Report by the
Board of Directors

Events in 2012

On 7 February Orion announced that it would continue development of an inhalable budesonide-formoterol combined formulation.

On 26 April Orion announced that it was suing Mylan in the United States to enforce its US patents covering the proprietary drug Stalevo®.

On 1 May the United States District Court gave its decision on the US patent infringement lawsuit concerning Orion’s proprietary drug Precedex®.

On 3 July Orion upgraded its full-year outlook for 2012.

On 5 September Orion announced that the total number of Orion Corporation B shares under the management of The Capital Group Companies, Inc. had increased to more than one-twentieth (1/20) of the total number of Orion Corporation shares.

On 9 October Orion upgraded its full-year outlook for 2012.

On 30 November Orion announced that it planned to apply for marketing authorisation for a combined budesonide-formoterol formulation in the Easyhaler® product family.

On 20 December Orion announced that it had reached a settlement with Mylan Pharmaceuticals Inc. to a patent dispute over the proprietary drug Comtan®.

Events after the period

There were no significant events after the period.

Financial review 2012

Net sales

The Orion Group’s net sales in 2012 were up by 7% at EUR 980 million (EUR 918 million in 2011). The net effect of currency exchange rates was plus EUR 16 million.

The Pharmaceuticals business’s net sales were up by 7% at EUR 929 (871) million. Net sales of Orion’s Stalevo® (carbidopa, levodopa and entacapone) and Comtess®/Comtan® (entacapone) Parkinson’s drugs were down by 6% at EUR 250 (267) million, which was 27% (31%) of the Pharmaceuticals business’s net sales. The net sales of other products in the portfolio, including EUR 17 million of net sales of generic entacapone products, were up by 12% at EUR 679 (604) million. The branded products based on in-house R&D accounted for EUR 429 (421) million, or 46% (48%) of the Pharmaceuticals business’s net sales.

The Diagnostics business’s net sales were up by 9% at EUR 54 (50) million.

Net sales and operating profit

Operating profit

The Orion Group’s operating profit was EUR 281 (283) million.

The Pharmaceuticals business’s operating profit was EUR 289 (288) million. Net sales and operating profit were enhanced by long-term compensatory payments of EUR 10 million related to the pricing of partner deliveries. In the comparative period net sales and operating profit were enhanced by a non-recurring payment of EUR 7 million. The gross profit percentage was lower than in the comparative period because products with lower margins accounted for an increasing proportion of sales. As anticipated, research and development costs were higher than in the comparative period.

The Diagnostics business’s operating profit was down by 47% at EUR 2.6 (4.9) million as marketing and product development costs increased, although sales grew well.

Operating expenses

The Group’s sales and marketing expenses were EUR 206 (205) million.

R&D expenses were up by 20% at EUR 105 (88) million and accounted for 11% (10%) of the Group’s net sales. Pharmaceutical R&D expenses amounted to EUR 97 (81) million. Research projects are reported in more detail under Pharmaceuticals in the Business Reviews.

Administrative expenses were up at EUR 45 (41) million.

Other operating income and expenses increased profit by EUR 6 (3) million. The income includes EUR 3 million insurance compensation payments relating to the fire at the Turku manufacturing plant in 2011.

R&D expenses

Group’s profit

The Group’s profit before taxes totalled EUR 279 (282) million. Basic earnings per share were EUR 1.48 (1.49) and diluted earnings per share were EUR 1.48 (1.49). Equity per share was EUR 3.63 (3.55). The return on capital employed before taxes (ROCE) was 46% (49%) and the return on equity after taxes (ROE) 41% (43%).

Financial position

The Group’s gearing was -2% (-7%) and the equity ratio 61% (64%).

The Group’s total liabilities at 31 December 2012 were EUR 326 (279) million. At the end of the period, interest-bearing liabilities amounted to EUR 137 (89) million, including EUR 107 (66) million of long-term loans.

The Group had EUR 145 (123) million of cash and cash equivalents at the end of the period, which are invested in short-term interest-bearing instruments issued by financially solid financial institutions and corporations.

Equity ratio and liabilities


Cash flow

Cash flow from operating activities was higher than in the comparative period at EUR 221 (199) million. Cash flow was higher because the amount tied up into working capital grew by less than in the comparative period and the amount of taxes paid was lower.

Cash flow from investing activities was EUR -47 (-44) million.

Cash flow from financing activities was EUR -152 (-200) million. Cash flow from financing activities improved on the comparative period because new long-term loans were raised.

Cash flow per share before financial items

Capital expenditure

The Group’s capital expenditure totalled EUR 47 (50) million. This comprised EUR 40 (30) million on property, plant and equipment and EUR 7 (19) million on intangible assets.

Investments


Outlook for 2013

Net sales will be at similar level to 2012 (net sales in 2012 were EUR 980 million).

Operating profit will be slightly lower than in 2012 (operating profit in 2012 was EUR 281 million).

The Group’s capital expenditure will be about EUR 80 million excluding substantial corporate or product acquisitions (the Group’s capital expenditure in 2012 was EUR 47 million).

Basis for outlook

Competition in the Finnish market will remain intense in 2013. However, product launches will continue to support Orion’s position as market leader.

The generic competition that commenced in April 2012 in the United States decreased sales of Orion’s Parkinson’s drugs. The decrease will continue in 2013 because generic products will be in the markets during the whole year and, in addition, the number of competitors will be greater than in 2012. US markets accounted for about EUR 60 million of the net sales of Orion’s Parkinson’s drugs in 2011 and about EUR 33 million in 2012. In addition, sales of generic entacapone products to the United States amounted to about EUR 17 million in 2012.

