Contents

GROUP MANAGEMENT REPORT

STRATEGY

VALUE

PREFACE OF THE CHAIRMAN 2 CHRONOLOGY 2005 4 INTERVIEW 6 CONSOLIDATED FINANCIAL STATEMENTS

Group Income Statement 74 Group Balance Sheet 75 Statement of Changes in Equity 76 Cash Flow Statement 77

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS A General Information 78 B Accounting and Consolidation Policies Inconsistent

with German Law 83 C Segment Reporting 92 D Explanatory Notes to the Income Statement 95 E Notes to the Balance Sheet 99 F Other Explanatory Notes 113

AUDITOR'S REPORT 122

REPORT OF THE SUPERVISORY BOARD 123

GLOSSARY 126

FINANCIAL CALENDAR, IMPRINT 130

Focused research, global growth 8 New indications, new markets 10 Development objective: system provider 12 New developments with large potential 14 Value-oriented research 16

Share 20 Corporate Governance 24 Directors' Dealings 26 Compensation Report 26 Annual Document 28

The Financial Year in Review 32 Market Conditions 34 Strategy 38 Major Events in the Financial Year 41 Business Situation 42 Earnings Position 45 Capital Expenditure and Depreciation and Amortisation 49 Financial Position and Statements of Assets 50 Research and Development 54 Production 58 Staff 59 Supplementary Report 61 Risk Report 62 Outlook 70

Annual Report

898500500

2005

Biotest AG, Landsteinerstr. 5, D-63303 Dreieich, Postfach 10 20 40, D-63266 Dreieich, Germany

Phone +49 (0) 6103 801-338, Fax +49 (0) 6103 801-347 E-mail: [email protected], www.biotest.com

Biotest AG, Landsteinerstr. 5, D-63303 Dreieich, Postfach 10 20 40, D-63266 Dreieich, Germany

Phone +49 (0) 6103 801-338, Fax +49 (0) 6103 801-347 E-mail: [email protected], www.biotest.com Annual Report

898500500

2005

PREFACE OF THE CHAIRMAN 2 CHRONOLOGY 2005 4 INTERVIEW 6 STRATEGY Focused research, global growth 8 New indications, new markets 10 Development objective: system provider 12 New developments with large potential 14 Value-oriented research 16 VALUE Share 20 Corporate Governance 24 Directors' Dealings 26 Compensation Report 26 Annual Document 28 GROUP MANAGEMENT REPORT The Financial Year in Review 32 Market Conditions 34 Strategy 38 Major Events in the Financial Year 41 Business Situation 42 Earnings Position 45 Capital Expenditure and Depreciation and Amortisation 49

Financial Position and Statements of Assets 50 Research and Development 54 Production 58 Staff 59 Supplementary Report 61 Risk Report 62 Outlook 70

CONSOLIDATED FINANCIAL STATEMENTS
Group Income Statement	74
Group Balance Sheet	75
Statement of Changes in Equity	76
Cash Flow Statement	77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
A General Information	78
B Accounting and Consolidation Policies Inconsistent
with German Law	83
C Segment Reporting	92
D Explanatory Notes to the Income Statement	95
E Notes to the Balance Sheet	99
F Other Explanatory Notes	113
AUDITOR'S REPORT	122
REPORT OF THE SUPERVISORY BOARD	123
GLOSSARY	126
FINANCIAL CALENDAR, IMPRINT	130

2005 At a Glance

GROUP		2005	2004	Change
Revenue	€ million	237.6	217.9	% 9.1
thereof: Germany	€ million	86.1	76.4	12.8
Rest of world	€ million	151.5	141.5	7.1
thereof: Pharmaceuticals	€ million	160.4	141.9	13.1
Diagnostics	€ million	77.2	76.0	1.6
EBITDA	€ million	39.6	31.5	25.7
EBIT	€ million	25.3	18.6	35.7
Profit before tax	€ million	15.0	6.2	141.1
Profit before tax
in % of sales		6.3	2.8
Net profit	€ million	10.2	5.0	102.3
RoCE	%	8.0	5.7
Structure of expenses, by nature:
– Cost of materials	€ million	71.2	78.0	– 8.7
– Staff cost	€ million	66.4	66.0	0.5
– Research and development	€ million	16.9	18.5	– 8.9
thereof: Biotherapeutics	€ million	3.6	1.3	176.9
– Research and development in % of sales		7.1	8.5
Capital expenditure:
– Property, plant
and equipment
and intangible assets	€ million	15.4	18.5	– 16.7
Financing:
– Cash flow
from operating activities	€ million	40.3	32.3	24.8
– Depreciation and amortisation	€ million	14.3	12.9	11.1
Equity	€ million	169.0	108.0	56.5
Equity as % of balance sheet total		48.5	30.1
Balance sheet total	€ million	348.6	358.3	– 2.7
Number of employees (full-time equivalents) as at year-end		1,074	1,009	6.4
Earnings per share	€	1.13	0.57	98.2
Earnings per preference share	€	1.19	0.68	75.0

Sales by Business Division

221.9

75.9

146.0

EBIT and Profit before Tax

- 1.4

EQUITY AND LIABILITIES

7.7

Structure of the Group Balance Sheet

2004 2005

169.0

111.9

67.7

108.0

90.8

159.5

2003 2004 2005

6.2

18.6

2003 2004 2005

76.0

217,9

141.9

77.2

Diagnostic division Pharmaceutical division

EBIT

Current liabilities Non-current liabilities Total equity

Profit before tax

237.6

160.4

15.0

25.3

€ million

250

200

150

100

€ million

-10

-20

€ million

400

300

200

100

Sales by Business Division

2005 At a Glance

Profit before tax

Structure of expenses, by nature:

– Research and development

Capital expenditure: – Property, plant and equipment

Financing: – Cash flow

Equity

Number of employees

GROUP 2005 2004 Change

Revenue € million 237.6 217.9 9.1 thereof: Germany € million 86.1 76.4 12.8

thereof: Pharmaceuticals € million 160.4 141.9 13.1

EBITDA € million 39.6 31.5 25.7 EBIT € million 25.3 18.6 35.7 Profit before tax € million 15.0 6.2 141.1

Net profit € million 10.2 5.0 102.3

– Cost of materials € million 71.2 78.0 – 8.7 – Staff cost € million 66.4 66.0 0.5 – Research and development € million 16.9 18.5 – 8.9 thereof: Biotherapeutics € million 3.6 1.3 176.9

and intangible assets € million 15.4 18.5 – 16.7

from operating activities € million 40.3 32.3 24.8 – Depreciation and amortisation € million 14.3 12.9 11.1 Equity € million 169.0 108.0 56.5

Balance sheet total € million 348.6 358.3 – 2.7

(full-time equivalents) as at year-end 1,074 1,009 6.4 Earnings per share € 1.13 0.57 98.2 Earnings per preference share € 1.19 0.68 75.0

in % of sales 6.3 2.8

RoCE % 8.0 5.7

in % of sales 7.1 8.5

as % of balance sheet total 48.5 30.1

Rest of world € million 151.5 141.5 7.1

Diagnostics € million 77.2 76.0 1.6

EBIT and Profit before Tax

€ million

Structure of the Group Balance Sheet EQUITY AND LIABILITIES

€ million

Highlights

130 131

Financial calendar

11 May 2006 Annual General Meeting

11 May 2006 Publication of Q1 Report

14 August 2006 Publication of Q2 Report

14 November 2006 Analysts' conference

14 November 2006 Publication of Q3 Report

Landsteinerstr. 5, D-63303 Dreieich, Germany P.O. Box 10 20 40, D-63266 Dreieich, Germany

Imprint

Phone +49 (0) 6103 801-338 Fax +49 (0) 6103 801-347

Website: www.biotest.com

assumes no obligation to do so.

E-mail: [email protected]

Photography: Ralf Braum, Frankfurt/Main

Biotest AG

Congress Center Frankfurt, 10:30 a.m.

Frankfurt/Main, Germany

Quarterly Report for Q1 2006

Quarterly Report for Q2 2006

Quarterly Report for Q3 2006

Conception, text and design: ergo Kommunikation, Köln/Frankfurt/Main, Germany

This annual report contains forward-looking statements on overall economic development as well as on the business, earnings, financial and asset situation of Biotest AG and its subsidiaries. These statements are based on current plans, estimates, forecasts and expectations of the company and thus are subject to risks and elements of uncertainty that could result in deviation of actual developments from expected developments. The forward-looking statements are only valid at the time of publication of this annual report. Biotest does not intend to update the forward-looking statements and

Autumn conference for analysts and journalists

Financial calendar

Focused research, global growth.

Biotest increased sales by 9.1% and the operating result by 35.7%. We strongly expanded the business in Europe, especially in the high margin German market.

The polyvalent immunoglobulin Intratect® has received approval for sale in additional nine European countries. Within 15 months of its initial approval in autumn 2004, Intratect® has achieved a market share of 19.4 % in Germany.

As the world's only active ingredient for the treatment of cytomegalovirus infection during pregnancy, we expect to see a considerable increase in the sales potential of Cytotect® Biotest in the medium term.

FDA approval of the blood group serology testing system TANGO® optimo opens the door to the world's largest and most attractive market for transfusion diagnostics for Biotest.

Biotest has achieved important milestones in the development of monoclonal antibodies. All research to date has confirmed earlier estimates regarding sales and earnings potential.

Through capital increases with net receipts totalling € 40 million and an optimised debt structure, Biotest has created the financial structure for future growth.

2 3

Dear Shareholders,

"For Biotest, 2005 marks the transition to a stage of growth." This is what we told shareholders in the 2004 annual report. Today we can say that we have achieved that expectation. We increased sales by 9.1 % compared to the previous year. It is especially worth mentioning that a large portion of our growth was made in Germany; that is, in a high margin market. This is reflected in our earnings figures: the percentage increase in EBIT, earnings before tax and earnings after tax was clearly stronger than sales.

Progress at Biotest is also being rewarded by the capital markets. The price of our ordinary share has more than doubled, and preference shares were even 132 % higher at year-end than at the beginning of the year. As in the previous year, the Biotest share thus developed clearly ahead of the stock market and industry environment.

The success of our capital measures is an indication of the positive assessment by investors. We have increased the capital stock of Biotest AG by € 3.8 million by issuing new shares in two steps. Investors – both private and institutional – have provided us with a net amount of € 40 million. We are especially pleased with the subscriptions by international investors. We will utilise this money to push the development of Biotest to a globally active specialist for innovative immunology and haematology. In so doing, the focus will be on research and development, as well as on the further internationalisation of our business. We have reached important milestones along this road in 2005:

Our polyvalent immunoglobulin Intratect®, which had already received approval for Germany in 2004, was approved in nine additional European countries in September 2005. Intratect's success has significantly exceeded our expectations: it already has a 19.4 % share of the German market. Marketing efforts just under way in the other European countries have also been extremely successful.

We have also increased the sales potential of our existing plasma preparations, for example with

Cytotect® Biotest as a result of its proven effectiveness in the treatment of cytomegalovirus infections during pregnancy. Worth mentioning, sales with the coagulation preparation Haemoctin® grew by 43 % compared to the previous year.

Technical Terms – Financial Terms Glossary

Imparity Principle

alised losses.

and goodwill.

Key Account

Offsetting

Large/important client.

Losses Carrying Forward

relevant for tax reasons.

Preference Dividend

erence shares.

Present Value

es in the future.

external suppliers.

Purchase Commitments

Interest Rate Swap

Intangible Assets

Requirement in German accounting law which mandates the reporting of unre-

Balance sheet item that does not relate to tangible assets (building, land, machinery…) For example concessions, licences

Agreement for an exchange of interest rate payments for a fixed duration on the basis of a notional principal amount.

Losses that cannot be attributed to past financial years can be carried forward to coming financial years in order to become

Closing out of a previous stock market transaction by sale of the position.

Special dividend paid to the holders of pref-

Equals today's value of a payment that aris-

Amount of open and binding orders from

WPHG (German Securities Trade Act) Law governing securities trading in Germany.

Equity Method/At Equity

of associated companies.

cal to the market price.

First in First out Method

Fair Value

earliest.

Free Float

free float.

HGB

Hedge Accounting

German Commerical Code (Handelsgesetzbuch)

Hidden Reserves

balance sheet.

ing principles.

IAS/IFRS

Accounting method for the consolidation

Value at which assets and liabilities would normally be traded between business partners. In most cases, the fair value is identi-

Method for the valuation of costs of materials. It always uses the purchasing price of the tranche that were purchased the

Freely tradable shares of a company. Holdings of more than 5% of all issued shares are no longer considered to be part of the

Establishment of so called hedging relationships between basic transactions (e.g. loan to private client) and the derivative financial instruments used for hedging.

