1) 74

Cash generated from operations 24,424 22,256

108 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

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

2018 2017

Interest received 23 28

Dividends received 1 2

Total 24 30

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.

Dividends paid in millions of CHF

2018 2017

Dividends to Roche Group shareholders (7,094) (6,998)

Dividends to non-controlling shareholders – Chugai (120) (102)

Dividends to non-controlling shareholders – Other (16) (19)

Dividend withholding tax (23) (21)

Total (7,253) (7,140)

Liabilities arising from financing activities

Movements in carrying value of recognised assets (liabilities) in millions of CHF

At

1 Januar y

Cash flows Non-cash changes

At 31 December

Outflow (Inflow)

Financing costs

Business combinations

Fair value and other

Foreign exchange

rates

2018 Debt 21 (18,960) 122 (11) 0 2 77 (18,770)

Interest payable 19 (218) 593 (594) 0 (2) 0 (221)

Derivative financial instruments, net 16, 19, 30 (22) 21 0 0 (14) 0 (15)

Cash collateral receivables (payables), net 16, 19, 30 39 (33) 0 0 0 0 6

Total (19,161) 703 (605) 0 (14) 77 (19,000)

2017 Debt 21 (22,355) 3,209 (97) (1) 28 256 (18,960)

Interest payable 19 (289) 648 (585) 0 3 5 (218)

Derivative financial instruments, net 16, 19, 30 (262) 17 10 0 213 0 (22)

Cash collateral receivables (payables), net 16, 19, 30 302 (252) 0 0 1 (12) 39

Total (22,604) 3,622 (672) (1) 245 249 (19,161)

Significant non-cash transactions

In 2018 there were no significant non-cash transactions (2017: none).

Roche Finance Repor t 2018 | 109

Notes to the Roche Group Consolidated Financial Statements | Roche Group

30. 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 Group level, risk management is an integral part of the long-term forecasting and controlling processes. Material risks are monitored and regularly discussed with the Corporate Executive Committee and the Audit Committee of the Board of Directors.

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 and 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, types 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 and Chugai.

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.

The Group considers a financial asset to be in default when the counterparty is unlikely to pay its obligations to the Group in full. In assessing whether a counterparty is in default, the Group considers both qualitative and quantitative indicators (e.g. overdue status) that are based on data developed internally and for certain financial assets are also obtained from external sources. A major part of the Group’s receivables which are past due more than 90 days relate to public customers. Risk of default of public customers is considered low. The Group has reasonable and supportable information to demonstrate that a more lagging default criterion is more appropriate for this particular customer segment.

Accounts receivable. At 31 December 2018 the Group has trade receivables of CHF 10.7 billion (2017: CHF 10.4 billion). 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 trade receivables management is to maximise the collection of unpaid amounts.

The Group uses an allowance matrix to estimate the allowance for doubtful accounts for all trade receivables. The expected credit loss (‘ECL’) rate is based on the Group’s historical experience and the Group’s expectation of economic conditions over the period until receivables are expected to be paid.

110 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Customer credit risk exposure based on accounts receivable days overdue (IFRS 9) in millions of CHF

Total Current Overdue

1–3 months Overdue

3–12 months

Overdue more than

1 year Credit

impaired

At 31 December 2018 Gross carrying amount 10,316 8,374 950 429 510 53

Group’s expected credit loss rate 5% 0% 2% 8% 80% 100%

Allowance for doubtful accounts (540) (23) (19) (36) (409) (53)

Ageing of accounts receivable that are not impaired (IAS 39) in millions of CHF

At 31 December 2017 Neither overdue nor impaired 8,629

Overdue under 1 month 203

Overdue 1–3 months 283

Overdue 3–6 months 251

Overdue 6–12 months 211

Overdue more than 1 year 0

Total accounts receivable 9,577

At 31 December 2018 the Group’s combined trade receivables balance with three US national wholesale distributors, McKesson Corp., AmerisourceBergen Corp. and Cardinal Health, Inc., was equivalent to CHF 2.7 billion representing 25% of the Group’s consolidated trade receivables (2017: CHF 2.4 billion representing 23%). There is no other 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. The Group obtains credit insurance and similar enhancements when appropriate to protect the collection of trade receivables. At 31 December 2018 no collateral was held for trade receivables (2017: none).

Since 2010 there have been financial difficulties in Southern European countries, notably Spain, Italy, Greece and Portugal. The Group is a leading supplier to the healthcare sectors in these countries and has trade receivables of CHF 0.8 billion (2017: CHF 0.9 billion) with the public and private customers in these countries. The Group uses different measures to improve collections in these countries, including intense communication with customers, factoring, negotiations of payment plans, charging of interest for late payments, and legal actions.

The nature and geographic location of counterparties to accounts receivable that are not overdue or impaired are shown in the table below. These include the balances with US national wholesalers and Southern Europe public customers described above.

Accounts receivable (not overdue), net of allowances for doubtful accounts and other allowances:

nature and geographical location of counterparties in millions of CHF

2018 2017

Regions Total Public

Whole- salers/

distributors Private Total Public

Whole- salers/

distributors Private

Switzerland 47 19 8 20 36 15 8 13

Europe 1,445 646 355 444 1,629 693 326 610

North America 3,255 74 3,161 20 3,092 56 2,295 741

Latin America 591 144 278 169 586 84 202 300

Japan 1,285 5 1,263 17 1,267 – 1,262 5

Asia, Australia and Oceania 1,129 144 766 219 1,192 60 491 641

Rest of the World 599 10 427 162 827 165 259 403

Total 8,351 1,042 6,258 1,051 8,629 1,073 4,843 2,713

Cash and marketable securities (excluding equity securities). At 31 December 2018 the Group has cash and marketable securities (excluding equity securities) of CHF 13.1 billion (2017: CHF 12.0 billion). 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.

Roche Finance Repor t 2018 | 111

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Cash and cash equivalents are held with banks and financial institutions, which are predominantly rated as investment grade (97% and 96% in 2018 and 2017, respectively), based on Moody’s and Standard & Poor’s ratings. Cash and short-term time deposits are subject to rules which limit the Group’s exposure to individual financial institutions.

Impairment on cash and cash equivalents is measured on a 12-month expected credit losses (‘ECL’) basis with a reference to external credit ratings of the counterparties, and reflect the short maturities of the exposures. The Group considers that its cash and cash equivalents have low credit risk based on these external credit ratings.

Investments in marketable securities (excluding equity 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 and with counterparties that have a credit rating of at least Baa3 from Moody’s and BBB- from Standard & Poor’s.

The credit risk of the counterparties with external ratings below investment grade or non-rated is closely monitored and reviewed on an individual basis.

Rating analysis of cash and marketable securities (excluding equity securities) – market values in millions of CHF

2018 (IFRS 9) 2017 (IAS 39)

Total

Fair value through OCI

(12-month ECL)

Amor tised costs

(12-month ECL) Total

Available- for-sale

Loans and receivables

A A A range 1,637 1,439 198 1,924 1,745 179

A A range 1,822 283 1,539 1,845 1,414 431

A range 8,687 2,042 6,645 7,249 3,563 3,686

BBB range 764 481 283 797 546 251

Total investment grade 12,910 4,245 8,665 11,815 7,268 4,547 Below BBB range (below investment grade) 93 0 93 112 0 112

Unrated 106 0 106 60 0 60

Total gross carrying amounts 13,109 4,245 8,864 11,987 7,268 4,719

Loss allowance 1) 1 0 1 0 0 0

1) The loss allowance related to fair value through OCI does not af fect the carr ying amount of marketable securities (excluding equity securities) but is booked against corresponding OCI reser ve instead.

Debt securities at amortised cost and those at fair value through OCI are investment grade and therefore considered to be low risk, and thus the impairment allowance is determined at 12-month expected credit losses (‘ECL’) with a reference to external credit ratings of the counterparties. There were no debt securities for which the Group observed a significant increase in the credit risk which would require the application of the lifetime expected credit losses impairment model. There was no material impact resulting from the revised impairment approach under IFRS 9. In addition, there were no material movements in the loss allowance in 2018.

Master netting agreements. The Group enters into derivative transactions and collateral agreements under International Swaps and Derivatives Association (ISDA) master netting agreements with the respective counterparties in order to mitigate counterparty risk. Under such agreements the amounts owed by each counterparty on a single day in respect of all transactions outstanding in the same currency are aggregated into a single net amount that is payable by one party to the other. The ISDA agreements do not meet the criteria for offsetting in the balance sheet as the Group does not have a currently enforceable right to offset recognised amounts, because the right to offset is only enforceable on the occurrence of future events, such as a default or other credit events.

Contract terms. At 31 December 2018 there are no significant financial assets whose terms have been renegotiated (2017: none).

Impairment losses. During 2018 total impairment losses for all financial assets excluding equity investments /securities (IFRS 9) amounted to CHF 1 million. During 2017 total impairment losses for available-for-sale assets (IAS 39) amounted to CHF 17 million.

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. Roche 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. At 31 December 2018 the Group has unused committed credit lines with various financial institutions totalling CHF 7.7 billion (2017: CHF 7.6 billion), of which CHF 7.4 billion serve as a back-stop line for the commercial paper program.

112 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

The remaining undiscounted cash flow contractual maturities of financial liabilities, including estimated interest payments, are shown in the table below.

Contractual maturities of financial liabilities in millions of CHF

Carr ying

value Total Less than

1 year 1–2

years 2–5

years Over

5 years

At 31 December 2018 Debt 21

– Bonds and notes 18,041 22,689 2,469 1,068 6,402 12,750

– Other debt 729 729 726 1 2 0

Contingent consideration 20 511 564 183 23 262 96

Accounts payable 17 3,526 3,526 3,526 – – –

Derivative financial instruments 19 153 153 64 11 78 0

Total financial liabilities 22,960 27,661 6,968 1,103 6,744 12,846

At 31 December 2017 Debt 21

– Bonds and notes 17,986 22,743 2,661 2,422 5,461 12,199

– Other debt 974 974 970 1 3 0

Contingent consideration 20 591 650 185 109 278 78

Accounts payable 17 3,454 3,454 3,454 – – –

Derivative financial instruments 19 119 119 93 10 15 1

Total financial liabilities 23,124 27,940 7,363 2,542 5,757 12,278

Take-or-pay commitments. The Group has entered into contract manufacturing agreements with various companies to further develop manufacturing capacity and flexibility, mainly in the Pharmaceuticals Division. There are future minimum take-or-pay commitments within some of these agreements with a total potential commitment from the Group of CHF 1.4 billion at 31 December 2018 (2017: CHF 1.9 billion).

Market risk

Market risk arises from changing market prices, mainly foreign exchange rates and interest rates, of the Group’s financial assets or financial liabilities which affect the Group’s financial result and equity.

Value-at-Risk. The Group uses Value-at-Risk ( VaR) to measure the impact of market risk on its financial instruments. VaR 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. VaR is calculated using a historical simulation approach and for each scenario, all financial instruments are fully valued and the total change in value and earnings is determined. 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.

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

Market risk of financial instruments in millions of CHF

2018 2017

VaR – Interest rate component 312 306

VaR – Foreign exchange component 17 24

VaR – Other price component 32 38

Diversification (40) (43)

VaR – Total market risk 321 325

The interest rate component remained largely stable. The foreign exchange component decreased due to a favourable exposure mix. The other price component arises mainly from movements in equity security prices and decreased due to lower volatility in held assets.

Roche Finance Repor t 2018 | 113

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Foreign exchange risk

The Group uses the Swiss franc as its reporting currency and as a result is exposed to movements in foreign currencies, mainly the US dollar, Japanese yen and euro. The Group’s foreign exchange risk management strategy 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 uses forward contracts, foreign exchange options and cross-currency swaps to hedge transaction exposures. Application of these instruments intends to continuously immunise against unfavourable developments of foreign exchange rates.

Interest rate risk

The Group mainly raises debt on a fixed rate basis for bonds and notes. The Group is exposed to movements in interest rates, mainly for its US dollar, Swiss franc and euro floating rate financial instruments and short-term debt. The Group’s interest rate risk management strategy is to optimise the net interest result. The Group may use forward contracts, options and interest rate swaps to hedge its interest rate exposures. Depending on the interest rate environment of major currencies, the Group will use these instruments to generate an appropriate mix of fixed and floating rate exposures.

Other price risk

Other price risk arises mainly from movements in the prices of equity securities. 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.

Capital management

The Group defines the capital that it manages as the Group’s total capitalisation, being the sum of debt plus 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.

The capitalisation is reported to senior management as part of the Group’s regular internal management reporting and is shown in the table below.

Capital in millions of CHF

2018 2017 2016

Capital and reserves attributable to Roche shareholders 22 27,622 26,441 23,911

Equity attributable to non-controlling interests 24 2,744 2,566 2,491

Total equity 30,366 29,007 26,402

Total debt 21 18,770 18,960 22,355

Capitalisation 49,136 47,967 48,757

The Group’s net equity was significantly impacted by the 2009 Genentech transaction (see Note 22).

The Group is not subject to regulatory capital adequacy requirements as known in the financial services industry. The Group has a majority shareholding in Chugai (see Note 23). Chugai is a public company and its objectives, policies and processes for managing its own capital are determined by Chugai management.

114 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Financial instrument accounting classifications and fair values

The fair values of financial assets and liabilities, together with the carrying value shown in the consolidated balance sheet are as follows:

Carrying value and fair value of financial instruments – 2018 (IFRS 9) in millions of CHF

Financial instruments mandatorily at fair value

through profit or loss

Financial instruments at fair value

through OCI

Fair value – hedging

instruments

Financial assets at

amor tised cost

Other financial liabilities

Total carr ying

value Fair value

At 31 December 2018 (IFRS 9) Other non-current assets 15

– Equity investments 458 102 – – – 560 560

– Other financial non-current assets – – – 134 – 134 134

Accounts receivable 12 – – – 9,776 – 9,776 9,776

Marketable securities 13

– Equity securities 9 – – – – 9 9

– Debt securities – 1,047 – – – 1,047 1,047

– Money market instruments – 3,198 – – – 3,198 3,198

– Time accounts over three months – – – 2,183 – 2,183 2,183

Cash and cash equivalents 14 – – – 6,681 – 6,681 6,681

Other current assets 16

– Derivative financial instruments – – 138 – – 138 138

– Other financial current assets – – – 941 – 941 941

Total financial assets 467 4,347 138 19,715 – 24,667 24,667

Debt 21

– Bonds and notes – – – – (18,041) (18,041) (18,721)

– Other debt – – – – (729) (729) (729)

Contingent consideration 20 (511) – – – – (511) (511)

Accounts payable 17 – – – – (3,526) (3,526) (3,526)

Derivative financial instruments 19 – – (153) – – (153) (153)

Total financial liabilities (511) – (153) – (22,296) (22,960) (23,640)

Carrying value and fair value of financial instruments – 2017 (IAS 39) in millions of CHF

Available- for-sale

Fair value – hedging

instruments Fair value – designated

Loans and receivables

Other financial liabilities

Total carr ying

value Fair value

At 31 December 2017 (IAS 39) Other non-current assets 15

– Available-for-sale investments 546 – – – – 546 546

– Other financial non-current assets – – – 139 – 139 139

Accounts receivable 12 – – – 9,577 – 9,577 9,577

Marketable securities 13 7,278 – – – – 7,278 7,278

Cash and cash equivalents 14 – – – 4,719 – 4,719 4,719

Other current assets 16

– Derivative financial instruments – 97 – – – 97 97

– Other financial current assets – – – 896 – 896 896

Total financial assets 7,824 97 – 15,331 – 23,252 23,252

Debt 21

– Bonds and notes – – – – (17,986) (17,986) (19,166)

– Other debt – – – – (974) (974) (974)

Contingent consideration 20 – – (591) – – (591) (591)

Accounts payable 17 – – – – (3,454) (3,454) (3,454)

Derivative financial instruments 19 – (119) – – – (119) (119)

Total financial liabilities – (119) (591) – (22,414) (23,124) (24,304)

Roche Finance Repor t 2018 | 115

Notes to the Roche Group Consolidated Financial Statements | Roche Group

The fair value of bonds and notes is Level 1 and 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.

Fair value hierarchy

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows: • Level 1 – quoted prices (unadjusted) in active markets for identical assets and liabilities. • Level 2 – observable inputs other than quoted prices in active markets for identical assets and liabilities. • Level 3 – unobservable inputs.

Fair value hierarchy of financial instruments in millions of CHF

Level 1 Level 2 Level 3 Total

At 31 December 2018 (IFRS 9) Marketable securities 13

– Equity securities at fair value through profit or loss 9 – – 9

– Debt securities at fair value through OCI 976 71 – 1,047

– Money market instruments at fair value through OCI – 3,198 – 3,198

Derivative financial instruments 16 – 138 – 138

Equity investments at fair value through OCI 15 – 102 – 102

Equity investments at fair value through profit or loss 15 248 210 – 458

Financial assets recognised at fair value 1,233 3,719 – 4,952

Derivative financial instruments 19 – (153) – (153)

Contingent consideration 20 – – (511) (511)

Financial liabilities recognised at fair value – (153) (511) (664)

At 31 December 2017 (IAS 39) Marketable securities 13

– Equity securities 10 – – 10

– Debt securities 1,118 43 – 1,161

– Money market instruments and time accounts over three months 50 6,057 – 6,107

Derivative financial instruments 16 – 97 – 97

Available-for-sale investments – held at fair value 15 121 173 – 294

Financial assets recognised at fair value 1,299 6,370 – 7,669

Derivative financial instruments 19 – (119) – (119)

Contingent consideration 20 – – (591) (591)

Financial liabilities recognised at fair value – (119) (591) (710)

The fair value hierarchy has been adjusted to reflect the presentational changes required as a result from implementing IFRS 9 ‘Financial Instruments’ as described in Note 33.

Level 1 financial assets consist of treasury bills, bonds and quoted shares. Level 2 financial assets consist primarily of commercial paper, certificates of deposit and derivative financial instruments.

The Group determines Level 2 fair values using the following valuation techniques: • Marketable securities and derivative financial instruments are based on valuation models that use observable market data for interest rates, yield curves, foreign exchange rates and implied volatilities for similar instruments at the measurement date.

• Equity investments at fair value through OCI and at fair value through profit or loss (previously available-for-sale investments) are based on a valuation model that uses the most recently published observable market data.

The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the transfer has occurred. There were no significant transfers between Level 1 and Level 2 and vice versa during the year (2017: none).

Time accounts over three months are accounted for at amortised cost under IFRS 9 and as a result are no longer included in the fair value hierarchy analysis for 2018 (they were accounted for as available-for-sale under IAS 39 and therefore were included in the fair value hierarchy in 2017).

116 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Level 3 fair values

Details of the determination of Level 3 fair value measurements are set out below.

Contingent consideration arrangements in millions of CHF

2018 2017

At 1 January (591) (1,089)

Arising from business combinations 6 0 (10)

Utilised for settlements 6 14 146

Total unrealised gains and losses included in the income statement

– Unused amounts reversed – recorded within general and administration 130 366

– Additional amount created – recorded within general and administration (51) (13)

– Discount unwind included in financing costs (15) (14)

Total gains and losses included in other comprehensive income

– Currency translation effects 2 23

At 31 December (511) (591)

During 2018 contingent consideration provisions decreased mainly due to the reversal of some of the provisions and to the payment of milestones. There was CHF 79 million of income, net, mainly from the reversal of the remaining provision related to the Trophos acquisition in 2015. Payments of CHF 14 million were made during 2018 for milestones related to the Dutalys and other acquisitions.