The entacapone molecule patent expired in November 2012 in the main European countries for Orion, and as a result there will be generic competitors to Comtan and Comtess in these markets in 2013. Data protection of Stalevo will remain valid in the European Union until October 2013 and generic competition is not expected to commence in Europe during the current year, even though the first generic marketing authorisation application in Europe has already been submitted. The total sales of Orion’s Parkinson’s drugs in Europe are expected to be slightly lower than in 2012. Elsewhere in the world generic competition is not expected to have a material impact on sales of these products in the current year.

A slight decrease in the gross profit as percentage of net sales is expected because sales of generic products will account for an even greater proportion of Orion’s total sales and price competition will remain intense in many markets.

Marketing expenditure will be similar to the previous year. Because the registrations and launches of new products are projects that take more than a year, the increases in resources and other inputs required in 2013 were planned mainly during the previous year.

Research and development costs will be higher than in 2012. They are partly the Company’s internal fixed cost items, such as salaries and maintenance of the operating infrastructure, and partly external variable costs. External costs arise from, among other things, long-term clinical trials, which are typically performed in clinics located in several countries. The most important clinical trials scheduled for 2013 are either ongoing from the previous year or at an advanced stage of planning, therefore their cost level can be estimated rather accurately. The accrued costs are materially affected by how the costs arising are allocated between Orion and its collaboration partners. The outlook estimate does not assume that Orion receives any material milestone payments from collaboration partners in 2013.

The estimated costs of the ongoing patent litigation in the United States are based on the planned timetables and work estimates. The costs due to the litigation will depend on a number of factors, which are difficult to estimate accurately.

Orion’s production capacity is nearly fully utilised following the increase in sales in recent years. Orion will make greater investments in production in 2013 than in recent years to develop and ensure future growth, delivery reliability and quality standards. One significant project is the packaging and logistics centre to be established in Salo, but significant investments will be also made in current manufacturing plants, for instance to increase the production capacity in Easyhaler drugs.

Near-term risks and uncertainties relating to the outlook

Sales of Orion’s Parkinson’s drugs will decrease in 2013 due to generic competition. The effects of the competition have been taken into account in the outlook estimate.

Sales of individual products and also Orion’s sales in individual markets may vary, for example depending on the extent to which the ever-tougher price and other competition prevailing in pharmaceutical markets in recent years will specifically affect Orion’s products. Deliveries to Novartis are based on timetables that are jointly agreed in advance. Nevertheless, they can change, for example as a consequence of decisions by Novartis concerning adjustments of stock levels. Royalties from Precedex may decrease materially in mid 2013 if Hospira is not granted six months of pediatric exclusivity for the product in the United States.

Most of the exchange rate risk relates to the US dollar. Typically, only less than 15% of Orion’s net sales comes from the United States. As regards currencies in European countries, the overall effect will be abated by the fact that Orion has organisations of its own in most of these countries, which means that in addition to sales income, there are also costs in these currencies.

Orion’s currently high production capacity utilisation rate and its broad product range may cause risks to the delivery reliability and make it more challenging than before to maintain the very high quality standard required. Authorities and key customers in different countries undertake regular and detailed inspections of development and manufacturing of drugs. Possibly required corrective actions may at least temporarily reduce delivery reliability.

Research projects always entail uncertainty factors that may either increase or decrease estimated costs. The projects may progress more slowly or faster than assumed, or they may be discontinued. Nonetheless, changes that may occur in ongoing clinical studies are reflected in costs relatively slowly, and they are not expected to have a material impact on earnings in the current year. Owing to the nature of the research process, the timetables and costs of new studies that are being started are known well in advance. They therefore typically do not lead to unexpected changes in the estimated cost structure. Orion generally undertakes Phase III clinical trials in collaboration with other pharmaceutical companies. Commencement of these collaboration relationships and their structure also materially affect the schedule and cost level of research projects.

Group’s financial objectives

Orion’s financial objectives are ensuring the Group’s financial stability and profitable growth.

These objectives are achieved through:

  • Increasing net sales. Achievement of this objective requires continuous investment in development of the product portfolio.
  • Maintaining profitability at a good level, the aim being operating profit that exceeds 20% of net sales.
  • Keeping the equity ratio at least 50%.

Orion’s dividend distribution policy

Orion’s dividend distribution takes into account the distributable funds and the capital expenditure and other financial requirements in the medium and long term to achieve the financial objectives.

Proposal by the Board of Directors for distribution of profit:
dividend per share EUR 1.30

The parent company’s distributable funds are EUR 246,624,622.55, including EUR 197,740,936.54 of profit for the financial year.

The Board of Directors proposes that a dividend of EUR 1.30 per share be paid from the parent company’s distributable funds. No dividend shall be paid on treasury shares held by the Company on the dividend distribution record date. On the day when the profit distribution was proposed, the number of shares conferring entitlement to receive dividend totalled 140,931,837, on which the total dividend payment would be EUR 183,211,388.10. The Group’s payout ratio for the financial year 2012 would be 87.8% (87.2%). The dividend payment date would be 4 April 2013, and shareholders registered in the Company’s shareholder register on 22 March 2013 would be entitled to the dividend payment.

The Board of Directors further proposes that EUR 250,000 be donated to medical research and other purposes of public interest in accordance with a separate decision by the Board and that EUR 63,163,234.45 remain in equity.

