36 Risk management In the individual business units, Lundbeck takes a systematic approach to monitoring, identifying and acting on the various types of risk. The goal is to reduce risks to the extent possible by maintaining a reasonable balance between costs and value-generating initiatives. T o a company conducting research and international operations such as Lundbeck, avoiding risk is neither possible, nor is it a defined goal. Rather, one of our goals is to handle such risk by maintaining a reasonable balance between costs and value-generating initiatives. Professional risk management requires unambiguous communication channels ­ horizontal as well as vertical, that such channels are used and that practical routines and procedures are in place for day-to-day risk management. The individual business units take a systematic approach to monitoring, identifying and quantifying the various types of risk. Furthermore, we have defined detailed reporting, decision-making and follow-up procedures and routines. The figure on the next page illustrates the diversity of the types of risk generally found in a pharmaceutical business. Particularly critical risks The Lundbeck management has identified the five following risks as particularly critical: 1. Risks associated with the Research & Development portfolio Lundbecks future success depends on its ability to identify, develop and market new innovative pharmaceuticals. Prior to obtaining regulatory approval for the sale of a product, Lundbeck must demonstrate for each specific indication the safety and efficacy of the drug candidate for use in humans through preclinical studies and clinical trials. Preclinical study results are not necessarily indicative of the results that will subsequently be achieved in clinical trials, and previous clinical trial results are not necessarily indicative of the results that will be achieved later in more extensive controlled trials. 2. Risks associated with intellectual property rights and generic competition Lundbecks continued success hinges on its ability to develop and patent new pharmaceuticals and to operate the business without infringing on others rights. However, patents and the patent application process in pharmaceutical companies such as Lundbeck are legally and scientifically complicated processes and may be subject to uncertainty. Patents are considered significant assets to the company, and Lundbeck has defined a policy of patenting all inventions to optimise the value of its pharmaceuticals and energetically to defend its intellectual property rights. 3. Risks associated with quality of pharmaceuticals It sometimes happens that pharmaceutical companies have to recall a product from the market due to the safety or quality of the pharmaceutical. Fortunately, pharmaceuticals are seldom recalled because the health of the patients is in jeopardy. However, due to the serious consequences that such situations may have, it is paramount that pharmaceutical companies thoroughly monitor the safety and quality of their pharmaceuticals. At Lundbeck, quality and safety is a key concern, and we currently have procedures and systems to ensure the quality and safety of our pharmaceuticals. If, despite our high levels of quality and safety, Lundbeck should be faced with a situation in which we had to recall a product, we have set up procedures to ensure a swift and efficient response and have launched risk-reducing measures to minimise the impact of a product recall. ANNUAL REPORT 2005 We improve the quality of life for those suffering from psychiatric and neurologi 2005 IN BRIEF Financial ratios DKKm Revenue by geography, DKKm 9,070 1,782 2,170 1,589 7.11 2.10 20 4 CONTENTS Overskrift Financial performance Financial forecast and targets Europe ­ Lundbecks large Lundbeck Annual Report 05 2-3 5 lundbeck.com Financial figures in Excel On Lundbecks website you 6 Financial performance in 2005 2005 was an eventful and financially satisfactory year for Lundbec Lundbeck Annual Report 05 4-5 7 1,488 million, corresponding to 16% of revenue. Depreciation and 8 lundbeck.com Annual reports going back 10 years In 1996, Lundbeck generated revenue of DKK 2,326 Lundbeck Annual Report 05 6-7 9 Financial forecast and targets Lundbeck deviates from previously 10 lundbeck.com Partner relationship Lundbeck collaborates with a number of partners both in the fi Lundbeck Annual Report 05 8-9 11 Europe ­ Lundbecks largest business area Revenue from our Europ 12 ! Facts