Contingent consideration arrangements

The Group is party to certain contingent consideration arrangements arising from business combinations. The fair values are determined considering the expected payments, discounted to present value using a risk-adjusted average discount rate of 3.6% (2017: 3.1%). The expected payments are determined by considering the possible scenarios of forecast sales and other performance criteria, the amount to be paid under each scenario, and the probability of each scenario. The significant unobservable inputs are the forecast sales, other performance criteria and the risk-adjusted discount rate. The estimated fair value would increase if the forecast sales or other performance criteria rates were higher or the risk-adjusted discount rate was lower. At 31 December 2018 the total potential payments under contingent consideration arrangements could be up to CHF 1.0 billion (2017: CHF 1.4 billion) as follows:

Potential payments under contingent consideration arrangements in millions of CHF

Acquisition Year acquired Operating segment 2018 2017

Dutalys 2014 Roche Pharmaceuticals 246 254

Santaris 2014 Roche Pharmaceuticals 156 148

Trophos 2015 Roche Pharmaceuticals 0 409

GeneWeave 2015 Diagnostics 167 166

Genia 2014 Diagnostics 165 164

Ariosa 2015 Diagnostics 148 147

Others Various Diagnostics 127 135

At 31 December 1,009 1,423

Roche Finance Repor t 2018 | 117

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Derivative financial instruments

The Group has entered into various currency swaps for certain non-US dollar debt instruments. Cash collateral agreements were entered into with the counterparties to the currency swaps to mitigate counterparty risk. The following table sets out the carrying value of derivative financial instruments and the amounts that are subject to master netting agreements.

Derivative financial instruments in millions of CHF

Assets Liabilities 2018 2017 2016 2018 2017 2016

Foreign currency derivatives

– Forward exchange contracts 131 92 162 (64) (92) (219)

– Cross-currency swaps 0 0 0 (67) (9) (220)

– Other 0 0 0 0 0 0

Interest rate derivatives

– Swaps 7 5 23 (22) (18) (8)

– Other 0 0 0 0 0 0

Other derivatives 0 0 0 0 0 0

Carrying value of derivative financial instruments 16, 19 138 97 185 (153) (119) (447) Derivatives subject to master netting agreements (63) (70) (72) 63 70 72

Collateral arrangements (33) 25 13 39 14 289

Net amount 42 52 126 (51) (35) (86)

Collateral arrangements

On 17 November 2017 the Group completed a tender offer to repurchase EUR 176 million of the 6.5% fixed rate notes due 4 March 2021. As a result a hedge was terminated and cash was received by the Group from a counterparty.

Movements in cash collateral other receivable (accrued liability) in millions of CHF

2018 2017

At 1 January 39 302

Net cash delivered by (to) the Group (33) (252)

Fair value and other 0 1

Currency translation effects 0 (12)

At 31 December 6 39

Hedge accounting

Upon transition to IFRS 9 (see Note 33) the Group elected not to restate comparative information. As a result certain information required by IFRS 9 is provided for 2018 only.

As described above the Group’s risk management strategy is to hedge the transaction exposures arising through foreign currency flows or monetary positions held in foreign currencies as well as to generate an appropriate mix of fixed and floating rate exposures. The level of hedging depends on market conditions and business requirements of the Group. The Group designates annually a specific interest rate risk management objective to ensure that a predetermined range of its interest rate risk exposure is at a floating rate.

Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments at each reporting date to ensure that an economic relationship exists between the hedged item and hedging instrument. The Group performs a qualitative assessment of the hedge effectiveness using a critical terms match method. As the critical terms of the hedged items and the hedging instruments match, the Group concludes that risks being hedged for the hedged items and the hedging instruments are sufficiently aligned, that there is no inherent mismatch in the hedging relationship and that a 100% hedge ratio applies both for the actual quantities hedged and for the hedge accounting.

118 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Accounting treatment, sources of ineffectiveness and prospective effectiveness assessment method by risk category

Accounting treatment Potential sources of inef fectiveness Prospective ef fectiveness assessment method

Interest rate and foreign exchange rate fluctuations Cash flow hedge Counterparty credit risk Critical terms match

Foreign exchange rate fluctuations Cash flow hedge Lower volume of hedged items/

counterparty credit risk

Critical terms match

Interest rate fluctuations Fair value hedge Counterparty credit risk Critical terms match

The ineffective portion of the hedge accounting is recognised in the income statement and included in other financial income (expense). It is measured using the hypothetical derivative method for cash flow hedges and the cumulative dollar offset method for fair value hedges. At 31 December 2018 none of the above potential sources of ineffectiveness, individually or collectively, resulted in material amounts of actual ineffectiveness being reported for any hedge accounting relationships.

The table below shows fair values and nominal amounts of derivative financial instruments, including a range of the timing of the nominal amount of the hedging instruments, which are designated as hedging instruments in a cash flow hedge and a fair value hedge. At 31 December 2018 the Group has the following cash flow hedges and fair value hedges which are designated in a qualifying hedge relationship:

Fair values and nominal amounts of derivatives used for hedge accounting – at 31 December 2018

Nominal amount Fair value asset

in million CHF Fair value liability

in million CHF Maturity range

Cash flow hedges Risk hedged: Interest rate and foreign exchange

rate fluctuations

– Cross-currency swaps EUR 850 million fixed into USD 0 (67) 2021

Risk hedged: Foreign exchange rate fluctuations

– Forward exchange contracts JPY 224 billion 13 (12) 2019–2020

Total 13 (79)

Fair value hedges Risk hedged: Interest rate fluctuations

– Interest rate swaps USD 3,305 million 1 (22) 2019–2022

– Interest rate swaps EUR 100 million 1 0 2021

– Interest rate swaps CHF 250 million 5 0 2022

Total 7 (22)

The fair values of derivative financial instruments used for hedge accounting are included in other current assets (see Note 16) or other current liabilities (see Note 19). The Group’s approach to managing market risk, including interest rate risk and foreign currency risk, is discussed in the ‘Market risk ’ section in this Note.

Cash flow hedges. The Group has entered into cross-currency swaps to hedge foreign exchange and interest rate risk on some of the bonds and notes issued by the Group which are denominated in euro. At 31 December 2018 such instruments are recorded as a net fair value liability of CHF 67 million (2017: CHF 9 million). There was no ineffective portion.

Chugai has entered into forward exchange contracts to hedge a part of its foreign translation exposure to Swiss franc and US dollar. At 31 December 2018 such instruments are recorded as fair value assets of CHF 13 million and as fair value liabilities of CHF 12 million (2017: fair value assets of CHF 4 million). There was no ineffective portion.

Carrying amount of items designated as hedged items in a cash flow hedging relationship in millions of CHF

2018 Assets Liabilities

Bonds and notes Risk hedged by cross-currency swaps: Interest rate and foreign exchange rate fluctuations

– Bonds and notes – 956

Inventories Risk hedged by forward exchange contracts: Foreign exchange rate fluctuations

– Inventories 2,001 –

Roche Finance Repor t 2018 | 119

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Hedging reserve for continuing hedging relationships in millions of CHF

2018

Total

Cross- currency

swaps

For ward exchange contracts

At 1 January 61 60 1

Gains (losses) taken to equity (61) (59) (2)

Transferred to income statement a) 42 42 0

Income taxes 4 4 0

Non-controlling interests 1 0 1

Currency translation effects 0 0 0

At 31 December 47 47 0

a) The entire amount transferred to the income statement was repor ted in other financial income (expense).

In 2018 there are no hedging relationships for which hedge accounting is no longer applied. The changes in the hedging reserve within equity are shown in Note 22.

The expected undiscounted cash flows from qualifying cash flow hedges, including interest payments during the duration of the derivative contract and final settlement on maturity, are shown in the table below.

Expected cash flows of qualifying cash flow hedges in millions of CHF

2018 2017

Total Less than

1 year More than

1 year Total Less than

1 year More than

1 year

Cash inflows 3,136 1,581 1,555 3,005 1,488 1,517

Cash outflows (3,281) (1,588) (1,693) (3,111) (1,493) (1,618)

Total cash inflow (outflow) (145) (7) (138) (106) (5) (101)

The undiscounted cash flows in the table above will affect profit or loss as shown below. These include interest payments during the duration of the derivative contract but do not include the final settlement on maturity.

Expected cash flows of qualifying cash flow hedges with impact on profit or loss in millions of CHF

2018 2017

Total Less than

1 year More than

1 year Total Less than

1 year More than

1 year

Cash inflows 188 63 125 258 64 194

Cash outflows (225) (75) (150) (297) (74) (223)

Total cash inflow (outflow) (37) (12) (25) (39) (10) (29)

Fair value hedges. The Group has entered into some interest rate swaps to hedge its exposure to changes in the fair value of some of its fixed-term debt instruments in respect of a benchmark interest rate. At 31 December 2018 such instruments are recorded as fair value liabilities of CHF 22 million (2017: CHF 18 million) and fair value assets of CHF 7 million (2017: CHF 5 million). During 2018 fair value adjustments of CHF 2 million were recorded on these interest rate swaps (2017: CHF 28 million). As the fair value hedge had been highly effective since inception, the result of the interest rate swaps was largely offset by changes in the fair value of the hedged debt instruments. The Group’s approach to managing market risk, including interest rate risk, is discussed in the ‘Market risk ’ section in this Note.

Carrying amount of items designated as hedged items in a fair value hedging relationship in millions of CHF

2018

Liabilities

Fair value adjustments

cumulative

Fair value adjustments

in current year

Bonds and notes Risk hedged by interest rate swaps: Interest rate fluctuations

– Bonds and notes 3,569 (15) (2)

Net investment hedges. The Group does not have any net investment hedges.

120 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

31. 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.

At 31 December 2018 and 2017, based on information supplied to the Group, a shareholder group with pooled voting rights owned 72,018,000 shares, which represented 45.01% of the issued shares. This group consisted of Ms Vera Michalski-Hoffmann, Ms Maja Hoffmann, Mr André Hoffmann, Dr Andreas Oeri, Ms Sabine Duschmalé-Oeri, Ms Catherine Oeri, Dr Jörg Duschmalé, Mr Lukas Duschmalé and the charitable foundation Wolf. The shareholder pooling agreement has existed since 1948. The figures above do not include any shares without pooled voting rights that are held outside this group by individual members of the group. Ms Maja Oeri, formerly a member of the pool, now holds 8,091,900 shares representing 5.057% of the voting rights independently of the pool.

Mr André Hoffmann and Dr Andreas Oeri are members of the Board of Directors of Roche Holding Ltd. Mr Hoffmann received remuneration totalling CHF 439,123 (2017: CHF 439,392) and Dr Oeri received remuneration totalling CHF 360,000 (2017: CHF 360,000).

There were no other transactions between the Group and the individual members of the above shareholder group with the exception of Dr Jörg Duschmalé, who worked as a post-doc at Roche until the end of September 2018.

Subsidiaries and associates

A listing of the Group subsidiaries and associates is included in Note 32. This listing excludes Chugai’s subsidiaries as well as not material companies, notably companies that are inactive, dormant or in liquidation. 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.

Key management personnel

Total remuneration of key management personnel was CHF 51 million (2017: CHF 53 million).

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. Dr Franz and members of the Corporate Executive Committee (CEC) 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 the members of the CEC. The members of the CEC also participate in certain equity compensation plans as described below. The terms, vesting conditions and fair value of these awards are disclosed in Note 27. New members of the CEC are included in the table below for the full calendar year in which they joined the CEC. Similarly, members of the CEC retiring partway through the year are included for the full calendar year in which they left the CEC.

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

2018 2017

Salaries, including cash-settled bonus 22 24

Bonus Stock Awards 6 6

Social security costs 2 2

Pensions and other post-employment benefits 4 4

Equity compensation plans 13 12

Board fees 3 4

Other employee benefits 1 1

Total 51 53

For the purposes of these remuneration disclosures the values for equity compensation plans, including the Bonus Stock Awards, are calculated based on the fair value used in Note 27. These represent the cost to the Group of such awards at grant date and reflect, amongst other matters, the observed exercise behaviour and exit rate for the whole population that receive the awards and initial simulations of any performance conditions.

Roche Finance Repor t 2018 | 121

Notes to the Roche Group Consolidated Financial Statements | Roche Group

The detailed disclosures regarding executive remuneration that are required by Swiss law are included in the Remuneration Report included in the Annual Report on pages 120 to 146. In those disclosures the values for equity compensation plans, including the Bonus Stock Awards, represent the fair value that the employee receives taking into account the preliminary assessment of any completed performance conditions. These fair values are shown in the table below, which reconciles those disclosures required by Swiss law to the above related party disclosures for key management personnel.

Reconciliation to executive remuneration disclosures required by Swiss law in millions of CHF

2018 2017

Total remuneration of the members of the Board of Directors and Corporate Executive Committee

(IFRS basis – see table above) 51 53

Deduct

– Bonus Stock Awards (IFRS basis) (6) (6)

– Equity compensation plans (IFRS basis) (13) (12)

Add back

– Bonus Stock Awards (Swiss legal basis) 4 3

– Equity compensation plans (Swiss legal basis) 15 14

Total remuneration of the members of the Board of Directors and Corporate Executive Committee (Swiss legal basis) 51 52

Of which (including social security costs)

– Board of Directors (page 134 of the Annual Report) 10 10

– Corporate Executive Committee (page 142 of the Annual Report) 41 42

Bonus Stock Awards. The Chairman of the Board of Directors and the Chief Executive Officer will be granted Bonus Stock Awards in lieu of their cash-settled bonus for the financial year 2018. These are subject to approval by the 2019 Annual General Meeting in March 2019 and will be issued in March 2019. The number of awards and fair value per award will be calculated at the grant date.

Equity compensation plans. The members of the Corporate Executive Committee received equity compensation as shown in the following tables.

Number of rights, options and awards granted to members of the Corporate Executive Committee

2018 2017

Roche Stock-settled Stock Appreciation Rights 278,433 248,961

Roche Restricted Stock Unit Plan 0 0

Roche Performance Share Plan 32,535 33,682

Contributions paid for members of the Corporate Executive Committee in millions of CHF

2018 2017

Roche Connect 0.3 0.3

Transactions with former members of the Board of Directors and Corporate Executive Committee. Pensions totalling CHF 2 million were paid by the Group to former Corporate Executive Committee members (2017: CHF 2 million).

Defined benefit plans

Transactions between the Group and the various defined benefit plans for the employees of the Group are described in Note 26.

122 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

32. List of subsidiaries and associates

The following is a listing of the Group subsidiaries and associates. It excludes Chugai’s subsidiaries as well as not material companies, notably companies that are inactive, dormant or in liquidation.

Listed companies

Countr y Company City Share capital

(in millions) Equity interest

(in %)

Switzerland Roche Holding Ltd Basel CHF 160.0 Stock Exchange: SIX Swiss Exchange Zurich Stock code (Share): RO, Valor: 1203211 Stock code (Genussschein): ROG, Valor: 1203204 ISIN Share: CH0012032113 ISIN Genussschein: CH0012032048 Market capitalisation: CHF 207,328 million

Japan Chugai Pharmaceutical Co., Ltd. Tokyo JPY 335.2 61.3 Stock Exchange: Tokyo Stock code: TSE:4519 ISIN: JP3519400000 Market capitalisation: JPY 3,491,305 million

United States Senseonics Holdings, Inc. Germantown USD 0.1 16.0 Stock Exchange: New York Stock Exchange (NYSE-MK T ) Stock code: SENS ISIN: US81727U1051 Market capitalisation: USD 458 million

Non-listed companies

Countr y Company City Share capital

(in millions) Equity interest

(in %)

Algeria Roche Algérie SPA Hydra DZD 1.0 48 Argentina Productos Roche S.A. Química e Industrial Tigre ARS 2,841.6 100

Roche Diabetes Care Argentina S.A. Tigre ARS 87.4 100 Australia Roche Diabetes Care Australia Pty Limited Bella Vista AUD 14.1 100

Roche Diagnostics Australia Pty. Limited North Ryde AUD 5.0 100 Roche Products Pty. Limited Dee Why AUD 65.0 100

Austria mySugr GmbH Vienna EUR 5.7 100 Roche Austria GmbH Vienna EUR 14.5 100 Roche Diabetes Care Austria GmbH Vienna EUR (–) 100 Roche Diagnostics GmbH Vienna EUR 1.1 100

Bangladesh Roche Bangladesh Limited Dhaka BDT 27.2 100 Belarus FLLC "Roche Products Limited" Minsk USD 1.5 100 Belgium N.V. Roche S.A. Brussels EUR 32.0 100

Roche Diagnostics Belgium NV Brussels EUR 3.8 100 Bermuda Chemical Manufacturing and Trading Company Limited Hamilton USD (–) 100

Hoffmann-La Roche Products Limited Hamilton USD (–) 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 (–) 100 Roche International Ltd. Hamilton USD (–) 100 Roche Intertrade Limited Hamilton USD 10.0 100 Roche Operations Ltd. Hamilton USD (–) 100 Roche Services Holdings Ltd. Hamilton USD (–) 100 Sapac Corporation Ltd. Hamilton CAD (–) 100 Syntex Pharmaceuticals International Limited Hamilton USD (–) 100

Bolivia Roche Bolivia SRL. Santa Cruz BOB 0.1 100 Bosnia and Herzegovina Roche d.o.o. farmaceutsko drustvo – Roche Ltd. Pharmaceutical Company Sarajevo BAM 13.1 100 Brazil Produtos Roche Químicos e Farmacêuticos S.A. São Paulo BRL 41.7 100

Roche Diabetes Care Brasil Ltda. São Paulo BRL 44.4 100 Roche Diagnostica Brasil Ltda. São Paulo BRL 415.9 100

Bulgaria Roche Bulgaria EOOD Sofia BGN 5.1 100 Cameroon Roche Cameroun SARL Douala X AF 60.0 100 Canada Hoffmann-La Roche Limited Mississauga CAD 40.3 100 Chile Roche Chile Limitada Santiago de Chile CLP 70.9 100

Roche Finance Repor t 2018 | 123

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Countr y Company City Share capital

(in millions) Equity interest

(in %)

China Roche (China) Holding Ltd. Shanghai USD 37.3 100 Roche (Shanghai) Pharmaceuticals Consulting Co., Ltd Shanghai CNY 30.0 100 Roche (Shanghai) Pharmaceuticals Trading Co., Ltd. Shanghai USD 25.0 100 Roche Diagnostics (Hong Kong) Limited Hong Kong HKD 10.0 100 Roche Diagnostics (Shanghai) Ltd. Shanghai USD 31.0 100 Roche Diagnostics (Suzhou) Limited Suzhou USD 100.0 100 Roche Hong Kong Limited Hong Kong HKD 10.0 100 Roche R&D Center (China) Ltd. Shanghai USD 35.8 100 Shanghai Roche Pharmaceuticals Limited Shanghai USD 278.7 70

Colombia Productos Roche S.A. Bogotá COP 26,923.7 100 Costa Rica Roche Services Americas, Sociedad de Responsabilidad Limitada San Jose CRC 5.8 100

Roche Servicios S.A. Heredia USD 8.1 100 Côte d’Ivoire Roche Côte d’Ivoire SARL Abidjan XOF 50.0 100 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, Medicinalvarer og Kemikalier Hvidovre DKK 4.0 100

Roche Diagnostics a/s Hvidovre DKK 1.3 100 Roche Innovation Center Copenhagen A /S Hoersholm DKK 100.1 100

Dominican Republic Productos Roche Dominicana, S.R.L. Santo Domingo DOP 0.6 100 Ecuador Roche Ecuador S.A. Quito USD 28.1 100 Egypt Roche Egypt for Manufacturing and Trading SAE Cairo EGP 1.0 100

Roche Egypt LLC Cairo EGP 0.1 95 RoDiagnostics Egypt for Trading S.A.E Giza EGP 5.0 100

El Salvador Productos Roche (El Salvador) S.A. de C.V. Antiguo Cuscatlan SVC 0.2 100 Estonia Roche Eesti OÜ Tallinn EUR 0.1 100 Finland Roche Diagnostics Oy Espoo EUR 0.2 100

Roche Oy Espoo EUR (–) 100 France Institut Roche SAS Boulogne-Billancourt EUR (–) 100