Difference between the total net book value and the higher total net market value of all assets which is not apparent in the

The International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS) are international account-

US approval of the fully automated TANGO® optimo blood analysis system has opened up the world's most attractive market for transfusion diagnostics since the end of 2005. 21 TANGO® systems had been delivered to Olympus, our distributor in the USA.

The development of monoclonal antibodies (mAb) for the treatment of autoimmune diseases and cancer offers a promising perspective for long-term growth at Biotest. Continuation of the clinical testing of BT-061 for the indications rheumatoid arthritis and psoriasis is planned for late summer 2006. Good Manufacturing Practice production at Lonza is going according to schedule. In addition, research in order to evaluate efficacy of mAb B-061 in asthma and other inflammatory diseases has started.

With regard to BT-062, which was developed for the therapy of multiple myeloma as well as for other oncological indications such as breast and prostate cancer, we have created important prerequisites for the start of phase I clinical trials. With regard to BT-063, the intensification of pre-clinical development is planned.

So far, clinical trials have substantiated our estimates regarding the efficacy and the specific mode of action of our mAb. BT-061, in particular, has blockbuster potential in the case of a regulatory approval. We will therefore strengthen the development of these projects. To do so, we are working together with renowned partners: both in pre-clinical and clinical research as well as in production.

We have underlined the importance of the mAb projects for corporate strategy by combining the activities into a separate Biotherapeutic segment. Through this new structure investments in these projects are transparent for our shareholders. As in

"We are adhering to our goals: we want to generate revenue of more than € 340 million in 2009 and steadily increase the earnings despite significant expenses for our research project."

all other areas, we will always review our decisions as to whether they have long-lasting positive effects on shareholder value.

In the past financial year, we increased our equity ratio to 48.5 % – through capital increases and through the reduction of liabilities. Consequently, Biotest's financial structure has clearly improved, and we are well armed for the upcoming tasks. Moreover, we were already able to improve the financial result in 2005, and this effect will be even more pronounced in the current year.

We achieved a lot in the past year. Important prerequisite was the ongoing support of both the shareholders and the creditors who have accompanied us on this journey. I would like to express my sincere thanks to all of you. I would also like to especially thank our employees whose commitment and performance is the basis for the success of Biotest. With a new success-related compensation system, we would like to align the management even more closely with the positive development of the company.

We are adhering to our goals: we want to generate revenue of more than € 340 million in 2009 and steadily increase the earnings despite significant expenses for our research project.

We look forward to your continued trust and support.

Sincerely yours,

Prof. Dr. Gregor Schulz

2005

Chronology of events

March

The FDA approves the TANGO® system for fullyautomated transfusion diagnostics for sale in the USA.

January

Jointly with AERES Biomedical, Biotest successfully concluded the engineering of BT-062. This created an important prerequisite for beginning the clinical development of the monoclonal antibody for use in multiple myeloma.

May

Change at the head of the Supervisory Board: Dr. Thorlef Spickschen, who has many years of experience in top positions at pharmaceutical companies, takes the place of Werner Spinner, who resigned at his own request.

January June

Demand for haemophilia products in Russia increases following the government's decision to reimburse costs for the prophylactic treatment of adult haemophiliacs as part of the national healthcare system. With Haemoctin® SDH, Biotest holds a significant share of this growth.

February

Biotest takes over the plasma donor station in Halle/Saale, Germany, previously operated by the competitor Baxter. With the plasma obtained at our own four stations, we cover a large part of our raw material need.

Biotest and Boehringer Ingelheim conclude an agreement for a joint research effort to investigate the efficacy of the monoclonal antibody BT-061 in infectious diseases such as asthma.

Biotest increases its share capital by € 2.9 million by issuing new ordinary shares. Approximately half of the shares are subscribed by a German financial investor against a cash contribution of € 10.0 million and the other half by the Dr. Schleussner family – major shareholder at Biotest – from the conversion of a shareholder loan totalling more than € 10.0 million in equity.

July

In consultation with the lending banks, Biotest optimises its debt financing: a syndicated loan agreement takes the place of the loans received under the collateral trustee agreement (CTA). This agreement converts part of the previous short-term credit line to long-term financing and reduces the level of debt.

September

Intratect®, which has been available in Germany since 2004, is approved for nine other countries in the European Union as part of a mutual recognition process.

October

Following approval of the corresponding reagents in September, the Annual Meeting of the American Association for Blood Banks (AABB) in Seattle is the kick-off for the marketing of TANGO® optimo in the USA.

The plant for the manufacture of the factor IX preparation Haemonine® in Dreieich receives approval from the authorities. Biotest starts production of the batches for the licensing procedure in November.

The New England Journal of Medicine publishes a study that proves that Cytotect® Biotest is suitable for treating cytomegalovirus infections during pregnancy. This doubles the market potential of the hyperimmunoglobulin.

Biotest AG increases its capital stock by an additional € 3.9 million by issuing new ordinary and preference shares. Net issue proceeds amount to approximately € 30 million.

October December

Jointly with our cooperation partner Lonza, we complete the manufacture of the first production batches of monoclonal antibody B-061. Good Manufacturing Practice production begins on schedule.

As part of the process to improve the management culture, Biotest starts a workshop series entitled "Management and Cooperation" for executives and employees.

6 7

"The upcoming years are years of growth."

Chairman of the Board Prof. Dr. Gregor Schulz and CFO Dr. Michael Ramroth in an interview.

"Focused research, global growth" is the motto of your annual report. What is behind this?

Schulz: Our growth strategy rests on two pillars: internationalisation and research. With plasma proteins and diagnostic products, we are opening up new regional markets through new regulatory approvals. We are further developing our plasma proteins already on the market for use in new clinical indications. In addition, we are pushing with the research and development of monoclonal antibodies – or mAb for short – which is associated with significant prospects for growth.

Ramroth: Whereas we are also planning to increase revenue in our traditional business by roughly 50 % in the coming four years. The potential of biotherapeutics tops this off.

Can you better qualify this potential?

Ramroth: Estimates indicate that global market volume for the main indications will be in the doubledigit-billion-dollar range by 2011. If Biotest's project go according to plan, from today's perspective it is quite conceivable that our products will account for an appreciable share.

How are the mAb from Biotest different from other active ingredients of this kind that either already exist or are currently under development?

Schulz: Our antibodies provide a unique mode of action. For example, BT-061, which can be used in the therapy of rheumatoid arthritis, among others acts immunmodulating; that is, it acts upon the immune system in such a way as to stop only those autoaggressive reactions that are directed against healthy cells, e.g., in the joints. Other biotherapeutics in this field of application are immunsuppressing; that means, they also suppress the body's own natural defence against infections. As a result, patients are exposed to significant risks of infection and side effects. However, this has not yet been observed with BT-061 in early clinical trials.

When do you expect approval for your active monoclonal antibodies?

Schulz: Provided that development continues to go according to schedule, a possible launch of BT-061 for the indication rheumatoid arthritis could take place in 2010.

Until this comes about, significant investments will be required. Is a company like Biotest in the position to bear these alone?

Ramroth: With the proceeds from last year's capital measures, we have the funds to press ahead alone with the projects through phase II of the clinical development. The subsequent phase III requires studies with large patient groups that are in fact very costly. At this point we will therefore invite globally active pharmaceutical companies to join forces with us.

Schulz: In doing so, we not only diversify the risk but also speed up the projects. We want to set up the licence agreements in such a way that a portion of the sales revenue in Europe stays with Biotest as part of a co-marketing concept. For other regions such as the USA or Japan, out-licensing would be a possibility. In exchange, the potential marketing partner would have to make milestone payments and pay licensing fees.

Mr. Ramroth, you mentioned the capital increase. Why did you already go about collecting money on a grand scale at the stock market this year if the large part of the expenses aren't going to occur until later?

Ramroth: With the start of clinical development, mAb development enters a new phase. We now have the necessary resources to push ahead quickly and can react with flexibility in the process. Money that we won't need until later will be used in the meantime to reduce our liabilities. Our financial result already considerably improved in 2005, and the effect will be made even clearer in 2006.

Schulz: But I would like to point out again that we are also investing in growth in the Pharmaceutical and Diagnostic segments: in research and development as well as in the opening up of new markets.

Apropos internationalisation: which markets are you focusing on?

Schulz: As a premium supplier, we are intensifying our activities in markets with high demands for quality. Besides Europe, this is especially true for North America. There we have reached an important milestone with the marketing start of the TANGO® system for transfusion diagnostics. FDA approval underscores the high quality of our products. Biotest is one of only three suppliers that sells transfusion diagnostics in the USA.

Ramroth: Attractive margins can also be obtained in the USA with plasma proteins and products for hygiene monitoring. That's why we are looking into market entry for our immunoglobulins as well.

When you look into the future – where do you see Biotest in five years?

Schulz: The upcoming years are years of growth. We want to make Biotest a leading supplier worldwide of plasma proteins. For diagnostic products, we want to further develop ourselves towards becoming a systems provider with a strong presence in all highly regulated markets. In addition there is a business with large potential – biotherapeutics. Biotest combines a well-established core business and visions for growth through entry in high revenue markets and new innovative products.

Focused research, global growth

Biotest is a specialist for innovative haematology and immunology with the comprehensive approach of a globally active pharmaceutical, diagnostics and biotherapeutics group. And we are expanding this position: through the continuous improvement of our products, targeted research and development and the move into additional markets. Biotest – a combination of substance and growth potential.

Pushing ahead with research projects, speeding up approval processes and expanding distribution on a global scale. In order to better implement these goals, Biotest increased the capital stock in financial year 2005. We are investing the money that was taken – a total of € 40 million – in projects that have the potential of making a significant contribution towards enhancing Biotest's value in the years to come.

Our growth strategy has two focal points: internationalisation and research. In the Pharmaceutical segment, we are further expanding our range of drugs to treat diseases of the immune system and to treat blood coagulation defects (e.g., haemophilia). Topquality products that are effective, well tolerable and easy to use strengthen our position. Their Europeanwide approval broadens our sales and earnings potential, and we are also considering entry into the US market with selected plasma products.

We have already taken this step with our diagnostic products. TANGO® optimo, the fully-automated blood group diagnostic system, including all corresponding reagents, has been marketed in the USA since autumn 2005 by our partner Olympus America. The market for so-called manual reagents will also open up following approval planned for the beginning of 2007. In the medium-term, we want to achieve a 20 % market share in the USA for transfusion diagnostics.

Already today, Biotest is among the leading suppliers in many of the markets that we service. Via selfowned companies and distribution partners, our products are sold in 159 countries around the world; the focus of sales, however, lies in Europe with a share of 85 %. In both of these segments, we want to increase business volume by approximately half in the coming four years.

At the same time, in the Biotherapeutic segment we are pushing ahead with the development of monoclonal antibodies (mAb) for the treatment of rheumatoid arthritis and other auto-immune diseases as well as various types of cancer. Alone for the three main indications rheumatoid arthritis, psoriasis and multiple myeloma, global market volume in 2011 is estimated in the two-digit-billion-dollar range. Due to its unique mode of action, scientists place great potential in the mAb from Biotest.

In 2005, we optimised Biotest's financing structure through various measures. With an equity ratio of 48.5 % and significantly reduced liabilities, we have the resources to consistently follow our path of growth in the coming years.

New indications, new markets

The prices for plasma proteins are rising around the world. This is particularly true for specialised products with special attributes. Biotest's plasma proteins are quality products. We are taking them into new, attractive markets, we are developing patient-friendly dosage forms and we are expanding the indication spectrum. The success of this growth strategy can already be seen.

Polyvalent immunoglobulins correct defects in the immune system. Patients often require these drugs over a long period of time. Tolerability and an especially simple usage are therefore of exceptional importance. Intratect® meets these requirements. What is particularly convincing about the new polyvalent immunoglobulin from Biotest is its high purity which makes it especially tolerable. Prerequisite for the high quality is a special manufacturing and purification procedure in one of the most modern plants for plasma processing in Europe. Biotest's significant investments in production are paying off: within one year of its launch in Germany, Intratect® has already achieved a market share of 19.4 %.

Meanwhile, the preparation has received approval in nine other European countries, and marketing is under way. It is exemplary of Biotest's strategy in the plasma protein business. Through targeted new and

further developments, we are expanding our position and opening up new markets. This works primarily through approval in additional countries.

Already in the past financial year, we increased sales with plasma proteins in European high price markets. We only participate in tenders for large deliveries to government organisations in developing and emerging markets if they meet our earnings expectations.

In the medium term, we also plan to market selected plasma products in the USA. Approval by the FDA would not only open up the door for Biotest to the world's largest market for these drugs but would also be an additional seal of approval that would underscore our position as a premium supplier.

Pharmaceutical drug marketing in Europe

Approval through recognition

Before a drug can be marketed, it has to be approved by the government. In Germany, the Paul-Ehrlich-Institute (PEI) based in Langen, near Darmstadt, is responsible for the approval of plasma proteins, among others. Its tasks also include evaluations with regard to drug safety (pharmacovigilance).