Earnings per share and dividend

Strategy

In November 2012, Orion’s Board of Directors confirmed that the strategic focus remains the same for 2013–2017. Orion’s strategic aims are profitable growth and increased shareholder value, whilst keeping business risks under control.

Orion’s strategic focus continues to be on:

  • growth of business operations through a competitive product portfolio
  • strengthening market position in Europe
  • improving the flexibility and efficiency of operations

All of Orion’s business divisions have a major role in achieving the financial objectives of the Group, but the two largest divisions, Proprietary Products and Specialty Products, are crucial. Orion strives to enhance synergies between patent-protected proprietary drugs, off-patent (i.e. generic) prescription drugs and self-care products.

Competitive product portfolio

Growth is based on a competitive product portfolio developed through Orion’s in-house R&D, collaborative research and active product acquisition. Potential corporate acquisitions are also continually evaluated.

Orion’s core therapy areas are central nervous system drugs, oncology and critical care drugs, and inhalable Easyhaler pulmonary drugs. Orion’s R&D operations concentrate on early-phase development. In addition to in-house research, Orion invests in early-phase research jointly with universities and other pharmaceutical companies. In the late phase of clinical development, Orion aims to share the costs with other pharmaceutical companies. Orion generally seeks partnerships for undertaking at least Phase III clinical trials, which are the final phase, especially for projects oriented towards markets outside Europe. Orion also seeks to acquire new early-phase product candidates and further developed products to reinforce the research pipeline based on its own research projects.

Orion continues the work to build up a competitive product portfolio. As regards Proprietary Products customers, the focus is on neurologists, urologists, pulmonary doctors, critical care doctors and other health care professionals in these specialised fields. For Specialty Products, important customer groups in Finland, for example, are general practitioners and pharmacy staff. Orion’s primary aim is to exploit all business opportunities from the drugs in the current product portfolio, such as dexdor®, Stalevo®, Simdax® and the Easyhaler product family. Orion’s next projects in late-phase development and commercialisation are development of inhalable Easyhaler combined formulation products, development of the Parkinson’s drug Stalevo for Japanese markets, development of a more effective levodopa product (ODM-101) and development of a drug (ORM-12741) for treatment of Alzheimer’s disease. In early clinical phases Orion is developing drugs for treatment of advanced prostate cancer (ODM-201) and for treatment of Parkinson’s disease (ODM-103, a new more effective COMT inhibitor). Orion also aims to ensure continuance of clinical trials through active early-phase research.

To be successful in the generic (i.e. off-patent) prescription drug and self-care product sector, it is especially important to have a broad and continually renewed portfolio. Orion seeks to secure a continuous stream of product launches through active product acquisition and its own development work. Orion determines the product portfolios individually for each market. In Finland Orion strives to maintain a broad range of prescription drugs and self-care products. In other key markets, such as Scandinavia, Eastern Europe and Russia, Orion’s product portfolio focuses on generic prescription drugs in certain therapy areas.

Strengthening market position in Europe

In specialised medical care, Orion concentrates on certain customer groups through its own sales network throughout Europe and through partners worldwide. Orion markets generic prescription drugs and self-care products mainly in the Nordic countries and Eastern Europe through its own sales network. Orion aims to strengthen its market leadership in Finland and make the Scandinavian countries a domestic market in which it has a strong presence. Orion’s aim in all the Nordic countries is to have a presence with a broad product range. In Central and Southern Europe the emphasis is on proprietary products and in Eastern Europe on generic products. Outside Europe, Orion operates mainly with partners.

Flexible and efficient operations

Because the operating environment changes all the time, the agility and flexibility of operations will in future be as crucial as cost-effectiveness. Orion’s key projects to improve operating efficiency have been implementing a new research and development model, building up partnership models for early-phase research, maintaining high delivery reliability in the supply chain cost efficiently, capacity reorganisation (including investment in Salo), managing diversification, improving the competitiveness of sales operations and general simplification and streamlining of operating practices.

Networking and seeking partners throughout the value chain will facilitate improvements to competitiveness and establishing a foundation for profitable future growth. R&D collaboration and active networking will enable Orion to increase the number of new research projects and balance the risks of projects in the research pipeline. Through partnerships in the supply chain, Orion will improve the efficiency of its operations by determining which products it will manufacture itself and to what extent products or semi-finished products will be acquired through its collaboration network. Partnerships in sales and marketing will ensure a broad network of distribution channels through which proprietary drugs developed by Orion will be distributed worldwide. Moreover, the product portfolio can be expanded by selling the partners’ products through Orion’s own sales network.

Through these strategic actions, Orion seeks to enhance its capability to continue operating as a pharmaceuticals and diagnostics company that provides new products and engages in R&D.

Business Reviews

Pharmaceuticals

According to statistics collected by Finnish Pharmaceutical Data Ltd, Finnish wholesale of human pharmaceuticals in 2012 totalled EUR 2,031 (1,972) million, up by 3% on the previous year.

Finland is the most important individual market for Orion, generating about one-quarter of the total net sales. Orion was able to increase its sales faster than the markets as a whole and strengthened its position as leader in marketing pharmaceuticals in Finland. According to statistics collected by Finnish Pharmaceutical Data Ltd, Orion’s wholesale of human pharmaceuticals in Finland in 2012 amounted to EUR 219 (202) million, up by 9% compared with the previous year. Orion’s market share of Finnish pharmaceuticals markets was 11% (10%).