Roche Diabetes Care France SAS Meylan EUR 4.5 100 Roche Diagnostics France SAS Meylan EUR 16.0 100 Roche SAS Boulogne-Billancourt EUR 38.2 100 Trophos SA Marseille EUR 1.9 100

Georgia Roche Georgia LLC Tbilisi GEL 0.5 100 Germany Ascur Versicherungsvermittlungs GmbH Grenzach-Wyhlen EUR (–) 100

FMI Germany GmbH Penzberg EUR (–) 100 Galenus Mannheim Pharma GmbH Mannheim EUR (–) 100 Roche Beteiligungs GmbH Grenzach-Wyhlen EUR 3.6 100 Roche Deutschland Holding GmbH Grenzach-Wyhlen EUR 6.0 100 Roche Diabetes Care Deutschland GmbH Mannheim EUR (–) 100 Roche Diabetes Care GmbH Mannheim EUR (–) 100 Roche Diagnostics Deutschland GmbH Mannheim EUR 1.0 100 Roche Diagnostics GmbH Mannheim EUR 94.6 100 Roche mtm laboratories AG Mannheim EUR 1.4 100 Roche Pharma AG Grenzach-Wyhlen EUR 61.4 100 Roche Privacy GmbH Grenzach-Wyhlen EUR (–) 100 Roche PV T GmbH Waiblingen EUR (–) 100 Roche Real Estate Services Mannheim GmbH Mannheim EUR 1.8 100 Roche Registration GmbH Grenzach-Wyhlen EUR (–) 100 Signature Diagnostics GmbH Potsdam EUR 0.1 100

Ghana Roche Products Ghana Limited Accra GHS 1.2 100 Greece Roche (Hellas) S.A. Athens EUR 80.1 100

Roche Diagnostics (Hellas) S.A. Athens EUR 27.8 100 Guatemala Productos Roche Guatemala (Sociedad Anónima) 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 Diabetes Care India Private Limited Mumbai INR 15.2 100

Roche Diagnostics India Private Limited Mumbai INR 149.2 100 Roche Products (India) Private Limited Mumbai INR 14.0 100 Viewics India Private Limited Pune INR (–) 100

Indonesia P.T. Roche Indonesia Jakarta IDR 1,323.0 98.6 Iran Roche Pars Co. (Ltd.) Tehran IRR 41,610.0 100 Ireland Roche Ireland Limited Clarecastle EUR 2.4 100

Roche Products (Ireland) Limited Dublin EUR (–) 100 Israel Medingo Ltd. Yoqneam Illit ILS 8.0 100

Roche Pharmaceuticals (Israel) Ltd. Hod Hasharon ILS (–) 100

124 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Countr y Company City Share capital

(in millions) Equity interest

(in %)

Italy Roche Diabetes Care Italy S.p.A. Monza EUR 40.2 100 Roche Diagnostics S.p.A. Monza EUR 18.1 100 Roche S.p.A. Monza EUR 34.1 100

Japan Roche DC Japan K. K. Tokyo JPY 10.0 100 Roche Diagnostics K.K. Tokyo JPY 2,500.0 100

Jordan F. Hoffmann-La Roche Ltd / Jordan P.S.C. Amman JOD (–) 100 Kazakhstan Roche Kazakhstan LLP Almaty K ZT 150.0 100 Kenya Roche Kenya Limited Nairobi KES 40.0 100 Latvia Roche Latvija SIA Riga EUR 1.7 100 Lebanon Roche Lebanon S.A.R.L. Beirut LBP 1,000.0 100 Lithuania UAB Roche Lietuva Vilnius EUR 0.2 100 Macedonia Roche Makedonija DOOEL Skopje EUR 0.3 100 Malaysia Roche (Malaysia) Sdn. Bhd. Kuala Lumpur MYR 4.0 100

Roche Diagnostics (Malaysia) Sdn. Bhd. Petaling Jaya MYR 0.9 100 Roche Services (Asia Pacific) Sdn. Bhd. Kuala Lumpur MYR 0.5 100

Mauritius Roche Products (Mauritius) Ltd Quatre Bornes MUR 4.0 100 Mexico Productos Roche, S.A. de C.V. Mexico City MXN 82.6 100

Roche DC México, S.A. de C.V. Mexico City MXN 3.9 100 Roche Servicios de México, S.A. de C.V. Mexico City MXN 3.5 100

Morocco Roche S.A. Casablanca MAD 59.5 100 Myanmar Roche Myanmar Company Limited Yangon USD (–) 100 Netherlands Roche Diabetes Care Nederland B.V. Almere EUR (–) 100

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 0.9 100 Nigeria Roche Products Limited Lagos NGN 200.0 100 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 (Panama), S.A. Panama City PAB (–) 100

Productos Roche Interamericana S.A. (PRISA) Panama City USD 0.1 100 Peru Productos Roche Química Farmacéutica S.A. Lima PEN 11.1 100

Roche Farma (Peru) S.A. Lima PEN 38.1 100 Philippines Roche (Philippines) Inc. Taguig City PHP 300.0 100 Poland Roche Diabetes Care Polska sp. z o.o. Warsaw PLN 2.0 100

Roche Diagnostics Polska Sp. z o.o. Warsaw PLN 8.0 100 Roche Polska Sp. z o.o. Warsaw PLN 25.0 100

Portugal Roche Farmacêutica Química, Lda. Amadora EUR 1.1 100 Roche Sistemas de Diagnósticos, Sociedade Unipessoal, Lda. Amadora EUR 2.6 100

Puerto Rico Genentech P.R., Inc. San Juan USD (–) 100 Roche Products Inc. Ponce USD 0.5 100 Syntex Puerto Rico, Inc. Ponce USD (–) 100

Romania Roche Romania S.R.L. Bucharest RON 472.2 100 Russian Federation Limited Liability Company Roche Diabetes Care Rus Moscow RUB 100.0 100

Limited Liability Company Roche Diagnostics Rus Moscow RUB 250.0 100 Roche - Moscow Ltd. Moscow RUB 2.6 100

Saudi Arabia Roche Products Saudi Arabia LLC Jeddah SAR 30.0 100 Serbia Roche d.o.o. Beograd Belgrade EUR 9.6 100 Singapore Roche Diabetes Care Asia Pacific Pte. Ltd. Singapore SGD 0.6 100

Roche Diagnostics Asia Pacific Pte. Ltd. Singapore SGD 20.4 100 Roche Singapore Pte. Ltd. Singapore SGD 4.0 100 Roche Singapore Technical Operations, Pte. Ltd. Singapore USD 35.0 100

Slovakia Roche Slovensko, S.R.O. Bratislava EUR 0.3 100 Slovenia Roche farmacevtska družba, d.o.o. Ljubljana EUR 0.2 100

Roche Finance Repor t 2018 | 125

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Countr y Company City Share capital

(in millions) Equity interest

(in %)

South Africa Kapa Biosystems (Pty) Ltd Cape Town ZAR (–) 100 Roche Diabetes Care South Africa Proprietary Limited Midrand ZAR 15.0 100 Roche Diagnostics Proprietary Limited Midrand ZAR (–) 100 Roche Products (Proprietary) Limited Illovo 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 Roche Diabetes Care Spain, S.L. Sant Cugat del Vallès EUR 1.0 100 Roche Diagnostics S.L. Sant Cugat del Vallès EUR 17.0 100 Roche Farma, S.A. Madrid EUR 45.0 100

Sweden Roche AB Solna SEK 20.0 100 Roche Diagnostics Scandinavia AB Solna SEK 9.0 100

Switzerland Biopharm AG Basel CHF 0.3 100 F. Hoffmann-La Roche Ltd Basel CHF 150.0 100 Hoffmann - La Roche Ltd Basel CHF 0.5 100 InterMune International AG Basel CHF 10.0 100 Museum Tinguely AG Basel CHF 0.1 100 Phaor AG Basel CHF 0.2 100 Rabbit-Air Ltd Bachenbülach CHF 3.0 100 Roche Capital Market Ltd Basel CHF 1.0 100 Roche Chemische Unternehmungen AG Basel CHF 1.3 100 Roche Diabetes Care (Switzerland) Ltd Rotkreuz CHF 0.1 100 Roche Diagnostics (Switzerland) Ltd Rotkreuz CHF 1.0 100 Roche Diagnostics International Ltd Rotkreuz CHF 20.0 100 Roche Finance Ltd Basel CHF 409.2 100 Roche Forum Buonas Ltd Buonas CHF 0.1 100 Roche Glycart Ltd Schlieren CHF 0.3 100 Roche Long Term Foundation Basel CHF 0.5 100 Roche Pharma (Switzerland) Ltd Reinach CHF 2.0 100 Syntex Pharm AG Rotkreuz CHF 0.5 100 Tavero AG Basel CHF 0.1 100

Taiwan Roche Diagnostics Ltd. Taipei T WD 339.5 100 Roche Products Ltd. Taipei T WD 1,000.0 100

Thailand Roche Diagnostics ( Thailand) Limited Bangkok THB 103.0 100 Roche Thailand Limited Bangkok THB 12.0 100

Tunisia Roche Tunisie SA Tunis TND 0.8 100 Turkey Infogenetik Moleküler Bilgi Hizmetleri Anonim Şirketi Istanbul TRY 3.5 100

Roche Diagnostics Turkey Anonim Şirketi Istanbul TRY 80.0 100 Roche Müstahzarlari Sanayi Anonim Şirketi Istanbul TRY 249.5 100

Ukraine Roche Ukraine LLC Kiev UAH 124.0 100 United Arab Emirates Roche Diabetes Care Middle East FZCO Dubai AED 0.5 100

Roche Diagnostics Middle East FZCO Dubai AED 19.0 100 Roche Pharmaceuticals Middle East FZCO Dubai AED 0.5 100

United Kingdom InterMune Holdings Limited Welwyn Garden City GBP (–) 100 Roche Diabetes Care Limited Burgess Hill GBP 0.4 100 Roche Diagnostics Limited Burgess Hill 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 Tusk Therapeutics Limited Welwyn Garden City GBP (–) 100

126 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Countr y Company City Share capital

(in millions) Equity interest

(in %)

United States Adheron Therapeutics Inc. South San Francisco USD (–) 100 Anadys Pharmaceuticals, Inc. South San Francisco USD (–) 100 Ariosa Diagnostics, Inc. San Jose USD (–) 100 Bina Technologies, Inc. Belmont USD (–) 100 BioVeris Corporation Indianapolis USD (–) 100 Flatiron Health, Inc. New York USD (–) 100 ForSight VISION4, Inc. South San Francisco USD (–) 100 Foundation Medicine Securities Corporation Cambridge USD (–) 100 Foundation Medicine, Inc. Cambridge USD (–) 100 Genentech USA, Inc. South San Francisco USD (–) 100 Genentech, Inc. South San Francisco USD (–) 100 GeneWEAVE Biosciences, Inc. Los Gatos USD (–) 100 Hoffmann-La Roche Inc. Little Falls USD 3.0 100 I5 Surviving Corp. South San Francisco USD (–) 100 IGEN International, Inc. Pleasanton USD (–) 100 IGEN LS LLC Pleasanton USD (–) 100 Ignyta, Inc. San Diego USD (–) 100 InterMune, Inc. South San Francisco USD (–) 100 IQuum, Inc. Marlborough USD (–) 100 Jecure Therapeutics, Inc. San Diego USD (–) 100 Kapa Biosystems, Inc. Wilmington USD (–) 100 Memory Pharmaceuticals Corp. Little Falls USD (–) 100 mySugr Inc. Encinitas USD (–) 100 Roche Diabetes Care, Inc. Indianapolis USD (–) 100 Roche Diagnostics Corporation Indianapolis USD (–) 100 Roche Diagnostics Hematology, Inc. Westborough USD (–) 100 Roche Diagnostics Operations, Inc. Indianapolis USD (–) 100 Roche Health Solutions Inc. Indianapolis USD (–) 100 Roche Holdings, Inc. South San Francisco USD 1.0 100 Roche Laboratories Inc. Little Falls USD (–) 100 Roche Molecular Systems, Inc. Pleasanton USD (–) 100 Roche Palo Alto LLC South San Francisco USD (–) 100 Roche Sequencing Solutions, Inc. Pleasanton USD (–) 100 Roche TCRC, Inc. New York USD (–) 100 Seragon Pharmaceuticals Inc. South San Francisco USD (–) 100 Spring Bioscience Corp. Pleasanton USD (–) 100 Tanox, Inc. South San Francisco USD (–) 100 Tensha Therapeutics, Inc. South San Francisco USD (–) 100 Therapeutic Human Polyclonals, Inc. South San Francisco USD (–) 100 Ventana Medical Systems, Inc. Tucson USD (–) 100 Viewics, Inc. San Jose USD (–) 100

Uruguay Roche International Ltd. (Montevideo Branch) Montevideo UYU (–) 100 Venezuela Productos Roche S.A. Caracas VEF 156.9 100 Vietnam Roche Vietnam Company Limited Ho Chi Minh City USD 15.0 100

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

Roche Finance Repor t 2018 | 127

Notes to the Roche Group Consolidated Financial Statements | Roche Group

33. Significant accounting policies

Consolidation policy

Subsidiaries are all companies over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. 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. Intercompany 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. Associates are companies over which the Group exercises, or has the power to exercise, significant influence, but which it does not control and they are accounted for using the equity method.

Segment reporting

For the purpose of segment reporting the Group’s Corporate Executive Committee (CEC) is considered to be the Group’s Chief Operating Decision Maker. The determination of the Group’s operating segments is based on the organisation units for which information is reported to the CEC on a regular basis. The information provided is used as the basis of the segment revenue and profit disclosures reported in Note 2, with the geographic analysis based on the location of customers. Selected segment balance sheet information is also routinely provided to the CEC.

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

The Annual Financial Statements are presented in Swiss francs. Most Group companies use their local currency as their functional currency. Certain Group companies use other currencies (such as US dollar, Swiss franc or euro) 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 other comprehensive income.

Upon consolidation, assets and liabilities of Group companies using functional currencies other than Swiss francs are translated into Swiss francs using year-end rates of exchange. The income statement and statement of 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 other comprehensive income.

Revenue

Sales. Revenue from the sale of goods supplied (product sales) and services rendered are recoded as ‘Sales’.

Sales are recognised when a promise in a customer contract (performance obligation) has been satisfied by transferring control over the promised goods and services to the customer. Control over a promised good or service refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, those goods or services. Control is usually transferred upon shipment, delivery to, upon receipt of goods by the customer, or as services are rendered, in accordance with the delivery and acceptance terms agreed with the customers. For goods subject to installation, such as instruments sold in the Diagnostics Division, sales are generally recognised upon completion of the installation at the customer’s site and customer acceptance. The amount of sales to be recognised (transaction price) is based on the consideration the Group expects to receive in exchange for its goods and services, excluding amounts collected on behalf of third parties such as value added taxes or other taxes directly linked to sales. If a contract contains more than one performance obligation, the transaction price is allocated to each performance obligation based on their relative stand-alone selling prices.

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Roche Group | Notes to the Roche Group Consolidated Financial Statements

Instruments in the Diagnostics Division may be sold together with other goods such as reagents and other consumables as well as services under a single contract or under several contracts that are combined for revenue recognition purposes. Sales are recognised upon satisfaction of each of the performance obligations in the contract. Instruments are either sold in cash and instalment sales transactions or otherwise made available to customers under finance lease and operating lease transactions. • Finance leases: Arrangements in which the Group transfers substantially all of the risks and rewards of ownership to the customer are treated as finance lease arrangements. Sales from finance leases are recognised at amounts that represent the fair value of the instrument, which approximates the present value of the minimum lease payments under the arrangement. As interest rates embedded in finance lease arrangements are approximately market rates, sales from finance leases are comparable to revenue for outright sales. Finance income for finance lease arrangements longer than twelve months is deferred and subsequently recognised based on a pattern that approximates the use of the effective interest rate method and recorded in royalty and other operating income.

• Operating leases: Sales from operating leases are recognised on a straight-line basis over the lease term or, when lease revenue is entirely variable and subject to subsequent reagent sales, as the performance obligation to deliver reagents is satisfied.

Sales, net of discounts, are based on estimates regarding the related obligations, including their stand-alone selling prices or fair values. It requires judgement to determine when different obligations are satisfied, including whether enforceable purchase commitments for further obligations exist and when they arise.

For contracts with distributors, no sales are recognised when goods are physically transferred to the distributor under a consignment arrangement, or if the distributor acts as an agent. In such cases, sales are recognised when control over the goods transfers to the end-customer, and distributor’s commissions are presented within marketing and distribution. Commissions and similar payments to distributors acting as principals are deducted from sales unless such payments are in exchange for a distinct service.

The consideration received by the Group in exchange for its goods and services may be fixed or variable. Variable consideration is only recognised when it is considered highly probable that a significant revenue reversal will not occur once the underlying uncertainty related to variable consideration is subsequently resolved. The most common elements of variable consideration in the Pharmaceuticals Division are listed below: • Government and regulatory mandatory price reductions. These consist of mandatory price reductions. The major elements are 340B Drug Discount Program, Medicaid and other plans in the US.

• Contractual price reductions. These include rebates and chargebacks that are the result of contractual agreements that are primarily volume-based and performance-based.

• Cash discounts. These include credits offered to wholesalers for remitting payment on their purchases within contractually defined incentive periods.

• Customer returns reserves. These are allowances established for expected product returns.

Revenues from product sales are recorded net of allowances for estimated rebates, chargebacks, cash discounts and estimates of product returns, all of which are established at the time of sale. All product sales allowances are based on estimates of the amounts earned or to be claimed on the related sales. These estimates take into consideration historical experience, current contractual and statutory requirements, specific known market events and trends such as competitive pricing and new product introductions, estimated inventory levels, and the shelf life of products. If actual future results vary, these estimates need to be adjusted, with an effect on sales and earnings in the period of the adjustment. Sales reductions that are expected to be withheld by the customer upon settlement, such as contractual price reductions and cash discounts, are recorded in the balance sheet as a deduction from trade receivables. Sales reductions that are separately payable to customers, governmental health authorities or healthcare regulatory authorities are recorded in the balance sheet as accrued liabilities. Provisions for sales returns are recorded in the balance sheet as other provisions.

The Group recognises a deferred income (contract liability) if consideration has been received (or has become receivable) before the Group transfers the promised goods or services to the customer. Deferred income mainly relates to remaining performance obligations for goods free of charge under certain patient access or similar programmes, reagents and other consumables and services.

Remaining performance obligations in (partially) unsatisfied long-term contracts are either included in deferred income or are related to amounts the Group expects to receive for goods and services that have not yet been transferred to customers under existing, non- cancellable or otherwise enforceable contracts. These are mainly associated with contracts with minimum purchase commitments related to reagents and consumables for previously sold instruments as well as monitoring and maintenance services. For contracts that have an original duration of one year or less, the Group has elected the practical expedient to not disclose the transaction price for remaining performance obligations at the end of each reporting period and at which point in time the Group expects to recognise these sales.

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Notes to the Roche Group Consolidated Financial Statements | Roche Group

Royalty and other operating income. Royalty and other operating income includes royalty income, income from out-licensing agreements and income from disposal of products and other items.

Royalty income earned through a licence is recognised as the underlying sales are recorded by the licensee.

Income from out-licensing agreements typically arises from the receipt of upfront, milestone and other similar payments from third parties for granting a licence to product- or technology-related intellectual property (IP). Out-licensing agreements may be entered into with no further obligation or may include commitments to conduct research, late-stage development, regulatory approval, co-marketing or manufacturing. Licences granted are usually rights to use IP and are generally unique. Therefore the basis of allocating revenue to performance obligations makes use of the residual approach. Upfront payments and other licensing fees are usually recognised upon granting the licence unless some of the income shall be deferred for other performance obligations using the residual approach. Such deferred income is released and recognised as revenue when other performance obligations are satisfied. Milestone payments are typically received upon reaching a specific scientific milestone (development milestone) or upon achieving a certain annual sales milestone (commercial milestone). Development milestone income is recognised at the point in time when it is highly probable that the respective milestone event criteria is achieved, and the risk of revenue reversal is considered remote. Commercial milestone income is accrued and recognised as revenue when it is highly probable that the annual sales milestone is reached during the period.