on Cipralex® Cipralex® is the third-most prescribed original antidepressant in Europe. L Lundbeck Annual Report 05 10 - 11 13 14 Since CHMPs (Committee for Medicinal Products for Human Use, under EMEA) temporary suspension of Lundbeck Annual Report 05 12 - 13 15 The US market ­ a strategic opportunity Representing 45% of 16 Lexapro® website Forest Laboratories has set up a website for everyone who wishes to know more a Lundbeck Annual Report 05 14 - 15 17 A market share of 22.5% makes Zoloft® the current market lea 18 ! Partnership with Merck Lundbeck formed its alliance with Merck in February 2004 to develop and Lundbeck Annual Report 05 16 - 17 19 Under the terms of the agreement, Lundbeck will start buildi 20 International Markets ­ long-term potential Revenue from markets outside Europe and the USA ­ I Lundbeck Annual Report 05 18 - 19 21 In 2005, the International Markets were characterised by inc 22 ! Ebixa® for specialists Lundbeck has prepared a special website for GPs and specialists who wis Lundbeck Annual Report 05 20 - 21 23 Conditions in International Markets The protection of intell 24 Developing new pharmaceuticals Lundbecks long-term goal is to become the worlds leader in the f Lundbeck Annual Report 05 22 - 23 ! CNSforum Read more about research and development in drugs in 26 Bifeprunox is a new compound (a D2 and 5-HT1A partial agonist) in phase III clinical development Lundbeck Annual Report 05 24 - 25 27 lundbeck.com Research literature Lundbecks employees have au 28 Launched pharmaceuticals in the market First Approved, registration no of countries 2001 82 Com Lundbeck Annual Report 05 26 - 27 29 Corporate governance Control is good, trust is better The p 30 Corporate governance Corporate governance at Lundbeck On 6 October 2005, the Copenhagen Stock E Lundbeck Annual Report 05 lundbeck.com Position on corporate governance Lundbecks Supervisory Board 32 Supervisory Board Flemming Lindeløv Chairman Elected at the 1998 General Meeting Born 20 August Lundbeck Annual Report 05 30 - 31 33 Remuneration of and shares held by members of the Supervisor 34 Remuneration of and shares held by members of the Executive Management Remuneration paid to the Lundbeck Annual Report 05 32 - 33 35 Organisation 36 Risk management In the individual business units, Lundbeck takes a systematic approach to monit Lundbeck Annual Report 05 34 - 35 37 4. Risks associated with foreign currency, interest rate and 38 Developing global competencies Human resources (HR) play a key strategic role at Lundbeck. Duri Lundbeck Annual Report 05 36 - 37 ! Lundbeck sought after Lundbecks HR department received almost 40 International career Lundbeck has subsidiaries and representative offices in 55 countries around Lundbeck Annual Report 05 38 - 39 41 New health, safety and environment strategy successfully imp 42 show that actual emissions have been reduced. Accordingly, the higher figures for Valby reflect Lundbeck Annual Report 05 40 - 41 43 Other initiatives enhanced efficiency in Lundbecks health, s 44 A Strategy for Health, Safety & Environment Read more about Lundbeck Health, Safety & En Lundbeck Annual Report 05 42 - 43 45 Overview of strategic objectives 2005-2010, target status 20 46 Lundbeck Annual Report 05 44 - 45 47 Focus on creating shareholder value Lundbecks shares are li 48 ! Annual General Meeting Lundbecks Annual General Meeting will be held on 24 April 2006 at 4 pm Lundbeck Annual Report 05 46 - 47 49 Releases from H. Lundbeck A/S in 2005 No. Date 50 lundbeck.com Archive of financial information The Lundbeck website provides announcements to the FINANCIAL REPORT 2005 51 2 Summary for the Group 2001-2005 Income statement (DKKm) Revenue Profit before research and devel Lundbeck Annual Report 05 12 - 13 50 - 51 3 Share data Average number of shares (millions) Earnin 4 Lundbeck Annual Report 05 12 - 13 52 - 53 5 Income statement for the year ended 31 December 2005 6 Balance sheet at 31 December 2005 Assets Parent 2004 DKKm Parent 2005 DKKm Notes Group 2005 D Lundbeck Annual Report 05 12 - 13 54 - 55 7 Balance sheet at 31 December 2005 Equity and liabilit 8 Statement of changes in equity at 31 December 2005 Group 2004 Equity at 31.12.2003 Effect of IFR Lundbeck Annual Report 05 12 - 13 56 - 57 9 Statement of changes in equity at 31 December 2005 Pa 10 Lundbeck Annual Report 05 12 - 13 58 - 59 58 11 Cash flow statement for the year ended 31 Decembe 12 Note 1 1. Accounting policies The annual report of H. Lundbeck A/S is presented