According to IMS Health pharmaceutical sales statistics, in the 12-month period ending in September 2012 the total sales of Parkinson’s drugs in the United States were up by 3% at USD 751 million (USD 727 million in the previous 12-month period). The five largest European markets for Parkinson’s disease drugs were Germany, the United Kingdom, France, Spain and Italy. In these countries, the combined sales of Parkinson’s drugs in the 12-month period ending in September 2012 totalled EUR 954 (987) million, and the average market decline was 3%.

The most important individual therapy area for Orion is still the treatment of Parkinson’s disease. Orion’s Parkinson’s drugs account for about a quarter of the Group’s net sales. Sales of entacapone drugs in the United States remained stable, and in Japan sales continued to grow well and clearly better than the market as a whole. According to IMS Health pharmaceutical sales statistics, in the 12-month period ending in September 2012, sales of entacapone drugs in the United States totalled USD 195 million (USD 190 million in the previous 12-month period). Stalevo and Comtan accounted for 83% of these sales and generic entacapone products supplied by Orion accounted for 17%. Sales remained stable at a total of EUR 157 (157) million in the five largest markets in Europe, and were up by 23% at EUR 66 (53) million in Japan. The market share of entacapone drugs was 26% in the United States, on average 16% in the five largest European markets and 11% in Japan.

According to IMS Health pharmaceutical sales statistics, sales of Orion’s Precedex® intensive care sedative (dexmedetomidine) were up by 27% at USD 248 million in the 12-month period ending in September 2012 (USD 194 million in the previous 12-month period). About four-fifths of the sales amounting to USD 193 (153) million were in the United States, where Precedex sales grew by 27%.

Net sales and operating profit of the Pharmaceuticals business

Net sales of the Pharmaceuticals business in 2012 were EUR 929 (871) million, up by 7% on the previous year. The operating profit of the Pharmaceuticals business was similar to the previous year at EUR 289 (288) million. The operating profit of the Pharmaceuticals business was 31% (33%) of the segment’s net sales.

Net sales of Orion’s top ten pharmaceuticals in 2012 were up by 5% at EUR 473 (451) million. They accounted for 51% (52%) of the total net sales of the Pharmaceuticals business.

Net sales of the branded products based on own in-house R&D were up by 2% at EUR 429 (421) million in 2012. These products accounted for 46% (48%) of the net sales of the Pharmaceuticals business.

Proprietary Products

The product portfolio of Proprietary Products consists of patented prescription products in three therapy areas: central nervous system diseases, oncology and critical care, and Easyhaler® pulmonary drugs.

Net sales of Proprietary Products in 2012 were similar to the previous year at EUR 404 (409) million.

Orion’s drugs for treatment of Parkinson’s disease are Stalevo® (active ingredients carbidopa, levodopa and entacapone) and Comtess®/Comtan® (entacapone), and their net sales in 2012 totalled EUR 250 (267) million. Sales of Parkinson’s drugs were down by 6% and accounted for 27% (31%) of the total net sales of the Pharmaceuticals business. The decrease in sales is mainly due to commencement of generic competition in the United States in April 2012, which decreased deliveries to Novartis. Net sales from deliveries of Stalevo and Comtan to Novartis were down by 11% at a total of EUR 152 (171) million. Deliveries of Stalevo to Novartis were down by 8% at EUR 95 (103) million, and deliveries of Comtan by 17% at EUR 56 (68) million. Total net sales generated by Stalevo and Comtess in Orion’s own sales organisation were up slightly at EUR 98 (96) million. Sales through Orion’s own sales network were up by 6% at EUR 86 (81) million for Stalevo and down by 16% at EUR 13 (15) million for Comtess.

The US Food and Drug Administration (FDA) has an ongoing safety review of Stalevo, which began in spring 2009. Orion is assisting the FDA in undertaking the safety review. The FDA has requested additional data based on databases concerning the significance of the results of the STRIDE-PD study, and consequently Orion and Novartis have undertaken epidemiological studies and results from them were submitted to authorities for review in the third quarter of 2012.

Net sales of Simdax®, a drug for treatment of acute decompensated heart failure, in 2012 were similar to the previous year at EUR 44 (44) million.

Total net sales of the Easyhaler® product family for treatment of asthma and chronic obstructive pulmonary disease were down by 12% in 2012 at EUR 27 (31) million. Sales of Easyhaler products through Orion’s own sales network in Europe continued to grow strongly, but sales through partners were lower than in the previous year. Orion continued repatriating the rights to Easyhaler products, and this transitional phase reduced sales through partners in the financial period.

Net sales of the Precedex® intensive care sedative (dexmedetomidine) were up by 38% in 2012 at EUR 45 (33) million. In the United States and markets outside Europe the sedative is sold by Orion’s partner Hospira. US markets account for about four-fifths of net sales of Precedex.

Net sales of Orion’s dexdor® intensive care sedative (dexmedetomidine) in 2012 were EUR 13 (1) million. Launching of the product progressed as planned in 2012, and it is already available in over fifteen European countries. It is anticipated that the product will be launched in Southern Europe and France during the current year.

Specialty Products

Net sales of the Specialty Products business division’s off-patent, i.e. generic prescription drugs and self-care products in 2012 were up by 14% at EUR 367 (321) million. The growth was enhanced among others by sales of Orion’s generic entacapone products, which commenced at the beginning of the year and totalled EUR 17 million, and are reported as part of the net sales of the Specialty Products business division.