Payments received for the disposal of product and similar rights are recognised as revenue upon transfer of control over such rights. To the extent that some of these payments relate to other performance obligations, a portion is deferred using the residual approach and recognised as revenue when or as activities such as manufacturing or other services are rendered. Income from profit-sharing arrangements with collaboration partners is recognised as underlying sales and cost of sales are recorded by the collaboration partners. Also included is income from other services rendered which are usually not part of the Group’s primary business activities, to the extent that such revenue is not recorded under ‘Sales’, and is recognised when control transfers and performance obligations are satisfied.

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

Internal research and development activities are expensed as incurred for the following: • Internal research costs incurred for the purpose of gaining new scientific or technical knowledge and understanding. • Internal development costs incurred for the application of research findings or other knowledge to plan and develop new products for commercial production. The development projects undertaken by the Group are subject to technical, regulatory and other uncertainties, such that, in the opinion of management, the criteria for capitalisation as intangible assets are not met prior to obtaining marketing approval by the regulatory authorities in major markets.

• Post-marketing studies after regulatory approval, such as phase IV costs in the pharmaceuticals business, generally involve safety surveillance and ongoing technical support of a drug after it receives marketing approval to be sold. They may be required by regulatory authorities or may be undertaken for safety or commercial reasons. The costs of such post-marketing studies are not capitalised as intangible assets as, in the opinion of management, they do not generate separately identifiable incremental future economic benefits that can be reliably measured.

Acquired in-process research and development resources obtained through in-licensing arrangements, business combinations or separate asset purchases are capitalised as intangible assets. The acquired asset must be controlled by the Group, be separately identifiable and expected to generate future economic benefits, even if uncertainty exists as to whether the research and development will ultimately result in a marketable product. Consequently, upfront and milestone payments to third parties for pharmaceutical products or compounds before regulatory marketing approval are recognised as intangible assets. Assets acquired through such arrangements are measured on the basis set out in the ‘Intangible assets’ policy. Subsequent internal research and development costs incurred post- acquisition are treated in the same way as other internal research and development costs. If research and development are embedded in contracts for strategic alliances, the Group carefully assesses whether upfront or milestone payments constitute funding of research and development work or acquisition of an asset.

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Roche Group | Notes to the Roche Group Consolidated Financial Statements

Employee benefits

Short-term employee benefits include wages, salaries, social security contributions, paid annual leave and sick leave, profit sharing and bonuses, and non-monetary benefits for current employees. The costs are recognised within the operating results when the employee has rendered the associated service. The Group recognises a liability for profit sharing and bonuses where contractually obliged or where there is a past practice that has created a constructive obligation.

Long-term employee benefits include long-service or sabbatical leave, long-service benefits and long-term disability benefits. The expected costs of these benefits are accrued over the period of employment. Any changes in the carrying value of other long-term employee benefit liabilities are recognised within the operating results.

Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. Termination costs are recognised at the earlier of when the Group can no longer withdraw the offer of the benefits or when the Group recognises any related restructuring costs.

Pensions and other post-employment benefits

For defined contribution plans the Group contributions are recognised within the operating results when the employee has rendered the associated service. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available.

For defined benefit plans the liability recognised in the balance sheet is the present value of the defined benefit obligation less the fair value of the plan assets. All changes in the net defined benefit liability are recognised as they occur as follows:

Recognised in the income statement: • Current service cost is charged to the appropriate income statement heading within the operating results. • Past service cost, including curtailment gains or losses, is recognised immediately in general and administration within the operating results.

• Settlement gains or losses are recognised in general and administration within the operating results. • Net interest on the net defined benefit liability is recognised in financing costs.

Recognised in other comprehensive income: • Actuarial gains and losses arising from experience adjustments (the difference between previous assumptions and what has actually occurred) and changes in actuarial assumptions.

• The return on plan assets, excluding amounts included in net interest on the net defined benefit liability. • Any change in the limit on the recognition of plan assets, excluding amounts included in net interest on the net defined benefit liability.

Net interest on the net defined benefit liability is comprised of interest income on plan assets, interest cost on the defined benefit obligation and interest on the effect of the limit on the recognition of pension assets. The net interest is calculated using the same discount rate that is used in calculating the defined benefit obligation, applied to the net defined liability at the start of the period, taking into account any changes from contribution or benefit payments.

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.

Equity compensation plans

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.

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Notes to the Roche Group Consolidated Financial Statements | Roche Group

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. The estimated useful lives of major classes of depreciable assets are as follows:

Land improvements 40 years Buildings 10–50 years Machinery and equipment 4–15 years Diagnostic instruments 3–5 years Office equipment 3–6 years Motor vehicles 5–8 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 lives of the assets are regularly reviewed and, if necessary, the future depreciation charges are accelerated. Repairs and maintenance costs are expensed as incurred.

Leases

Where the Group is the lessee. Finance leases exist when substantially all of the risks and rewards of ownership are transferred to the Group. 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. Finance lease assets are 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. Operating leases exist when substantially all of the risks and rewards of ownership are not transferred to the Group. 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. Certain assets, mainly Diagnostics instruments, are leased to third party customers through both finance and operating lease arrangements. Such transactions may be entered into in separate contracts or in combined contracts including reagents and other consumables and services. • Finance leases: Finance lease assets are reported as receivables at an amount equal to the net investment in the lease. Sales from finance leases are recognised at amounts that represent the fair value of the instrument, which approximates the present value of the minimum lease payments under the arrangement. Finance income for finance lease arrangements longer than twelve months is deferred and subsequently recognised based on a pattern that approximates the use of the effective interest method and recorded in royalty and other operating income.

• Operating leases: Sales from operating leases are recognised on a straight-line basis over the lease term or, when lease revenue is entirely variable and subject to subsequent reagent sales, as the performance obligation for reagents are satisfied.

Sales, net of discounts, are based on estimates regarding the related obligations, including their stand-alone selling prices or fair values. It requires judgement to determine when different obligations are satisfied, including whether enforceable purchase commitments for further obligations exist and when they arise.

Mergers and acquisitions

Business combinations. Business combinations are accounted for using the acquisition method of accounting. At the date of the acquisition the Group initially recognises the fair value of the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquired business. The consideration transferred is measured at fair value at the date of acquisition. Where the Group does not acquire 100% ownership of the acquired business, non-controlling interests are recorded either at fair value or as the proportion of the fair value of the acquired net assets attributable to the non-controlling interest. Directly attributable acquisition-related costs are expensed as incurred within general and administration expenses.

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Roche Group | Notes to the Roche Group Consolidated Financial Statements

Asset acquisitions. Asset acquisitions are acquisitions of legal entities that do not qualify as business combinations. At the date of the acquisition the Group initially recognises the individual identifiable assets acquired and liabilities assumed. The cost representing the cash consideration paid at the date of the acquisition is allocated to the individual identifiable assets and liabilities at the date of the acquisition. Subsequent consideration for performance-related development milestones is recognised as intangible assets when the specific milestones have been achieved. Such transactions do not give rise to goodwill. Directly attributable acquisition-related costs are expensed as incurred within general and administration expenses.

Goodwill

Goodwill arises in a business combination and is the excess of the consideration transferred to acquire the business over the underlying fair value of the net identified assets acquired. Goodwill is not amortised but is tested for impairment at least annually and upon the occurrence of an indication of impairment.

Intangible assets

Purchased patents, licences, trademarks and other intangible assets are initially recorded at cost. Assets that have been acquired through a business combination are initially recorded at fair value. Once available for use, intangible assets are amortised on a straight- line basis over their useful lives. Intangible assets are reviewed for impairment at each reporting date. The estimated useful life is the lower of the legal duration and the economic useful life. The estimated useful lives of intangible assets are regularly reviewed. Estimated useful lives of major classes of amortisable intangible assets are as follows:

Product intangibles in use up to 20 years Marketing intangibles in use up to 10 years Technology intangibles in use up to 14 years

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 of disposal 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 interest rate. When an impairment loss arises, the useful life of the asset is reviewed and, if necessary, the future depreciation/ amortisation charge is accelerated. If the amount of impairment loss subsequently decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, then the previously recognised impairment loss is reversed through the income statement as an impairment reversal.

Impairment of goodwill

Goodwill is assessed for impairment at each reporting date and is additionally tested annually for impairment. Goodwill is allocated to cash-generating units and when the recoverable amount of the cash-generating unit, being the higher of its fair value less costs of disposal 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. When an acquired business that is included within a cash- generating unit permanently ceases to operate then it is treated as a disposal of that business. For separately identifiable goodwill that was generated on the initial acquisition of that business and where all of the factors that made up that goodwill are entirely unrelated to the continuing operations of the cash-generating unit, then the goodwill is deemed to have been disposed of and is fully impaired. The impairment testing methodology is further described in Note 9.

Inventories

Inventories are stated at the lower of cost and net realisable value. The cost of finished goods, work in process and intermediates 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.

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Notes to the Roche Group Consolidated Financial Statements | Roche Group

Receivables, including accounts receivable

Policy applicable from 1 January 2018. Receivables are carried at the original invoice amount less allowances made for doubtful accounts, trade discounts, cash discounts, volume rebates and similar allowances. A receivable represents a right to consideration that is unconditional and excludes contract assets. An allowance for doubtful accounts is recorded for expected credit losses over the term of the receivables. These estimates are based on specific indicators, such as the ageing of customer balances, specific credit circumstances and the Group’s historical loss rates for each category of customers, and adjusted for forward-looking macroeconomic data. Expenses for doubtful trade receivables are recognised within marketing and distribution expenses. 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.

Receivables are written off (either partly or in full) when there is no reasonable expectation of recovery. Where receivables have been written off, the Group continues to engage in enforcement activities to attempt to recover the receivable due. Where recoveries are made, these are recognised in profit or loss.

For trade and lease receivables, the Group applies the simplified approach prescribed by IFRS 9, which requires/permits the use of the lifetime expected loss provision from initial recognition of the receivables. The Group measures an allowance for doubtful accounts equal to the credit losses expected over the lifetime of the trade and lease receivables.

Policy applicable before 1 January 2018. Receivables 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 where there is objective evidence that the Group will not be able to collect all amounts due. These estimates are based on specific indicators, such as the ageing of customer balances, specific credit circumstances and the Group’s historical experience, taking also into account economic conditions. Expenses for doubtful trade receivables are recognised within marketing and distribution expenses. 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.

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 equivalents if they are readily convertible to known amounts of cash, are subject to insignificant risk of changes in their fair value and have a maturity of three months or less from the date of acquisition.

Provisions and contingencies

Provisions are recognised where a legal or constructive obligation has been incurred which will probably lead to an outflow of resources that can be reliably estimated. In particular, restructuring provisions are recognised when the Group has a detailed formal plan that has either commenced implementation or has been announced. Provisions are recorded for the estimated ultimate liability that is expected to arise and are discounted when the time value of money is 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 price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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.

Financial instruments

Policy applicable from 1 January 2018. From 1 January 2018 the Group classifies its financial instruments in the following measurement categories which are disclosed in Note 30: amortised cost; fair value through OCI; fair value through OCI – equity investments; or fair value through profit or loss (including hedging instruments).

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Roche Group | Notes to the Roche Group Consolidated Financial Statements

The classification depends on the Group’s business model for managing the financial assets and the contractual terms of the cash flows. The Group reclassifies debt securities and financial assets at amortised cost when and only when its business model for managing those assets changes.

At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss.

Amortised cost. Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost, less provision for impairment. A gain or loss on a debt security that is subsequently measured at amortised cost and is not part of a hedging relationship is recognised in profit or loss when the asset is derecognised or impaired. Interest income from these financial assets is included in other financial income using the effective interest rate method. Assets at amortised cost are mainly comprised of accounts receivable, cash and cash equivalents and time accounts over three months.

Fair value through other comprehensive income (fair value through OCI). These are financial assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest. Those are initially recorded and subsequently carried at fair value. Changes in the fair value are recorded in other comprehensive income, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss. Interest income from these financial assets is included in other financial income using the effective interest rate method. Fair value through other comprehensive income assets are mainly comprised of money market instruments and debt securities.

Equity investments at fair value through other comprehensive income (fair value through OCI). These are equity investments in private biotechnology companies, which are kept as part of the Group’s strategic alliance efforts. These assets are subsequently measured at fair value. Dividends are recognised as other financial income in profit or loss unless the dividend clearly represents a recovery of part of the cost of the investment. Other net gains and losses are recognised in OCI and included in the fair value reserve. When such an asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified within equity from the fair value reserve to retained earnings and never to profit or loss.

Fair value through profit or loss. These are financial assets whose performance is evaluated on a fair value basis. A gain or loss on a financial asset that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognised in profit or loss and presented within other financial income (expense) in the period in which it arises. Fair value through profit or loss assets are mainly comprised of equity investments/securities. Contingent consideration liabilities are initially recorded and subsequently carried at fair value with changes in fair value recorded in general and administration within the operating results of the income statement.

Fair value through profit or loss – hedging instruments. These are derivative financial instruments that are used to manage the exposures to foreign currency, interest rate, equity market and credit risks. These instruments are initially recorded and subsequently carried at fair value. Apart from those derivatives designated as qualifying cash flow hedging instruments, all changes in fair value are recorded as other financial income (expense).

Policy applicable before 1 January 2018. Financial instruments were classified into the following categories which are disclosed in Note 30: available-for-sale; fair value – hedging instruments; fair value – designated; loans and receivables.

Available-for-sale. These are non-derivative financial assets that are either designated as such or are not classified in any other financial asset category. Available-for-sale assets are initially recorded and subsequently carried at fair value. Changes in fair value are recorded in other comprehensive income, except for impairments and interest and foreign exchange components. When an investment is derecognised, the cumulative gains and losses in equity are reclassified to other financial income (expense). Available-for-sale assets are mainly comprised of marketable securities.

Fair value – hedging instruments. These are derivative financial instruments that are used to manage the exposures to foreign currency, interest rate, equity market and credit risks. Derivative financial instruments are initially recorded and subsequently carried at fair value. Apart from those derivatives designated as qualifying cash flow hedging instruments, all changes in fair value are recorded as other financial income (expense).

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Notes to the Roche Group Consolidated Financial Statements | Roche Group

Fair value – designated. These are non-derivative financial instruments that are designated as fair value through profit or loss on initial recognition. Designated fair value instruments are initially recorded and subsequently carried at fair value with changes in fair value recorded in the income statement. Designated fair value instruments are mainly comprised of contingent consideration liabilities with changes in fair value recorded in general and administration within the operating results.

Loans and receivables. These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are initially recorded at fair value and subsequently carried at amortised cost using the effective interest rate method, less any impairment losses. Loans and receivables are mainly comprised of accounts receivable and cash and cash equivalents.

No change in policies on 1 January 2018 for the following items:

Other financial liabilities. These are non-derivative financial liabilities. Other financial liabilities are initially recorded at fair value, less transaction costs, and subsequently carried at amortised cost using the effective interest rate method. Other financial liabilities are mainly comprised of debt and trade payables.

Debt. 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.

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. A financial liability is derecognised when the contractual obligations are discharged, cancelled or expire.

Impairment of financial assets

Policy applicable from 1 January 2018. The Group recognises loss allowances for expected credit losses (‘ECL’) for financial assets measured at amortised cost and debt securities measured at fair value through OCI.

For trade and lease receivables the Group measures the allowance for doubtful accounts at an amount equal to lifetime ECL.

For debt securities carried at fair value through OCI and debt securities and other financial assets at amortised cost, which are determined to have low credit risk based on external credit ratings of the counterparties, the Group measures loss allowances at an amount equal to 12-month ECL. The Group considers debt securities to have low credit risk when their credit risk rating is equivalent to the globally understood definition of ‘investment grade’. The Group considers this to be at least Baa3 from Moody’s and BBB- from Standard & Poor’s. When the credit risk of debt securities carried at fair value through OCI and debt securities and other financial assets at amortised cost has increased significantly since their initial recognition, the Group measures loss allowances at an amount equal to lifetime ECL. The Group assumes that the credit risk of such instruments have increased significantly if they are more than 30 days past due.

Financial assets are written off (either partially or in full) when there is no realistic prospect of recovery. This is generally the case when the Group determines that the customer does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. However, financial assets that are written off are still subject to enforcement activities in order to comply with the Group’s policy for recovery of amounts due.

Policy applicable before 1 January 2018. Financial assets are individually assessed for possible impairment at each reporting 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. Available-for-sale equity securities that have a market value of more than 25% below their original cost, or have a market value below their original cost for a sustained six-month period will be considered as impaired.

For financial assets carried at amortised cost, any impairment charge is the difference between the carrying value and the recoverable amount, calculated 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 other comprehensive income for the difference between the original cost and the fair value.

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Roche Group | Notes to the Roche Group Consolidated Financial Statements

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 as available-for-sale, the reversal is recognised directly in other comprehensive income.

Hedge accounting

The Group uses derivatives to manage its exposures to foreign currency, interest rate, equity market and credit risks. The instruments used may include interest rate swaps, cross-currency swaps, forwards contracts and options. The Group generally limits the use of hedge accounting to certain significant transactions. To qualify for hedge accounting, the hedging relationship must meet several strict conditions on eligibility of hedging and hedged instruments, formal designation and documentation, as well as hedge effectiveness and reliability of measurement. 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 other financial income (expense).

Cash flow hedge. This is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction and could affect profit or loss. The hedging instrument is recorded at fair value. The effective portion of the hedge is included in other comprehensive income and any ineffective portion is reported in other financial income (expense). 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 item, the cumulative changes in the fair value of the hedging instrument that have been recorded in other comprehensive income are included in the initial carrying value of the non-financial item at the date of recognition. For all other cash flow hedges, the cumulative changes in the fair value of the hedging instrument that have been recorded in other comprehensive income are included in other financial income (expense) when the forecasted transaction affects net income.

Fair value hedge. This is a hedge of the exposure to changes in fair value of a recognised asset or liability, or an unrecognised firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect profit or loss. 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. Changes in the fair values are reported in other financial income (expense).

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. Where the amount of tax liabilities is uncertain, accruals are recorded within income tax liabilities for management’s best estimate of the ultimate liability that is expected to arise based on the specific circumstances and the Group’s historical experience.

Deferred tax assets and liabilities are recognised on temporary differences between the tax bases of assets and liabilities and their carrying values. Deferred tax assets 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 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 taxes are determined based on the currently enacted tax rates applicable in each tax jurisdiction where the Group operates.

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 are held for the Group’s potential conversion obligations that may arise from the Group’s equity compensation plans.

Roche Finance Repor t 2018 | 137

Notes to the Roche Group Consolidated Financial Statements | Roche Group

Changes in accounting policies

In 2018 the Group implemented the following new standards, including any consequential amendments to other standards, with a date of initial application of 1 January 2018. • IFRS 9 ‘Financial Instruments’ • IFRS 15 ‘Revenue from Contracts with Customers’ • ‘Definition of a Business’ (Amendments to IFRS 3)

The Group has also implemented various other minor amendments to existing standards and interpretations, which have no material impact on the Group’s overall results and financial position.

None of the new standards, revised standards, amended standards or interpretations have a material impact on the Group’s overall results and financial position. The nature and the effects of the changes most relevant to the Group’s financial statements are given below.

IFRS 9 ‘Financial Instruments’

Effective 1 January 2018 the Group has implemented IFRS 9 ‘Financial Instruments’. The new standard replaces IAS 39 ‘Financial Instruments: Recognition and Measurement’. The standard deals with the classification, recognition and measurement (including impairment) of financial instruments and also introduces a new hedge accounting model. The new standard results in an increased volume of disclosure information in the Annual Financial Statements.

