UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

Serono S.A.

(Translation of registrant’s name into English)

15 bis, Chemin des Mines
Case Postale 54
CH-1211 Geneva 20
Switzerland

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F x Form 40-F o

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ____

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ____

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes o      No x

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-     .

 

 

Media Release

FOR IMMEDIATE RELEASE

Geneva, Switzerland, October 25, 2005 — Serono (virt-x: SEO and NYSE: SRA) today reported its third quarter results for the period ended September 30, 2005.

Key Points for Third Quarter 2005

Ø		Total revenues of $638.3m, up 12.7% excluding a one-time payment of $67m from a licensing agreement in Q3 2004 and up 0.7% on a reported basis

Ø		Product sales up 10.3% to $571.5m, driven primarily by Rebif® sales up 19.8% to $315.6 million

Ø		Adjusted net income* up 32.8% to $158.9m and adjusted basic EPS* up 37.6% to $10.91 per bearer share and $0.27 per ADS

Ø		Reported net income of $142.4m down 10.3% and reported basic EPS of $9.77 per bearer share and $0.24 per ADS down 7.0% including a charge of $18.3m for the transfer of the Serono Genetics Institute (SGI)

Ø		Primary endpoint met in multicentre phase 3 study of interferon-beta-1a monotherapy for the treatment of chronic hepatitis C in Asian patients

Ø		New R&D collaborations — HuMax-CD4™ (zanolimumab) from Genmab and Aurora kinase inhibitor from Rigel Pharmaceuticals

Ø		Final settlement of the previously reported U.S. Attorney’s investigation of Serostim®

“We continue to deliver robust earnings growth and to generate strong cash flows, enabling us to advance and expand our new product pipeline,” said Ernesto Bertarelli, Chief Executive Officer. “Over the next eighteen months, we expect to complete four Phase 3 and three Phase 2 clinical trials including today’s positive outcome of the study of interferon-beta-1a in chronic hepatitis C in Asian patients.”

“We remain focused on maximizing the potential of our marketed products,” said Stuart Grant, Chief Financial Officer. “Our gross margin is best-in-class and we continue to seek sustained improvement in operating margin. Given our momentum, we are confident that we will reach the upper end of our adjusted net income guidance for the full year.”

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Financial Performance

In the third quarter 2005, total revenues grew by 12.7% on an adjusted basis. Revenues for the third quarter 2004 included a one-time payment of $67m from a licensing agreement. On a reported basis, total revenues grew by 0.7% to $638.3m (Q3 2004: $633.6m) and decreased by 0.5% in local currencies in the recent quarter. Product sales rose 10.3% to $571.5m (Q3 2004: $518.1m), or 9.4% in local currencies.

Gross margin for the third quarter 2005 was 88.6% (Q3 2004: 83.9%). Excluding a charge of $20.5m related to the closure of an obsolete manufacturing site, gross margin in the third quarter 2004 was 87.9%.

Selling, general and administrative expenses were $201.3m or 31.5% of total revenues (Q3 2004: $196.4m). SG&A expenses increased 2.5% compared to the prior year.

Research and development expenses were $146.9m (Q3 2004: $124.2m) and included an $18.3m charge related to the transfer of SGI. Excluding this charge, R&D expenses for the third quarter 2005 were $128.5m or 20.1% of total revenues and 3.5% higher than the prior year period.

Other operating expenses were $65.9m (Q3 2004: $56.0m), including expenses of $5.0m related to stock options in accordance with the IFRS 2 accounting change effective since January 1, 2005.

Reported net income for the third quarter of 2005 decreased 10.3% to $142.4m (Q3 2004: $158.7m), or 14.1% in local currencies. Reported basic earnings per share (EPS) decreased 7.0% to $9.77 per bearer share (Q3 2004: $10.51) and $0.24 per American Depositary Share (ADS) (Q3 2004: $0.26).

Adjusted net income* increased 32.8% to $158.9m from $119.7m in the prior year, resulting in an adjusted net margin of 24.9% of total revenues compared to 21.1% in the prior year. Adjustments for the third quarter 2005 included an $18.3m charge related to the transfer of SGI, and for third quarter 2004 a one-time payment of $67m from a licensing agreement and a $20.5m charge related to the closure of a manufacturing facility.

For the first nine months, net cash flow from operating activities before change in working capital was $555.0m (YTD 2004: $561.7m), or $439.5m after change in working capital (YTD 2004: $424.1m).

As of September 30, 2005, there were 14,573,281 outstanding equivalent bearer shares of Serono SA, net of treasury shares.

Settlement of Serostim^® Investigation

In April 2005, the company announced that it had taken a $725.0m provision to cover the settlement and related costs of an investigation led by the U.S. Attorney’s office in Massachusetts into commercial practices related to Serostim^®. On October 17, 2005, Serono announced that its U.S. affiliates agreed to settle the government investigation. The provision, which was recorded as an exceptional charge in the company’s earnings report for the first quarter of 2005, will be sufficient to cover the comprehensive settlements and related costs. “This settlement concludes a four-year investigation into commercial practices related to Serostim^®, and we are pleased to put the matter behind us,” said Thomas G. Gunning, Vice President and General Counsel of Serono US Operations. All Serono branded products, including Serostim^®, remain available to all patients in the United States, including Medicaid, Medicare and other Federal health care program patients.

