Exchange differences arising from the translation of foreign associates are recognised in the Group directly in equity. Derivative financial instruments Forward exchange contracts and other derivative financial instruments are initially recognised in the balance sheet at cost, corresponding to the fair value of the consideration paid or received, while subsequent valuations are measured at fair value. Positive and negative fair values are included in other receivables and other payables respectively. Changes in the fair value of derivative financial instruments classified as hedging instruments and meeting the criteria for hedging future cash flows are recognised directly in equity (hedge accounting). Income and expenses related to such hedging transactions are transferred from equity on realisation of the hedged item and included in the same item as the hedged item. Changes in the fair value of derivative financial instruments classified as hedging instruments and meeting the criteria for hedging the fair value of a recognised asset or liability are recognised in the income statement together with changes in the value of the hedged asset or liability (hedge accounting). For derivative financial instruments which do not meet the criteria for accounting treatment as hedging instruments, changes in fair value are recognised in the income statement as they arise. Changes in the fair value of derivative financial instruments used to hedge net investments in independent foreign subsidiaries or associates and which otherwise meet the relevant criteria are recognised directly in equity (hedge accounting). Segment assets are those operating assets that are employed by a segment in its operating activity and that are either directly attributable or can be allocated to the segment on a reasonable basis. Transactions between geographical segments are made at market value. Distribution costs Distribution costs comprise expenses incurred in connection with the distribution of the Groups products sold during the year and in connection with sales campaigns, etc. launched during the year under review, including direct distribution and marketing costs, salaries, etc. for the sales and marketing functions, as well as depreciation/ amortisation and other indirect costs. Administrative expenses Administrative expenses comprise expenses incurred during the year for the management and administration of the Group, including expenses in connection with the administrative functions, management, office premises and office expenses, as well as depreciation/amortisation and other indirect costs. Research and development costs Research and development costs comprise expenses incurred during the year in connection with the Groups research and development functions, including wages and salaries, depreciation/ amortisation and other indirect costs as well as costs relating to research and development cooperation on in-licensed products. Research costs are always recognised in the income statement as they are incurred. Development costs are capitalised if a number of specific criteria for capitalising these costs are deemed to have been met. Otherwise, development costs will be recognised in the income statement as they are incurred. See Accounting policies critical to financial reporting on page 61 for a description of conditions for capitalising development costs. Government loans and grants Forgivable government development loans are recognised as income in the income statement as the research and development costs relating to the project are incurred, provided that these costs are recognised in the income statement. In the event of repayment, the repayments including interest are recognised as an expense in the income statement as the related income is recognised as income. Income statement Revenue Revenue comprises invoiced sales for the year less returned goods and sales taxes consisting mainly of value added taxes and foreign drug taxes. Sales subject to a price adjustment clause are included in revenue at the time of delivery at the minimum price. The balance of the invoiced price is recognised in the balance sheet as a prepayment and is subsequently included in revenue when the price has been finally determined. The price is finally determined as the product is resold by the customer. See Accounting policies critical to financial reporting on page 61 for a description of the accounting treatment of income from Forest. Moreover, revenue includes licence income and royalties from outlicensed products as well as non-refundable down-payments and milestone payments relating to research cooperation when the payments relate to the research results achieved and each payment has been individually agreed. In addition, income from the reduction of investments in research enterprises, considered to represent the sale of research results, is recognised as revenue. Cost of sales Cost of sales comprises the cost of goods sold. Cost includes the cost of raw materials, consumables and goods for resale, direct labour and indirect costs of production, including the cost of operating and depreciating/amortising manufacturing facilities. Cost of sales moreover includes expenses in connection with quality certification of sold products and any writedown to net realisable value of unsaleable and slow moving items. Segment information The Groups activities are exclusively in the business segment of Pharmaceuticals for the treatment of illnesses in the field of CNS. Revenue, segment assets and additions to property, plant and equipment and intangible segment assets are disclosed within the secondary geographical segments. Segment information is provided in accordance with the Groups accounting policies, risks and internal financial management policies. 