Classification and measurement of financial instruments. Previously all marketable securities were classified as available-for-sale under IAS 39. Under the new standard, equity securities are classified as fair value through profit or loss, debt securities and money market instruments as fair value through other comprehensive income (OCI) and time accounts over three months as amortised cost. The Group elected to classify certain strategic equity investments as fair value through OCI. When such strategic equity investments are sold, the cumulative amount included in the fair value reserve is transferred to retained earnings.

Impairment of financial assets. On 1 January 2018 the Group changed the methodology of assessing impairment of its financial assets from the incurred loss model (used in IAS 39) to the expected credit loss model (used in IFRS 9). In accordance with the transitional provisions of IFRS 9, the Group has not restated prior periods but it has reassessed the impairment allowances under the new approach as of 1 January 2018.

Hedge accounting. The new standard also introduces a new hedge accounting model which requires hedge accounting relationships to be based upon the Group’s own risk management strategy and objectives and to be discontinued only when the relationships no longer qualify for hedge accounting. The Group has applied the revised hedge accounting guidance to its hedging relationships prospectively with effect from 1 January 2018. All hedge accounting relationships designated under the previous IAS 39 guidance have continued to be valid hedge accounting relationships in accordance with IFRS 9.

Transition approach. The Group has applied the exemption from full retrospective application for the classification and measurement requirements, including impairment, meaning that the comparative 2017 results have not been restated. Differences in the carrying amounts of financial assets and reclassification adjustments from the adoption of IFRS 9 are recognised in retained earnings and reserves as at 1 January 2018. Accordingly, the information presented for 2017 does not generally reflect the requirements of IFRS 9 but rather those of IAS 39.

Presentational changes. As a result of implementing IFRS 9, the Group has made a number of presentational changes to the statement of comprehensive income, statement of changes in equity, and to Notes 4, 13, 15 and 30.

138 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Impact from the initial application of IFRS 9. The impact from the initial application of IFRS 9 on the Group’s consolidated balance sheet and the Group’s consolidated equity is as follows:

Revised Roche Group consolidated balance sheet (selected items) in millions of CHF

Balance at

1 Januar y 2018 Application

of IFRS 9

Balance at 1 Januar y 2018

(revised)

Accounts receivable 9,577 (6) 9,571

Deferred tax assets 3,576 1 3,577

Total net assets 29,007 (5) 29,002

Capital and reserves attributable to Roche shareholders 26,441 (5) 26,436

Total equity 29,007 (5) 29,002

Revised Roche Group consolidated equity (selected items) in millions of CHF

Balance at

1 Januar y 2018

Application of IFRS 9

(net of tax)

Balance at 1 Januar y 2018

(revised)

Retained earnings 33,266 105 33,371

Fair value reserves 158 (110) 48

Total equity 29,007 (5) 29,002

There was a reclassification within equity of CHF 110 million, net of tax, transferred from fair value reserves to retained earnings on 1 January 2018 which related to unrealised gains for equity instruments/investments due to their reclassification as fair value through profit or loss (previously classified as available-for-sale). In addition, there was a decrease of CHF 5 million, net of tax, in retained earnings due to additional bad debt allowance on trade and lease receivables resulting from applying the expected credit loss model (used in IFRS 9).

The following table reconciles the carrying amounts of financial assets under IAS 39 to the carrying amounts under IFRS 9 on transition to IFRS 9 on 1 January 2018. There were no reclassifications for financial liabilities.

Reclassifications of financial instruments on adoption of IFRS 9 in millions of CHF

Measurement categor y Original (IAS 39)

New (IFRS 9)

Balance at 1 Januar y 2018

Remeasurement from application

of IFRS 9

Balance at 1 Januar y 2018

(revised)

Current financial assets – Accounts receivable Loans and receivables Amortised cost 9,577 (6) 9,571

– Equity securities Available-for-sale Fair value through profit

or loss

10 0 10

– Debt securities Available-for-sale Fair value through OCI 1,161 0 1,161

– Money market instruments Available-for-sale Fair value through OCI 3,019 0 3,019

– Time accounts over three months Available-for-sale Amortised cost 3,088 0 3,088

– Derivative financial instruments Fair value through profit

or loss

Fair value through profit

or loss

97 0 97

– Other financial current assets Loans and receivables Amortised cost 896 0 896

Non-current financial assets – Equity investments at fair value

through OCI

Available-for-sale Fair value through OCI 267 0 267

– Equity investments at fair value

through profit or loss

Available-for-sale Fair value through profit

or loss

279 0 279

– Other financial non-current assets Loans and receivables Amortised cost 139 0 139

Roche Finance Repor t 2018 | 139

Notes to the Roche Group Consolidated Financial Statements | Roche Group

IFRS 15 ‘Revenue from Contracts with Customers’

Effective 1 January 2018 the Group has implemented IFRS 15 ‘Revenue from Contracts with Customers’. The new standard replaces IAS 18 ‘Revenue’ and IAS 11 ‘Construction Contracts’. IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised, and also contains new requirements related to presentation. The core principle in the framework is that revenue should be recognised dependent on the transfer of promised goods or services to the customer for an amount that reflects the consideration which should be received in exchange for those goods or services. The objective of the standard is to provide a five-step approach to revenue recognition that includes identifying contracts with customers, identifying performance obligations, determining transaction prices, allocating transaction prices to performance obligations, and recognising revenue when or as performance obligations are satisfied. Judgement needs to be applied, including making estimates and assumptions, for multiple-element contracts in identifying performance obligations, in constraining estimates of variable consideration and in allocating the transaction price to each performance obligation and to lease components (if any), particularly in the Diagnostics business and for out-licensing agreements. The new standard results in an increased volume of disclosure information in the Annual Financial Statements.

Changes introduced by the standard relevant to the Roche Group. The new standard provides additional requirements and guidance that are relevant to the Group, notably on the following areas: • Revenue from licences of intellectual property, including sales-based royalties, on constraining estimates of variable consideration such as e. g. development milestones, and on providing a material right to receive additional goods free of charge under certain patient access programmes that may be regarded as a separate performance obligation. There is no material impact from these changes.

• The new standard also clarifies how to allocate sales, including the treatment of discounts, to each element in multiple-elements contracts and when to recognise sales for each of those elements. Such contracts are entered into in the Diagnostics Division and typically include obligations for instruments (including those provided under leasing arrangements), reagents and other consumables, and services. It requires the use of estimates and assumptions and some judgement to apply this guidance in practice. There is no material impact from this guidance.

• Out-licensing agreements in the Pharmaceuticals Division may be entered into with no further obligation or may include commitments to conduct research, late-stage development, regulatory approval, co-marketing or manufacturing. These may be settled by a combination of up-front payments, milestone payments, other licensing fees, and reimbursements for services provided. Whether to consider these commitments as a single performance obligation or separate ones, or even being in scope of IFRS 15, is not straightforward and requires some judgement. Depending on the conclusion, this may result in all revenue being calculated at inception and either being recognised at once or spread over the term of a longer performance obligation. The answers under the new standard may be different from those currently used. The new standard provides an exemption for sales-based royalties for licences of intellectual property which will continue to be recognised as revenue as underlying sales are incurred.

Transition approach and use of practical expedients. The Group has applied the full retrospective method for the transition. Certain practical expedients permitted by the standard during the transition have also been used, notably: • the relief to not restate contracts that began and were completed in 2017 or were completed before 1 January 2017; and • the relief to not provide in 2018 the disclosure requirement as per IFRS 15 paragraph 120 for the comparative 2017 period (‘amount of the transaction price allocated to the remaining performance obligations’).

Since the new standard, including the use of practical expedients, has not modified the timing or amounts of revenue recognised for 2017, no restatement has been necessary.

Presentational changes. As a result of implementing IFRS 15, the Group has also made a presentational change to the income statement to include a subtotal ‘Revenue’, and has created a new note for ‘Revenue’ as Note 3.

‘Definition of a Business’ (Amendments to IFRS 3)

In October 2018 the International Accounting Standards Board issued amendments to IFRS 3 ‘Business Combinations’. The amendments further clarify the definition of a business and add an optional ‘concentration test’ to aid the assessment of whether a transaction represents a business combination or is simply in substance the purchase of a single asset or group of similar assets. These amendments are mandatory from 2020 and may be early adopted. The amendments are particularly relevant for many of the acquisitions carried out by the Group, since the value in the acquired companies often largely consists of the rights to a single product or technology. Therefore, effective 1 January 2018, the Group has early implemented these amendments, with prospective application and with no restatement of comparative period information.

140 | Roche Finance Repor t 2018

Roche Group | Notes to the Roche Group Consolidated Financial Statements

Note 6 has been expanded and renamed as ‘Mergers and acquisitions’ to include both transactions accounted for as business combinations and asset acquisitions. Asset acquisitions are acquisitions of legal entities that do not qualify as business combinations under IFRS 3. Cash consideration paid for asset acquisitions at the transaction date and subsequent additional contingent payments made upon the achievement of performance-related development milestones are now presented in the line ‘Asset acquisitions’ as disclosed in Note 6. Subsequent consideration for performance-related development milestones for transactions treated as asset acquisitions is recognised as intangible assets when the specific milestones have been achieved. Previously intangible assets acquired in asset acquisitions were included in the line items ‘Purchase of intangible assets’ in the statement of cash flows and ‘Additions’ in Note 10 ‘Intangible assets’.

Future new and revised standards

The Group is currently assessing the potential impacts of the various new and revised standards and interpretations that will be mandatory from 1 January 2019 which the Group has not yet applied. Based on the analysis to date, the Group does not anticipate that these will have a material impact on the Group’s overall results and financial position except for the effects from the implementation of IFRS 16 ‘Leases’ as summarised below.

IFRS 16 ‘Leases’

The Group will implement the new standard effective 1 January 2019. IFRS 16 will replace existing leases guidance, including IAS 17 ‘Leases’, and sets out the principles for recognition and measurement of leases. The new standard will also result in an increased volume of disclosure information in the Annual Financial Statements.

The main effect on the Group is that IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. It requires a lessee to recognise assets and liabilities for almost all leases, including operating leases. The Group has assessed the potential impact and expects the carrying value of leased assets to increase by approximately CHF 1.2 billion, with lease liabilities expected to increase by a similar amount at the date of implementation. The application of the new standard will result in part of what are currently reported as operating lease costs being recorded as interest expenses. Given the leases involved and the current low interest rate environment, the Group does not currently expect this effect to be material. The Group is currently finalising the exact impact of the new standard.

Transition approach and use of practical expedients. The Group will apply the cumulative catch-up method for the transition. Therefore the cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 January 2019, with no restatement of comparative information. Some practical expedients permitted by the standard will also be used, notably to not reassess upon transition whether an existing contract contains a lease, and the recognition exemptions for short-term leases and leases of low-value assets.

Presentational changes. As a result of implementing IFRS 16, the Group will make a number of presentational changes in 2019, notably to present ‘Right-of-use assets’ as a separate line item in the balance sheet and to include lease liabilities in other current and non- current liabilities. A new note for ‘Leases’ will be created to include the increased volume of required disclosure information.

Roche Finance Repor t 2018 | 141

Repor t of Roche Management on Internal Control over Financial Repor ting | Roche Holding Ltd, Basel

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 2018 based on the criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework 2013 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 over financial reporting was effective as of 31 December 2018.

The Statutory Auditor KPMG AG has audited the consolidated financial statements of Roche Holding Ltd for the year ended 31 December 2018, 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 150 to 151.

Christoph Franz Alan Hippe Chairman of the Board of Directors Chief Financial Officer

Basel, 28 January 2019

142 | Roche Finance Repor t 2018

Roche Group | Statutor y Auditor’s Repor t

Statutory Auditor’s Report To the General Meeting of Roche Holding Ltd, Basel

Report on the Audit of the Consolidated Financial Statements

Opinion

We have audited the consolidated financial statements of Roche Holding Ltd and its subsidiaries (the Group), which comprise the consolidated balance sheet as at 31 December 2018 and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion the consolidated financial statements (pages 40 to 140) give a true and fair view of the consolidated financial position of the Group as at 31 December 2018, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS) and comply with Swiss law.

Basis for Opinion

We conducted our audit in accordance with Swiss law, International Standards on Auditing (ISAs) and Swiss Auditing Standards. Our responsibilities under those provisions and Standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession, as well as the IESBA Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in accordance with those requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Chargebacks, other rebates and sales returns in the US pharmaceuticals business

Carrying value of the InterMune goodwill relating to the Pharmaceuticals Division

Carrying value of product intangible assets

Uncertain tax positions

Acquisition of Flatiron Health, Inc.

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Roche Finance Repor t 2018 | 143

Statutor y Auditor’s Repor t | Roche Group

Chargebacks, other rebates and sales returns in the US pharmaceuticals business

Key Audit Matter Our response

The Group’s pharmaceuticals business makes sales to various customers in the US that fall under certain commercial and government-mandated contracts, purchasing and reimbursement arrangements, of which the most significant are Medicaid and the 340B Drug Discount Program. The Group also provides a right of return to its US customers for certain products, with return periods that in some cases extend several years into the future. These arrangements result in deductions to gross amounts invoiced in arriving at revenue and create obligations for the Group to provide customers with chargebacks or other rebates and to give credit for sales returns. The estimated amounts are deducted from gross sales and recorded as accrued liabilities (rebates) or provisions for sales returns, or as a deduction from accounts receivable (chargebacks). These estimates are based on analyses of existing contractual or legislatively mandated obligations, historical trends and the Group’s experience.

Management has determined accrued liabilities and deductions to accounts receivable for expected chargebacks and other rebates, predominantly Medicaid, of CHF 1,441 million to be necessary at 31 December 2018. Additionally, provisions for sales returns mainly relating to products at or near loss of exclusivity of CHF 455 million were recorded at 31 December 2018.

We focused on this area because the arrangements are complex and because establishing an appropriate year-end position requires significant judgement and estimation by management. The assumptions required for estimating provisions for sales returns are also made more complicated given the recent or impending loss of exclusivity in the US for some of the Group’s pharmaceutical products.

Our audit procedures included, amongst others, on a sample basis, obtaining management’s calculations for accrued liabilities, provisions and accounts receivable deductions, recalculating the amounts and validating the reasonableness of key assumptions used by reference to internal and external sources including the terms of the applicable contracts, US government pricing information, historical chargebacks and other rebates, historical sales returns levels and to current trends.

We considered the accuracy of management’s estimates in previous years by comparing historical accrued liabilities, provisions and accounts receivable deductions recorded to the actual settlements. We also assessed changes in the accrual rates used within the estimates for 2018, including responding to an increase in the utilisation of the 340B Drug Discount Program in 2018, by comparing the accrual rates to current chargeback, other rebate payment and sales return trends.

We considered the adequacy of the Group’s revenue recognition accounting policies, including the recognition and measurement of deductions to gross sales relating to chargebacks, other rebates and sales returns and related disclosures.

For further information on chargebacks, other rebates and sales returns in the US pharmaceuticals business refer to the following:

Page 127 (Significant accounting policies, note 33), page 46 (General accounting principles – Key accounting judgements, estimates and assumptions, note 1) and pages 51, 76 and 79–84 (Financial disclosures, note 3 Revenue, note 12 Accounts receivable, note 19 Other current liabilities and note 20 Provisions and contingent liabilities).

144 | Roche Finance Repor t 2018

Roche Group | Statutor y Auditor’s Repor t

Carrying value of the InterMune goodwill relating to the Pharmaceuticals Division

Key Audit Matter Our response

At 1 January 2018, the Group held goodwill of CHF 4,870 million arising from past acquisitions of the Pharmaceuticals Division, principally Genentech and InterMune together with smaller technology transactions and product transactions. Goodwill is tested annually for impairment and in addition is assessed for impairment at the reporting date.

During the year management undertook a reassessment of the cash-generating units (‘CGUs’) used for allocating goodwill in the Pharmaceuticals Division. Management was required to apply judgement in allocating the goodwill to the appropriate businesses as well as in assessing the future performance and prospects of each CGU. Following on from this reassessment management recorded an impairment in respect of the InterMune goodwill of CHF 2,040 million.

Impairment testing uses projections of future cash flows based on the most recent long-term forecasts approved by management, including estimated sales volumes and pricing. The long-term forecasts are projected over five years.

We focused in particular on InterMune goodwill in light of the amount of judgement and estimation required, and the impairment recorded in the year.

Our audit procedures included, amongst others, assessing the Group’s forecasting procedures and the integrity of the discounted cash flow models which management used to prepare the valuations. We challenged the robustness of the key assumptions used to determine the recoverable amounts, including identification of and allocation to the CGU (including management’s reassessment of the CGUs in the year), forecast cash flows, growth rates and the discount rates based on our understanding of the commercial prospects of the products and the markets in which they are commercialised.

We did this by using our own valuation specialists to assist us in evaluating the assumptions and methodologies used by management, in particular those relating to the discount rates, by comparing relevant assumptions to industry and economic forecasts. In addition, we identified and analysed changes in assumptions from prior periods, made an assessment of the consistency of assumptions, and performed a comparison of assumptions with publicly available data. We also performed a retrospective assessment of the accuracy of management’s past projections by comparing historical forecasts to actual results.

We also assessed whether the Group’s disclosures about the sensitivity of the outcome of the impairment assessment to changes in key assumptions reflect the risks inherent in the valuation of goodwill.

For further information on the carrying value of goodwill relating to the Pharmaceuticals Division refer to the following:

Page 127 (Significant accounting policies, note 33), page 46 (General accounting principles – Key accounting judgements, estimates and assumptions, note 1) and pages 68–71 (Financial disclosures, note 9 Goodwill).

Roche Finance Repor t 2018 | 145

Statutor y Auditor’s Repor t | Roche Group

Carrying value of product intangible assets

Key Audit Matter Our response

The Group has significant product intangible assets (31 December 2018 – CHF 8,956 million) acquired through business combinations or in-licensing arrangements. These comprise product intangibles in use (CHF 5,180 million) being amortised and product intangibles not available for use (CHF 3,776 million) not being amortised. An impairment assessment is carried out for all product intangibles when there is evidence that an asset may be impaired, with intangible assets that are not yet available for use also being tested for impairment annually.

Product intangibles in use (CHF 5,180 million) predominantly relate to acquired products that have been launched, with the key risk being the ability to successfully commercialise the products concerned. The largest single intangible asset arose on the acquisition of InterMune in 2014 and relates to Esbriet (CHF 2,413 million). We focused on this product intangible in use because of the previous impairments recorded, the low level of headroom and because the assessment of recoverability involves the forecasting and discounting of future cash flows, which is inherently judgemental. Key estimates and assumptions include revenue growth, the timing and impact of loss of exclusivity, discount rates and the development and commercialisation of competing products. The drivers of revenue growth include persistence rate, treatment rate and market share.

Product intangibles not available for use (CHF 3,776 million) mostly represent in-process research and development assets. Due to the inherent uncertainties in the research and development processes, intangible assets not available for use are particularly at risk of impairment. The impairment assessment requires management to make key assumptions and judgements on the clinical, technical and commercial viability of the new products. Accordingly, we also focused our audit work on these areas. Risks include an inability to achieve successful trial results, obtain required clinical and/ or regulatory approvals and a highly competitive business environment in the therapeutic areas where the Group has significant assets in research or development.