Full Year 2005 Outlook

In 2005, adjusted net income is now expected to reach the upper end of the initial $520m — $540m guidance range based on currency exchange rates prevailing when guidance was initially issued on February 1^st 2005. This outlook does not include expenses related to any new business development transactions or other non-recurring items in 2005. To date, known adjustments include a charge of $725.0m ($660.5m after-tax) related to resolution of the US Attorney’s Office investigation of Serostim^®, a $30.0m ($28.5m after-tax) gain on sale of investment in Celgene, an $8.4m write-down of investment in CancerVax and an $18.3m ($16.6m after tax) charge related to the transfer of SGI. Therefore the 2005 IFRS earnings guidance is now expected to be a net loss at the lower end of the $117m — $137m range.

Serono continues to expect that product sales will grow between 10% and 15%, leading to total revenues of at least $2.6 billion for the full year, based on currency exchange rates prevailing on February 1^st 2005, when guidance was issued.

Therapeutic Areas Review

In the third quarter of 2005, total neurology sales increased by 18.4% to $321.9m (Q3 2004: 271.8m). Rebif^®‘s performance continues to be strong with worldwide sales up 19.8% to $315.6m, or 18.5% in local currencies (Q3 2004: $263.5m). Outside the USA, Rebif^® sales grew by 14.5% to $213.2m (Q3 2004: $186.2m). In the USA, Rebif^® sales increased by 32.6% to $102.5m (Q3 2004: $77.3m), reaching quarterly sales above $100m for the first time.

Sales of GONAL-f^® decreased by 5.8%, or 6.6% in local currencies, to $125.6m (Q3 2004: $133.3m). In late June 2005, a strategic alliance with Priority Healthcare in the Reproductive Health area in the USA was rolled out.

Saizen^® sales increased by 15.2% (13.9% in local currencies) to $50.8m (Q3 2004: $44.1m) in the third quarter, while Serostim^® sales were $17.8m (Q3 2004: $21.2m), consistent with the previous two quarters.

Sales of Raptiva^®, the first-to-market biological treatment for psoriasis in the European Union, reached $10.0m in the third quarter (Q3 2004: $1.0m). Raptiva^® is now approved in 44 countries and major European countries have granted reimbursement. Raptiva^® was launched in France in the third quarter, has just been approved in Canada and will be fully rolled-out in Italy in the fourth quarter.

R&D News

Serono reports today that a multicenter phase 3 study of interferon-beta-1a monotherapy for the treatment of chronic hepatitis C (HCV) in Asian patients met its primary endpoint. The proportion of patients who achieved sustained virological response (SVR), defined as an absence of detectable HCV RNA in serum after 24 weeks of treatment and 24 weeks of observation, was 26.6% in the interferon-beta-1a group (n=128) versus no responder in the placebo group (n=129), a statistically significant result (p<0.001). Results of an active comparator phase of the study evaluating the effect of interferon-beta-1a versus interferon-beta-1a in combination with ribavirin will be available in the next few months.

On August 18, 2005 Serono signed a worldwide agreement with Genmab A/S to develop and commercialize HuMax-CD4™ (zanolimumab), a fully human, monoclonal antibody that targets the CD4 receptor on T-lymphocytes. A pivotal Phase 3 study of HuMax-CD4™ is ongoing in cutaneous T-cell lymphoma and a Phase 2 study is ongoing in non-cutaneous T-cell lymphoma.

On October 25, 2005 Rigel Pharmaceuticals, Inc. granted Serono an exclusive license to develop and commercialize product candidates from its Aurora kinase inhibitor program. The lead candidate, R763, is a highly potent, multi-Aurora kinase inhibitor that has been shown to inhibit proliferation and trigger apoptosis in several tumor cell lines including the cervix, colon, lung, pancreas and prostate.

On October 3, 2005 Serono and CancerVax Corporation announced the decision to discontinue a Phase 3 clinical trial of Canvaxin™ in patients with Stage III melanoma based upon the recommendation of an independent Data and Safety Monitoring Board (DSMB), following completion of the third interim analysis of this study. The DSMB found that the data were unlikely to provide significant evidence of an overall survival benefit.

Serono currently expects to complete four Phase 3 and three Phase 2 studies by the end of 2006. Pipeline news flow before year-end 2005 includes the outcome of a proof of concept study of TACI-Ig in rheumatoid arthritis , and the outcome of Phase 3 clinical trials of Serostim^® in HIV-Associated Adipose Redistribution Syndrome (HARS) and IFN-beta in chronic Hepatitis C in Asia.

Conference Call and Webcast

Serono will hold a conference call today, October 25, 2005, starting at 3.00 pm Central European Time (9.00 am U.S. Eastern Time) during which Serono management will present the Company’s third quarter 2005 results. To join the telephone conference please dial 1 866 291 4166 (from the US), 091 610 5600 (from Switzerland), 0207 107 0611 (from the UK) and +41 91 610 5600 (from elsewhere). The event will also be relayed by live audio webcast, which interested parties may access via Serono’s Corporate home page, www.serono.com. A link to the webcast will be provided immediately prior to the event and will be available for replay following the event.

