1 NOTES Equity Dividend Proposed dividend is recognised as a liability at the time of adoption of the dividend resolution at the annual general meeting (the time of declaration). Dividend expected to be paid for the year is shown as a separate item in the statement of equity. Treasury shares Cost and selling prices of treasury shares as well as dividends are recognised directly in retained earnings under equity. Gains and losses on sales are therefore not recognised in the income statement. Other equity instruments Cost and selling prices of other equity instruments, including option premiums in connection with option contracts for the purchase of treasury shares, are recognised directly in retained earnings under equity. Share-based payment Share-based incentive programmes in which employees may opt only to buy shares in the parent company (equity schemes) are measured at the equity instruments fair value at the date of grant and recognised in the income statement under staff costs when the employee obtains the right to buy the shares. The balancing item is recognised directly in equity. Share-based incentive programmes in which employees have the difference between the agreed price and the actual share price settled in cash are measured at fair value at the date of grant and recognised in the income statement under staff costs when the final right of cashsettlement is obtained. The incentive programmes are subsequently remeasured on each balance sheet date and upon final settlement, and any changes in the fair value of the programmes are recognised in the income statement under staff costs. The balancing item is recognised under liabilities and equity. Pension obligations The Group has entered into pension agreements and similar agreements with most of the Groups employees. Periodical payments to defined contribution plans are recognised in the income statement at the due date and any contributions payable are recognised in the balance sheet under liabilities. The present value of the Groups obligations relating to future pension payments according to defined benefit plans is measured on an actuarial basis at intervals of not more than three years on the basis of the pensionable period of employment up to the time of the actuarial valuation. Actuarial gains and losses are recognised in the income statement as they are calculated. Provision is made in the balance sheet for the present value of plans which are not funded. The present value of the obligation according to defined benefit plans which are funded by independent pension funds is measured less the fair value of the plan assets, and any net obligation is recognised in the balance sheet under noncurrent liabilities. Any net asset is recognised in the balance sheet as a financial asset. The years changes in the obligations relating to defined benefit plans are recognised in the income statement. Income tax and deferred tax Current tax liabilities and current tax receivables are recognised in the balance sheet, computed as tax calculated on the taxable income for the year, adjusted for provisional taxes paid. Tax payments for the jointly taxed companies of the Lundbeck Group are settled through intra-group accounts with the parent company LFI a/s. Deferred tax is recognised according to the balance sheet liability method on all temporary differences between the carrying amounts of assets and liabilities and their tax base, except for temporary differences arising either on initial recognition of goodwill or initial recognition of a transaction that is not a business combination and with the temporary difference ascertained at the time of the initial recognition affecting neither the financial results nor the taxable income. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, unless the parent company has a possibility of controlling when the deferred tax is to be realised and it is likely that the deferred tax will not crystallise as current tax. Deferred tax is calculated based on the planned use of each asset and settlement of each liability, respectively. Deferred tax is measured by using the tax rates and tax rules that, based on legislation in force or in reality in force at the balance sheet date, are expected to apply in the respective countries when the deferred tax is expected to crystallise as current tax. Changes in deferred tax as a result of changed tax rates or tax rules are recognised in the income statement. Deferred tax assets, including the tax value of tax loss carry-forwards, are recognised in the balance sheet at the value at which the asset is expected to be realised, either through a set-off against deferred tax liabilities or as net assets to be offset against future positive taxable income. Deferred tax concerning recaptured losses in jointly taxed foreign subsidiaries in previous years is recognised to the extent a tax liability is expected to arise in connection with future profits or on the disposal of the asset. Tax on equity items relating to deferred income and expenses in connection with financial instruments, treasury shares and options to purchase treasury shares as well as payments concerning share option plans and other share price based plans is recognised in equity. However, changes in deferred tax concerning the cost of share-based payments are generally recognised in the income statement. Provisions Provisions are recognised when the Group has a legal or constructive obligation that arises from past events and it is probable that an outflow of financial resources will be required to settle the obligation. Return obligations imposed on the industry are recognised in the balance sheet under provisions. Debt Mortgage debt and debt to credit institutions are recognised at the time of the raising of the loan at proceeds received less transaction costs paid. In subsequent periods the financial liabilities are measured at amortised cost, equivalent to the capitalised value when the effective rate of interest is used, so that the difference between 66 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