Drug approval in the EU member countries is carried out according to a centralised approval procedure or the decentralised mutual recognition (MR) procedure. If a drug is approved according to the centralised procedure by the European Medicines Agency (EMEA) and the European Commission, it may be marketed in all EU countries. Under the MR procedure, the applicant first approaches the competent higher federal authority in his country. Based on the national approval, recognition of the drugs is then sought in other countries.

Biotest follows the MR procedure when seeking European approval for its plasma proteins. The monoclonal antibodies developed by the Biotherapeutic segment receive approval as biotechnological preparations via the centralised procedure of the EMEA. Biotest possesses extensive resources and considerable experience with approval procedures.

Expansion of the indication spectrum represents a second way of tapping additional growth potential. Accordingly, Cytotect® Biotest – the world's leading hyperimmunglobulin for treating cytomegalovirus infections – is the only drug proven to be suitable for use during pregnancy. A cytomegalovirus infection is a widespread and in most cases, harmless, viral disease. However, the virus is dangerous during pregnancy. About 10 % of children infected before birth exhibit severe brain damage, diseases of the liver and kidneys, and damage to the eyes and ears. A study conducted on 181 pregnant women with a cytomegalovirus infection concluded that both the therapeutic and prophylactic administration of Cytotect® Biotest drastically reduces these severe malformations. This opens up an additional revenue potential in the double-digit-million-dollar range. Cytomegalovirus infection occurs in around 7,000 pregnancies each year in Germany alone.

As a third approach to tap additional markets, we further develop preparations so that they are simpler to use and easier to manage. Presumably in 2007, we will launch Hepatect® SC – the first of our immunoglobulins that can be administered as a drug subcutaneously. Especially for long-term patients, a subcutaneous (in the abdominal wall) injection would denote considerable relief compared to the intravenous (IV) administration widely-used today.

Development objective: systems provider

The USA is the largest market for diagnostic products in the world – and at the same time the market with the strictest criteria for approval. The fact that we are allowed to sell our TANGO® system for blood group testing in the USA, as well, underscores the high quality of products by Biotest. It allows us to concentrate on the marketing of our diagnostic products in areas with high standards and attractive margins.

Two things are decisive in transfusion and transplantation diagnostics. First: absolutely reliable results. Second: efficient and cost-effective processes. There is a common solution for both: automation. By relying mainly on automated procedures to carry out blood group analysis, virus testing or tissue typing, the risk of user errors declines and the diagnosis becomes faster. The demand for such systems is rising: even labs in clinics or doctor's offices with a lower testing volume are increasingly relying on automation.

Biotest responded to these market trends at an early stage and implemented the transformation from a pure supplier of test reagents to a systems provider. As an example, the fully automated blood group device TANGO® optimo allows for quick and reliable

automated blood group determination. The testing systems QuickStep® and ELPHA® are used in specialised laboratories and clinics for typing associated with organ and tissue transplantations. In addition, we also supply a broad range of reagents for manual blood diagnostics.

The US approval has provided Biotest with access to the world's most attractive diagnostics market. Besides Biotest, only two other suppliers of transfusion diagnostics currently fulfil the strict FDA requirements.

The annual sales volume in the USA lies at approximately USD 200 million, and we want to secure about one-fifth of this amount for Biotest in the medium term. Within five years, we want to sell 300 devices

including their corresponding reagents. The first sales figures attest to this: we already delivered 21 devices in the first three months following market launch to our partner Olympus America which distributes TANGO® optimo and the corresponding reagents.

By offering system solutions and through approval in highly regulated markets, Biotest is removing itself from the price competition in other regions that can sometimes be very fierce. We will continue to pursue this course in coming years as well. We are currently testing the development of a completely new microchip-based typing procedure that could set new standards of quality and efficiency in transplantation diagnostics.

Quality and efficiency are also important requirements for hygiene monitoring solutions. The pharmaceutical industry, in particular, is obligated to closely monitor the purity of their manufacturing plants and to document the results. The hygiene monitoring product area, which includes the Hycon products by Biotest and products from our associated company Heipha Dr. Müller GmbH in Heidelberg, comprises a broad range of devices and reagents which measure the level of germs in the air and on surfaces. We offer a special device for monitoring isolated clean rooms (ICR). We are presently working on a new air sampler that is easier to operate and delivers even more reliable results than those of products now on the market.

Just like in transplantation and transfusion diagnostics, the USA is also the world's most attractive market for premium suppliers in the area of hygiene monitoring. Biotest already has a presence in the USA via a distribution company – in light of the large potential, we are planning to set up our own manufacturing plant for Heipha products.

New developments with large potential

Biotest is currently developing three monoclonal antibodies (mAb). The biotechnologically active ingredients could be used to treat chronic and so far incurable diseases as well as autoimmune diseases. The mAb represent an additional sales potential in the billion-dollar range.

Rheumatoid arthritis (RA) affects approximately 800,000 people in Germany alone and approximately 1% of the population worldwide. The disease often begins with inflammation between the fingers and toes and spreads little by little to other joints. Patients with this disease suffer from severe pain, and their mobility is restricted. Further symptoms include fever, fatigue and a general decline in health.

In the long term, the inflammation causes damage to bones and cartilage in the joints and can completely destroy them. Internal organs can also be affected. The cause of this usually chronic disease has not been definitely investigated, but it is thought to be a malfunction of the body's own immune system. As a result, immune cells migrate to the affected joint where they produce certain cytokines (messengers) that are responsible for the swelling process and the damage to the cartilage.

This is exactly the point targeted by Biotech preparations from competitors, which today account for more than half of the worldwide market volume for the therapy of rheumatoid arthritis. They alleviate or stop the body's damaging immune reaction against itself. However, they also suppress the desired defence reaction of the immune system, which can result in severe infections in patients. Studies show that approximately 20 to 30 % of the patients do not respond to this method of therapy. BT-061, one of three monoclonal antibodies in Biotest's development pipeline, acts immunomodulating by inhibiting the damaging reaction of the immune system (autoaggression) without interfering with other defence functions. That makes it interesting for use in the therapy of various autoimmune diseases: besides for rheumatoid arthritis, where it significantly alleviates symptoms such as morning stiffness or joint pain, BT-061 has demonstrated its effectiveness for psoriasis in first clinical observations. Its suitability for additional

mAb by Biotest

High number of patients, large market potential

mAb represent a significant additional sales potential for Biotest. According to an estimate by the science journal Nature, USD 10.5 billion will be spent for the treatment of rheumatoid arthritis in 2008 worlwide, and approximately 85 % of this amount will be spent on biotechnologically manufactured agents. Experts estimate the market volume for psoriasis preparations at USD 3.3 billion in 2013. Including the indications SLE and multiple myeloma, this yields an estimated market volume of approximately USD 14 billion in 2011.

applications such as asthma and other inflammatory diseases is currently being examined. BT-063 has a similar method of action as BT-061. Among others, it is being developed for the therapy of Systemic Lupus Erythematosus (SLE), a chronic rheumatic disease that often affects the skin, joints and inner organs. In central Europe, approximately 10 to 30 out of every 100,000 people suffer from this disease. It most frequently begins between ages 25 and 35, and more

incurable cancer of the bone marrow that has its origin in the uncontrolled growth of plasma cells. Approximately three to four of every 100,000 people in western industrialised countries are affected. Those who come down with the disease build up an increased, life-threatening concentration of plasma cells in the bone marrow. The malignant cells conglomerate into so-called plasmocytoma and can lead to a destruction of the bone's substance. The calcium

"The benefits of BT-062 are very high, due to its selectivity, potency, and novel mechanism of action compared to any other conventional treatment or novel biologic under development."

Prof. Dr. K. Anderson, Director of Jerome Lipper Multiple Myeloma Centre at Dana-Farber Cancer Institute in Boston and Professor at Harvard Medical School, regarding BT-062.

than 90 % of those afflicted are female. BT-063 has already been successfully tested in animal models and in a pilot study with six patients. The third mAb in Biotest's development pipeline also demonstrates promising data for its effectiveness in animal models. BT-062 is a highly specific antibody that destroys cancer cells with a high level of effectiveness and speed. Once development has been successfully completed, it can represent a completely new form of therapy for multiple myeloma. Multiple myeloma is a previously

that is released during this process accumulated in the blood and can trigger kidney failure. The excess of plasma cells decreases the number of red and white blood cells, and a deficiency of white blood cells increases the chance of infection. Up to now, 75 % of those patients die within five years, and after ten

years the mortality rate is more than 95 %.

According to estimates by independent scientists, BT-062 has a great potential in oncology. The first analyses regarding the effectiveness in breast and prostate cancer are under way.

Value-oriented research

Through the expansion of own capabilities and cooperation with powerful partners, we are accelerating the development of monoclonal antibodies. This way we can take better advantage of the opportunities associated with this research while controlling risks.

In the development of mAb, we are initially concentrating on indications with a high patient potential and/or a particularly high medical need, i.e., rheumatoid arthritis and psoriasis or multiple myeloma. With regard to BT-061, we have already discussed the structure of the clinical studies with the responsible Paul Ehrlich Institute for use in rheumatoid arthritis (Phase II) and psoriasis (Phase I). With regard to BT-062, preliminary discussions with the FDA are planned. They are the prerequisite for beginning the clinical development in multiple myeloma, which we would like to start together with Harvard Medical School.

It is our view that BT-062 could satisfy the conditions for an accelerated approval procedure in the event that the clinical data show outstanding effectiveness. European and US authorities grant preparations such a procedure if they could possibly constitute a significant improvement in comparison to preparations currently found on the market for the treatment, diagnosis or prevention of a disease. In addition, BT-062 could fulfil the necessary conditions for orphan drug status. This grants companies doing research on drugs that are capable of treating rare diseases (less than 200,000 patients in the USA) tax relief and exclusive distribution rights for seven years following market approval.

We want to proceed with the development of mAb in two steps: up to and including Phase II (see box), we will get started by ourselves. Beginning in Phase III, we are planning to enter into cooperation agreements with large international pharmaceutical companies. This way we could accelerate the development while also reducing costs and thus the associated risk for Biotest. An additional advantage of this approach is

that the distribution and marketing strength of our partners could be helpful in the case of a later market introduction. We intend to set up the license agreements in such a way that Biotest also retains part of the distribution rights for Europe (co-marketing). With the money that we receive for licenses for non-European markets, we want to defray our share of costs for Phase III development.

Since large amounts of antibodies are already required for the clinical trial, we have already set up the system for the large industrial production of BT-061 and BT-062 and are building one for BT-063. We have sourced out the manufacturing to companies specialised in the production of monoclonal antibodies: BT-061, for instance, has been contracted out to a subsidiary of the globally active Lonza group. This further accelerates the development of mAb since it is then not necessary to set up own capacities which would otherwise be very time-intensive.

Clinical testing Three phases until approval

Before a new drug is approved, there is first a development and a testing phase that takes up several years. After the active ingredient has already been tested in the laboratory and in animal trials for its effectiveness and possible undesirable toxic effects (preclinical research), clinical testing can get underway. It is supposed to deliver insights based on specific findings as to how a drug works when used in humans.

Every test of a drug on humans must be approved by the national approval authority of the country in which the study takes place. The Paul Ehrlich Institute is in charge of our preparation in Germany and has 60 days to ask questions about our application, to approve our application or to deny it. In addition, permission must be received from an ethic commission that is composed of physicians, theologians, lawyers, and other persons with a non-medical background.

In both Europe and the USA, the process from clinical development to approval is divided into three phases: In Phase I of clinical testing, the active ingredient is tested in studies on healthy volunteers or patients, e.g., for cancer drugs. The primary purpose is to determine whether the active ingredient works the same way in the human body as it does in animals, such as in absorption, dispersal and elimination. In

addition, possible side effects on blood pressure, pulse and other parameters are documented and investigations are made concerning dosage and tolerability.

During the subsequent Phase II, the drug is administered to a limited group of patients. The studies made during this phase serve to analyse the effectiveness and tolerability of the drug, determine the proper dosage and identify possible side effects.

Phase III studies are also referred to as approval studies or confirmatory studies. The drug is normally examined in a controlled, randomly selected blind study. One half of the patients receive the new drug, while the other half is treated with a form of therapy that has already been approved. The results are then compared with each other. If a therapy does not yet exist for the indication, the control group usually receives a placebo. For firsttime approvals, usually at least two independent studies are required that each deliver statistical proof of the drug's effectiveness.

A so-called regulatory approval dossier summarises the results of the three phases and serves as a basis for the responsible authorities in the approval process.

Safety

Expecting a child. During pregnancy, harmless infections can have fatal consequences. For example, a cytomegalovirus infection, which can cause serious harm to the unborn child. A study shows that our immunoglobulin Cytotect® Biotest significantly reduces this danger – and namely without side-effects. So that the wish for "a healthy baby" becomes reality.