63 ANNUAL REPORT 2006 WE IMPROVE THE QUALITY OF LIFE... FOR PEOPLE SUFFERING FROM PSYCHIATRIC AND NEUROLOGICAL DISORDERS LUNDBECK AT A GLANCE H. Lundbeck A/S is an international pharmaceutical company with more than 50 ye See page 26 for further information about Lundbecks marketed pharmaceuticals ALZHEIMERS DEPRESSION CONTENTS MANAGEMENT REPORT Strong growth of the Groups new pharmaceuticals and progress in the pipel FINANCIAL REPORT Revenue DKK 9,221 million Profit from operations DKK 1,784 million Net profit for t FINANCIAL HIGHLIGHTS 2002-2006 Revenue DKK 9,221 million Research and development costs DKK 1,958 mi FINANCIAL PERFORMANCE The Groups new pharmaceuticals posted strong growth in all markets in 2006 and 12.9% 2.9% 15.1% By the end of 2006, Cipralex® held a market share of 12.9 per cent in Europe. By th 14 Serdolect® was launched in 14 markets in 2006. Total revenue Cipralex® Income from Lexapro® Ebix DECISIVE Lundbeck has defined a clear-cut strategy and business model for the Groups long-term devel NICHE PLAYER Through its extensive and dedicated operations as a specialist business, Lundbeck has b How will Lundbeck achieve its vision? STRATEGY Through development and growth Lundbecks vision is t 70% + 30%= 1 Own research In-licencing Lundbeck has: · a solid position in the CNS market, enjoying How does a small pharmaceutical company achieve success? LUNDBECKS BUSINESS Through a clearly defin Partnerships enable Lundbeck to maintain a research and development portfolio on a level with much l How does Lundbeck manage the Groups risks? RISK MANAGEMENT Through balanced risk exposure In the in Particularly critical risks Based on reports received by its business units, Lundbeck management has How does Lundbeck ensure good corporate governance and responsible business ethics? CORPORATE GOVER The committee prepares its recommendation to the Supervisory Board on the basis of general trends am THE LUNDBECK SHARE Lundbecks shares are listed on the Copenhagen Stock Exchange. The price of the sh Lundbecks Annual General Meeting will be held on 24 April 2007 at 4pm at Radisson SAS Falconer Cente Composition of shareholders At the end of 2006, the 27,098 shareholders registered in the companys r Analyst coverage Company ABG Sundal Collier ABN AMRO/Alfred Berg Blue Oak Capital Carnegie Bank CSFB CNS Lundbeck is dedicated to the development of pharmaceuticals for the treatment of diseases of the WORLD LEADER Lundbecks vision is to become one of the worlds leading companies in the field of disea MARKETED PHARMACEUTICALS In 2006, Lundbeck marketed a total of 14 different pharmaceuticals for the Launched pharmaceuticals in the market Compound Escitalopram Mechanism of action ASRI Indication Dep ALZHEIMERS DISEASE Alzheimers disease is the most common form of dementia. According to WHO, about 2 DementiaNet.com DementiaNet.com An online community and information website for people affected by DEPRESSION Depression is a serious disease with symptoms that may include persistent low mood, dimin 70+ million One reason why it is so difficult to tackle the biological cause of depression is that PARKINSONS DISEASE Parkinsons disease is a progressive, degenerative disorder caused by the degenera Azilect® Lundbeck has launched Azilect® in more than 20 countries. After my third or fourth appointm SCHIZOPHRENIA Schizophrenia is a mental disorder that occurs in varying degrees but is most often ch 1% Up to one per cent of the population is directly affected by schizophrenia. Read more about the d How is the the basis of long-term growth secured? INNOVATION Through the development and procuremen 250 The US market accounts for 56 per cent of the world market for pharmaceuticals for disorders of The fact that no one knows with certainty why these disorders arise is a major challenge. Read more The brain. At only 1.35 kg and accounting for less than two per cent of our body weight, the brain i RESPONSIBLE Acting responsibly is a key value for Lundbeck. We know that our decisions and actions m ACTIONS Lundbeck remains dedicated to maintaining the position as an attractive workplace with a goo How can Lundbeck retain and attract competent and committed employees? AN ATTRACTIVE WORKPLACE Thro Meet Lundbecks employees at lundbeck.com/careers Our leadership development programme builds on thr Health and safety statistics for 2004-2006 2004 Lost-time accidents Registered near-misses Indicator How can Lundbeck continue to grow without increasing its impact on the environment? ENVIRONMENTAL I More production, less environmental impact Lundbeck experienced a positive trend in 2006: we increas Strategic objectives for 2005-2010, target status in 2006 and new targets for 2007 Strategic objecti How does Lundbeck contribute to scientific progress? RESEARCH AND KNOWLEDGE SHARING Through innovat 100.000 specialists around the world have benefited from the Lundbeck Institutes direct and indirect FINANCIAL REPORT 50 FINANCIAL REPORT 50 Summary for the Group 60 102 103 106 107 108 110 Notes Management statement Audi Summary for the Group 2002-2006 Income statement (DKKm) Revenue Profit before research and developm Share data Average number of shares (millions)1 Earnings per share (EPS) (DKK)1 Diluted earnings per 54 Income statement for the year ended 31 December 2006 Parent 2005 DKKm Parent 2006 DKKm Group 2006 DK Balance sheet at 31 December 2006 Assets Parent 2005 DKKm Parent 2006 DKKm Group 2006 DKKm Group 200 Balance sheet at 31 December 2006 Equity and liabilities Parent 2005 DKKm Parent 2006 DKKm Group 200 Statement of changes in equity at 31 December 2006 ­ Group Share capital DKKm Share premium DKKm Ret Statement of changes in equity at 31 December 2006 ­ Parent Share capital DKKm Reserve for net reval Cash flow statement 1 January ­ 31 December 2006 Parent 2005 DKKm Parent 2006 DKKm Group 2006 DKKm G NOTES 1. Accounting policies The annual report of H. Lundbeck A/S is presented in accordance with In 1 NOTES Recognition and measurement take into consideration gains, losses and risks that arise befo Exchange differences arising from the translation of foreign associates are recognised in the Group 1 NOTES If the related development costs are recognised in the balance sheet, the development loan Gains or losses on the disposal or retirement of items of property, plant and equipment are calculat 1 NOTES Equity Dividend Proposed dividend is recognised as a liability at the time of adoption of t the proceeds and the nominal value is recognised in the income statement over the loan period. Debt 2-3 NOTES 2. Revenue Parent 2005 DKKm Parent 2006 DKKm Group 2006 DKKm Group 2005 DKKm 296.6 2,803 3. Staff costs ­ continued Parent 2005 DKKm Parent 2006 DKKm Group 2006 DKKm Group 2005 DKKm Execut 3 NOTES 3. Staff costs ­ continued Incentive plans Warrant scheme for the Executive Management and 3. Staff costs ­ continued Share price based plan for employees in foreign subsidiaries (1999 plan) 3-6 NOTES 3. Staff costs ­ continued Stock Appreciation Rights for employees of US subsidiaries (20 4. Depreciation and amortisation ­ continued 2005 Parent Property, plant and equipment DKKm Parent I 7-8 NOTES 7. Tax on profit for the year Parent 2005 DKKm Parent 2006 DKKm Group 2006 DKKm Group 200 8. Property, plant and equipment and intangible assets Group Land and buildings DKKm Other fixtures 8 NOTES 8. Property, plant and equipment and intangible assets ­ continued Group 2006 Cost at 01.01 8. Property, plant and equipment and intangible assets ­ continued Goodwill impairment test The carr 8 NOTES 8. Property, plant and equipment and intangible assets ­ continued Parent company Land and 8. Property, plant and equipment and intangible assets ­ continued Parent company Goodwill DKKm Pate 9-10 NOTES 9. Investments in subsidiaries 2006 Carrying amount at 01.01.2006 Capital contributions 10. Investments in associates 2006 Parent Parent Accumulated revaluation/ impairment losses DKKm Par 11-14 NOTES 11. Other investments and other receivables Group Receivables from associates DKKm Avai 11. Other investments and other receivables ­ continued Fair value adjustment of available-for-sale 15 NOTES 15. Pension obligations and similar obligations Group 2006 DKKm Group 2005 DKKm Present v 15. Pension obligations and similar obligations ­ continued A pension plan was set up in the USA in 16 NOTES 16. Deferred tax liabilities Group Temporary differences between assets and liabilities as 16. Deferred tax liabilities ­ continued Parent company Temporary differences between assets and lia 17-18 NOTES 17. Provisions Parent 2005 DKKm Parent 2006 DKKm Group 2006 DKKm Group 2005 DKKm 128.8 18. Mortgage and bank debt ­ continued Group Fixed/ floating Weighted average effective interest rat 18-20 NOTES 18. Mortgage and bank debt ­ continued Bank debt Parent 2005 DKKm Parent 2006 DKKm Grou 19. Treasury shares Parent company and Group 2006 Holding at 01.01.2006 Additions Shares cancelled 21-22 NOTES 21. Contingent liabilities Forest See note 2 Revenue in respect of the consequences of 22. Financial instruments Foreign currency risk Net forward exchange contracts outstanding for the G 22 NOTES 22. Financial instruments ­ continued Trading part Market value (forward exchange contract 22. Financial instruments ­ continued Credit risks The primary financial instruments shown in the ba 22-23 NOTES 22. Financial instruments ­ continued Interest rate risks The interest rate risk has be 23. Related parties Lundbecks related parties are - The companys principal shareholder, LFI a/s, Ves 23-27 NOTES 23. Related parties ­ continued Transactions and balances with associates Parent 2005 D 25. Earnings per share 2006 2005 Profit for the year (DKKm) Minority interests (DKKm) Net profit fo 28-30 NOTES 28. Acquisition of company In 2006, Lundbeck acquired the SGS-518 development project b 30. Releases from H. Lundbeck A/S in 2006 No. Date Subject No. Date Subject 253 06.12.2006 252 06. MANAGEMENT STATEMENT We have today presented the annual report of H. Lundbeck A/S for the financial INDEPENDENT AUDITORS REPORT To the shareholders of H. Lundbeck A/S We have audited the annual report SUPERVISORY BOARD Mats Pettersson Elected at the 2003 General Meeting Born 7 November 1945 CEO, Biov Jes Østergaard Elected at the 2003 General Meeting Born 5 March 1948 President, ilochip A/S Member, EXECUTIVE MANAGEMENT 31 December 2006 Claus Bræstrup Born 18 January 1945 President and CEO Director 107 The specialist in psychiatry and pioneer in neurology H. Lundbeck A/S Ottiliavej 9 2500 Copenhagen