The launches of generic prescription drugs and self-care products were weighted more towards prescription drugs than before, and for that reason the total number of launches was less than in 2011. There were 116 (135) product launches (product/market) in 2012.

Net sales of Orion’s human pharmaceuticals in Finland were up by 8% at EUR 238 (220) million in 2012. Specialty Products accounted for the majority of sales. Orion managed to increase its sales, especially in prescription drugs.

Net sales of Orion’s human pharmaceuticals in Eastern Europe and Russia in 2012 were up by 16% at altogether EUR 63 (54) million. Specialty Products account for the majority of sales in the region.

Animal Health

In the Nordic countries and some Eastern European markets Orion itself sells veterinary drugs, and in other markets the Company operates through partners. In addition, in the Nordic countries Orion markets and sells veterinary drugs manufactured by several international companies. Orion’s Animal Health business division has a strong market position in the Nordic countries, its home markets.

Net sales of the Animal Health business division in 2012 were EUR 69 (68) million. Sales of the animal sedatives at EUR 23 (23) million accounted for 33% (34%) of the division’s net sales. Orion’s animal sedatives are Dexdomitor® (dexmedetomidine), Domitor® (medetomidine), Domosedan® (detomidine) and Antisedan® (atipamezole).

Fermion

Fermion manufactures active pharmaceutical ingredients for Orion and other pharmaceutical companies. Its product range comprises nearly 30 pharmaceutical ingredients. Fermion’s net sales in 2012 excluding pharmaceutical ingredients supplied for Orion’s own use were up by 12% at EUR 48 (43) million and accounted for about two-thirds of Fermion’s entire net sales. Several key products performed well, even though competition in the markets remained intense. Capacity utilisation at Fermion’s plants was very high during the period under review. Capacity utilisation was increased by manufacturing active ingredients required for development work on Orion’s own proprietary drugs, in addition to the normal product range.

Research and development projects

The Group’s R&D expenses in 2012 were up by 20% at EUR 105 (88) million, of which the Pharmaceuticals business accounted for EUR 97 (81) million. The Group’s R&D expenses accounted for 11% (10%) of the Group’s net sales. R&D expenses also include expenses relating to development of the current portfolio.

Orion has ongoing projects to broaden the range of the inhalable Easyhaler® drugs product family. Orion is developing a budesonide-formoterol formulation that combines budesonide as an anti-inflammatory agent and formoterol as a long-acting bronchodilator. Following the positive results obtained in the pharmacokinetic studies of the Easyhaler development programme in late 2012, Orion plans to apply for marketing authorisation for the budesonide-formoterol formulation. Orion anticipates that the application for marketing authorisation in Europe could be submitted in the first quarter of 2013.

In addition, Orion has another Easyhaler research programme in progress to develop a fluticasone-salmeterol formulation. In this formulation fluticasone acts as an anti-inflammatory agent and salmeterol acts as a long-acting bronchodilator.

Orion is collaborating with Novartis to develop Stalevo® drug for the Japanese markets. Novartis initiated the necessary clinical bioavailability study in November 2012.

Orion is continuing to develop an androgen receptor antagonist (ODM-201) for the treatment of advanced prostate cancer jointly with Endo Pharmaceuticals Inc. with the objective of approval of the drug globally. Phase I/II clinical trials on safety, efficacy and pharmacokinetics showed that initial results concerning efficacy were promising, and the product was well tolerated with no significant adverse events detected. The results were presented at the ESMO international oncology congress at the end of September 2012. Development of the product is now in Phase II clinical trials. Negotiations to find a suitable partner for markets outside Europe and North America are ongoing.

Orion has completed Phase II clinical trials with an alpha-2c adrenoceptor antagonist (ORM-12741). The trials investigated the efficacy and safety of the drug candidate in treatment of cognitive and behavioral symptoms relating to Alzheimer’s disease. The results from Phase II clinical trials in 2012 were positive, and negotiations to find a suitable partner for the next development phase are ongoing.

Orion is developing a new more effective levodopa product (ODM-101) based on optimised new formulations and doses of known compounds. The results obtained from Phase II clinical trials in 2012 were positive. Negotiations to find a suitable partner for the next development phase are ongoing.

In 2012 Orion began Phase I clinical safety trials with a new COMT inhibitor (ODM-103). It is a new molecule that enhances the therapeutic effects of levodopa used to treat Parkinson’s disease by blocking the COMT enzyme. The pre-clinical study results indicated that the new molecule is more effective than the COMT inhibitor entacapone, which is already in the markets.

In addition, Orion has several projects in the early research phase investigating prostate cancer, neuropathic pain, Parkinson’s disease and Alzheimer’s disease, among others.

Diagnostics

Orion Diagnostica manufactures convenient and quick in vitro diagnostic tests and testing systems suitable for point-of-care testing. Net sales of the Diagnostics business in 2012 were up by 9% at EUR 54 (50) million.

QuikRead® infection tests remained the main product, with sales continuing strong in the review period. Sales of the more user-friendly prefilled QuikRead 101 system and QuikRead go®, a new generation testing instrument, developed well. Launching of the FOB (Faecal Occult Blood) quantitative test for the QuikRead 101 system began during the review period. The new product version helps to screen gastrointestinal disorders.

Launching of two QuikRead go tests for the QuikRead go system also commenced during the review period. With a QuikRead go CRP+Hb test, a patient’s C-reactive protein (CRP) and haemoglobin (Hb) values can be determined in one blood sample. The QuikRead go Strep A test helps to detect patients with pharyngitis who would benefit from antibiotic treatment.