Biotest Share is in Demand with Institutional and Private Investors

Successful capital increase, rise in share price of more than 100 %, clear gain in sales: 2005 was also an extremely successful year for Biotest on the capital market.

Dynamic upwards trend on the stock market

The German stock markets developed very positively in 2005. The Deutsche Aktienindex (DAX) closed on 30 December 2005 with 5,408.26 points approximately 27 % higher than the previous year (4,256.08 points). The SDAX, which is made up of 50 small caps, even managed to push ahead by 35 % to 4,248.90 points. For both indices, the bulk of the upward movement fell on the second half of the year.

The shares of companies from the healthcare industry consolidated in the Prime Pharma & Healthcare Performance Index quoted 26 % higher at the end of the past year as compared to twelve months earlier, and the Euro-Stoxx-Healthcare Index for European shares from the healthcare are increased by 19 %.

Biotest share reaches new peaks

The development of the Biotest share outperformed all comparative indices. Ordinary and preference shares continued uninterrupted along the upwards trend of the previous year. At the end of 2005, the price of ordinary shares in the electronic trading segment

Development of share price in 2005

XETRA was at € 24.45 or twice as high (+ 102 %) as in the previous year. Preference shares increased by 132 % to € 22.30. In the meantime, ordinary shares reached a five-year high with a price of € 30.40, and preference shares even reached a seven-year high with € 26.00. The interim decline in the share price in autumn resulted partially from a technical effect through the inclusion of new shares issues in the course of the capital increase as well as from profit-taking.

On a basis of the closing prices in XETRA, which comprises the largest portion of stock market turnover, the market capitalisation of Biotest AG amounted to € 250.67 million at year's end.

As at 30 December 2005, the 4,666,667 preference shares from Biotest – all of which were free floating – were worth a total of € 104.06 million. With this market capitalisation of its preference shares, Biotest would have held position 44 in the SDAX at 30 December 2005. If our share price continues to develop positively, we hope to move into the small cap index at one of the next regular weighting adjustments.

Successful capital increase ensures more widely spread shareholdings and liquidity

Through the issue of approximately 2.0 million ordinary and 0.7 million preference shares, the capital stock of Biotest AG has increased by € 6.8 million to a current level of € 27.3 million.

In June 2005, Biotest increased the capital stock by € 2.9 million by issuing 1.39 million ordinary shares excluding the subscription rights of existing shareholders. A German financial investor subscribed 570,000 shares in cash to the amount of € 10.0 million, and the Schleussner family subscribed 569,150 shares in exchange for the conversion of a partner's loan with an equity volume of € 10.0 million.

In October 2005, the capital stock was increased by an additional € 3.9 million. The offer comprised 856,525 new ordinary and 666,667 new preference shares. For each six old ordinary or preference shares held, shareholders could subscribe one new share of the same class.

Volume of securities traded

Monthly values from the order book statistic (in thousand securities)

Of the preference shares on offer, 99.67 % were subscribed during the two-week subscription period; the subscription rate was 99.29 % for ordinary shares. The Schleussner family made only minimal use of their subscription rights, so that 450,000 ordinary shares were sold within the framework of a private placement. Demand exceeded the available lot by a multiple. The new shares fully qualify for dividend already in financial year 2005.

The capital increase resulted in a further increase in the share of international institutional investors in the capital of Biotest. Especially institutional investors specialised in the healthcare area took up the share certificates that were newly issued in the capital increase. Due to the fact that subscription rights were not exercised, the Schleussner family's stake in ordinary shares declined to 50.03 %; twelve months earlier it was still at 60 %.

In addition, more than 10 % of ordinary shares are held by Kreissparkasse Biberach. The rest of the ordinary shares and all preference shares are widely scattered via the stock market. Capital measures are also the reason for considerably higher sales with Biotest shares. The number of traded shares on all German stock exchanges was approximately 50 % higher than in the previous year and reached 5.6 million. Approximately 90 % of all transactions took place in the XETRA electronic trading segment and in floor trading at the Frankfurt securities exchange.

Investor and creditor relations further intensified

One of the main priorities of investor relations work in the past year was communication in connection with the capital measures. In the forefront of the capital increase without preclusion of subscription rights in October, the Board of Management presented the company and the strategy of growth to national and international investors in a roadshow.

In addition, Biotest sought out an active dialogue with the relevant players on the capital market. The Board of Management gave details on a regular basis regarding the business, earnings and financial situation to portfolio managers, analysts and representatives of the credit-lending banks.

We held press and analysts' conferences in April and October 2005 to announce the 2004 financial statements that were published at the end of March and the third-quarter figures.

Just 26 days after the balance sheet date, detailed information was available on the course of business in both business areas and on the progress of development in the Biotherapeutic segment. The interim reports after the first, second and third quarter were published on average 40 days after the respective accounting date. In the past year, Biotest therefore consistently complied with the deadlines specified by the German Corporate Governance Code for the publication of financial information.

In ad hoc announcements and press releases, we provided the public with comprehensive and current information on the development of the company. Additionally, we presented ourselves to attendees at the DVFA SEQ-Smart Equities Conference in Frankfurt am Main.

The capital measures – as well as the operational success – served to more strongly draw the attention of capital market oriented media to Biotest. Research and analysis firms also commented on the company and its perspectives to a greater extent than in the previous year. Special mention should be made of the inclusion of coverage by the research firm equinet.

Interested parties can view or download presentations, speeches and annual and interim reports at the "Investor Relations" section of our company website (www.biotest.de). We send information on the company to more than 600 addresses both in Germany and abroad.

We published the consolidated financial statements for 2005 on 17 March 2006. This took place 76 days after the balance sheet date and was thus ahead of the 90 day deadline set by the German Corporate Governance Code.

DATA AND KEY FIGURES FOR THE BIOTEST SHARE

Security codes WKN, ISIN (ordinary shares) 522720, DE0005227201 Security codes WKN, ISIN (preference shares) 522723, DE0005227235

Stock Exchange Symbol	BIO (ordinary shares), BIO3 (preference shares)
Stock Markets	Frankfurt, Berlin, Dusseldorf, Hamburg, Stuttgart as well as XETRA
Market Segment	Prime Standard/official market
Prime Industry	Pharma & Healthcare
Industry Group	Pharmaceuticals
Designated Sponsor	Deutsche Bank
Number of Shares	5,995,675 ordinary shares, 4,666,667 preference shares
Share Capital	€ 27.3 million
Approved Capital	€ 10.24 million

€	2005	2004	2003
Dividend per ordinary share	0.12 1)	0.11	0.00
Dividend per preference share	0.18 1)	0.11	0.22 2)
Earnings per share	1.13	0.57	- 0.77
Additional dividend rights preference shares	0.06	0.11	0.11
Earnings per preference share	1.19	0.68	- 0.66
Cash flow3) per share	3.78	4.04	2.67
Ordinary shares
Opening price XETRA	12.21	7.16	5.08
High XETRA	30.40	13.85	8.50
Low XETRA	11.78	7.16	3.15
Closing price XETRA	24.45	12.10	7.50
Market capitalization at year-end (€ million)	146.59	48.40	30.00
Preference shares
Opening price XETRA	9.46	4.82	3.28
High XETRA	26.00	11.45	6.85
Low XETRA	9.17	5.03	2.85
Closing price XETRA	22.30	9.58	4.96
Market capitalization at year-end (€ million)	104.07	38.32	19.84

1) proposal

2) including € 0.11 late payment from 2002

3) operative cash flow before changes in working capital

24 25

Corporate Governance at Biotest

Joint report by the Supervisory Board and the Board of Management of Biotest AG pursuant to Section 3.10 of the German Corporate Governance Code

Corporate Governance principles

Biotest's corporate strategy is oriented towards broadening the product range through a focused research and development program and on this basis towards shaping growth in international markets. In the long term, this will secure an attractive ratio between opportunity and risk for the stakeholders in the company – shareholders, customers, business partners and employees.

In light of this, Biotest views corporate governance, risk management and controlling and compliance as an integrated subject area. In the pursuit of overriding strategic goals, it is our policy to attain the greatest possible efficiency at each level of the company, to act in a responsible manner at all times, and to limit the risks incurred as a necessity, such as with regard to long-term research projects.

A responsible management with a focus on the long term and its efficient control are as a matter of course an integral part of our corporate culture. Both executive bodies work together in a trusting manner and orient themselves on internationally recognised standards of good corporate governance. In so doing, compliance with regulatory provisions and transparency requirements of the capital market at all times is self-evident.

The German Corporate Governance Code (the "Code") in its most current version is always authoritative for the concrete implementation and further development of our principles of responsible corporate conduct. Effective 2 June, 2005, several new recommendations were added to the Code, which in particular set higher standards concerning the composition of the Supervisory Board and the Audit Committee. Board of Management and Supervisory Board have intensively dealt with the new requirements and decided to implement the recommendations of the Code without exception in the future as well.

Corporate Governance in financial year 2005

During financial year 2005, there were no deviations from the Declaration of Compliance applicable for the period. There were no conflicts of interest during the reporting period. Statutes and bylaws of Biotest AG in their current version are fully compliant with the Code.

Approximately 170 persons participated in the Annual Shareholders' Meeting of the company on 20. May, 2005 in Frankfurt/Main. With 78.41% of all ordinary shares present, they approved all the agenda items with a large majority. Particularly noteworthy is the creation of a new approved capital in the amount of € 10.24 million. The preferred shareholders also approved this agenda item at a separate meeting following the annual shareholders' meeting with 19.50 % of the votes present. The statutes of Biotest AG were amended accordingly.

All necessary reports and documentations were also made available in advance on the Internet pages of Biotest. The Chairman of the Supervisory Board also informed the Annual Shareholders' Meeting about the basics of the remuneration system.

Efficiency review by the Supervisory Board

The Supervisory Board of Biotest AG has made preparations for the renewed review of the efficiency of its activities in the first half of the year 2006. As already in 2004, potential for improvement is to be revealed through special interviews with all members of the Supervisory Board. Biotest will report on the results in the next annual report. An efficiency review should be conducted at least every two years.

Implementation of the recommendations and suggestions of the code

Biotest AG is compliant with all of the recommendations of the German Corporate Governance Code also in its new version of 2 June 2005. Furthermore, Biotest also complies largely with the suggestions of the Code. Sole exception: for cost reasons, we will not broadcast the Annual Shareholders' Meeting of the company via the Internet. The statement of compliance that was approved at the balance sheet meeting of the Supervisory Board on 15 March 2006 is available on the company's web page at www.biotest.de. Also available at this site are the previous statements of compliance, the corporate governance report, the remuneration report and the company statutes.

In addition to the principle of "comply-or-explain," according to which companies only need to justify their deviations from the Code, Board of Management and Supervisory Board elaborate on two major new recommendations in this report.

According to section 5.4.2 sentence 1, the Code recommends that the Supervisory Board, based on its own judgement, needs to include a sufficient number of independent members. The Supervisory Board of Biotest AG is composed of four shareholders' representatives and two employee representatives. No business or personal relationships that constitute a conflict of interest exist between these members and Biotest AG or its Board of Management. In so far, the entire Supervisory Board is independent in the sense of section 5.4.2 sentence 1 of the Code. The law firm Ashurst, where Mr. Reinhard Eyring, member of the Supervisory Board, is engaged, received a total of € 504 thousand (previous year: € 134 thousand) for consulting services in financial year 2005. The increase is due to legal counsel in connection with the capital increase of Biotest AG, among others (due diligence and submission of stock exchange prospectus).

According to section 5.3.2, the Code requires that the chairman of the auditing committee is in the possession of special knowledge and experience in the application of accounting standards and internal controlling procedures. Chairman of the auditing committee is Dr. Jochen Hückmann. As Chairman of the Management Board of Merz GmbH & Co. KGaA, he commands extensive knowledge and experience. Merz has already reported in accordance with International Accounting Standards for a number of years.

New legal requirements

Biotest has fulfilled all legal requirements concerning capital market communication during financial year 2005. All purchases and sales that are subject to reporting obligations (exceeding Euro 5,000 per annum) of officers and other executives of the company have been reported immediately. Due to the Ordinance specifying Duties to Notify, Inform and Disclose and the Duty to Maintain Insider Lists according to the Securities Trading Act (Verordnung zur Konkretisierung von Anzeige-, Mitteilungs- und Veröffentlichungspflichten sowie der Pflicht zur Führung von Insiderverzeichnissen nach dem Gesetz über den Wertpapierhandel – Wertpapierhandelsanzeige- und Insiderverzeichnisverordnung – "WpAIV") that became effective at the end of 2004 and is also

taken into consideration in the amended section 6.6 of the Code, Biotest is publishing the transactions for the first time as part of the Report on Corporate Governance.