Our audit procedures included, amongst others, challenging the robustness of the key assumptions used to determine the recoverable amounts, including forecast revenues, useful lives and the discount rates. Our challenge was based on our understanding of the commercial prospects of the individual products, as well as the relevant business areas and markets in which they operate. We used our valuation specialists to assist us in evaluating the assumptions and methodologies used by management in relation to the discount rates. We made our own assessments in relation to key inputs such as projected pricing and volumes, and the products’ projected share of the therapeutic area or in vitro diagnostic market, by comparing relevant assumptions to industry forecasts, reviewing analyst commentaries and by retrospective assessment of the accuracy of previous projections. We compared management’s assumptions with external data where it was available, for example in the case of Esbriet. We performed sensitivity analysis over individual intangible asset impairment models to assess the level of sensitivity to key assumptions so we could focus our work on those areas and assess management’s allowance for risk.

For product intangibles not yet available for use, our audit included assessing the reasonableness of management’s assumptions regarding the probability of obtaining regulatory approval through comparison to industry practice, past history, and consideration of the Group’s internal governance and approval processes. We also interviewed a number of senior research, development and commercial personnel in order to understand and challenge those assumptions.

For further information on the carrying value of product-related intangible assets refer to the following:

Page 127 (Significant accounting policies, note 33), page 46 (General accounting principles – Key accounting judgements, estimates and assumptions, note 1) and pages 72–75 (Financial disclosures, note 10 Intangible assets).

146 | Roche Finance Repor t 2018

Roche Group | Statutor y Auditor’s Repor t

Uncertain tax positions

Key Audit Matter Our response

The Group operates across a wide range of different tax jurisdictions around the world and is thus subject to occasional challenges by local tax authorities in respect of cross-border transfer pricing arrangements for goods and services, financing and transaction-related tax matters in connection with the integration of investments, divestments and licensing contracts. Areas of particular focus include transfer pricing arrangements such as those relating to the Group’s manufacturing and supply chains.

Where the amount of tax liabilities is uncertain, the Group recognises accruals that reflect management’s best estimate of the outcome based on the facts known in the relevant jurisdiction. The Group has open tax and transfer pricing matters with various tax authorities where the range of possible outcomes is broad. At 31 December 2018, the Group has recognised current income tax liabilities of CHF 3,808 million which includes accruals for uncertain tax positions.

We focused on this area as the estimates of the amounts of tax receivable or payable require a significant level of expertise and judgement.

Our audit procedures included, amongst others, obtaining an understanding of uncertain tax positions through inquiry of employees of the tax department and management of affiliates. We reviewed documentation in relation to correspondence with tax authorities to verify whether tax exposures have been considered and provided for where necessary.

For significant items we challenged management’s judgement regarding the eventual resolution with national tax authorities of double taxation conflicts, pending tax audits and estimates of tax exposures with the assistance of our local country tax specialists. For the most significant uncertain tax positions, our work included the consideration of third-party transfer pricing studies and the use, where available, of past experience with the tax authorities in the respective jurisdiction. Additionally we used our own tax specialists’ expertise to assess the appropriateness of the key assumptions made by management and to conclude on a best estimate of the outcome.

Our audit approach included additional audit procedures performed at Group level to consider the more significant uncertain tax positions in particular for transfer prices applied for goods and services and intellectual property rights.

For further information on uncertain tax positions refer to the following:

Page 127 (Significant accounting policies, note 33), page 46 (General accounting principles – Key accounting judgements, estimates and assumptions, note 1) and pages 55–57 (Financial disclosures, note 5 Income taxes).

Roche Finance Repor t 2018 | 147

Statutor y Auditor’s Repor t | Roche Group

Acquisition of Flatiron Health, Inc.

Key Audit Matter Our response

The Group acquired Flatiron Health, Inc. (‘Flatiron Health’) on 5 April 2018 for a total consideration of USD 1,616 million. The consideration was primarily allocated to intangible assets and goodwill of CHF 695 million and CHF 1,128 million, respectively.

The acquisition of Flatiron Health required management to apply judgement in identifying and valuing the intangible assets and in the allocation of goodwill arising from the transaction to the cash-generating units benefitting from the synergies identified.

The key assumptions relating to the valuation of the intangible assets included revenue growth, the discount rate and the competitive environment. In particular, we focused on the valuation of Flatiron Health’s technology platform which required additional consideration relating to the applied obsolescence rate.

The goodwill arising from the transaction was attributed to the Roche Pharmaceuticals cash-generating unit which reflects the benefits to the Group’s oncology research and development activities through the use of Flatiron Health’s real-world evidence.

Our audit procedures in relation to the acquisition of Flatiron Health included, amongst others, an inspection of the legal agreements supporting the transaction. We also examined information contained within due diligence and valuation reports as well as internal management presentations to the Board of Directors.

We challenged the appropriateness of the methodology used by management to value the identified intangible assets and compared the useful economic life of those intangible assets with similar technology platforms based on our understanding of the technology platform and the business areas in which Flatiron Health operates. In addition, we considered an appropriate range of alternative obsolescence rates.

With the support of our own valuation specialists we evaluated key estimates and assumptions used by management in the purchase price allocation. This evaluation focused on the appropriateness of the discount rate applied and key assumptions made regarding the revenue growth and competitive environment. We challenged these assumptions based on our sector expertise with reference to other transactions of a similar nature and by performing sensitivity analysis over key assumptions. Throughout our procedures we held inquiries of management’s external valuers.

We obtained an understanding of how Flatiron Health’s real-world evidence would be used within the Roche business and other expected synergies to justify the level of goodwill recognised on the acquisition and assessed the appropriateness of management’s decision to allocate the goodwill to the Roche Pharmaceuticals cash-generating unit.

We have also assessed whether the Group’s disclosures in relation to the acquisition meet the requirements of the relevant accounting standards.

For further information on acquisition of Flatiron Health, Inc. refer to the following:

Page 127 (Significant accounting policies, note 33), page 46 (General accounting principles – Key accounting judgements, estimates and assumptions, note 1) and pages 58–61 (Financial disclosures, note 6 Mergers and acquisitions).

148 | Roche Finance Repor t 2018

Roche Group | Statutor y Auditor’s Repor t

Other Information in the Annual Report

The Board of Directors is responsible for the other information in the annual report. The other information comprises all information included in the annual report, but does not include the consolidated financial statements, the stand-alone financial statements of the company, the remuneration report and our auditor’s reports thereon.

Our opinion on the consolidated financial statements does not cover the other information in the annual report and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information in the annual report and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibility of the Board of Directors for the Consolidated Financial Statements

The Board of Directors is responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with IFRS and the provisions of Swiss law, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Swiss law, ISAs and Swiss Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Swiss law, ISAs and Swiss Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

— Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

— Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances.

— Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made.

— Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.

Roche Finance Repor t 2018 | 149

Statutor y Auditor’s Repor t | Roche Group

— Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

— Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.

We communicate with the Board of Directors or its relevant committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the Board of Directors or its relevant committee with a statement that we have complied with relevant ethical requirements regarding independence, and communicate to them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the Board of Directors or its relevant committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report, unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on Other Legal and Regulatory Requirements

In accordance with article 728a para. 1 item 3 CO and the Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors.

We recommend that the consolidated financial statements submitted to you be approved.

KPMG AG

Mark Baillache Marc Ziegler Licensed Audit Expert Licensed Audit Expert Auditor in Charge

Basel, 28 January 2019

KPMG AG, Viaduktstrasse 42, PO Box 3456, CH-4002 Basel

KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss legal entity. All rights reserved.

150 | Roche Finance Repor t 2018

Roche Group | Independent Reasonable Assurance Repor t on Internal Control over Financial Repor ting

Independent Reasonable Assurance Report on Internal Control over Financial Reporting To the Board of Directors of Roche Holding Ltd, Basel

We were engaged by the Board of Directors to carry out a reasonable assurance engagement on the design, implementation and operating effectiveness of the system of internal control over financial reporting of the Roche Group as it was in place at 31 December 2018. Management of Roche Holding Ltd assessed the effectiveness of its system of internal control over financial reporting as of 31 December 2018 based on the criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework 2013, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Responsibilities of the Board of Directors and Management

The Board of Directors and management of Roche Holding Ltd are responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting as included in the accompanying Report of Roche Management on Internal Control over Financial Reporting.

An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial statements prepared in accordance with International Financial Reporting Standards (IFRS). An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with the applicable financial reporting framework; and (3) provide reasonable assurance regarding the prevention or timely detection of the unauthorised acquisition, use, or disposition of the entity’s assets that could have a material effect on the entity’s financial statements.

Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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.

Our Responsibilities

Our responsibility is to examine the design, implementation and effectiveness of the company’s internal control over financial reporting and to report thereon in the form of an independent, reasonable assurance conclusion, based on the evidence obtained. We conducted our engagement in accordance with the International Standard on Assurance Engagements (ISAE) 3000 Assurance Engagements Other Than Audits or Reviews of Historical Financial Information issued by the International Auditing and Assurance Standards Board. That standard requires that we plan and perform our procedures to obtain reasonable assurance about whether effective internal control over financial reporting was maintained, in all material respects.

The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of the design, implementation and effectiveness of the company’s internal control over financial reporting. Our examination included obtaining an understanding of internal control over financial reporting, testing and evaluating the design, implementation and operating effectiveness of internal control based on the assessed risk, and performing such other procedures, as we considered necessary in the circumstances.

Roche Finance Repor t 2018 | 151

Independent Reasonable Assurance Repor t on Internal Control over Financial Repor ting | Roche Group

Our Independence and Quality Control

The firm applies International Standard on Quality Control 1 and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements.

We have complied with the independence and other ethical requirements of the Code of Ethics for Professional Accountants issued by the International Ethics Standards Board for Accountants, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.

Conclusion

Our conclusion has been formed on the basis of, and is subject to, the matters outlined in this report.

We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our conclusion.

In our opinion, the Roche Group maintained, in all material respects, effective internal control over financial reporting as of 31 December 2018 based on criteria established in Internal Control – Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with Swiss Auditing Standards and International Standards on Auditing, the consolidated financial statements of Roche Holding Ltd for the year ended 31 December 2018 and our report dated 28 January 2019 expressed an unqualified opinion on those consolidated financial statements.

KPMG AG

Mark Baillache Marc Ziegler Licensed Audit Expert Licensed Audit Expert

Basel, 28 January 2019

KPMG AG, Viaduktstrasse 42, PO Box 3456, CH-4002 Basel

KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss legal entity. All rights reserved.

152 | Roche Finance Repor t 2018

Roche Group | Multi-Year Over view and Supplementar y Information

Multi-Year Overview and Supplementary Information

Multi-Year Overview

Statistics, as reported

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Income statement in millions of CHF Sales 49,051 47,473 42,531 45,499 46,780 47,462 48,145 50,576 53,299 56,846

EBITDA 18,028 18,517 16,933 19,040 19,802 19,558 19,479 20,483 21,201 22,825

Operating profit 12,277 13,486 13,454 14,125 16,376 14,090 13,821 14,069 13,003 14,769

Net income attributable to Roche shareholders 7,784 8,666 9,343 9,539 11,164 9,332 8,863 9,576 8,633 10,500

Research and development 9,874 10,026 8,326 9,552 9,270 9,895 9,581 11,532 11,292 12,092

Balance sheet in millions of CHF Non-current assets 36,086 33,408 33,344 33,434 33,003 44,426 47,581 48,149 45,104 46,273

Current assets 38,479 27,612 28,232 31,371 29,164 31,114 28,182 28,670 31,572 32,244

Total assets 74,565 61,020 61,576 64,805 62,167 75,540 75,763 76,819 76,676 78,517

Non-current liabilities (43,084) (34,380) (30,884) (27,868) (25,166) (30,874) (28,695) (27,817) (25,509) (25,118)

Current liabilities (22,067) (14,978) (16,210) (20,209) (15,760) (23,108) (23,768) (22,600) (22,160) (23,033)

Total liabilities (65,151) (49,358) (47,094) (48,077) (40,926) (53,982) (52,463) (50,417) (47,669) (48,151)

Net assets 9,414 11,662 14,482 16,728 21,241 21,558 23,300 26,402 29,007 30,366

Capital and reserves attributable to Roche shareholders 7,366 9,469 12,095 14,494 19,294 19,586 20,979 23,911 26,441 27,622

Equity attributable to non-controlling interests 2,048 2,193 2,387 2,234 1,947 1,972 2,321 2,491 2,566 2,744

Additions to property, plant and equipment 2,837 2,633 2,006 2,130 2,458 2,905 4,077 3,790 3,477 3,796

Personnel Number of employees at end of year 81,507 80,653 80,129 82,089 85,080 88,509 91,747 94,052 93,734 94,442

Key ratios Net income attributable to Roche shareholders as % of sales 16 18 22 21 24 20 18 19 16 19

Net income attributable to Roche shareholders as % of equity 106 92 77 66 58 48 42 40 33 38

Research and development as % of sales 20 21 20 21 20 21 20 23 21 21

Current ratio % 174 184 174 155 185 135 119 127 142 140

Equity and non-controlling interests as % of total assets 13 19 24 26 34 29 31 34 38 39

Human capital return on investment ratio 2.02 2.13 2.31 2.25 2.45 2.16 2.06 2.06 1.89 1.96

Data on shares and non-voting equity securities Number of shares 160,000,000 160,000,000 160,000,000 160,000,000 160,000,000 160,000,000 160,000,000 160,000,000 160,000,000 160,000,000

Number of non-voting equity securities (Genussscheine) 702,562,700 702,562,700 702,562,700 702,562,700 702,562,700 702,562,700 702,562,700 702,562,700 702,562,700 702,562,700

Total shares and non-voting equity securities 862,562,700 862,562,700 862,562,700 862,562,700 862,562,700 862,562,700 862,562,700 862,562,700 862,562,700 862,562,700

Total dividend in millions of CHF 5,175 5,693 5,865 6,340 6,728 6,901 6,987 7,073 7,159 7,504a)

Earnings per share and non-voting equity security (diluted) in CHF 9.02 10.11 10.98 11.16 12.93 10.81 10.28 11.13 10.04 12.21

Dividend per share and non-voting equity security in CHF 6.00 6.60 6.80 7.35 7.80 8.00 8.10 8.20 8.30 8.70a)

Information in this table is stated as repor ted and changes in accounting policies arising from changes in International Financial Repor ting Standards are not applied retrospectively. a) 2018 dividend proposed by the Board of Directors.

Roche Finance Repor t 2018 | 153

Multi-Year Over view and Supplementar y Information | Roche Group

Multi-Year Overview and Supplementary Information

Multi-Year Overview

Statistics, as reported

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Income statement in millions of CHF Sales 49,051 47,473 42,531 45,499 46,780 47,462 48,145 50,576 53,299 56,846

EBITDA 18,028 18,517 16,933 19,040 19,802 19,558 19,479 20,483 21,201 22,825

Operating profit 12,277 13,486 13,454 14,125 16,376 14,090 13,821 14,069 13,003 14,769

Net income attributable to Roche shareholders 7,784 8,666 9,343 9,539 11,164 9,332 8,863 9,576 8,633 10,500

Research and development 9,874 10,026 8,326 9,552 9,270 9,895 9,581 11,532 11,292 12,092

Balance sheet in millions of CHF Non-current assets 36,086 33,408 33,344 33,434 33,003 44,426 47,581 48,149 45,104 46,273

Current assets 38,479 27,612 28,232 31,371 29,164 31,114 28,182 28,670 31,572 32,244

Total assets 74,565 61,020 61,576 64,805 62,167 75,540 75,763 76,819 76,676 78,517

Non-current liabilities (43,084) (34,380) (30,884) (27,868) (25,166) (30,874) (28,695) (27,817) (25,509) (25,118)

Current liabilities (22,067) (14,978) (16,210) (20,209) (15,760) (23,108) (23,768) (22,600) (22,160) (23,033)

Total liabilities (65,151) (49,358) (47,094) (48,077) (40,926) (53,982) (52,463) (50,417) (47,669) (48,151)

Net assets 9,414 11,662 14,482 16,728 21,241 21,558 23,300 26,402 29,007 30,366

Capital and reserves attributable to Roche shareholders 7,366 9,469 12,095 14,494 19,294 19,586 20,979 23,911 26,441 27,622

Equity attributable to non-controlling interests 2,048 2,193 2,387 2,234 1,947 1,972 2,321 2,491 2,566 2,744

Additions to property, plant and equipment 2,837 2,633 2,006 2,130 2,458 2,905 4,077 3,790 3,477 3,796

Personnel Number of employees at end of year 81,507 80,653 80,129 82,089 85,080 88,509 91,747 94,052 93,734 94,442

Key ratios Net income attributable to Roche shareholders as % of sales 16 18 22 21 24 20 18 19 16 19

Net income attributable to Roche shareholders as % of equity 106 92 77 66 58 48 42 40 33 38

Research and development as % of sales 20 21 20 21 20 21 20 23 21 21

Current ratio % 174 184 174 155 185 135 119 127 142 140

Equity and non-controlling interests as % of total assets 13 19 24 26 34 29 31 34 38 39

Human capital return on investment ratio 2.02 2.13 2.31 2.25 2.45 2.16 2.06 2.06 1.89 1.96

Data on shares and non-voting equity securities Number of shares 160,000,000 160,000,000 160,000,000 160,000,000 160,000,000 160,000,000 160,000,000 160,000,000 160,000,000 160,000,000

Number of non-voting equity securities (Genussscheine) 702,562,700 702,562,700 702,562,700 702,562,700 702,562,700 702,562,700 702,562,700 702,562,700 702,562,700 702,562,700

Total shares and non-voting equity securities 862,562,700 862,562,700 862,562,700 862,562,700 862,562,700 862,562,700 862,562,700 862,562,700 862,562,700 862,562,700

Total dividend in millions of CHF 5,175 5,693 5,865 6,340 6,728 6,901 6,987 7,073 7,159 7,504a)

Earnings per share and non-voting equity security (diluted) in CHF 9.02 10.11 10.98 11.16 12.93 10.81 10.28 11.13 10.04 12.21

Dividend per share and non-voting equity security in CHF 6.00 6.60 6.80 7.35 7.80 8.00 8.10 8.20 8.30 8.70a)

Information in this table is stated as repor ted and changes in accounting policies arising from changes in International Financial Repor ting Standards are not applied retrospectively. a) 2018 dividend proposed by the Board of Directors.

154 | Roche Finance Repor t 2018

Roche Group | Multi-Year Over view and Supplementar y Information

Sales by division in millions of CHF

2014 2015 2016 2017 2018

Pharmaceuticals 36,696 37,331 39,103 41,220 43,967

Diagnostics 10,766 10,814 11,473 12,079 12,879

Total 47,462 48,145 50,576 53,299 56,846

Sales by geographical area in millions of CHF

2014 2015 2016 2017 2018

Switzerland 526 497 577 574 627

Germany 2,900 2,734 3,004 3,041 3,147

Rest of Europe 11,119 10,046 10,264 10,135 9,828

Europe 14,545 13,277 13,845 13,750 13,602

United States 18,041 20,164 21,192 23,122 26,105

Rest of North America 962 855 851 897 931

North America 19,003 21,019 22,043 24,019 27,036

Latin America 3,285 2,832 2,681 3,024 2,870

Japan 3,755 3,648 4,211 4,214 4,175

Rest of Asia 5,327 6,006 6,461 6,824 7,689

Asia 9,082 9,654 10,672 11,038 11,864

Africa, Australia and Oceania 1,547 1,363 1,335 1,468 1,474

Total 47,462 48,145 50,576 53,299 56,846

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

2014 2015 2016 2017 2018

Pharmaceuticals 1,674 2,706 2,154 2,030 2,340

Diagnostics 1,228 1,363 1,629 1,443 1,376

Corporate 3 8 7 4 80

Total 2,905 4,077 3,790 3,477 3,796

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

2014 2015 2016 2017 2018

Switzerland 691 964 892 846 858

Germany 527 602 759 541 543

Rest of Europe 335 349 315 322 329

Europe 1,553 1,915 1,966 1,709 1,730

United States 683 1,382 1,060 844 900

Rest of North America 6 4 7 7 4

North America 689 1,386 1,067 851 904

Latin America 113 132 133 110 113

Japan 154 230 192 331 647

Rest of Asia 371 379 387 422 371

Asia 525 609 579 753 1,018

Africa, Australia and Oceania 25 35 45 54 31

Total 2,905 4,077 3,790 3,477 3,796

Roche Finance Repor t 2018 | 155

Multi-Year Over view and Supplementar y Information | Roche Group

Alternative Performance Measures

The financial information included in the Financial Review includes certain Alternative Performance Measures (APMs) which are not accounting measures as defined by IFRS, in particular the core results, net working capital, net operating assets, free cash flow and constant exchange rates. These APMs should not be used instead of, or considered as alternatives to, the Group’s consolidated financial results based on IFRS. These APMs may not be comparable to similarly titled measures disclosed by other companies. All APMs presented in the Financial Review relate to the performance of the current year and comparative periods.