Sales growth was strongest in China, Japan and Germany. In Nordic countries sales grew strongly in Norway, and in the other Nordic countries sales continued at nearly the same level as in the previous year. In 2012 Orion Diagnostica focused strongly on taking the early-phase technology it had acquired in the previous year into full use in its research and product development programmes.

The operating profit of the Diagnostics business was EUR 2.6 (4.9) million. The profit development was affected among others by the above mentioned increases in expenditure on product development and sales.

Shares and shareholders

On 31 December 2012 Orion had a total of 141,257,828 (141,257,828) shares, of which 43,267,218 (44,993,218) were A shares and 97,990,610 (96,264,610) B shares. The Group’s share capital was EUR 92,238,541.46 (92,238,541.46). At the end of December 2012 Orion held 325,991 (413,754) B shares as treasury shares. On 31 December 2012 the aggregate number of votes conferred by the A and B shares was 963,008,979 (995,715,216) excluding treasury shares.

At the end of December 2012, Orion had 56,519 (57,188) registered shareholders.

Voting rights conferred by shares

Each A share entitles its holder to twenty (20) votes at General Meetings of Shareholders and each B share one (1) vote. However, a shareholder cannot vote more than 1/20 of the aggregate number of votes from the different share classes represented at the General Meetings of Shareholders. The Company itself and Orion Pension Fund do not have the right to vote at Orion Corporation’s General Meetings of Shareholders.

Both share classes, A and B, confer equal rights to the Company’s assets and dividends.

Conversion of shares

The Articles of Association entitle shareholders to demand the conversion of their A shares to B shares within the limitation on the maximum number of shares of a class. In 2012 a total of 1,726,000 shares were converted.

Trading in Orion’s shares

Orion’s A shares and B shares are quoted on NASDAQ OMX Helsinki in the Large Cap group under the Healthcare sector heading under the trading codes ORNAV and ORNBV. Trading in both of the Company’s share classes commenced on 3 July 2006, and information on trading in the Company’s shares has been available since this date.

On 31 December 2012 the market capitalisation of the Company’s shares excluding treasury shares was EUR 3,120 million.

In 2012 a total of 4,054,722 A shares and 84,056,278 B shares were traded on NASDAQ OMX Helsinki. The total value of the shares traded was EUR 1,435 million. During the year, 9% of the A shares and 87% of the B shares were traded. The average turnover in Orion’s shares was 62%.

The price of Orion’s A shares rose by 45% and the price of its B shares rose by 47% during 2012. On 31 December 2012 the closing quotation was EUR 22.05 for the A shares and EUR 22.18 for the B shares. The highest quotation for Orion’s A shares in 2012 was EUR 22.57 and the lowest quotation was EUR 13.31. The highest quotation for the B shares in 2012 was EUR 22.74 and the lowest quotation was EUR 13.31.

Orion shares are also traded on various alternative trading platforms in addition to NASDAQ OMX Helsinki. In 2012 NASDAQ OMX Helsinki accounted for about 95% of the entire trading volume in Orion A shares. In 2012 NASDAQ OMX Helsinki accounted for about 50% of the entire trading volume in Orion B shares (source: Fidessa Fragmentation Index).

Authorisations of the Board of Directors

Orion’s Board of Directors was authorised by the Annual General Meeting on 24 March 2010 to decide on a share issue in which shares held by the Company can be conveyed. The authorisation to issue shares is valid for five years from the decision taken by the Annual General Meeting.

The Board of Directors is authorised to decide on conveyance of no more than 500,000 Orion Corporation B shares held by the Company. Such shares held by the Company can be conveyed either against or without payment. Such shares held by the Company can be conveyed by selling them in public trading on NASDAQ OMX Helsinki; in a share issue placement to the Company’s shareholders in proportion to their holdings at the time of the conveyance regardless of whether they own A or B shares; or in a share issue placement deviating from shareholders’ pre-emptive rights if there is a weighty financial reason, such as the development of the capital structure of the Company, using the shares to finance possible corporate acquisitions or other business arrangements of the Company, financing capital expenditure or as part of the Company’s incentive plan. The share issue placement can be without payment only if there is an especially weighty financial reason in the view of the Company and to the benefit of all its shareholders. The amounts paid for shares in the Company conveyed shall be recorded in a distributable equity fund. The Board of Directors shall decide on other matters related to the conveyance of shares held by the Company. The authorisation was exercised as described below under the heading “Share-based Incentive Plan”. On 31 December 2012 the Board of Directors had outstanding authorisation to convey 309,337 Orion Corporation B shares held by the Company.

The Board of Directors is not authorised to increase the share capital or to issue bonds with warrants or convertible bonds or stock options.

Share-based Incentive Plan

In February 2010 the Board of Directors of Orion Corporation decided on a share-based incentive plan for the Group key persons. The Plan includes earning periods and the Board of Directors annually decided on the beginning and duration of the earning periods in 2010, 2011 and 2012. The Board of Directors decided on the earnings criteria and on targets to be established for them at the beginning of each earning period. The target group of the Plan consists of approximately 30 people. The total maximum amount of rewards to be paid on the basis of the Plan is 500,000 Orion Corporation B shares and a cash payment corresponding to the value of the shares.