Directors' Dealings 2005

Name	Function	W0N/ISIN	Share class	Purchase/	Trade date	Number	€ Price	€ Value
				Sale		of shares
Dr. Joachim Herborg	Other management	522723	Pref. share	Sale	31.10.2005	1,000	22.96	22,956.60
Dr. Rainer Pabst	Other management	522723	Pref. share	Sale	28.10.2005	200	22.96	4,591.12
Dr. Michael Ramroth	Executive body	522723	Pref. share	Sale	31.10.2005	1,500	22.96	34,440.00
Dr. Cathrin Schleussner	Supervisory body	522720	Ord. share	Sale	27.10.2005	16,199	22.50	364,477.50
Dr. Cathrin Schleussner	Supervisory body	522720	Ord. share	Sale	15.08.2005	288,039	17.57	5,060,852.00
Joshua Schleussner		522720	Ord. share	Sale	27.10.2005	395	22.50	8,887.50
Sylvie Schleussner		522720	Ord. share	Sale	27.10.2005	395	22.50	8,887.50
Prof. Dr. Gregor Schulz	Executive body	522723	Pref. share	Sale	31.10.2005	1,500	22.96	34,440.00
Dr. Thorlef Spickschen	Supervisory body	522720	Ord. share	Sale	31.10.2005	367	22.50	8,339.40
Dr. Thorlef Spickschen	Supervisory body	A0FAPJ/00	Subscr. right	Sale	20.10.2005	2	0.40	0.80
Dr. Thorlef Spickschen	Supervisory body	522720	Ord. share	Sale	10.08.2005	2,200	22.51	49,531.25
Dr. Rolf Vornhagen	Other management	522723	Pref. share	Sale	31.10.2005	1,000	22.9566	22,956.60

In the implementation provisions of the German Law for the Improvement of Investor Protection, which also encompasses the duty to keep lists of insiders, Biotest orientates itself on the Issuer Guideline prepared by the German Federal Financial Supervisory Authority (BaFin).

Compensation of the Board of Management and the Supervisory Board

Joint report by the Supervisory Board and the Board of Management of Biotest AG pursuant to Section 4.23 of the German Corporate Governance Code

Compensation of the Board of Management

The compensation of the Board of Management is specified by the Supervisory Board. It is composed of a fixed compensation, a bonus and a component with long-term incentive effect and risk elements. Added to this is non-cash compensation for a company car and for retirement benefits, among others. All compensation components are approximate both individually and as a whole.

The annual fixed salary is based on the economic position and future prospects of Biotest as well as on the level of compensation paid in a comparable environment. The variable compensation component is based to 35 % on EBIT, to 35 % on Return on Capital Employed (RoCE) and to 30 % on the achievement of individual goals in the previous financial year. The individual targets are agreed annually between the members of the Board of Management and the Presiding Committee. After the end of the financial year, the Presiding Committee sets the level for the performance-related component. The component with long-term incentive effect and risk elements was based for the first

time in the financial year on the newly created Long-Term Incentive Plan (LTI), which includes further executives in addition to the members of the executive board. It replaces the virtual share options program of Biotest AG that expired in financial year 2004.

Both members of the Board of Management were given the option of purchasing 1,500 preference shares of Biotest AG per person at the current market price. 25 % of the purchase price will be reimbursed by Biotest AG. The shares purchased must be held in the securities account for three years. Once this period has elapsed, additional preference shares are granted depending on the achievement of defined performance targets. The beneficiaries are required to pay the proportionate amount of the equity capital – € 2.56 per share – for those shares. Challenging execution hurdles were defined for these performance targets. No additional preference shares are granted below an annual average EBIT-margin of 8.5 % or for a share price advance of less than 10 %. In addition, a cap was agreed for extraordinary and unforeseeable developments. The number of preference shares that can be obtained after three years have elapsed is limited to a maximum of six times the number of preference shares initially purchased.

In financial year 2005, the individual members of the Board of Management received the following compensation.

Total remuneration for the active members of the Board of Management amounted to a total of € 778 thousand in 2005 (previous year: € 995 thousand).

Of this amount, apportionable to Prof. Dr. Gregor Schulz is a fixed salary of € 250 thousand, plus allowances for insurance, among others, and non-cash compensation for a company car totalling € 40 thousand and performance-related earnings in the sum of € 114 thousand. In addition, a pro-rata provision was made for Prof. Dr. Gregor Schulz in the amount of € 20 thousand for performance-related earnings for the successful conclusion of capital measures in 2005. This amount, however, will not be paid out until November 2006 upon fulfilment of further conditions.

Of the total amount, a fixed salary of € 200 thousand is apportionable to Dr. Michael Ramroth, plus allowances for insurance, among others, and non-cash compensation for a company car totalling € 40 thousand and performance-related earnings in the sum of € 94 thousand. In addition, a pro-rata provision was made for Dr. Michael Ramroth in the amount of € 20 thousand for performance-related earnings for the successful conclusion of capital measures in 2005. This amount, however, will not be paid out until November 2006 upon fulfilment of further conditions.

Participation of the members of the Board of Management in the long-term-incentiveprogramme is as follows:

2005 in € thousands	Value of shares purchased	Company allowance for own investment	Total cost of the stock option plan	Cost of the stock option plan in 2005
Prof. Dr. Gregor Schulz	34	9	154	9
Dr. Michael Ramroth	34	9	154	9
	68	18	308	18

28 29

Compensation of the Supervisory Board

The compensation of the Supervisory Board is stipulated in the Articles of Association. The members each receive an annual fixed compensation of € 15,000 as well as a variable compensation payment in the amount of € 500 for every € million that exceeds EBIT with a minimum amount of € 14.3 million. This minimum amount increases annually by 10 % beginning in financial year 2005 up to and including financial year 2007.

The Chairman of the Supervisory Board receives double that amount and his Deputy one and a half times that amount. For work in a Supervisory Board Committee, members will receive an additional € 3,000 and the chairman € 5,000.

In addition, Biotest reimburses the members for VAT payable on Supervisory Board emoluments.

2005 in € thousand	Fixed compensation	Variable compensation	Total compensation
Dr. Thorlef Spickschen (Chairman since 20 May 2005)	23	3	26
Werner Spinner (Chairman until 20 May 2005)	15	2	17
Dr. Cathrin Schleussner (Deputy Chairman)	26	5	31
Kerstin Birkhahn	15	5	20
Reinhard Eyring	18	5	23
Johannes Hartmann	18	5	23
Dr. Jochen Hückmann	23	5	28
	138	30	168

Annual Document

Pursuant to Sec. 10 of the German Securities Prospectus Act (WpPG), listed companies are obligated to make annually available to the public a document containing information published or made available to the public in the twelve preceding months to comply with certain regulations under German company or capital market law.

The following table contains all information that Biotest AG published or made available to the public in the period from January 2005 up to and including December 2005 as a result of the regulations of negotiable instruments law as stated in Sec. 10, para 1, WpPG. The third column of the table lists where the information was published and where it can be viewed. Provided that information was only published on the Internet, the respective printed version of the document can be requested from Biotest.

A list in accordance with Sec. 10, para 1, WpHG is updated at the end of each quarter and can be viewed in the Investor Relations area of the Biotest website.

Information type	Date of publication	Publication in/available at
Ad hoc announcements
Ad hoc announcement pursuant	16.03.2005
to Sec. 15 WpHG: "Excellent		www.biotest.de
preliminary result: Biotest achieves		Category: Investor Relations –
group profit of € 5.0m in 2004		Announcements
Ad hoc announcement pursuant	24.03.2005	www.biotest.de
to Sec. 15 WpHG:		Category: Investor Relations –
"Change of the Supervisory Board"		Announcements
Ad hoc announcement pursuant	30.06.2005	www.biotest.de
to Sec. 15 WpHG: "Biotest AG increases		Category: Investor Relations –
capital stock by up to € 2.92m"		Announcements
Ad hoc announcement pursuant	06.09.2005	www.biotest.de
to Sec. 15 WpHG: "Biotest AG increases		Category: Investor Relations –
capital stock by up to € 3.9m"		Announcements
Ad hoc announcement pursuant	10.10.2005	www.biotest.de
to Sec. 15 WpHG:		Category: Investor Relations –
"Biotest fixes subscription price"		Announcements
Documents regarding capital measures
Securities prospectus	10.10.2005	Download file at:
for capital increase		www.biotest.de/de/data/pdf/
		wertpapierprospekt.pdf
Rights offer for shares	10.10.2005	Download file at:
from the capital increase		www.biotest.de/de/data/pdf/
		bezugsangebot.pdf
Annual Reports
Annual Report 2004	30.03.2005	www.biotest.de
		Category: Investor Relations –
		Publications
Quarterly Reports
Q1 Report 2005	10.05.2005	www.biotest.de
		Category: Investor Relations –
		Publikationen – Quarterly Reports
Q2 Report 2005	05.08.2005	www.biotest.de
		Category: Investor Relations –
		Publications – Quarterly Reports
Q3 Report 2005	14.11.2005	www.biotest.de
		Category: Investor Relations –
		Publications – Quarterly Reports
Annual General Meeting
Invitation/Agenda of Annual	07.04.2005	www.biotest.de
General Meeting 2005		Category: Investor Relations –
		Annual General Meeting
Invitation/Agenda of Additional	07.04.2005	www.biotest.de
Meeting 2005 of		Category: Investor Relations –
Preference Shareholders		Annual General Meeting
Corporate Governance
Declaration of Compliancy	18.03.2005	www.biotest.de
pursuant to Sec. 161 AktG		Category: Investor Relations –
		Corporate Governance

Trust

Blood transfusions during serious operations are a routine clinical procedure. Precisely for this reason, it must be guaranteed that the blood types of donors and recipients exactly match. The fully-automated testing system TANGO® optimo from Biotest determines blood types reliably and efficiently. That makes security during transfusions a sure thing.

Group Management Report

The Financial Year in Review

32 33

Profit-yielding growth, improvement in the financing structure through capital increases and restructuring of external financing with reduction of debts and important advances in the implementation of the strategy: the financial year 2005 was very successful for Biotest.

At € 237.6 million, revenue was approximately 9.1 % higher than in the previous year; for the first time in three years, Biotest was on a path of growth. At 35.7 %, the operating result (EBIT) grew at an above-average rate to € 25.3 million (previous year: € 18.6 million). Earnings after interest (EBT) showed even more dynamic progress, and at € 15.0 million was more than twice as high as in 2004 (€ 6.2 million).

With our corporate strategy, we are pursuing the goal of strengthening Biotest's position as a global specialist for innovative immunology and haematology. We reached important milestones in this direction in 2005. We made significant headway both in the internationalisation of the business and in the diversification of our products – for instance, through the approval of our immunoglobulin Intratect® in nine additional European countries and the diagnostic system TANGO® in the USA. The development of therapeutic monoclonal antibodies is proceeding on schedule.

Following replacement of the collateral trustee agreement (CTA) by a syndicated loan, conclusion of an additional profit-sharing rights agreement and successful capital measures, the financial basis for our future growth appears extremely sound: equity ratio stood at 48.5 % as at the balance sheet date; at 78.6 %, total equity, pension reserves and long-term financial liabilities altogether accounted for a much larger share of the balance sheet total than in the previous year (53.6 %).

About Biotest

Biotest is a pharmaceutical and diagnostics company active in the research and development, production and distribution of medical preparations for the therapy of diseases of the immune system and in the haemopoietic systems, of reagents and testing systems for blood and transplantation diagnostics as well as of substances and systems for hygiene monitoring of air and surfaces.

Biotest has approximately 1,100 employees worldwide, most of which work in Germany at the headquarter in Dreieich near Frankfurt am Main. In addition, we have subsidiaries and associated companies in Germany and in ten further countries in Europe, America and Asia.

Segmentation

Since financial year 2005, Biotest's activities have been divided into three operating segments: Pharmaceuticals, Diagnostics and Biotherapeutics. The Corporate segment shows costs incurred by the overarching group management. The figures for financial year 2004 have been adjusted for the changed presentation to make them comparable with last year's data.

In the Pharmaceutical segment, Biotest researches, develops, produces and distributes drugs derived from human plasma. These can be divided into three groups: immunoglobulins, coagulation factors and albumins. Our preparations are used in diseases of the immune and haemopoietic systems.

The Diagnostic segment comprises the development and production of various reagents and devices for the typing of red and white blood cells and other tissue cells, as well as testing substances and systems for hygiene monitoring.

The Biotherapeutic segment was set up in financial year 2005. The development of monoclonal antibodies (mAb) is clustered within this segment. The biotechnically-produced active ingredients are to be used in the treatment of rheumatoid arthritis and other autoimmune diseases as well as for the therapy of multiple myeloma, a malignant cancer of the bone marrow. With the new segmentation, we are staying abreast of the large potential that the development of mAb holds for Biotest, while furthermore ensuring the transparency of expenses incurred in this regard.