###

Some of the statements in this press release are forward looking. Such statements are inherently subject to known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of Serono and affiliates to be materially different from those expected or anticipated in the forward-looking statements. Forward-looking statements are based on Serono’s current expectations and assumptions, which may be affected by a number of factors, including those discussed in this press release and more fully described in Serono’s Annual Report on Form 20-F filed with the US Securities and Exchange Commission on March 16, 2005. These factors include any failure or delay in Serono’s ability to develop new products, any failure to receive anticipated regulatory approvals, any problems in commercializing current products as a result of competition or other factors, our ability to obtain reimbursement coverage for our products, the outcome of government investigations and litigation and government regulations limiting our ability to sell our products. Serono has no responsibility to update the forward-looking statements contained in this press release to reflect events or circumstances occurring after the date of this press release.

###

About Serono

Serono is a global biotechnology leader. The Company has eight biotechnology products, Rebif^®, Gonal-f^®, Luveris^®, Ovidrel^®/Ovitrelle^®, Serostim^®, Saizen^®, Zorbtive™ and Raptiva^®. In addition to being the world leader in reproductive health, Serono has strong market positions in neurology, metabolism and growth and has recently entered the psoriasis area. The Company’s research programs are focused on growing these businesses and on establishing new therapeutic areas, including oncology. Currently, there are approximately 30 ongoing development projects.

In 2004, Serono achieved worldwide revenues of US$2,458.1 million, and a net income of US$494.2 million, making it the third largest biotech company in the world. Its products are sold in over 90 countries. Bearer shares of Serono S.A., the holding company, are traded on the virt-x (SEO) and its American Depositary Shares are traded on the New York Stock Exchange (SRA).

For more information, please contact:

Serono in Geneva, Switzerland:
Media Relations:		Investor Relations:
Tel: +41-22-739 36 00		Tel: +41-22-739 36 01
Fax: +41-22-739 30 85		Fax: +41-22-739 30 22
http://www.serono.com		Reuters: SEO.VX / SRA
		Bloomberg: SEO VX / SRA US
Serono, Inc., Rockland, MA
Media Relations:		Investor Relations:
Tel. +1 781 681 2340		Tel. +1 781 681 2552
Fax: +1 781 681 2935		Fax: +1 781 681 2912
http://www.seronousa.com

On the following pages, there are:

	•		Tables detailing sales in dollars by therapeutic area, geographic region and the top 10 products for the 3 and 9 months ended September 30, 2005 and 2004.
	•		Consolidated statements of income for the 3 and 9 months ended September 30, 2005 and 2004; the consolidated balance sheets as of September 30, 2005 and December 31, 2004; the consolidated statements of equity as of September 30, 2005 and 2004; the consolidated statements of cash flows for the 9 months ended September 30, 2005 and 2004; the selected explanatory notes to the consolidated financial statements; and a reconciliation of “adjusted” earnings guidance to IFRS earnings guidance for the year ended December 31, 2005. These consolidated financial statements have been prepared on the basis of International Financial Reporting Standards.

Sales by therapeutic area

		Three Months Ended												Three Months Ended
		September 30, 2005												September 30, 2004
		$ million				% of sales				% change $				$ million				% of sales
Neurology			321.9				56.3	%			18.4	%			271.8				52.5	%
Reproductive Health			152.8				26.7	%			(4.1	%)			159.4				30.8	%
Growth & Metabolism			69.0				12.1	%			5.5	%			65.4				12.6	%
Dermatology			10.0				1.8	%			932.6	%			1.0				0.2	%
Others			17.8				3.1	%			(13.3	%)			20.5				4.0	%
Total sales (US$ million)		$	571.5				100	%			10.3	%		$	518.1				100	%

Sales by geographic region

		Three Months Ended												Three Months Ended
		September 30, 2005												September 30, 2004
		$ million				% of sales				% change $				$ million				% of sales
Europe			241.0				42.2	%			14.4	%			210.7				40.7	%
North America			215.9				37.8	%			1.3	%			213.1				41.1	%
Latin America			31.2				5.5	%			22.8	%			25.4				4.9	%
Others			83.4				14.5	%			20.9	%			68.9				13.3	%
Total sales (US$ million)		$	571.5				100	%			10.3	%		$	518.1				100	%

Sales by therapeutic area

		Nine Months Ended												Nine Months Ended
		September 30, 2005												September 30, 2004
		$ million				% of sales				% change $				$ million				% of sales
Neurology			951.5				54.9	%			18.4	%			803.9				51.1	%
Reproductive Health			498.1				28.7	%			(2.4	%)			510.4				32.4	%
Growth & Metabolism			206.5				11.9	%			6.8	%			193.4				12.3	%
Dermatology			21.8				1.3	%			1651.4	%			1.2				0.1	%
Others			56.5				3.2	%			(12.5	%)			64.6				4.1	%
Total sales (US$ million)		$	1,734.4				100	%			10.2	%		$	1,573.5				100	%