Core results

Core results allow for an assessment of both the Group’s actual results as defined by IFRS and the underlying performance of the business. The core results concept, which is used in the internal management of the business, is based on the IFRS results, with the following adjustments: • Global restructuring plans (see Note 7) are excluded. • Amortisation and impairment of intangible assets (see Note 10) and impairment of goodwill (see Note 9) are excluded. • Acquisition accounting and other impacts from the accounting for merger and acquisition transactions and alliance arrangements (see Financial Review) are excluded.

• Discontinued operations (currently none) are excluded. • Legal and environmental cases (see Financial Review) are excluded. • Global issues outside the healthcare sector beyond the Group’s control are excluded. • Material treasury items such as major debt restructurings (currently none) are excluded. • Pension plan settlements (see Note 26) are excluded. • The tax benefit recorded under IFRS in respect of Equity Compensation Plans (ECPs), which varies according to the price of the underlying equity, is replaced by a normalised tax benefit, being the IFRS 2 expense multiplied by the applicable tax rate (see Note 5).

The core results concept was further described on 22 October 2010 at an Investor Update teleconference, which is available for download at: http://www.roche.com/investors/ir_agenda/csr_151010.htm

The Group’s IFRS results, including the divisional breakdown, are reconciled to the core results in the tables below. The calculation of Core EPS is also given in the tables below. Additional commentary to the adjustment items is given in the Financial Review.

156 | Roche Finance Repor t 2018

Roche Group | Multi-Year Over view and Supplementar y Information

Core results reconciliation – 2018 in millions of CHF

IFRS

Global restruc-

turing

Intangibles amor ti-

sation Intangibles impairment

M& A and alliance

trans- actions

Legal & environ-

mental

Pension plan

settlements Global issues

Normali- sation of ECP tax benefit Core

Sales 56,846 – – – – – – – – 56,846

Royalties and other operating

income 2,651 (16) – – – – – – – 2,635

Cost of sales (17,269) 400 1,111 294 – – 0 – – (15,464)

Marketing and distribution (10,109) 168 36 – – – 0 – – (9,905)

Research and development (12,092) 110 147 788 – – 0 – – (11,047)

General and administration (5,258) 245 – 2,254 35 159 5 – – (2,560)

Operating profit 14,769 907 1,294 3,336 35 159 5 – – 20,505

Financing costs (770) 2 – – 15 9 – – – (744)

Other financial income

(expense) 149 – – – – – – – – 149

Profit before taxes 14,148 909 1,294 3,336 50 168 5 – – 19,910

Income taxes (3,283) (150) (184) (229) (29) (37) (1) (35) 19 (3,929)

Net income 10,865 759 1,110 3,107 21 131 4 (35) 19 15,981

Attributable to

– Roche shareholders 10,500 759 1,097 3,097 21 131 4 (35) 19 15,593

– Non-controlling interests 365 – 13 10 – – – – – 388

Core results reconciliation – 2017 in millions of CHF

IFRS

Global restruc-

turing

Intangibles amor ti-

sation Intangibles impairment

M& A and alliance

trans- actions

Legal & environ-

mental

Pension plan

settlements Global issues

Normali- sation of ECP tax benefit Core

Sales 53,299 – – – – – – – – 53,299

Royalties and other operating

income 2,447 0 – – – – – – – 2,447

Cost of sales (18,179) 484 1,545 1,784 – – 0 – – (14,366)

Marketing and distribution (9,847) 326 9 0 – – 0 – – (9,512)

Research and development (11,292) 87 137 676 – – 0 – – (10,392)

General and administration (3,425) 311 – 1,058 (350) (80) 22 – – (2,464)

Operating profit 13,003 1,208 1,691 3,518 (350) (80) 22 – – 19,012

Financing costs (839) 2 – – 14 4 – – – (819)

Other financial income

(expense) 84 – – – (9) – – – – 75

Profit before taxes 12,248 1,210 1,691 3,518 (345) (76) 22 – – 18,268

Income taxes (3,423) (248) (513) (867) (2) 46 (4) 116 31 (4,864)

Net income 8,825 962 1,178 2,651 (347) (30) 18 116 31 13,404

Attributable to

– Roche shareholders 8,633 962 1,162 2,645 (347) (28) 18 116 31 13,192

– Non-controlling interests 192 – 16 6 – (2) – – – 212

Roche Finance Repor t 2018 | 157

Multi-Year Over view and Supplementar y Information | Roche Group

Divisional core results reconciliation – 2018 in millions of CHF

IFRS

Global restruc-

turing

Intangibles amor ti-

sation Intangibles impairment

M& A and alliance

trans- actions

Legal & environ-

mental

Pension plan

settlements Core

Pharmaceuticals Sales 43,967 – – – – – – 43,967

Royalties and other operating income 2,553 – – – – – – 2,553

Cost of sales (10,491) 292 969 (274) – – 0 (9,504)

Marketing and distribution (7,068) 97 32 0 – – 0 (6,939)

Research and development (10,299) 76 130 507 – – 0 (9,586)

General and administration (3,874) 58 – 2,147 91 24 5 (1,549)

Operating profit 14,788 523 1,131 2,380 91 24 5 18,942

Diagnostics Sales 12,879 – – – – – – 12,879

Royalties and other operating income 98 (16) – – – – – 82

Cost of sales (6,778) 108 142 568 – – 0 (5,960)

Marketing and distribution (3,041) 71 4 0 – – 0 (2,966)

Research and development (1,793) 34 17 281 – – 0 (1,461)

General and administration (748) 38 – 107 (56) 131 0 (528)

Operating profit 617 235 163 956 (56) 131 0 2,046

Corporate General and administration (636) 149 – – 0 4 0 (483)

Operating profit (636) 149 – – 0 4 0 (483)

Divisional core results reconciliation – 2017 in millions of CHF

IFRS

Global restruc-

turing

Intangibles amor ti-

sation Intangibles impairment

M& A and alliance

trans- actions

Legal & environ-

mental

Pension plan

settlements Core

Pharmaceuticals Sales 41,220 – – – – – – 41,220

Royalties and other operating income 2,284 0 – – – – 0 2,284

Cost of sales (11,978) 377 1,230 1,664 – – 0 (8,707)

Marketing and distribution (6,960) 234 6 0 – – 0 (6,720)

Research and development (9,704) 21 123 524 – – 0 (9,036)

General and administration (1,620) 245 – 384 (324) (143) 18 (1,440)

Operating profit 13,242 877 1,359 2,572 (324) (143) 18 17,601

Diagnostics Sales 12,079 – – – – – – 12,079

Royalties and other operating income 163 0 – – – – – 163

Cost of sales (6,201) 107 315 120 – – 0 (5,659)

Marketing and distribution (2,887) 92 3 0 – – 0 (2,792)

Research and development (1,588) 66 14 152 – – 0 (1,356)

General and administration (1,262) 27 – 674 (27) 58 4 (526)

Operating profit 304 292 332 946 (27) 58 4 1,909

Corporate General and administration (543) 39 – – 1 5 0 (498)

Operating profit (543) 39 – – 1 5 0 (498)

158 | Roche Finance Repor t 2018

Roche Group | Multi-Year Over view and Supplementar y Information

Core EPS (basic)

2018 2017

Core net income attributable to Roche shareholders (CHF millions) 15,593 13,192

Weighted average number of shares and non-voting equity securities in issue (millions) 27 854 853

Core earnings per share (basic) (CHF) 18.25 15.47

Core EPS (diluted)

2018 2017

Core net income attributable to Roche shareholders (CHF millions) 15,593 13,192

Increase in non-controlling interests’ share of core net income, assuming all outstanding Chugai stock

options exercised (CHF millions) (1) (1)

Net income used to calculate diluted earnings per share (CHF millions) 15,592 13,191

Weighted average number of shares and non-voting equity securities in issue used to calculate diluted earnings per share (millions) 27 860 860

Core earnings per share (diluted) (CHF) 18.14 15.34

Free cash flow

Free cash flow is used to assess the Group’s ability to generate the cash required to conduct and maintain its operations. It also indicates the Group’s ability to generate cash to finance dividend payments, repay debt and to undertake merger and acquisition activities. The free cash flow concept is used in the internal management of the business.

Operating free cash flow is calculated based on the IFRS operating profit and adjusted for certain cash items, movements in net working capital and capital expenditures (investments in property, plant and equipment and intangible assets). Operating free cash flow is different from cash flows from operating activities as defined by IAS 7 in that it includes capital expenditures (which is within the responsibility of divisional management) and excludes income taxes paid (which is not within the responsibility of divisional management). Cash outflows from defined benefit plans are allocated to the operating free cash flow based on the current service cost with the residual allocated to treasury activities.

Free cash flow is calculated as the operating free cash flow adjusted for treasury activities and taxes paid. Free cash flow is different from total cash flows as defined by IAS 7 in that it excludes dividend payments, cash inflows/outflows from financing activities such as issuance/repayment of debt, purchase/sale of marketable securities and cash inflows/outflows from mergers, acquisitions and divestments.

Roche Finance Repor t 2018 | 159

Multi-Year Over view and Supplementar y Information | Roche Group

Operating free cash flow and free cash flow are calculated as shown in the tables below. Additional commentary to the adjustment items is given in the Financial Review.

Operating free cash flow reconciliation in millions of CHF

2018 2017

Cash flows from operating activities (IFRS basis in accordance with IAS 7) 19,979 18,024 Add back

– Income taxes paid 3,288 3,909

Deduct

– Investments in property, plant and equipment (4,043) (3,509)

– Investments in intangible assets (879) (704)

– Disposal of property, plant and equipment 146 100

– Disposal of intangible assets 0 0

Pensions and other post-employment benefits

– Add back total payments for defined benefit plans 785 538

– Deduct allocation of payments to operating free cash flow (582) (532)

Other operating items 47 1

Operating free cash flow 18,741 17,827

Free cash flow reconciliation in millions of CHF

2018 2017

Cash flows from operating activities (IFRS basis in accordance with IAS 7) 19,979 18,024 Deduct

– Investments in property, plant and equipment (4,043) (3,509)

– Investments in intangible assets (879) (704)

– Disposal of property, plant and equipment 146 100

– Disposal of intangible assets 0 0

– Interest paid (593) (648)

Other operating items 47 1

Other treasury items 154 156

Free cash flow 14,811 13,420

160 | Roche Finance Repor t 2018

Roche Group | Multi-Year Over view and Supplementar y Information

Supplementary information used to calculate the divisional operating free cash flow is shown in the table below.

Divisional operating free cash flow information in millions of CHF

Pharmaceuticals Diagnostics Corporate Group 2018 2017 2018 2017 2018 2017 2018 2017

Depreciation, amortisation and impairment Depreciation of property, plant and equipment 1,129 1,165 1,097 1,024 66 7 2,292 2,196

Amortisation of intangible assets 1,131 1,359 163 332 – – 1,294 1,691

Impairment of property, plant and equipment 137 184 1 37 3 12 141 233

Impairment of goodwill 2,147 384 107 674 – – 2,254 1,058

Impairment of intangible assets 233 2,188 849 272 – – 1,082 2,460

Total 4,777 5,280 2,217 2,339 69 19 7,063 7,638 Other adjustments Add back

– Expenses for equity-settled equity compensation

plans 392 388 78 73 38 34 508 495

– Net (income) expense for provisions 750 102 269 152 85 16 1,104 270

– Net (gain) loss from disposals (336) (308) 14 9 0 0 (322) (299)

– Non-cash working capital and other items 583 473 160 145 (11) (1) 732 617

Deduct

– Utilisation of provisions (637) (405) (153) (140) (58) (76) (848) (621)

– Proceeds from disposals 377 460 107 50 (3) – 481 510

Total 1,129 710 475 289 51 (27) 1,655 972

Operating profit cash adjustments 5,906 5,990 2,692 2,628 120 (8) 8,718 8,610

EBITDA

The Group does not use Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) in either its internal management reporting or its external communications. In the opinion of the Group’s management, operating free cash flow gives a more useful and consistent measurement of ‘cash earnings’ than EBITDA, which includes many non-cash items such as provisions, allowances for trade receivables and inventories, and certain non-cash entries arising from acquisition accounting and pension accounting.

For the convenience of those readers that do use EBITDA, this is provided in the table below. As the starting point this uses the core results, which already exclude the amortisation and impairment of goodwill and intangible assets.

EBITDA (using core results) in millions of CHF

Pharmaceuticals Diagnostics Corporate Group 2018 2017 2018 2017 2018 2017 2018 2017

EBITDA Core operating profit 18,942 17,601 2,046 1,909 (483) (498) 20,505 19,012

Depreciation and impairment of property, plant and

equipment – Core basis 1,159 1,145 1,092 1,025 69 19 2,320 2,189

EBITDA 20,101 18,746 3,138 2,934 (414) (479) 22,825 21,201 – margin, % of sales 45.7 45.5 24.4 24.3 – – 40.2 39.8

Roche Finance Repor t 2018 | 161

Multi-Year Over view and Supplementar y Information | Roche Group

Net operating assets

Net operating assets allow for an assessment of the Group’s operating performance of the business independently from financing and tax activities. Net operating assets are calculated as property, plant and equipment, goodwill, intangible assets, net working capital and long-term net operating assets minus provisions.

The calculation of the net operating assets disclosed in Note 2 of the Annual Financial Statements is shown in the tables below.

Net operating assets reconciliation – 2018 in millions of CHF

Pharmaceuticals Diagnostics Corporate Taxation and

Treasur y Group

Property, plant and equipment 15,123 6,413 282 – 21,818

Goodwill 3,883 5,065 – – 8,948

Intangible assets 8,297 1,049 – – 9,346

Inventories 4,284 2,336 1 – 6,621

Provisions (2,508) (948) (325) – (3,781)

Current income tax net liabilities – – – (3,600) (3,600)

Deferred tax net assets – – – 3,511 3,511

Defined benefit plan net liabilities – – – (6,140) (6,140)

Marketable securities – – – 6,437 6,437

Cash and cash equivalents – – – 6,681 6,681

Debt – – – (18,770) (18,770)

Other net assets (liabilities)

– Net working capital (1,812) 361 (215) – (1,666)

– Long-term net operating assets 420 46 (1) – 465

– Other – – – 496 496

Total net assets 27,687 14,322 (258) (11,385) 30,366

Net operating assets reconciliation – 2017 in millions of CHF

Pharmaceuticals Diagnostics Corporate Taxation and

Treasur y Group

Property, plant and equipment 14,358 6,431 123 – 20,912

Goodwill 4,870 5,207 – – 10,077

Intangible assets 6,326 2,042 – – 8,368

Inventories 5,126 2,280 1 – 7,407

Provisions (2,449) (842) (299) – (3,590)

Current income tax net liabilities – – – (3,060) (3,060)

Deferred tax net assets – – – 3,081 3,081

Defined benefit plan net liabilities – – – (6,620) (6,620)

Marketable securities – – – 7,278 7,278

Cash and cash equivalents – – – 4,719 4,719

Debt – – – (18,960) (18,960)

Other net assets (liabilities)

– Net working capital (1,706) 314 (120) – (1,512)

– Long-term net operating assets 434 11 (2) – 443

– Other – – – 464 464

Total net assets 26,959 15,443 (297) (13,098) 29,007

162 | Roche Finance Repor t 2018

Roche Group | Multi-Year Over view and Supplementar y Information

Net debt

Net debt is used to monitor the Group’s overall short- and long-term liquidity. Net debt is calculated as the sum of total debt (long-term and short-term) less marketable securities, cash and cash equivalents.

Net debt calculations, including details of movements during the current year, are shown in the table on page 33 in the Financial Review.

Net working capital

Net working capital is used to assess the Group’s efficiency in utilising assets and short-term liquidity. Net trade working capital is calculated as trade receivables and inventories minus trade payables. Net working capital is calculated as net trade working capital adjusted for other receivables and other payables.

Net working capital and net trade working capital calculations are shown in the tables on page 20 (Pharmaceuticals Division), page 26 (Diagnostics Division) and page 28 (Corporate) in the Financial Review.

Constant exchange rates

Certain percentage changes in the Financial Review have been calculated using constant exchange rates (CER) which allow for an assessment of the Group’s financial performance with the effects of exchange rate fluctuations eliminated. The percentage changes at constant exchange rates are calculated using simulations by reconsolidating both the current reported period and the prior period numbers at constant currency exchange rates, equalling the average exchange rates for the prior year. For example, a CER change between a 2018 line item and its 2017 equivalent is calculated using the average exchange rate for the year ended 31 December 2017 for both the 2018 line item and the 2017 line item and subsequently calculating the change in percent with respect to the two recalculated numbers.

Foreign exchange gains and losses are excluded from the calculation of CER growth rates in the earnings per share disclosures. In countries where there is a significant devaluation in the local currency in the current year, the simulations use the average exchange rate of the current year instead of the prior year to avoid that CER growth rates are artificially inflated.

Roche Finance Repor t 2018 | 163

Roche Securities | Roche Group

Roche Securities

300

250

200

150

100

50

0

Roche share Swiss Market Index (rebased)

Price development of share in CHF

20182017201620152014

300

250

200

150

100

50

0

Roche non-voting equity security Swiss Market Index (rebased)

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

20182017201620152014

40

50

60

30

20

10

0

Roche ADR Standard & Poor’s 500 Index (rebased)

Price development of American Depositary Receipt (ADR) in USD

20182017201620152014

Eight Roche American Depositar y Receipts (ADRs) are equivalent to one non-voting equity security (Genussschein). ADRs have been traded in the US over-the-counter market since July 1992. Information in these tables is restated for the change in the ratio for the ADRs from 1:1 to 2:1 ef fective 24 Januar y 2005, the change in the ratio for the ADRs from 2:1 to 4:1 ef fective 9 Januar y 2009 and the change in the ratio for the ADRs from 4 :1 to 8 :1 ef fective 27 Februar y 2014.

164 | Roche Finance Repor t 2018

Roche Group | Roche Securities

Number of shares and non-voting equity securities a)

2014 2015 2016 2017 2018

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 Number of own shares and non-voting equity securities

(Genussscheine) held (12,819,364) (10,542,434) (10,635,070) (8,712,977) (8,134,699)

Total in issue 849,743,336 852,020,266 851,927,630 853,849,723 854,428,001

Data per share and non-voting equity security in CHF

2014 2015 2016 2017 2018

Earnings (basic) 10.99 10.42 11.24 10.12 12.29

Earnings (diluted) 10.81 10.28 11.13 10.04 12.21

Core earnings (basic) 14.53 13.66 14.68 15.47 18.25

Core earnings (diluted) 14.29 13.49 14.53 15.34 18.14

Equity attributable to Roche shareholders 23.05 24.62 28.07 30.97 32.33

Dividend 8.00 8.10 8.20 8.30 8.70c)

Stock price of share b) Opening 247.40 267.75 276.75 238.00 246.20

High 289.00 284.50 276.75 271.75 258.00

Low 239.40 244.40 223.50 230.40 211.60

Year-end 267.75 276.75 238.00 246.20 239.40

Stock price of non-voting equity

security (Genussschein) b) Opening 249.20 269.90 276.40 232.60 246.50

High 294.60 286.20 276.40 272.60 259.50

Low 239.00 241.70 220.10 227.70 207.70

Year-end 269.90 276.40 232.60 246.50 243.40

Market capitalisation in millions of CHF

2014 2015 2016 2017 2018

Year-end 229,003 235,554 199,022 210,426 207,328

Key ratios (year-end)

2014 2015 2016 2017 2018

Dividend yield of shares in % 3.0 2.9 3.4 3.4 3.6

Dividend yield of non-voting equity securities (Genussscheine) in % 3.0 2.9 3.5 3.4 3.6

Price /earnings of shares 25 27 21 25 20

Price /earnings of non-voting equity securities (Genussscheine) 25 27 21 25 20

a) Each non-voting equity security (Genussschein) confers the same rights as any of the shares to par ticipate in the available earnings and any remaining proceeds from liquidation following repayment of the nominal value of the shares and the par ticipation cer tificate capital (if any). Shares and non-voting equity securities are listed on the SIX Swiss E xchange. 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) 2018 dividend proposed by the Board of Directors.