Key Figures on Corporate Management

Key figures used in the management of Biotest are Return on Capital Employed (RoCE) as relates to the overall company and Earnings before Interest and Tax (EBIT) and Earnings before Tax (EBT) at the segmental level. Cash flow is an important parameter with regard to corporate financing. In this regard, measures based on key figures aimed at reducing working capital were introduced in financial year 2005.

Market Conditions

At a glance

34 35

Market conditions relevant for Biotest in the Pharmaceutical segment encompass the areas of plasma collection, processing and purification as well as marketing of the final products. The Diagnostic segment is active in the market for blood transfusions, infection diagnostics and the transplantation of human tissue (organs and bone marrow). The pharmaceutical industry is the main customer group for hygiene monitoring, and it uses our products for monitoring cleanroom conditions during production.

Market conditions for the pharmaceutical business developed favourably. In the second half of 2005, a recovery that started in the USA was noticeable for the immunoglobulin market, which was also accompanied by price increases in Europe. The markets served by Biotest outside of Europe (the Middle East, North Africa, South America) were again characterised by intense competition. Thus margins on calls for tenders continued to be under pressure.

The markets for diagnostic devices remained difficult in Europe in 2005, and the continuing cost pressure in the healthcare sector weighted down prices. In the USA, we continue to observe positive market conditions for suppliers of diagnostic products, especially in the transfusion medical sector.

On a whole, Biotest's overall expectations concerning market development as mentioned in the 2004 annual report by and large materialised.

Plasma proteins

The plasma protein industry is currently dominated by three large companies, which hold approximately 70 % of the global market volume. Biotest achieved a world market share of approximately 2 % in financial year 2005. Within the markets that we serve, the revenue share of our products reached approximately 9 %, and this share was substantially exceeded in sub-markets. As an example, the polyvalent immunoglobulin Intratect® achieved a market share of 19.4 % already in its first year following market introduction in Germany.

25 20 15 10 5 0 2001 2002 2003 2004 2005 22.7 21.4 22.8 21.0 25.0* Source: Bundesverband der Betriebskrankenkassen (BKK) * 2005: estimate

Spending on drugs by the statutory health insurance sector in Germany € billion

Human plasma is raw material for three major product groups: immunoglobulins, coagulation factors and albumin. As Biotest expected, excess supply on the global plasma markets declined in 2005. This development results from a major reduction of capacities by many large suppliers that already took place in 2004 and the accompanying drawdown of sizeable inventories. Due to the limited supply, the purchasing prices for plasma raw material were 5 % higher for Biotest at the end of the year compared to the beginning. In some instances, price increases were even higher. The reduced supply of raw material also led to increasing prices for plasma preparations, but the development differed by regions and product groups.

Price increases were witnessed for immunoglobulins in the past year, caused by lower supply and an increasing demand.

The prices for coagulation factors were largely stable in Europe. Biotest distributes drugs with the coagulation factors VIII and IX. Countries outside Western Europe and the USA cover their demand predominantly with plasmatic preparations, since these are considerably less expensive. In continental Europe, somewhat more than half of all haemophiliacs are treated with biotechnologically manufactured – so called recombinant – factors. The relationship between the two has remained unchanged in the past financial year. In Great Britain and North America, recombinant factors dominate the treatment of haemophilia.

There is some evidence that the plasmatic factor VIII concentrates induce fewer inhibitors (inhibitors hinder the effectiveness of factor VIII). Furthermore, there are indications that plasmatic factor VIII medications with von-Willebrand factors are more effective in the therapy of inhibitors. Our factor VIII product Haemoctin® SDH combines both advantages. In our assessment, these preparations will continue to attract a significant share of the demand in Europe.

In Russia, sales of coagulation factors were up sizably because costs for the prophylactic treatment of adult haemophiliacs in Russia have been covered by the state health system since 2005. The prices achieved in competitions for tenders in emerging markets continued to be under pressure. However, indications were mounting that the price decline is coming to a halt, especially with regard to factor VIII drugs.

As in the previous years, the market for albumin was difficult. The effects of the excess supply from previous years are being felt more strongly than for coagulation factors and immunoglobulins.

In Germany, with a share of 37.0 % in annual revenue the single most important market for Biotest's Pharmaceutical segment, the regulatory framework conditions have somewhat improved. The mandatory discount for producers of pharmaceuticals, which in 2004 was increased to 16 % in the context of the Statutory Health Insurance Modernisation Act, was reduced to 6 % on 1 January 2005. The statutory health insurance funds spend € 25 billion on drugs according to an estimate by the German Association of Company Health Insurance Schemes. This was significantly more than in the previous

year (€ 21 billion). According to calculations by the German Institute of Medical Statistics (IMS), the pharmaceutical industry lost revenues in the amount of € 600 million due to the mandatory discount. In the previous year, with the higher rebates in place, the loss was € 1.8 billion.

All prescription preparations that are distributed via public pharmacies and are not subject to the regulation on fixed charges are subject to the mandatory rebate in the statutory health insurance system. At Biotest, approximately 85 % of revenues from immunoglobulins obtained in the pharmacy market in Germany are affected by this regulation.

The concentration process among German pharmacies, which set in as a result of a lifting of the ban on owning more than one pharmacy (Mehrbesitzverbot) in 2004, continued in 2005. Due to specialisation and the cooperation with hospital associations, as well as the aggregation of orders, the purchasing power of pharmacies increased.

In the other countries relevant for Biotest, the framework conditions remained substantially unchanged.

Biotherapeutics

Monoclonal antibodies (mAb) are genetically engineered, highly specialised antibodies. Due to their specific mode of action, mAb have great potential for human medicine – with a focus on oncology, haematology and autoimmune diseases. According to a study by Datamonitor, 32 % of global sales in biotechnology could be related to mAb by 2008. A market volume of approximately USD 30 billion is predicted for 2010.

Major indications of the mAb in Biotest's development pipeline are rheumatoid arthritis, psoriasis and multiple myeloma, a form of leukaemia. Rheumatoid arthritis – also called chronic polyarthritis – is the most frequently occurring rheumatic disease. According to estimates, approximately 0.5 % to 1 % of the population are afflicted with this chronic inflammatory disease, which mostly affects the joints and, less frequently, inner organs. Significantly more than 50 % of the market volume for the therapy of rheumatoid arthritis relate to biotechnologically manufactured drugs. With the foreseeable market approval of additional biotherapeutic products in the coming years, the market for pharmaceuticals for the treatment of rheumatoid arthritis will grow to USD 10.5 billion according to a forecast by the science journal Nature. According to expectations, more than 85 % of the market volume (2001: 56 %) will then relate to biotherapeutical products. Following approval, we are optimistic that we can capture a significant share of this market since mAb BT-061 by Biotest possesses a unique mode of action: it is immunmodulating and causes fewer side effects than the TNF antagonists, that are currently in predominant use and which suppress the immune system. Psoriasis is a chronic, inflammatory skin disease with increased production of scaly skin that occurs in waves. Approximately 1 % to 3 % of the global population are affected. As an example, in the USA a prevalence rate of 2.1 % (equivalent to 4.5 million patients) is cited, and all age groups are affected.

An increase in registered diseases is expected due to population growth. The market for psoriasis therapeutics is likely to grow at an above-average rate, since here as well the share of the more expensive biotherapeutical products – predominantly TNF antagonists – is increasing. A market volume of USD 3.3 billion is expected in 2013. Multiple myeloma is a currently incurable cancer of the bone marrow, which has its cause in an uncontrolled growth of plasma cells. Affected are about 3 to 4 out of 100,000 persons in western industrialised countries. The development of new methods of treatment will lead to an increase of the market volume in 2011 to approximately USD 1.2 billion according to estimates. About USD 500 million will relate to new agents, among them monoclonal antibodies, according to a study by the specialist journal Nature.

Diagnostics

In transfusion and transplantation diagnostics, more than 80 % of global market volume was generated in the highly regulated markets of North America, Europe and Japan in the previous year. The global diagnostics market is also characterised by a high degree of concentration among suppliers. The world's ten leading producers of in-vitro diagnostics (IVD) hold a combined market share of 80 %.

In Europe, the market continued to be characterised by unchanged fierce price competition. In December 2005 the transition period for the IVD directive of the European Union (EU) ended. Since then only diagnostic devices with a CE certification are allowed for sale inside the EU. In the year under review, suppliers of products without seal of quality sold those at extremely low prices in order to make use of the last possibility for a legal disposal. This put the price level in the entire market under pressure. The transplantation sector was also struggling with a declining demand: this was true in particular for sales to the operators of databases for bone marrow donors.

Especially in the area of transfusion medicine, the market for diagnostics in the US is highly attractive. Due to strict criteria for approval, only two suppliers were active in transfusion diagnostics prior to the market entrance of Biotest with its fully automated blood group device TANGO® in October 2005. The price level is thus significantly higher than in Europe and will continue to move upward in the current year. In the area of transplantation diagnostics, the trend towards DNA-based procedures has continued, while transfusion diagnostics continue to be based almost exclusively on proven serological methods.

The business with products for hygiene monitoring for the pharmaceutical industry was further characterised by a favourable environment. Strict legal requirements continued to support the stable demand for hygiene monitoring products.

Management Report

38 39

Strategy – Global Specialist for Innovative Immunology and Haematology

Biotest's line of business has a strong ethical component, and our products and our operating principles have to satisfy these demands. The overriding objective at Biotest is to offer patients with largely chronic, partly life-threatening immunological, haematological or oncological diseases the chance for a lasting effective therapy with the greatest possible safety, compatibility and in a patient-friendly dosage form.

Biotest views itself as a globally active specialist for innovative immunology and haematology. Group strategy is targeted accordingly: we provide resources for research and development in order to develop new markets both at home and abroad with innovative plasma proteins, biotherapeutic products and diagnostic products.

After extensive investments in the production of pharmaceuticals, we can process considerably more plasma, achieve larger outputs during production and, at the same time, ensure products of premium quality. In the Pharmaceutical segment, we are striving to become one of the five largest producers of plasma proteins in Europe and double our world market share within five years. In the same time period, the share of all immunoglobulins within Germany's growth market is to increase from 14.9 % (at the beginning of 2005) to more than 20 %. We are going to gear ourselves strictly towards the principle "profitability before revenue" and are therefore focusing our activities on products with high margins and attractive market segments. The latter is also true for the Diagnostic segment, where we are concentrating our activities on markets with strict licensing procedures (Europe, USA, Japan) and on products with high quality standards.

Internationalism of the plasma proteins and diagnostic products business

Biotest is placing more effort – centred around an optimised product range – on the approval of its plasma proteins in those foreign markets that are especially conducive to the achievement of adequate and comparably stable margins. These mainly include the countries of the European Union (EU) and the United States (USA). Following one approval by the Food and Drug Administration (FDA), we want to launch plasma proteins with particular product attributes and for special indications in the US market. This mainly relates to the polyvalent immunoglobulin Intratect® and hyperimmunoglobulins. Since it is a sign of quality which has a positive effect on the product-image, FDA approval would also serve to benefit sales in additional international markets, including Asia among others.

By means of a stronger presence with premium products in high price markets, Biotest wants to reduce the percentage of sales generated in tender markets. This is based on the grounds that sales volumes in this area are unpredictable, and the attainable price is on average lower than via other distribution channels.

In addition, we are planning to expand our toll manufacturing business. As part of the joint venture BioDarou P.J.S. Co. with the Iranian company Darou Paksh already set up in financial year 2003, we are establishing donor capacities in Iran. The plasma collected there will be processed in Dreieich into plasma preparations – coagulation factors, immunoglobulins und albumin – and will be sent back to Iran.

The BioDarou joint venture can serve as a model for similar agreements in further countries, and negotiations are in progress. By means of toll manufacturing, Biotest is opening up an interesting growth market and can further stabilise the capacity utilisation of plasma protein production.

In the area of transfusion diagnostics, we have the opportunity to accelerate our international business as a result of the FDA approval of the fully automated blood group device TANGO® and all reagents. We market the TANGO® system in the USA via our distribution partner Olympus America Inc. The marketing of manual reagents to smaller clinics is to take place via our own distribution organisation. We are also going to internationalise the device and reagent business for hygiene monitoring with a special focus on North America. In order to develop the attractive US and Canadian markets for products by Heipha Dr. Müller GmbH, own production facilities set up locally are planned.

Higher product quality

We are also able to achieve higher margins through improved product quality. An example of this is our polyvalent immunoglobulin Intratect®, with which we were already able to gain market acceptance for price increases in 2005. Chromatographic precision cleaning lends Intratect® special product attributes and thus allows its positioning as a premium preparation.

Tapping new indication fields for plasma proteins

With a target-oriented research and development, Biotest is supporting the value-based expansionary course in the pharmaceutical area. At the centre of the innovation process is the investigation of new indications within the immunoglobulin product area.