Sales by geographic region

		Nine Months Ended												Nine Months Ended
		September 30, 2005												September 30, 2004
		$ million				% of sales				% change $				$ million				% of sales
Europe			783.5				45.2	%			16.2	%			674.3				42.9	%
North America			617.4				35.6	%			2.0	%			605.2				38.5	%
Latin America			93.1				5.4	%			15.7	%			80.5				5.1	%
Others			240.4				13.8	%			12.6	%			213.5				13.6	%
Total sales (US$ million)		$	1,734.4				100	%			10.2	%		$	1,573.5				100	%

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TOP TEN PRODUCTS

				Three Months Ended												Three Months Ended
				September 30, 2005												September, 2004
		* TA		$ million				% of sales				% change $				$ million				% of sales
Rebif®		MS			315.6				55.2	%			19.8	%			263.5				50.9	%
Gonal-f®		RH			125.6				22.0	%			(5.8	%)			133.3				25.7	%
Saizen®		Growth			50.8				8.9	%			15.2	%			44.1				8.5	%
Novantrone®		MS/Oncology			18.2				3.2	%			(15.4	%)			21.5				4.1	%
Serostim®		Wasting			17.8				3.1	%			(15.7	%)			21.2				4.1	%
Raptiva®		Dermatology			10.0				1.8	%			932.6	%			1.0				0.2	%
Cetrotide®		RH			6.3				1.1	%			17.2	%			5.4				1.0	%
Crinone®		RH			5.6				1.0	%			21.9	%			4.6				0.9	%
Ovidrel®		RH			5.3				0.9	%			33.9	%			3.9				0.8	%
Stilamin®		Other			3.9				0.7	%			13.5	%			3.4				0.7	%

				Nine Months Ended												Nine Months Ended
				September 30, 2005												September, 2004
		* TA		$ million				% of sales				% change $				$ million				% of sales
Rebif®		MS			934.4				53.9	%			19.7	%			780.6				49.6	%
Gonal-f®		RH			413.5				23.8	%			(1.9	%)			421.6				26.8	%
Saizen®		Growth			152.2				8.8	%			18.0	%			129.0				8.2	%
Serostim®		Wasting			53.4				3.1	%			(16.8	%)			64.1				4.1	%
Novantrone®		MS/Oncology			52.5				3.0	%			(13.1	%)			60.4				3.8	%
Raptiva®		Dermatology			21.8				1.3	%			1651.4	%			1.2				0.1	%
Cetrotide®		RH			18.7				1.1	%			3.5	%			18.1				1.2	%
Crinone®		RH			17.7				1.0	%			29.9	%			13.7				0.9	%
Ovidrel®		RH			17.3				1.0	%			42.0	%			12.2				0.8	%
Metrodin-HP®		RH			10.8				0.6	%			(6.0	%)			11.5				0.7	%

* Therapeutic Areas

RH

=

Reproductive Health

Wasting

=

AIDS Wasting

MS

=

Multiple Sclerosis

Growth

=

Growth Retardation

Oncology

=

Oncology

Dermatology

=

Dermatology

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Consolidated Income Statements (unaudited)

Nine months ended September 30		2005				% of								2004 (1)				% of
		US$’000				Revenues				% change				US$’000				Revenues
Revenues
Product sales			1,734,372								10.2	%			1,573,482
Royalty and license income			182,088								(11.1	%)			204,842
Total Revenues			1,916,460				100.0	%			7.8	%			1,778,324				100.0	%
Operating Expenses
Cost of product sales			198,861												231,095
% of Sales			11.5	%											14.7	%
Selling, general and administrative			638,422				33.3	%			11.3	%			573,638				32.3	%
Research and development			448,922				23.4	%			20.2	%			373,538				21.0	%
Other operating expense, net			921,369				48.1	%			444.4	%			169,237				9.5	%
Total Operating Expenses			2,207,574				115.2	%			63.8	%			1,347,508				75.8	%
Operating (Loss) / Income			(291,114	)			(15.2	%)			(167.6	%)			430,816				24.2	%
Financial income, net			27,565								(35.3	%)			42,615
Other income / (expense), net			24,360												(644	)
Total Non Operating Income, net			51,925												41,971
(Loss) / Income Before Taxes			(239,189	)			(12.5	%)			(150.6	%)			472,787				26.6	%
Taxes			10,290												77,004
Net (Loss) / Income			(249,479	)			(13.0	%)			(163.0	%)			395,783				22.3	%
Attributable to:
Minority interest			778												(180	)
Equity holders of the parent			(250,257	)			(13.1	%)			(163.2	%)			395,963				22.3	%

Nine months ended September 30		2005								2004(1)
		US$				% change				US$
Basic (Loss) / Earnings per Share
- Bearer shares			(17.18	)			(167.1	%)			25.61
- Registered shares			(6.87	)			(167.1	%)			10.24
- American depositary shares			(0.43	)			(167.1	%)			0.64
Diluted (Loss) / Earnings per Share
- Bearer shares			(17.18	)			(167.3	%)			25.52
- Registered shares			(6.87	)			(167.3	%)			10.21
- American depositary shares			(0.43	)			(167.3	%)			0.64