Stock codes

Share Non-voting equity security American Depositar y Receipt (ADR)

SIX Swiss Exchange RO ROG –

Bloomberg RO SW ROG VX RHHBY US

Reuters RO.S ROG.VX RHHBY.PK

Roche Finance Repor t 2018 | 165

Roche Holding Ltd, Basel

Financial Statements 166 Notes to the Financial Statements 168 1. Summary of significant accounting policies 168 2. Shareholders’ equity 168 3. Contingent liabilities 169

4. Significant shareholders 169 5. Full-time equivalent employees 170 6. Board and Executive shareholdings 170

Appropriation of Available Earnings 173 Statutory Auditor’s Report to the General Meeting of Roche Holding Ltd, Basel 174

166 | Roche Finance Repor t 2018

Roche Holding Ltd, Basel | Financial Statements

Financial Statements

Balance sheet in millions of CHF

31 December 2018 31 December 2017

Current assets Cash and cash equivalents 1,754 843

Marketable securities 930 1,440

Accounts receivable from Group companies 4,859 5,104

Short-term loans to Group companies 1,000 1,200

Total current assets 8,543 8,587

Non-current assets Long-term loans to Group companies 618 612

Investments 8,869 8,852

Total non-current assets 9,487 9,464

Total assets 18,030 18,051

Short-term liabilities Accounts payable to Group companies 6 10

Interest-bearing liabilities to Group companies 789 1,301

Other short-term liabilities 16 15

Total short-term liabilities 811 1,326

Long-term liabilities Provisions 35 35

Total long-term liabilities 35 35 Total liabilities 846 1,361

Shareholders’ equity Share capital 160 160

Non-voting equity securities (Genussscheine) p.m. p.m.

Legal retained earnings:

– General legal retained earnings 300 300

Voluntary reserves and retained earnings:

– Free reserve 6,000 6,000

– Special reserve 2,152 2,152

– Available earnings

– Balance brought forward from previous year 919 878

– Net income for the year 7,653 7,200

Total shareholders’ equity 17,184 16,690

Total shareholders’ equity and liabilities 18,030 18,051

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

Roche Finance Repor t 2018 | 167

Financial Statements | Roche Holding Ltd, Basel

Income statement in millions of CHF

Year ended 31 December 2018 2017

Income Income from investments (dividend income) 7,614 7,189

Other financial income

– Interest income from loans to Group companies 31 31

– Income from marketable securities and other 7 2

Guarantee fee income from Group companies 77 87

Other income 36 38

Total income 7,765 7,347

Expenses Administration expenses (35) (39)

Other expenses (45) (48)

Financial expenses (16) (52)

Direct taxes (16) (8)

Total expenses (112) (147)

Net income 7,653 7,200

168 | Roche Finance Repor t 2018

Roche Holding Ltd, Basel | Notes to the Financial Statements

Notes to the Financial Statements

1. Summary of significant accounting policies

Basis of preparation

The financial statements of Roche Holding Ltd, Basel (the ‘Company’) have been prepared in accordance with the provisions of Swiss Law on Accounting and Financial Reporting (32nd title of the Swiss Code of Obligations, ‘CO’). Where not prescribed by law, the significant accounting principles applied are described below.

The Company has prepared its consolidated financial statements in accordance with a recognised accounting standard (International Financial Reporting Standards). In accordance with the CO, the Company decided to forgo presenting additional information on audit fees in the notes as well as a cash flow statement.

Valuation methods and translation of foreign currencies

Marketable securities are reported at the lower of cost or market value. All other financial assets, including investments, are reported at cost less appropriate write-downs. Own equity instruments are recognised at cost and deducted from equity at the time of purchase. If the own equity instruments are sold, the gain or loss is recognised through the income statement. Assets and liabilities denominated in foreign currencies are translated into Swiss francs using year-end rates of exchange, except investments 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.

Investments

The direct and indirect investments of the Company are listed in Note 32 to the Roche Group Annual Financial Statements. This listing excludes Chugai’s subsidiaries as well as not material companies, notably companies that are inactive, dormant or in liquidation. Ownership interests equal voting rights.

Taxes

Direct taxes include corporate income and capital taxes.

2. Shareholders’ equity

Share capital

As in the previous year, share capital amounts to CHF 160 million. The share capital consists of 160,000,000 bearer shares with a nominal value of CHF 1.00 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 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.

Roche Finance Repor t 2018 | 169

Notes to the Financial Statements | Roche Holding Ltd, Basel

Own equity instruments

At 31 December 2018 the Company did not hold any Roche shares or non-voting equity securities (2017: none). During 2018 and 2017 the Company neither purchased nor sold Roche shares or non-voting equity securities.

Company’s subsidiaries that meet the definitions and requirements of Article 659b CO do not hold equity instruments. Within the Roche Group Annual Financial Statements some entities (mainly foundations) are included in the consolidation which do not qualify as subsidiaries under Article 659b CO.

Movement in recognised amounts in millions of CHF

Share capital

Legal retained earnings

Voluntar y reser ves and retained earnings Own equity instruments

Total equity

Free reser ve

Special reser ve

Available earnings

As at 1 January 2016 160 300 6,000 2,152 7,870 (15) 16,467

Net income – – – – 7,067 – 7,067

Dividends – – – – (6,986) – (6,986)

Transactions in own equity instruments – – – – – 15 15

As at 31 December 2016 160 300 6,000 2,152 7,951 0 16,563

Net income – – – – 7,200 – 7,200

Dividends – – – – (7,073) – (7,073)

Transactions in own equity instruments – – – – – 0 0

As at 31 December 2017 160 300 6,000 2,152 8,078 0 16,690

Net income – – – – 7,653 – 7,653

Dividends – – – – (7,159) – (7,159)

Transactions in own equity instruments – – – – – 0 0

As at 31 December 2018 160 300 6,000 2,152 8,572 0 17,184

3. Contingent liabilities

Guarantees

The Company has issued guarantees for certain bonds and notes, commercial paper and credit facilities of Group companies. The nominal amount outstanding at 31 December 2018 was CHF 18.4 billion (2017: CHF 18.6 billion). These are described in Note 21 to the Roche Group Annual Financial Statements.

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 13 March 2018 and on other information available to the Company.

170 | Roche Finance Repor t 2018

Roche Holding Ltd, Basel | Notes to the Financial Statements

Controlling shareholders

At 31 December 2018 and 2017, based on information supplied to the Group, a shareholder group with pooled voting rights owned 72,018,000 shares, which represented 45.01% of the issued shares. This group consisted of Ms Vera Michalski-Hoffmann, Ms Maja Hoffmann, Mr André Hoffmann, Dr Andreas Oeri, Ms Sabine Duschmalé-Oeri, Ms Catherine Oeri, Dr Jörg Duschmalé, Mr Lukas Duschmalé and the charitable foundation Wolf. The shareholder pooling agreement has existed since 1948. The figures above do not include any shares without pooled voting rights that are held outside this group by individual members of the group. Ms Maja Oeri, formerly a member of the pool, now holds 8,091,900 shares representing 5.057% of the voting rights independently of the pool.

At 31 December 2018, based on information supplied to the Group, 53,332,863 shares (2017: 53,332,863 shares) are owned by Novartis Holding AG, Basel (participation below 331⁄3%).

5. Full-time equivalent employees

The annual average number of full-time equivalent employees for 2018 and 2017 did not exceed ten people.

6. Board and Executive shareholdings

Board of Directors

Directors Mr André Hoffmann and Dr Andreas Oeri and certain 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 2018 and 2017 this group held 72,018,000 shares (45.01% of issued shares). Detailed information about this group is given in Note 4. In addition, at the end of the year 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.

Shareholdings of members of the Board of Directors

Shares Non-voting equity securities

(Genussscheine) Other2018 2017 2018 2017

Ch. Franz 16,014 11,522 4,810 4,810

A. Hoffmann 0a) 0a) 200 200

J. Bell 1,115 1,115 1,647 1,647

J. Brown 729 729 0 0

P. Bulcke 0 0 4,000 4,000

A. Hauser 0 0 150 150 d)

R. P. Lifton 0 0 0 0 e)

A. Oeri 0a) 0a) 187,793 187,793

B. Poussot 500 500 500 500

S. Schwan – – – – b)

C. Suessmuth Dyckerhoff 0 0 2,100c) 621c)

P. R. Voser 0 0 5,000 5,000

Total 18,358 13,866 206,200 204,721

a) Does not include shares held in the shareholder group with pooled voting rights. b) As a member of the Corporate E xecutive Committee, Dr Schwan’s shareholdings are disclosed in the tables below. c) Jointly held with close relative. d) Close relatives of A. Hauser held 20 non-voting equity securities (Genussscheine) (2017: 20). e) R. P. Lif ton held 300 Roche American Depositar y Receipts (ADRs) (2017: 300). Eight ADRs are equivalent to one non-voting equity security (Genussschein). ADRs have been

traded in the US over-the-counter market since July 1992.

Roche Finance Repor t 2018 | 171

Notes to the Financial Statements | Roche Holding Ltd, Basel

Corporate Executive Committee

At the end of the year members of the Corporate Executive Committee and persons closely associated with them held shares and non-voting equity securities as shown in the table below.

Shareholdings of members of the Corporate Executive Committee

Shares Non-voting equity securities

(Genussscheine) Other

2018 2017 2018 2017

S. Schwan 175,890 153,428 35,270 27,040 a)

R. Diggelmann n/a 0 n/a 8,058 a)

M. Heuer 3 n/a 18,602 n/a a), c), d)

A. Hippe 6,970 6,970 19,956 16,585 a)

G.A. Keller 19,191 19,191 21,462 18,445 a), b)

D. O’Day 3,065 3,065 19,432 16,091 a)

C.A. Wilbur 0 0 3,955 3,141 a)

Total 205,119 182,654 118,677 89,360

a) Equity compensation awards: S-SARs, RSUs and Roche Per formance Share Plan. b) Close relatives of Dr Keller held 1,100 Roche shares (2017: 1,100 Roche shares). c) M. Heuer held 4,897 Restricted Stock Units (RSUs), whereof 1,519 were issued in 2016, 1,532 in 2017 and 1,846 in 2018. RSU’s terms and vesting conditions of these awards

are disclosed in Note 27 to the Roche Group Annual Financial Statements. d) Close relatives of M. Heuer held 729 Roche non-voting equity securities.

At 31 December 2018 members of the Corporate Executive Committee held Stock-settled Stock Appreciation Rights (S-SARs) as shown in the table below. The terms and vesting conditions of these awards are disclosed in Note 27 to the Roche Group Annual Financial Statements and additional supplementary information is in the Remuneration Report included in the Annual Report on pages 120 to 146.

S-SARs awards held at 31 December 2018

Year of issue 2018 2017 2016 2015 2014 2013 2012 Total

S. Schwan 100,677 85,476 89,517 59,997 54,453 30,000 0 420,120

M. Heuer a) 15,402 12,381 12,840 9,120 8,076 10,392 0 68,211

A. Hippe 40,275 34,191 35,811 24,003 21,783 0 0 156,063

G. A. Keller 37,758 32,052 33,570 22,503 20,424 0 0 146,307

D. O’Day 62,919 53,424 55,950 30,000 27,231 0 0 229,524

C. A. Wilbur 21,402 16,032 15,339 4,164 5,754 4,594 0 67,285

Total CEC 278,433 233,556 243,027 149,787 137,721 44,986 0 1,087,510

Strike price (CHF ) 220.80 251.90 251.50 256.10 263.20 214.00 157.50

Expiry date Mar. 2025 Mar. 2024 Mar. 2023 Mar. 2022 Mar. 2021 Mar. 2020 Mar. 2019

a) Close relatives of M. Heuer held 460 S-SARs issued in 2012 (strike price: CHF 157.50; expir y date: 8 March 2019; grant value per S-SAR: CHF 24.41).

In 2016, Restricted Stock Units (RSUs) as remuneration component for the Corporate Executive Committee were replaced by awarding of corresponding Performance Share Plan (PSP) awards. RSU awards vest to the recipient after three years only. Thereafter, the non- voting equity securities may remain blocked for up to ten years. At 31 December 2018 members of the Corporate Executive Committee did not hold any RSUs except for Michael Heuer as disclosed above.

172 | Roche Finance Repor t 2018

Roche Holding Ltd, Basel | Notes to the Financial Statements

At 31 December 2018 members of the Corporate Executive Committee as shown in the table below held PSP awards from the PSP performance cycles 2017–2019 and 2018–2020. The terms and vesting conditions of these awards are disclosed in Note 27 to the Roche Group Annual Financial Statements and additional supplementary information is in the Remuneration Report included in the Annual Report on pages 120 to 146. Each award will result in between zero and two non-voting equity securities or shares (before value adjustment), depending upon the achievement of the performance targets and the discretion of the Board of Directors. After vesting, the non-voting equity securities or shares may remain blocked for up to ten years. At the end of the 2016–2018 cycle the performance targets were not achieved and accordingly the participants received none of the originally targeted shares. The total target number of awards for the other outstanding performance cycles at 31 December 2018 are shown in the table below.

Roche Performance Share Plan (PSP) awards held at 31 December 2018

PSP 2018–2020 PSP 2017–2019

S. Schwan 11,076 11,565

M. Heuer a) 0 0

A. Hippe 4,430 4,626

G. A. Keller 4,153 4,337

D. O’Day b) 6,923 7,228

C. A. Wilbur 2,353 2,168

Total CEC 28,935 29,924

Allocation date Feb. 2021 Feb. 2020

a) M. Heuer is not par ticipating in the PSP programme. b) Potential awards will be reduced due to resignation.

Information relating to the number and value of rights, options and awards granted to employees of the Roche Group and members of the Board of Directors and Corporate Executive Committee of the Company are disclosed in Note 27 and Note 31 to the Roche Group Annual Financial Statements.

Roche Finance Repor t 2018 | 173

Appropriation of Available Earnings | Roche Holding Ltd, Basel

Appropriation of Available Earnings

Proposals to the Annual General Meeting in CHF

2018 2017

Available earnings Balance brought forward from previous year 918,813,395 877,981,254

Net profit for the year 7,653,109,954 7,200,102,551

Total available earnings 8,571,923,349 8,078,083,805

Appropriation of available earnings Distribution of an ordinary dividend of CHF 8.70 gross per share and non-voting equity security

(Genussschein) as against CHF 8.30 last year (7,504,295,490) (7,159,270,410)

Total appropriation of available earnings (7,504,295,490) (7,159,270,410)

To be carried forward on this account 1,067,627,859 918,813,395

174 | Roche Finance Repor t 2018

Roche Holding Ltd, Basel | Statutor y Auditor’s Repor t

Statutory Auditor’s Report To the General Meeting of Roche Holding Ltd, Basel

Report on the Audit of the Financial Statements

Opinion

We have audited the financial statements of Roche Holding Ltd, which comprise the balance sheet as at 31 December 2018, the income statement for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

In our opinion the financial statements (pages 165 to 173) for the year ended 31 December 2018 comply with Swiss law and the company’s articles of incorporation.

Basis for Opinion

We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Our responsibilities under those provisions and Standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the entity in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Report on Key Audit Matters based on the circular 1/2015 of the Federal Audit Oversight Authority

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. We have determined that there are no key audit matters to communicate in our report.

Responsibility of the Board of Directors for the Financial Statements

The Board of Directors is responsible for the preparation of the financial statements in accordance with the provisions of Swiss law and the company’s articles of incorporation, and for such internal control as the Board of Directors determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Board of Directors is responsible for assessing the entity’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Swiss law and Swiss Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

Roche Finance Repor t 2018 | 175

Statutor y Auditor’s Repor t | Roche Holding Ltd, Basel

As part of an audit in accordance with Swiss law and Swiss Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

— Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

— Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal control.

— Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made.

— Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the entity to cease to continue as a going concern.

We communicate with the Board of Directors or its relevant committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the Board of Directors or its relevant committee with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the Board of Directors or its relevant committee, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report, unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on Other Legal and Regulatory Requirements

In accordance with article 728a para. 1 item 3 CO and the Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of financial statements according to the instructions of the Board of Directors.

We further confirm that the proposed appropriation of available earnings complies with Swiss law and the company’s articles of incorporation. We recommend that the financial statements submitted to you be approved.

KPMG AG

Mark Baillache Marc Ziegler Licensed Audit Expert Licensed Audit Expert Auditor in Charge

Basel, 28 January 2019

KPMG AG, Viaduktstrasse 42, PO Box 3456, CH-4002 Basel

KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss legal entity. All rights reserved.

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.

The statement regarding earnings per share growth is not a profit forecast and should not be interpreted to mean that Roche’s earnings or earnings per share for 2019 or any subsequent period will necessarily match or exceed the historical published earnings or earnings per share of Roche.

All trademarks are legally protected.

Links to third-party pages are provided for convenience only. We do not express any opinion on the content of any third-party pages and expressly disclaim any liability for all third-party information and the use of it.

The Roche Finance Report is published in German and English. In case of doubt or differences of interpretation, the English version shall prevail over the German text.

Our reporting consists of the actual Annual Report and of the Finance Report and contains the annual financial statements and the consolidated financial statements. With regards to content, the Management Report as per the Articles of Incorporation consists of both aforementioned reports with the exception of the Remuneration Report.

Printed on non-chlorine bleached, FSC-certified paper.

Published by F. Hoffmann-La Roche Ltd Group Communications 4070 Basel, Switzerland Tel.: +41 (0)61 688 11 11 www.roche.com

To order/download publications Internet: roche.com/publications E-mail: [email protected] Fax: +41 (0)61 688 69 02

Media Relations Tel.: +41 (0)61 688 88 88 E-mail: [email protected]

Investor Relations Tel.: +41 (0)61 688 88 80 E-mail: [email protected]

Corporate Sustainability Committee Tel.: +41 (0)61 688 40 18 E-mail: [email protected]

Next Annual General Meeting: 5 March 2019

F. Hoffmann-La Roche Ltd 4070 Basel, Switzerland

© 2018

All trademarks are legally protected.

www.roche.com

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P A T I E N T S In cancer, modern care helps where no effective treatments were avai lable prev iously. Innovative therapies allow this woman on the  cover picture to carry on with her life. See back cover for more.

I N N O V A T I O N Advanced analytics enable us to create a wealth of new data insights and opportunities across the entire  product lifecycle and R&D value chain to ultimately improve outcomes for patients.

P A R T N E R S Roche is expanding its colla b- orations, combining its own strengths with the unique tools of its partners to elevate personalised healthcare to a new level for many more patients.

HER JOURNE Y TO RECOVERY The woman shown on the cover of  the Roche Finance Report this year appeared on the cover of our 2017 report as well. Last year she was in the midst of receiving treatment for her breast cancer when photographed and this came through powerfully on the cover.

Now, a year later, she is enjoying life again.

Finance Report 2018