Development of new ways of administering plasma proteins

Immunoglobulins are almost exclusively administered intravenously (IV) or intramuscularly (IM). Biotest is accelerating the clinical development of subcutaneous (SC) dosage forms, starting with the hyperimmunoglobulin Hepatect®. The advantage for patients, who often have to be treated on a permanent basis, is that they can administer the medicine themselves and save numerous visits to the hospital or doctor's office.

Adding to the product portfolio

To round off the product range, in-house developments are to replace preparations that up to now have been marketed under license. This includes, among others, our own coagulation factor IX (Haemonine®).

Ensuring supply with human plasma

40 41

In order to gain more independence from price developments on the international plasma markets, we want to meet approximately 40 % of the plasma requirement with our own collection stations in the long term. Moreover, through a high degree of self sufficiency, we are ensuring the consistent quality of our raw material.

Development of monoclonal antibodies

The focus of the Biotherapeutic segment is on the value-based development of the monoclonal antibodies BT-061, BT-062 and BT-063. In terms of large revenue and result potential, we are concentrating first of all on indications with high patient frequencies of occurrence (rheumatoid arthritis, psoriasis) and/or especially high therapeutic requirements (multiple myeloma). Biotest intends to press ahead with the development of mAb up to and including clinical phase II using own resources. Starting with the costintensive clinical phase III, we would like to continue the development together with pharmaceutical or biotech partners. Our goal is not to completely out-license the products but rather to do so just for specific markets outside of Europe. While the funds for the execution of phase II will come to a large extent from the capital increase conducted in 2005, we would like to raise our share of the costs beginning in Phase III through the expected milestone and upfront payments of development partners. Accelerated development is needed especially with regard to BT-061 and BT-062 because potential mAb competitors are also currently pursuing clinical development. Besides the mode of action, a shortest-possible time-to-market decides the success of a product.

Advancement to systems provider for diagnostics

With regard to diagnostics products, we are continuing the strategic advancement from a supplier of reagents to systems provider. In transplantation diagnostics, Biotest is aiming at the further expansion of genomic evidence methods and to this end is strengthening the research efforts in the area of chip technology.

Cooperations

We will also implement our strategy of growth through cooperation with partner companies. The cooperations extend across the entire value-added chain. We are placing the emphasis of the cooperations on research and development, and within this area we will focus in particular on the mAb projects, on the production of plasma proteins via toll manufacturing and on the in-sourcing of licensing production and in distribution.

Major Events in the Financial Year

Approval in attractive international markets

After approval was issued twelve months ago in Germany, in September 2005 the polyvalent immunoglobulin Intratect® was approved in the context of the mutual recognition procedure in nine additional European countries. For Greece, the United Kingdom, Ireland, Italy, Austria, Poland and Hungary, confirmation of approval is on hand.

The fully automated blood group device TANGO® was approved for marketing in the USA in early summer, and the accompanying reagents were approved in autumn. Furthermore, activities are under way for the approval of manual reagents in the USA and Canada. Following their successful conclusion, our diagnostic products will be approved for distribution in all highly regulated markets of the world. Since only few suppliers are active in these markets due to the stringent criteria for approval, they offer a very attractive price level.

We have also expanded the international toll manufacturing business. As part of the joint venture BioDarou P.J.S. Co., we set up a donor facility in Teheran. In addition, a further toll manufacturing agreement was reached with the partially state-owned company Iranian Blood Research & Fractionation (IBRF).

Opening up new fields of indications for plasma proteins

Our hyperimmunoglobulin Cytotect® Biotest is the only drug worldwide with a proven effectiveness in the treatment of cytomegalovirus infection in pregnant women, according to the publication of a study in the renowned New England Journal of Medicine. The treatment with Cytotect® Biotest can help to prevent severe deformations in newborns. For our immunoglobulin Intratect®, we are currently researching its suitability for the treatment of chronic pain syndrome (fibromyalgia). Furthermore, studies were started on the application of Pentaglobin®, among others, in the case of abdominal sepsis (poisoning of the abdominal area).

Development of monoclonal antibodies

For the monoclonal antibody BT-061 for the treatment of rheumatoid arthritis and psoriasis which has advanced furthest in development, the continuation of clinical trials is planned for the late summer 2006. The preparations for this are advancing according to plan. Furthermore, we agreed on a research programme with the pharmaceutical company Boehringer Ingelheim in June 2005, with the goal of testing the efficacy of BT- 061 in allergic illnesses such as asthma.

The antibody BT-062 for the treatment of multiple myeloma was humanised by our partner AERES Biomedical Ltd. at the beginning of 2005. This was an important prerequisite for the start of clinical trials. For BT-063 work on humanisation and for the establishment of the production system has begun.

In the implementation of its strategy, Biotest has restructured pharmaceutical research and development in order to optimise functional processes between the R&D sectors plasma proteins and biotherapeutical products. In order to increase development capacities for biotherapeutical products, personnel were increased.

Financing of the growth course

Biotest's goal is to largely finance growth from equity. In order to reach that goal, the registered capital of the company was increased by € 6.8 million. The capital increases resulted in a net cash inflow of approximately € 40 million.

Business Situation

At € 237.6 million, Biotest increased group revenue by 9.1 % compared to the previous year (€ 217.9 million). For the most part, growth was the result of a very good development in Europe. In Germany, revenue increased by 12.8 % from € 76.4 million to € 86.1 million. The share of domestic revenue in group revenue thus increased to 36.3 % (previous year: 35.1 %). In Europe excluding Germany (and including Russia), Biotest had sales of € 115.6 million that were 12.6 % higher than in the previous year. Growth in Europe more than compensated for the weak development in other markets. Outside of Europe, revenues of € 35.9 million were 7.6 % below previous year's value.

Revenue by segment

€ million

42 43

Business development pharmaceuticals

The pharmaceutical business had the most significant share in growth. At € 160.4 million, revenue for the Pharmaceutical segment exceeded previous year's figure (€ 141.9 million) by 13.1 %. Main growth drivers were the polyvalent immunoglobulins and the coagulation factors. With the polyvalent immunoglobulin Intratect®, Biotest obtained sales in Germany that were 50.6 % higher than in financial year 2004 (with Intratect® and the predecessor product Intraglobin®). Our premium preparation has already achieved a market share of 19.4 % in Germany within the first year following approval (unlike most competitor preparations). Intratect® can be stored at room temperature, is available in liquid form ready for infusion and is also suitable for patients with sugar intolerability. In the context of the mutual recognition at the European Union level, Intratect® has meanwhile been approved in nine European countries (besides Germany) including Italy and the United Kingdom. Both countries have a particularly high demand for immunoglobulins.

Revenue by region

in %

With coagulation preparations, we obtained 43.4 % more than in the previous year. In particular, sales of the factor VIII product Haemoctin® SDH advanced markedly. In Germany, Biotest has increased its market share in plasmatic coagulation factors from 18 % to 20 %.

At the international level, the additional business with Russia was the main reason for the growth of Haemoctin® SDH. Since the decision by the Russian government to reimburse the costs for the pre-treatment of adult haemophiliacs, an attractive market has opened up in which Biotest has had a significant share from the very beginning.

44 45

Business with hyperimmunoglobulins, which are used in the prophylaxis and therapy of specific inflammations, developed without a clear trend. Sales of Hepatect®, which is used in the prophylaxis of hepatitis B, developed favourably. Biotest, amongst others, profited from the delayed approval of a product by a Spanish competitor.

Revenues declined compared to the previous year for business with the other immunoglobulins Cytotect® Biotest and Varitect® because the more cost-efficient virostatics were frequently given preference over our products.

The increase in revenues for immunoglobulins and coagulation factors was predominantly caused by higher volumes. In Germany, the increase for immunoglobulins is also due to higher prices: as an example, in September 2005 we were able to put through a price increase of 5 % on average thanks to the very high demand. An additional positive price effect resulted from the reduction of the mandatory discount for medications in the statutory health insurance system.

The revenue obtained with Pentaglobin® for the treatment of severe bacterial infections increased by 24.4 %. The growth results among others from noticeably stronger sales in Greece and Russia.

In light of the very good business development in Europe and the continuation of the strained situation in the markets for tender business in emerging and developing countries, Biotest exercised restraint just as in the previous year.

Due to the continuation of the difficult market situation, revenues with albumin were 1.7 % below previous year's figure.

Business development diagnostics

In the Diagnostic segment, Biotest had sales of € 77.2 million, or 1.6 % more than in the previous year (€ 76.0 million). Gains in the strong-selling transfusion diagnostics (+5.0 %) and hygiene monitoring (+2.7 %) product groups stood out against losses in the rest of the business areas: volume in transplantation diagnostics was 6.4 % below previous year's level, and with reagents for clinical infection diagnostics in the laboratory area, Biotest sold 8.3 % less than in 2004. The market was characterised by fierce price competition, which is why Biotest is taking a conservative approach to this field, analogous to the strategy regarding tender competition for plasma proteins.

German business with devices and reagents used in transfusion diagnostics was largely stable. In August, Biotest delivered eight TANGO® fully automated blood group devices to the hospital corporation LBK Hamburg GmbH. With seven hospitals and more than 20 service providers, LBK is one of the largest health companies in Europe. Biotest prevailed with its proposal in a European-wide tender.

The business development of our subsidiary in Hungary was very dynamic due to the further expansion of our market share in the area of reagents for transfusion diagnostics and the first two placements of QuickStep® fully automated devices for antibody detection in transplantation diagnostics. In addition, in 2005 the Hungarian company started marketing Biotest products in Bulgaria and Romania.

We also achieved higher sales in France. Growth, however, did not meet our expectations.

The most important event for this business area was the approval of TANGO® and all of its corresponding test reagents in the USA. Immediately following approval, our partner Olympus America, Inc., started its marketing effort. As a kick-off, Olympus America presented the system during the annual meeting of the American Association for Blood Banks (AABB) in Seattle, Washington, and triggered a lot of interest. In 2005, 21 systems were already sold to Olympus.

The business with reagents for transplantations diagnostic was again difficult. The intensity of competition remains high, and the market volume is down as a whole, especially regarding sales to operators of donor data files. Biotest clearly felt the effects of the collapse of the UK market. In light of these general business conditions, we are focusing distribution in transplantation diagnostics on the target group immunological laboratories at hospitals.

The bulk of growth in the business with systems, reagents and devices for hygiene monitoring of air and surfaces was accounted for by Heipha Dr. Müller GmbH, in which we have a 51 % share. The company sold significantly more than in the previous year, especially with products for the pharmaceutical industry. Due to high requirements on the reliability of the monitoring systems, this market segment can only be served by topquality suppliers.

Business development biotherapeutics

In the Biotherapeutic segment, the development of monoclonal antibodies (mAb) proceeded according to plan. Further information about our biotherapeutics can be found in the section "Research and Development." Since all products are still in an early stage of development, no sales were achieved in this area.

Earnings Position

The earnings position of the Biotest group considerably improved in the past financial year. The determining factors were strong gains in the operational business and a significantly improved financial result. We increased earnings before interest and taxes (EBIT) by 35.7 % to € 25.3 million. At € 15.0 million, the group result before taxes (EBT) was 141.1 % above previous year's figures (€ 6.2 million). Return on sales, defined as the ratio between earnings before interest and taxes divided by sales, amounted to 10.6 % across the group, approximately a quarter more than in 2004.

At 8.0 %, the return on capital employed (RoCE) was notably higher than in the previous year (5.7 %).

Growth in earnings primarily resulted from the positive development in the Pharmaceutical segment, which at € 28.9 million achieved a 32.0 % higher EBIT than in the previous year (€ 21.9 million). The increase was mainly due to an expansion of sales.

The Diagnostic segment clearly increased EBIT to € 3.4 million (previous year: € 1.2 million), but still remained below expectations due to continued intensive competition in the European market which put a strain on margins. At € 2.0 million, earnings before tax (EBT) provided a basis for the segment's return to profitability (previous year: € – 0.3 million).

EBIT and earnings before tax

€ million

46 47

In the Biotherapeutic segment, the development of monoclonal antibodies led to expenses of € 3.7 million (previous year: € 1.5 million) and accordingly to a negative operating result in this amount.

At € 3.3 million, the costs shown in the Corporate segment for cross-functional functions (primarily the Board of Management and strategic projects) were 8.2 % higher than in 2004 (€ 3.1 million) due to increased cross-functional project expenses.

The above-average positive development of earnings before tax (EBT) can be attributed to the financial result. At € – 10.0 million, it significantly improved compared to the previous year (€ – 12.2 million). The main reason for this is the discontinuation of the financing costs associated with the collateral trustee agreement. Furthermore, credits for interest on tax refunds from previous financial years and a remission of a debt by the banks had a positive effect on the financial result.