Basic (Loss) / Earnings per Share are calculated in accordance with IAS 33 — “Earnings per Share” by dividing the Net (Loss) / Income attributable to equity holders of the parent, ($250.3 million) for the nine months ended September 30, 2005 (2004: $396.0 million), by the weighted average number of shares outstanding during the period presented. This is 10,160,991 bearer shares (2004: 11,059,040) and 11,013,040 registered shares (2004: 11,013,040). The total weighted average number of bearer shares is 14,566,207 (2004: 15,464,256) for the nine months ended September 30, 2005. As each American depositary share represents ownership interest in one fortieth of bearer share, Basic and Diluted (Loss) / Earnings per American depositary share is calculated as one fortieth of the Basic and Diluted (Loss) / Earnings per bearer share.

For Diluted (Loss) / Earnings per Share, the weighted average number of bearer shares outstanding is adjusted to assume conversion of all potential dilutive shares arising from outstanding stock options and the convertible bond. The effect of outstanding stock options and the convertible bond are excluded from the calculation of Diluted (Loss) per Share for the nine months ended September 30, 2005 as they were anti-dilutive (2004: included with number of bearer shares of 11,509,808).

The accompanying selected explanatory notes form an integral part of these financial statements.

(1)

Restated historical basis to reflect the adoption of new IFRS accounting standards that became effective on January 1, 2005 (see explanatory notes to the interim financial statements).

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Consolidated Income Statements (unaudited)

Three months ended September 30		2005				% of								2004(1)				% of
		US$’000				Revenues				% change				US$’000				Revenues
Revenues
Product sales			571,472								10.3	%			518,147
Royalty and license income			66,851								(42.1	%)			115,483
Total Revenues			638,323				100.0	%			0.7	%			633,630				100.0	%
Operating Expenses
Cost of product sales			64,866								(22.1	%)			83,244
% of Sales			11.4	%											16.1	%
Selling, general and administrative			201,307				31.5	%			2.5	%			196,385				31.0	%
Research and development			146,863				23.0	%			18.3	%			124,158				19.6	%
Other operating expense, net			65,857				10.3	%			17.6	%			55,988				8.8	%
Total Operating Expenses			478,893				75.0	%			4.2	%			459,775				72.6	%
Operating Income			159,430				25.0	%			(8.3	%)			173,855				27.4	%
Financial income, net			11,601								(36.4	%)			18,235
Other income / (expense), net			2,080												(708	)
Total Non Operating Income, net			13,681												17,527
Income Before Taxes			173,111				27.1	%			(9.5	%)			191,382				30.2	%
Taxes			30,724												31,231
Net Income			142,387				22.3	%			(11.1	%)			160,151				25.3	%
Attributable to:
Minority interest			18												1,431
Equity holders of the parent			142,369				22.3	%			(10.3	%)			158,720				25.0	%

Three months ended September 30		2005								2004(1)
		US$				% change				US$
Basic Earnings per Share
- Bearer shares			9.77				(7.0	%)			10.51
- Registered shares			3.91				(7.0	%)			4.20
- American depositary shares			0.24				(7.0	%)			0.26
Diluted Earnings per Share
- Bearer shares			9.70				(6.9	%)			10.43
- Registered shares			3.88				(6.9	%)			4.17
- American depositary shares			0.24				(6.9	%)			0.26

Basic Earnings per Share are calculated in accordance with IAS 33 — “Earnings per Share” by dividing the Net Income attributable to equity holders of the parent, $142.4 million for the three months ended September 30, 2005 (2004: $158.7 million), by the weighted average number of shares outstanding during the period presented. This is 10,166,799 bearer shares (2004: 10,696,046) and 11,013,040 registered shares (2004: 11,013,040). The total weighted average number of bearer shares is 14,572,015 (2004: 15,101,262) for the three months ended September 30, 2005. As each American depositary share represents ownership interest in one fortieth of bearer share, Basic and Diluted Earnings per American depositary share is calculated as one fortieth of the Basic and Diluted Earnings per bearer share.

For Diluted Earnings per Share, the weighted average number of bearer shares outstanding is adjusted to assume conversion of all potential dilutive shares arising from outstanding stock options and the convertible bond. The number of bearer shares used to calculate Diluted Earnings per Share for the three months ended September 30, 2005 is 10,624,369 (2004: 11,143,231).

The accompanying selected explanatory notes form an integral part of these financial statements.

(1)

Restated historical basis to reflect the adoption of new IFRS accounting standards that became effective on January 1, 2005 (see explanatory notes to the interim financial statements).