On 12 March 2012 Orion transferred altogether 87,763 Orion Corporation B shares held by the Company as a share bonus for 2011 to the key persons employed by the Group and belonging to the Share-based Incentive Plan of the Group. The transfer was based on the authorisation by the Annual General Meeting on 24 March 2010. The price per share of the transferred shares was EUR 16.3848, which was the volume weighted average quotation of Orion Corporation B shares on 12 March 2012. The total transaction price of the transferred shares was therefore EUR 1,437,979.20.

Share ownership

Orion's shares are in the book-entry system maintained by Euroclear Finland, and Euroclear Finland maintains Orion's official shareholder register.

At the end of December 2012 Orion had a total of 56,519 (57,188) registered shareholders, of whom 95% (95%) were private individuals holding 48% (50%) of the entire share stock and 64% (65%) of the total votes. There were altogether 47 (44) million nominee-registered shares which was 33% (31%) of all shares, and they conferred entitlement to 7% (6%) of the total votes.

At the end of December 2012 Orion held 325,991 (413,754) B shares as treasury shares, which is 0.2% (0.3%) of the Company’s total share stock and 0.03% (0.04%) of the total votes.

Notification threshold

On 5 September 2012 Orion announced that on 3 September 2012 the total number of Orion Corporation B shares under the management of The Capital Group Companies, Inc. had increased to more than one-twentieth (1/20) of all Orion Corporation shares. According to the notification, The Capital Group Companies, Inc. owned 8,313,900 Orion B shares, which was 5.89% of the shares and 0.84% of Orion’s total number of votes.

Management’s shareholdings

At the end of 2012, the members of the Board of Directors owned a total of 2,161,100 of the Company’s shares, of which 1,825,264 were A shares and 335,836 B shares. At the end of 2012, the President and CEO owned 44,750 of the Company’s shares, which were all B shares. The members of the Group’s Executive Management Board (excluding the President and CEO) owned a total of 126,565 of the Company’s shares, which were all B shares. Thus, the Company’s executive management held 1.65% of all of the Company’s shares and 3.84% of the total votes.

The Company does not have stock option programmes.


Corporate Governance

The management system of the Orion Group consists of the Group level functions and business divisions. In addition, the system includes the organisation of the administration of the legal entities. For the steering and supervision of operations, the Group has a control system for all levels.

The parent company of the Group is Orion Corporation, whose shareholders exercise their decision-making power at a General Meeting of Shareholders in accordance with the Limited Liability Companies Act and the Articles of Association. General Meetings of Shareholders elect the Board of Directors and decide on amendments to the Articles of Association, issuance of shares and repurchase of the Company’s own shares, among other things.

The Board of Directors of Orion Corporation handles and decides all the most important issues relating to the operations of the whole Group or any units irrespective of whether the issues legally require a decision of the Board of Directors. The Board also ensures that good corporate governance practices are followed in the Orion Group.

The Board of Directors of the parent company comprises at least five and at most eight members elected by a General Meeting of Shareholders. The term of the members of the Board of Directors ends at the end of the Annual General Meeting of Shareholders following the election. A General Meeting of Shareholders elects the Chairman of the Board of Directors, and the Board of Directors elects the Vice Chairman of the Board of Directors, both for the same term as the other members. A person who has reached the age of 67 may not be elected a member of the Board of Directors.

The President and CEO of the parent company is elected by the Board of Directors. In accordance with the Limited Liability Companies Act, the President and CEO is in charge of the day-to-day management of the Company in accordance with instructions and orders issued by the Board of Directors. In addition, the President and CEO ensures that the bookkeeping of the Company complies with the law and that its asset management is arranged in a reliable way.

If the service contract of the President and CEO is terminated on the Company’s initiative, the notice period is 6 months. If the service contract is terminated on the initiative of the President and CEO, the notice period is 6 months, unless otherwise agreed. The service ends at the end of the notice period. If the service contract is terminated either on the Company’s initiative or on the initiative of the President and CEO because of a breach of contract by the Company, the President and CEO will be compensated with a total sum corresponding to the monetary salary for 18 months, unless otherwise agreed. No such separate compensation will be paid if the President and CEO resigns at his own request for reasons other than a breach of contract by the Company.

Orion publishes its Corporate Governance statement separately from the Report by the Board of Directors on the Company’s website.

Changes in Executive Management Board

Virve Laitinen, M.Sc. (Tech.), M.B.A., became Senior Vice President for the Supply Chain line function and a member of the Executive Management Board of the Orion Group on 1 January 2012. She was previously Director responsible for the Orion Business Planning and Control function.

Annual General Meeting on 20 March 2012

Orion Corporation’s Annual General Meeting was held on 20 March 2012 in the Helsinki Fair Centre. In addition to matters in accordance with Section 10 of the Articles of Association and Chapter 5, Section 3 of the Limited Liability Companies Act, the meeting dealt with a proposal concerning distribution from the distributable equity as a repayment of capital.

Distribution of a dividend of EUR 1.30 per share was approved for 2011, in accordance with the Board’s proposal. In addition, a repayment of capital to the shareholders of EUR 0.12 per share was approved, in accordance with the Board’s proposal.

The decisions taken by the Annual General Meeting and the organising meeting of the Board of Directors were reported in stock exchange releases on 20 March 2012.

Annual General Meeting on 19 March 2013

Orion Corporation’s Annual General Meeting will be held on Tuesday 19 March 2013 in the Helsinki Fair Centre commencing at 14:00.


