Management Presentation: Biosimilar Pipeline and Margin Improvement Strategy
Non-IFRS financial definitions included in this presentation
Core results
Sandoz core results - including core EBITDA, core operating income and core net income - exclude fully the amortization
and impairment charges of intangible assets, excluding software, net gains and losses on fund investments and equity
securities valued at fair value through profit and loss and certain acquisition and divestment-related items. The following
items that exceed a threshold of USD 25 million are also excluded: integration- and divestment-related income and
expenses; divestment gains and losses; restructuring charges / releases and related items; legal related items; impairments
of property, plant and equipment; software and financial assets, and income and expense items that management deems
exceptional and that are or are expected to accumulate within the year to be over a USD 25 million threshold. Sandoz
believes that investor understanding of its performance is enhanced by disclosing core measures of performance because,
since core measures exclude items that can vary significantly from year to year, they enable a better comparison of business
performance across years. For this same reason, Sandoz uses these core measures in addition to IFRS and other
measures as important factors in assessing its performance.
The following are examples of how these core measures are utilized:
- In addition to monthly reports containing financial information prepared under IFRS, senior management receives a
monthly analysis incorporating these core measures;
- Annual budgets are prepared for both IFRS and core measures.
As an internal measure of Sandoz' performance, the core results measures have limitations, and the Sandoz' performance
management process is not solely restricted to these metrics. A limitation of the core results measures is that they provide a
view of the Sandoz' operations without including all events during a period, such as the effects of an acquisition, divestment,
or amortization/impairments of purchased intangible assets, impairments to property, plant and equipment and
restructurings and related items.
Constant currencies
Changes in the relative values of non-US currencies to the US dollar can affect Sandoz' financial results and financial
position. To provide additional information that may be useful to investors, including changes in sales volume, Sandoz
presents information about its net sales and various values relating to operating and net income that are adjusted for such
foreign currency effects. Constant currency calculations have the goal of eliminating two exchange rate effects so that an
estimate can be made of underlying changes in the combined income statement excluding the impact of fluctuations in
exchanges rates:
- the impact of translating the income statements of combined entities from their non-USD functional currencies to USD;
- the impact of exchange rate movements on the major transactions of combined entities performed in currencies other than
their functional currency.
Sandoz calculates constant currency measures by translating the current year's foreign currency values for sales and other
income statement items into USD (excluding the IAS 29 "Financial Reporting in Hyperinflationary Economies" adjustments
to the local currency income statements of subsidiaries operating in hyperinflationary economies), using the average
exchange rates from the prior year and comparing them to the prior year values in USD. Sandoz uses these constant
currency measures in evaluating its performance, since they may assist the Company in evaluating its ongoing performance
from year to year. However, in performing its evaluation, Sandoz also considers equivalent measures of performance that
are not affected by changes in the relative value of currencies.
Growth rate calculation
For ease of understanding, Sandoz uses a sign convention for its growth rates such that a reduction in operating expenses
or losses compared to the prior year is considered favorable and hence shown as a positive change (growth).
Free cash flow
Sandoz defines free cash flow as net cash flows from operating activities and cash flow from investing activities associated
with the purchase or sale of property, plant and equipment, of intangible assets, of financial assets and of other non-current
assets. Excluded from free cash flow are cash flows from investing activities associated with acquisitions and divestments of
businesses and of interests in associated companies, purchases and sales of marketable securities, commodities, time
deposits and net cash flows from financing activities. Free cash flow is a non-IFRS measure and is not intended to be a
substitute measure for net cash flows from operating activities as determined under IFRS. Free cash flow is presented as
additional information because management believes it is a useful supplemental indicator of the Sandoz' ability to operate
without reliance on additional borrowing or use of existing cash. Free cash flow is a measure of the net cash generated that
is available for investment in strategic opportunities, returning to shareholders and for debt repayment. Free cash flow is a
non-IFRS measure, which means it should not be interpreted as a measure determined under IFRS.
Free cash flow conversion
Sandoz defines free cash flow conversion as free cash flow divided by EBITDA. This measure represents a company's
ability to convert its operating profits into free cash flow (FCF) in a given period.
EBITDA
Sandoz defines earnings before interest, tax, depreciation and amortization (EBITDA) as operating income, excluding
depreciation of property, plant and equipment, depreciation of right-of-use assets, amortization of intangible assets, and
impairments of property, plant and equipment, right-of-use assets and of intangible assets.
Net debt
Sandoz defines net debt as current financial debts and derivative financial instruments plus non-current financial debt less
cash and cash equivalents and marketable securities, commodities, time deposits and derivative financial instruments. Net
debt is presented as additional information because it sets forth how management monitors net debt or liquidity and
management believes it is a useful supplemental indicator of the Sandoz' ability to pay dividends, to meet financial
commitments, and to invest in new strategic opportunities, including strengthening its balance sheet.
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Management Presentation
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