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Pro forma net income and pro forma earnings per share

Nine months ended September 30		2005				% of								2004(1)				% of
		US$’000				Revenues				% change				US$’000				Revenues
Net (Loss) / Income			(249,479	)			(13.0	%)			(163.0	%)			395,783				22.3	%
Litigation expense and related costs			725,000												—
Tax impact on litigation expense and related costs			(64,525	)											—
Provision for R&D site transfer			18,316												—
Tax impact on provision for R&D site transfer			(1,758	)											—
Gain on sale of investment in Celgene			(29,963	)											—
Tax impact on gain on sale of investment in Celgene			1,439												—
Impairment loss on investment in CancerVax			8,440												—
Provision for Manufacturing site closure			—												20,500
Tax impact on provision for Manufacturing site closure			—												(3,280	)
License income for a non-core technology			—												(67,000	)
Tax impact on license income for a non-core technology			—												10,720
Pro forma Net Income			407,470				21.3	%			14.2	%			356,723				20.8	%
Attributable to:
Minority interest			778												(180	)
Equity holders of the parent			406,692				21.2	%			14.0	%			356,903				20.9	%

Nine months ended September 30		Pro forma basis 2005(3)				Pro forma basis 2005(3)				Pro forma basis 2004(1)(3)
		US$				% change				US$
Basic Earnings per Share(2)
- Bearer shares			27.92				21.0	%			23.08
- Registered shares			11.17				21.0	%			9.23
- American depositary shares			0.70				21.0	%			0.58
Diluted Earnings per Share(2)
- Bearer shares			27.81				20.6	%			23.06
- Registered shares			11.12				20.6	%			9.23
- American depositary shares			0.70				20.6	%			0.58

Three months ended September 30		2005				% of								2004(1)				% of
		US$’000				Revenues				% change				US$’000				Revenues
Net Income			142,387				22.3	%			(11.1	%)			160,151				25.3	%
Provision for R&D site transfer			18,316												—
Tax impact on provision for R&D site transfer			(1,758	)											—
Provision for Manufacturing site closure			—												20,500
Tax impact on provision for Manufacturing site closure			—												(3,280	)
License income for a non-core technology			—												(67,000	)
Tax impact on license income for a non-core technology			—												10,720
Pro forma Net Income			158,945				24.9	%			31.3	%			121,091				21.4	%
Attributable to:
Minority interest			18												1,431
Equity holders of the parent			158,927				24.9	%			32.8	%			119,660				21.1	%

Three months ended September 30		Pro forma basis 2005(3)				Pro forma basis 2005(3)				Pro forma basis 2004(1)(3)
		US$				% change				US$
Basic Earnings per Share(2)
- Bearer shares			10.91				37.6	%			7.92
- Registered shares			4.36				37.6	%			3.17
- American depositary shares			0.27				37.6	%			0.20
Diluted Earnings per Share(2)
- Bearer shares			10.80				36.5	%			7.91
- Registered shares			4.32				36.5	%			3.17
- American depositary shares			0.27				36.5	%			0.20

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Reconciliation of “Adjusted” Earnings Guidance to IFRS Earning Guidance

For the year ended December 31, 2005		Low				High
		US$’000				US$’000
“Adjusted” earning guidance			520,000				540,000
Non-recurring adjustments to arrive at IFRS earning guidance
Litigation expense and related costs(1)			725,000				725,000
Tax impact on litigation expense and related costs(1)			(64,525	)			(64,525	)
Provision for R&D site transfer(2)			18,316				18,316
Tax impact on provision for R&D site transfer(2)			(1,758	)			(1,758	)
Gain on sale of investment in Celgene(3)			(29,963	)			(29,963	)
Tax impact on gain on sale of investment in Celgene(3)			1,439				1,439
Impairment loss on investment in CancerVax(4)			8,440				8,440
IFRS earning guidance			(136,949	)			(116,949	)

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Consolidated Balance Sheets (unaudited)

As of		September 30, 2005				December 31, 2004(1)
		US$’000				US$’000
Assets
Current Assets
Cash and cash equivalents			981,309				275,979
Short-term financial assets			621,135				784,999
Trade accounts receivable			399,443				427,935
Inventories			270,002				326,937
Prepaid expenses and other current assets			214,375				237,205
Total Current Assets			2,486,264				2,053,055
Non-Current Assets
Tangible fixed assets			737,899				799,878
Intangible assets			336,004				290,558
Deferred tax assets			230,634				201,023
Long-term financial assets			643,559				929,030
Other long-term assets			85,593				133,302
Total Non-Current Assets			2,033,689				2,353,791
Total Assets			4,519,953				4,406,846
Liabilities
Current Liabilities
Trade and other payables			337,719				426,616
Short-term financial debts			26,805				34,527
Income taxes			111,367				166,861
Deferred income — current			32,502				33,128
Provisions and other current liabilities			972,288				225,143
Total Current Liabilities			1,480,681				886,275
Non-Current Liabilities
Long-term financial debts			626,646				640,892
Deferred tax liabilities			20,114				24,242
Deferred income — non current			132,660				157,004
Provisions and other long-term liabilities			263,041				261,728
Total Non-Current Liabilities			1,042,461				1,083,866
Total Liabilities			2,523,142				1,970,141
Shareholders’ Equity
Share capital			235,124				254,420
Share premium			461,704				1,023,332
Treasury shares			(372,869	)			(987,489	)
Retained earnings			1,660,048				2,020,425
Fair value and other reserves			5,221				56,829
Cumulative foreign currency translation adjustments			6,614				65,845
Total Shareholders’ Equity attributable to equity holders of the parent			1,995,842				2,433,362
Minority Interests			969				3,343
Total Shareholders’ Equity			1,996,811				2,436,705
Total Liabilities and Shareholders’ Equity			4,519,953				4,406,846

The accompanying selected explanatory notes form an integral part of these financial statements.