in accordance w Lundbeck Annual Report 05 60 - 61 13 carrying amount of investments in subsidiaries and equity at 14 Note 1 The consolidated financial statements are prepared by adding together uniform items and Lundbeck Annual Report 05 62 - 63 15 Derivative financial instruments Forward exchange contracts 16 Note 1 Research and development costs Research and development costs comprise expenses incurred Lundbeck Annual Report 05 64 - 65 17 protected by intellectual property rights, the maximum amort 18 Note 1 Investments in associates in the consolidated financial statements Investments in associ Lundbeck Annual Report 05 66 - 67 19 Share-based incentive programmes in which employees receive 20 Notes 1-3 Debt Mortgage debt and debt to credit institutions are recognised at the time of the Lundbeck Annual Report 05 68 - 69 21 2. Revenue Parent 2004 DKKm Parent 2005 DKKm Group 2005 DKKm 22 Note 3 3. Staff costs, continued Employees Parent 2004 Parent 2005 Group 2005 Group 2004 1,985 Lundbeck Annual Report 05 12 - 13 70 - 71 23 3. Staff costs, continued Warrant scheme for the Exe 24 Notes 3-4 3. Staff costs, continued Share price based plan for employees in foreign subsidiarie Lundbeck Annual Report 05 12 - 13 72 - 73 25 3. Staff costs, continued Executive Management Numbe 26 Notes 5-7 5. Audit fees Parent 2004 DKKm Parent 2005 DKKm Group 2005 DKKm Group 2004 DKKm 1.7 Lundbeck Annual Report 05 12 - 13 74 - 75 27 7. Tax on profit for the year Parent 2004 DKKm Paren 28 Note 8 8. Property, plant and equipment and intangible assets Group Land and buildings DKKm Pla Lundbeck Annual Report 05 12 - 13 76 - 77 29 Goodwill DKKm Patent rights DKKm Product rights DK 30 Note 8 8. Property, plant and equipment and intangible assets, continued Parent Land and buildi Lundbeck Annual Report 05 12 - 13 78 - 79 31 Goodwill DKKm Patent rights DKKm Product rights DK 32 Notes 8-9 8. Property, plant and equipment and intangible assets, continued Goodwill impairmen Lundbeck Annual Report 05 12 - 13 80 - 81 33 9. Investments in subsidiaries, continued Share of 34 Notes 10-11 10. Investments in associates 2005 Parent Parent Accumulated revaluation/ impairmen Lundbeck Annual Report 05 12 - 13 82 - 83 35 10. Investments in associates, continued Financial h 36 Notes 12-15 12. Inventories Parent 2004 DKKm Parent 2005 DKKm Group 2005 DKKm Group 2004 DKKm Lundbeck Annual Report 05 12 - 13 84 - 85 37 15. Provisions for pensions and similar liabilities 38 Notes 15-16 15. Provisions for pensions and similar liabilities, continued Furthermore, the Gro Lundbeck Annual Report 05 12 - 13 86 - 87 39 16. Provision for deferred tax Group Temporary diffe 40 Notes 16-18 16. Provision for deferred tax, continued Parent Temporary differences between asse Lundbeck Annual Report 05 12 - 13 88 - 89 41 17. Other provisions Parent 2004 DKKm Parent 2005 DK 42 Note 18 18. Mortgage and bank debt, continued Group Weighted average effective interest rate Fi Lundbeck Annual Report 05 12 - 13 90 - 91 43 18. Mortgage and bank debt, continued Parent 2004 DK 44 Notes 19-21 19. Treasury shares Parent and Group Shares of DKK 5 nom. Number Nominal value DKKm Lundbeck Annual Report 05 12 - 13 92 - 93 45 20. Contractual obligations, continued Other purchas 46 Note 22 22. Financial instruments Currency risks Net forward exchange contracts outstanding for Lundbeck Annual Report 05 12 - 13 94 - 95 47 22. Financial instruments, continued Trading part Ma 48 Note 22 22. Financial instruments, continued Credit risks The primary financial instruments sho Lundbeck Annual Report 05 12 - 13 96 - 97 49 22. Financial instruments, continued Interest rate r 50 Notes 23-24 23. Related parties Lundbecks related parties are - The companys principal sharehol Lundbeck Annual Report 05 12 - 13 98 - 99 51 23. Related parties, continued Transactions and bala 52 Notes 25-28 25. Earnings per share 2005 2004 Profit for the year (DKKm) Minority interests (DK Lundbeck Annual Report 05 100 - - 13 12 101 53 27. Working capital changes Parent 2004 DKKm Paren 54 Management statement We have today presented the annual report of H. Lundbeck A/S for 2005. The Lundbeck Annual Report 05 102 - - 13 12 103 55 Auditors report To the shareholders of H. Lundbec Lundbeck worldwide Parent company Denmark H. Lundbeck A/S Synthesis factories Denmark H. Lundbeck Design: Bysted A/S Photo: Thomas Busk Print: Quickly Tryk A/S March 2006 The specialist in psychiatry and pioneer in neurology H. Lundbeck A/S Ottiliavej 9 DK-2500 Copenhag