Significant risks and uncertainties

Risk management constitutes a significant part of Orion Group’s management system and is an integral part of the Company’s responsibility structure and business operations. The aim is to identify, measure and manage the risks that might threaten the Company’s operations and the achievement of the objectives set for the Company.

Overall risk management processes, practical actions and the definition of responsibilities are developed by means of regular risk identification approaches covering the following areas:

  • strategic risks, including research and development risks
  • operational risks, including sales and business risks, as well as risks related to production, safety and the environment
  • financial risks, including market, credit and liquidity risks.

Operational risk management also includes project-specific risk management.

Agreements referred to in Ministry of Finance decree 1020/2012, Section 8.1, Paragraph 11

Orion and its marketing partner Novartis have marketing agreements concerning the Comtess®/Comtan® and Stalevo® drugs. These agreements include terms concerning change of control in the company that entitle a party to terminate the agreement in certain circumstances, as referred to in the Ministry of Finance Decree 1020/2012, Section 8.1, Paragraph 11.

Personnel

The average number of employees in the Orion Group in 2012 was 3,495 (3,328). At the end of December 2012 the Group had a total of 3,486 (3,425) employees, of whom 2,783 (2,705) worked in Finland and 703 (720) outside Finland.

Salaries and other personnel expenses in 2012 totalled EUR 212 (186) million.

Environmental issues

Orion’s environmental impacts relate mainly to consumption of supply chain raw materials, energy and water, emissions into the air and amounts of waste created by operations. All of the Group’s manufacturing plants are in Finland. The manufacturing plants, located in Espoo, Turku, Kuopio, Hanko and Oulu, are all regulated by environmental permits issued by local environmental authorities.

Orion monitors the environmental impacts of its operations by measuring and monitoring consumption of materials, energy and water, emissions into the air and waste water, and amounts of waste created by operations. Orion reports annually on issues within its environmental responsibilities in its Sustainability Report, which is consistent with GRI guidelines.

Significant legal proceedings

Legal proceedings against the Sandoz companies

On 1 May 2012 Orion announced that it had been informed that the United States District Court for the District of New Jersey had given its decision on the patent infringement lawsuit that Orion Corporation and Hospira, Inc. filed on 4 September 2009 to enforce US Patents Nos. 4,910,214 and 6,716,867. The respondents in the case are Sandoz Inc., Sandoz International GmbH and Sandoz Canada Inc. (hereinafter collectively “Sandoz”).

The court found that US Patent No. 4,910,214 is valid and enforceable. Sandoz is permanently enjoined from the commercial manufacture, use, sale or offer for sale in the United States or importation into the United States of its generic dexmedetomidine product until such time as US Patent No. 4,910,214 expires, including any applicable extensions. The Court also ordered that the effective date of Sandoz’s Abbreviated New Drug Application No. 91-465 shall not occur until the expiration of Patent No. 4,910,214, including any applicable extensions. Separately, the court found that US Patent No. 6,716,867 is invalid as obvious.

Orion’s licensee Hospira, Inc. sells Precedex® in the United States and in markets outside Europe.

Orion and Hospira have filed an appeal against the decision to the court of appeals, and so has Sandoz.

Legal proceedings against Caraco Pharmaceutical Laboratories, Ltd.

On 12 November 2010 Orion Corporation and Hospira, Inc. jointly filed a patent infringement lawsuit in the United States against Caraco Pharmaceutical Laboratories, Ltd. to enforce Orion’s and Hospira’s joint patent No. 6,716,867 valid in the United States. Gland Pharma Ltd. has since been added as a defendant in the lawsuit.

Caraco had submitted an application for authorisation to produce and market in the United States a generic version of Orion’s proprietary drug Precedex® (dexmedetomidine hydrochloride 100 µg/ml), which is marketed in the United States by Orion’s licensee Hospira.

Orion expects the costs of the legal proceedings against Caraco to be substantially less than the costs of the entacapone patent litigation that had previously been pending in the United States. Consideration of the case has been suspended pending the conclusion of the above-mentioned appeal proceedings against the Sandoz companies concerning Patent No. 6,716,867.

Legal proceedings against Mylan Pharmaceuticals Inc.

On 20 December 2012 Orion announced that Orion Corporation and Mylan Pharmaceuticals Inc. had agreed a settlement to the patent infringement lawsuit filed by Orion in the United States against Mylan Pharmaceuticals Inc. concerning Mylan’s submission of an abbreviated new drug application (ANDA) for a generic version of Orion's Comtan® with strength 200 mg.

The lawsuit was filed by Orion against Mylan in the United States in 2011. Under the terms of the settlement agreement, Mylan may launch a generic version of Comtan with strength 200 mg in US markets on 1 April 2013 at the earliest.

Subject to the Court's approval, the case will be dismissed and the US Patent No. 5,446,194 will remain in force.

In addition, on 26 April 2012 Orion Corporation filed a patent infringement lawsuit in the United States against Mylan Pharmaceuticals Inc. to enforce its US Patents Nos. 5,446,194, 6,500,867 and 6,797,732.

Mylan is seeking authorisation to produce and market generic tablets (strengths 12.5/50/200 mg; 18.75/75/200 mg; 25/100/200 mg; 31.25/125/200 mg; 37.5/150/200 mg and 50/200/200 mg) in the United States, with carbidopa, levodopa and entacapone as active ingredients in the same proportion as in Orion’s proprietary drug Stalevo® for treatment of Parkinson’s disease. Stalevo is an enhanced levodopa treatment which is marketed in the United States by Orion’s exclusive licensee, Novartis.


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