(1)

Restated historical basis to reflect the adoption of new IFRS accounting standards that became effective on January 1, 2005 (see explanatory notes to the interim financial statements).

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Consolidated Statement of Changes in Equity (unaudited)

																										Total Shareholders’
																						Cumulative foreign				Equity attributable to
																		Fair value and other				currency translation				equity holders of the								Total Shareholders’
		Share capital				Share premium				Treasury shares				Retained earnings				reserves				adjustments				parent				Minority interests				Equity
		US$’000				US$’000				US$’000				US$’000				US$’000				US$’000				US$’000				US$’000				US$’000
Balance as of January 1, 2004:
As previously reported			253,895				1,002,991				(157,642	)			1,669,700				22,711				88,535				2,880,190				1,614				2,881,804
Effect of revisions to IAS 39 - “Financial Instruments: Recognition and Measurement”															(26,649	)			33,137				(2,035	)			4,453								4,453
Effect of IFRS 2 - “Share-Based Payment”															(2,947	)							(258	)			(3,205	)							(3,205	)
As restated (1)			253,895				1,002,991				(157,642	)			1,640,104				55,848				86,242				2,881,438				1,614				2,883,052
Acquisition of treasury shares											(541,016	)															(541,016	)							(541,016	)
Issue of share capital			522				19,958				3,301																23,781								23,781
Net income															395,963												395,963				(180	)			395,783
Dividend — bearer shares															(71,096	)											(71,096	)							(71,096	)
Dividend — registered shares															(28,258	)											(28,258	)							(28,258	)
Fair value adjustments on available-for sales investments																			(7,843	)							(7,843	)							(7,843	)
Translation effects																							(19,529	)			(19,529	)			(11	)			(19,540	)
Balance as of September 30, 2004 (1)			254,417				1,022,949				(695,357	)			1,936,713				48,005				66,713				2,633,440				1,423				2,634,863
Balance as of January 1, 2005:
As previously reported			254,420				1,023,125				(987,489	)			2,064,499				23,482				69,841				2,447,878				3,343				2,451,221
Effect of revisions to IAS 39 - “Financial Instruments: Recognition and Measurement”															(28,546	)			33,347				(2,246	)			2,555								2,555
Effect of IFRS 2 - “Share-Based Payment”							207								(15,528	)							(1,750	)			(17,071	)							(17,071	)
As restated (1)			254,420				1,023,332				(987,489	)			2,020,425				56,829				65,845				2,433,362				3,343				2,436,705
Issue of share capital			705				20,337				3,281																24,323								24,323
Issue of call options on Serono shares															262												262								262
Fair value of stock options on Serono shares that have vested							9,373																				9,373								9,373
Cancellation of treasury shares			(20,001	)			(591,338	)			611,339																—								—
Net loss															(250,257	)											(250,257	)			778				(249,479	)
Dividend — bearer shares															(76,992	)											(76,992	)							(76,992	)
Dividend — registered shares															(33,390	)											(33,390	)							(33,390	)
Recognition of unrealized loss on available-for-sale investment																			8,440								8,440								8,440
Fair value adjustments on available-for sales investments																			(50,957	)							(50,957	)							(50,957	)
Fair value adjustments on financial instruments																			(9,091	)							(9,091	)							(9,091	)
Changes in minorities																											—				(3,035	)			(3,035	)
Translation effects																							(59,231	)			(59,231	)			(117	)			(59,348	)
Balance as of September 30, 2005			235,124				461,704				(372,869	)			1,660,048				5,221				6,614				1,995,842				969				1,996,811

The accompanying selected explanatory notes form an integral part of these financial statements.

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Consolidated Cash Flow Statements (unaudited)

Nine months ended September 30		2005				2004 (1)
		US$’000				US$’000
Net (Loss) / Income			(249,479	)			395,783
Reversal of non-cash items
Taxes			10,290				77,004
Depreciation and amortization			100,911				108,603
Financial income			(41,097	)			(51,304	)
Financial expense			19,161				17,704
Non-recurring legal charge			725,000				—
Other non-cash items			(9,765	)			13,949
Cash Flows From Operating Activities Before Working Capital Changes			555,021				561,739
Working Capital Changes
Trade accounts payable, other current liabilities and deferred income			(65,911	)			56,056
Trade accounts receivable and other receivables			33,072				(102,815	)
Inventories			5,806				(693	)
Prepaid expenses and other current assets			(1,548	)			(22,301	)
Taxes paid			(86,954	)			(67,913	)
Total working capital changes			(115,535	)			(137,666	)
Net Cash Flows From Operating Activities			439,486				424,073
Investment in tangible fixed assets			(107,427	)			(130,774	)
Proceeds from disposal of tangible fixed assets			2,374				3,867
Purchase of intangible and other long-term assets			(82,564	)			(21,773	)
Purchase of available-for-sale investments			(253,229	)			(838,059	)
Proceeds from sale of available-for-sale investments			685,182				536,611
Interest received			77,308				75,095
Net Cash Flows From Investing Activities			321,644				(375,033	)
Acquisition of treasury shares			—				(541,016	)
Proceeds from issue of Serono shares			11,055				10,333
Proceeds from exercise of options on Serono shares			6,418				2,095
Proceeds from issue of options on Serono shares			261				—
Increase in long-term financial debt			60,740				24,488
Change in short-term financial debt			(6,966	)			6,200
Other non-current liabilities			(12,419	)			(7,013	)
Interest paid			(3,046	)			(3,249	)
Dividends paid			(110,382	)			(99,354	)
Net Cash Flows From Financing Activities			(54,339	)			(607,516	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents			(1,461	)			(1,081	)
Net Increase/(Decrease) in Cash and Cash Equivalents			705,330				(559,557	)
Cash and cash equivalents at the beginning of period			275,979				1,003,972
Cash and cash equivalents at the end of period			981,309				444,415

The accompanying selected explanatory notes form an integral part of these financial statements.

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Selected explanatory notes to the interim financial report for the nine months ended September 30, 2005 (unaudited)

1. Basis of Preparation

This unaudited interim financial report of the Serono group (“group” or “Serono”) has been prepared in accordance with IAS 34 — “Interim Financial Reporting” and in accordance with the accounting policies set out in the Serono 2004 Annual Report, with the exception of the following new International Financial Reporting Standards adopted by the group:

IAS 1 — “Presentation of Financial Statements”

IAS 1 (revised) requires minority interests to be included in Shareholders’ Equity in the consolidated balance sheets and not to be presented as a separate category and it is no longer deducted in arriving at the group’s net income or loss. The group’s net income or loss presented in the consolidated income statements is allocated to the equity holders of the parent and minority interests. Earnings per share will continue to be calculated on the net income or loss attributable solely to the equity holders of the parent.

IFRS 2 — “Share-Based Payment”

IFRS 2 requires that the fair value of equity-based compensation instrument to be recognized as expense in the consolidated income statement. The group adopted IFRS 2 as of January 1, 2005 retroactively for all grants of shares, stock options or other equity instruments that were granted after November 7, 2002 and had not yet vested as of January 1, 2005. As permitted by IFRS 2, the group has restated its prior-year audited historical consolidated financial statements to reflect the expense of stock options granted since the effective date of IFRS 2. As a result, other operating expense, net, reported for the nine months ended September 30, 2004 has been increased by $8.5 million with a decrease in net income reported by the same amount. Retained earnings as of January 1, 2004 and 2005 have been reduced by $2.9 million and $15.5 million, respectively.

IFRS 3 — “Business Combinations”

Under IFRS 3, which became effective as of January 1, 2005 all goodwill is considered to have an indefinite life and is no longer amortized but tested at least annually for impairment. The group adopted IFRS 3 as of January 1, 2005 and ceased amortizing goodwill.

IAS 38 — “Intangible Assets”

Under IAS 38 (revised), the group is required to adopted changes to accounting for intangible assets. Acquired intangible assets as part of in-licensing agreements after January 1, 2005 are capitalized even if they have not yet achieved technical feasibility, which is usually signified by regulatory approval.

IAS 39 — “Financial Instruments: Recognition and Measurement”

Under the revised version of IAS 39, with effect from January 1, 2005, the definition of objective evidence related to the impairment of available-for-sale investments has been expanded such that any significant or prolonged decline in the fair value of an available-for-sale investment below its cost is objective evidence of impairment. Management considers “significant” to mean at least 25% of the cost of an investment and “prolonged” to mean more than six months. Accordingly, several of the group’s equity investments were impaired in prior years under the revised definition of objective evidence. The revisions to IAS 39 must be applied retrospectively, and as a result, opening retained earnings as of January 1, 2004 and 2005 have been adjusted as if this standard had always been in use. Retained earnings as of January 1, 2004 and 2005 have been reduced by $26.6 million and $28.5 million, which is net of income taxes in the amounts of $4.5 million and $2.6 million, respectively. Fair value and other reserves as of January 1, 2004 and 2005 have been increased by $33.1 million and $33.3 million, respectively.

These consolidated financial statements were approved for issuance on October 18, 2005 by Serono S.A.’s Board of Directors.

Selected explanatory notes to the interim financial report for the nine months ended September 30, 2005 (unaudited)

2. Segment information — geographical segments

										Middle East,
										Africa and				Asia-Pacific,
						North				Eastern				Oceania				Latin
Nine months ended September 30, 2005		Europe				America				Europe				and Japan				America				Unallocated				Total
		US$000				US$000				US$000				US$000				US$000				US$000				US$000
Product sales			783,472				617,376				139,550				100,874				93,100				—				1,734,372
Royalty and license income			154,052				1,358				26,678				—				—				—				182,088
Total Revenues			937,524				618,734				166,228				100,874				93,100				—				1,916,460
Operating (Loss) / Income			(316,348	)			322,942				43,753				31,252				49,761				230				131,590
Corporate research and development expenses			—				—				—				—				—				(422,704	)			(422,704	)
Operating Loss			—				—				—				—				—				—				(291,114	)