After tax and without interests in the result of minority partners (Heipha Dr. Müller GmbH – Viro-Immun Labor-Diagnostika GmbH and Biotest Grundstücksverwaltung GmbH), a net profit remains totalling € 10.2 million. Taking into account the capital increases, this yields a result of € 1.13 per share (previous year: € 0.57) and € 1.19 per preference share (previous year: € 0.68).

Cost of sales

Cost of sales increased group-wide by 10.5 % to € 126.1 million. The increase is due to higher expenses in the Pharmaceutical segment. At 55.4 %, the cost of sales ratio (cost of sales relative to revenue) was higher in this segment than in the previous year, whereas we were able to reduce this ratio in the Diagnostic segment by 3.5 percentage points.

On the one hand, the reason for the increase in cost of sales for plasma proteins was the sizeable increase in business volume, especially with regard to Intratect®. The primary products for albumin and cryoprecipitate, the basis for coagulation factors, are automatically generated during the manufacturing process of Intratect®. Still, albumin, in particular, could only be marketed at low margins due to the continuation of the difficult market environment.

On the other hand, the cost of sales ratio was weighted down by non-recurring special items. As an example, in 2005 Biotest sold a large position of factor VIII at an unusually low price as part of a one-time offer. These were inventories that had already been accumulated in financial year 2004 in order to meet a call for tenders in Brazil. However, following the intervention of a competitor, Biotest did not get the contract after all.

Costs

€ million

The beginning of price rises on the global plasma markets had no bearing on us due to long-term supply agreements and the increased self-supply ratio. Biotest invested at an early stage in achieving a larger independence from the raw materials markets. In February 2005, our subsidiary Plasma Service Europe GmbH took over a plasmapheresis station in Halle, Germany that had been formerly operated by our competitor Baxter. As a result, Biotest now has four of its own donor stations (three in Germany and one in Austria).

In the Diagnostic segment, we were able to reduce the cost of sales ratio through a streamlining of the product line and the associated optimisation of the range of products offered as well as through process optimisation.

Distribution and administrative expenses

Expenses for distribution and administration increased by 11.3 % from € 66.8 million in the previous year to € 74.4 million. At 31.3 %, their share of revenue was nearly unchanged.

R&D expenses

48 49

In the last financial year, Biotest spent € 16.9 million for research and development, 8.6 % less than in the previous year (€ 18.5 million). Of this, direct research and development programmes accounted for 78 % and developments supporting products accounted for 22 %. In the Pharmaceutical segment, the expense amounted to € 9.3 million (previous year: € 13.4 million). The decline can be traced back to the fact that in 2004 the R&D expense was characterised by the approval of Intratect® and the change-over in the production of plasma proteins to the new manufacturing technology.

We significantly increased expenditures for the development of monoclonal antibodies combined under the Biotherapeutic segment by 176.9 % to € 3.6 million. This development occurred as scheduled and is the outcome of additional milestones that we reached in the development of three mAb.

At € 4.0 million, R&D expenses in the Diagnostic segment were slightly higher than in the previous year (€ 3.8 million). The key aspects were activities for the approval of manual reagents for use in transfusion diagnostics in the USA.

Other operating income and expenses

The balance of other operating income and expenses amounted to € 5.1 million compared to € 2.5 million in the previous year. The earnings mainly resulted from increased exchange rate gains and higher earnings from secondary businesses such as the cross-charging of costs and earnings from the disclosure of know-how.

Proposal for the distribution of earnings

The next Annual Shareholders' Meeting of Biotest AG takes place on 11 May 2006 in Frankfurt am Main, Germany. The Board of Management and the Supervisory Board will propose to distribute a dividend in the amount of € 0.12 per ordinary share and € 0.18 per preference share (previous year: € 0.11 in each case) corresponding to the balance sheet profit of Biotest AG in the amount of € 4.4 million and to carry forward € 2.8 million to a new account. Due to the capital measures undertaken in financial year 2005 and the entitlement to dividend of the new shares, the planned total amount of € 1.6 million to be distributed as dividend is € 0.7 million higher than in financial year 2004.

Capital Expenditure and Depreciation and Amortisation

At € 15.4 million, the capital expenditure volume at Biotest was below previous year's level (€ 18.5 million). At € 12.0 million, property, plant and equipment accounted for 78 % of capital expenditure; Biotest invested € 3.4 million in intangible assets.

The capital expenditures were counterbalanced by depreciation and amortisation charges in the amount of € 14.3 million (previous year: € 12.9 million). The increase was especially caused by the fact that we activated a distribution right for Greece purchased from our former distributor in financial year 2004. The depreciation and amortisation on this intangible asset took effect over a full year for the first time in 2005.

As in previous years, the Pharmaceutical segment also accounted for the lion's share of the capital expenditure volume in 2005. Of the € 10.3 million (previous year: € 14.5 million) that Biotest invested in this segment, € 7.9 million was poured into the modernisation and expansion of production facilities. Focal points continued to be the cGMP (cGMP = current good manufacturing practises) adjustment to upgrade the pharmaceutical production. In reaction to the high demand for our plasma proteins, we also decided to double the capacity of immunoglobulin production in a second step to 4,000 kilograms per year.

Another important capital expenditure was the purchase of the plasmapheresis station in Halle, Germany. Furthermore, we set up a new environmentally-friendly waste-water treatment plant at the site in Dreieich, Germany amounting to € 1.1 million.

Capital expenditure and depreciation and amortisation

€ million

In the Diagnostic segment, Biotest invested € 5.2 million (previous year: € 4.0 million).

From the capital expenditure projects currently still under way, consequential liabilities accrue for the upcoming years. These mainly concern the capital expenditure programme in the production of plasma proteins. Of the volume scheduled until 2008, Biotest had accomplished 83 % at year's end. An additional € 4.0 million is required to conclude projects still outstanding for the adjustment of production, of which approximately € 2.2 million will be accounted for in 2006 and the rest in 2007 and 2008.

We will invest an additional € 0.8 million in the first stage of immunoglobulin production. Expansion through the second stage will add up to approximately € 2.5 million in 2006 for a total of € 9.0 million (presumably until 2008).

Financial Position and Statement of Assets Balance Sheet

Assets

50 51

At € 147.0 million, tangible fixed assets (including leased property, plant and equipment), corresponds approximately to the value as at 31 December 2004 (€ 147.4 million).

At € 108.4 million, the inventory volume was significantly lower than in the previous year (€ 116.7 million). As in previous years, the Pharmaceutical segment accounted for the lion's share at € 87.3 million. While we increased our inventories of raw materials in order to serve the orders concluded for the first half of 2006, inventories of unfinished products significantly decreased.

In addition to the good sales situation, this was reflective of the fact that inventories built up as part of the 2004 approval process for Intratect® were reduced as scheduled. Inventories of Pentaglobin® were higher at year-end 2005 than at the beginning. The product can no longer be manufactured in the new production facility. We have therefore awarded production to a partner, and we anticipate approval of the respective products for 2006. We have pre-manufactured in preliminary stages the amount of Pentaglobin® that we expect to sell until that time. Increased inventories of Hepatect® FH are due to the necessary production of consistency batches for the approval.

The amount of trade accounts receivable increased from € 56.1 million to € 66.1 million as a result of the higher revenue volume and increased sales in countries with longer payment time periods (e.g., in Russia).

At € 7.6 million, the amount of liquid assets held on 31 December 2005 was considerably below previous year's figure (€ 19.6 million). However, the 2004 figure had significantly risen due to the balance sheet date cut-off, since we had built up liquidity at that time that we then used for debt redemption at the beginning of 2005.

Equity and liabilities

In June 2005, Biotest increased the registered capital by approximately € 2.92 million by issuing new ordinary shares. With the approval of the Supervisory Board, the Board of Management made partial use of Authorised Capital excluding shareholders' subscription rights. 570,000 ordinary shares were subscribed by a German financial investor against a cash contribution of € 10.01 million, and an additional 569,150 ordinary shares were subscribed by the Dr. Schleussner family from the conversion of a shareholder loan totalling € 10 million. In October 2005, Biotest increased the registered capital by an additional € 3.9 million by issuing 856,525 new ordinary shares and 666,667 new preference shares. The capital increase was fully placed, and net issue proceeds totalled approximately € 30 million.

Structure of the group balance sheet ASSETS

2004 2005

Structure of the group balance sheet EQUITY AND LIABILITIES

€ million

Biotest is using the funds received to continue with its planned international growth and to accelerate the clinical development of monoclonal antibodies. Since the proceeds from the emission will be needed over a period of several years, we have temporarily used a portion to reduce our financial liabilities.

Biotest is using the funds received to push ahead with its planned international growth and to accelerate the clinical development of monoclonal antibodies. Since the proceeds from the emission will be needed over a period of several years, we have temporarily used a portion to reduce our financial liabilities.

Already mid-year, a syndicated loan agreement took the place of the loans received under the collateral trustee agreement (CTA) that had been in existence since February 2003. This agreement converts part of the previous short-term credit line totalling € 47.5 million to long-term financing. In addition, Biotest accrued approximately € 10.0 million as part of a profit-sharing rights agreement which will be due in seven years. These are subordinate loans. We used these funds to reduce loans at the end of the year.

Because of the capital increase, the share of subscribed capital grew from € 20.5 million to € 27.3 million. At € 123.1 million, capital reserves were more than 50 % higher than the balance sheet of the previous year (€ 79.0 million).

At € 169.0 million as at 31 December 2005, total equity at the Biotest group was 56.5 % higher overall than in the previous year (€ 108.0 million). The equity ratio increased from 30.1 % to 48.5 %.

We significantly reduced financial liabilities from € 163.7 million to € 88.5 million. Due to funds accrued through the capital measures, we have used only a small portion of the credit line agreed to on the part of the banks at the end of the financial year.

Resulting from the reduction in the financial liabilities, total liabilities for the group decreased from € 250.3 million at the end of financial year 2004 to € 179.6 million as at 31 December 2005.

Cash flow statement

At € 26.8 million, cash flow from operating activities was approximately 5.9 % higher than in 2004 (€ 25.3 million). Operating cash flow (before change in working capital) amounted to € 40.3 million and thus exceeded previous year's value in the amount of € 32.3 million by 24.8 %. The decisive factor was the overall positive business development which resulted in significantly higher earnings before tax.

However, we were unable to further decrease working capital despite a significant reduction in inventories. In the financial year, a cash outflow of € 2.0 million (previous year: cash inflow of € 4.5 million) arose from the change in the working capital.

At € 12.6 million, cash outflow from investment activity was significantly lower than in the previous year (€ 17.3 million). Due to high advance payments in the previous year for the adjustment of pharmaceutical production, considerably fewer cash payments for capital expenditures in plant and equipment were required in the reporting year. This trend will continue in financial year 2006 as expected.

Cash outflow from financing activity amounted to € 26.4 million (previous year: € 0.5 million). The high cash inflows from the capital increases in the total gross amount of € 41.6 million were primarily used to reduce short-term bank liabilities since these won't be needed until sometime in the following financial year for research and development projects and for the further internationalisation of Biotest.

As at the balance sheet date, Biotest had cash and cash equivalents in the amount of € 7.6 million (previous year: € 19.6 million). Previous year's high figure was caused by changes in the circle of credit-lending banks: immediately after the 2004 balance sheet date, Biotest paid off a loan and again significantly reduced liquid funds.

In the past financial year, Biotest was able to fulfil its payment obligations at all times. In light of the clearly improved financing structure, from today's perspective the fulfilment of such obligations is also ensured in the future.

Cash flow statement

€ thousand

Business situation of the group

54 55

The business situation of Biotest significantly improved in 2005 compared to the previous year. The positive development resulted from higher earnings in operational business as well as from the optimised financial structure with an increase in equity, reduction of debts and the conversion of short-term into long-term liabilities. The continued existence of the company was not at any time in jeopardy in the past financial year is also not jeopardised from today's point of view.

Research and Development

The goal of research and development at Biotest is to complement the existing product portfolio in the Pharmaceutical and Diagnostic segments with new products that have large revenue and earnings potential. This refers to both the further development of existing pharmaceutical products and diagnostic devices – for example, through a simplified dosage form and the expansion of the indication spectrum for immunoglobulins – as well as completely new developments, such as mAb.

Biotest has its own resources in pre-clinical research, in all phases of clinical research and in the management of drug approvals. Through various cooperations, we improve the efficiency of our R&D activities. This is especially true for the Biotherapeutic segment, where we accelerate product development through cooperation with well-known international partners. Because we hand over production of testing and approval batches, for instance, to companies specialised in this area, Biotest does not have the expenses otherwise necessary for the construction of own production capacities. We also cooperate with other companies for research and development in the Diagnostic segment.

In financial year 2005, we defined new focal points for research and development. Expenses in previous years resulted to a large degree from the switchover of production in the Pharmaceutical segment to the new filter aid procedure and the transfer of production based on the centrifugal process to cooperation partners. This development work is now successfully completed, and routine production has started. In contrast, we have sharply increased R&D expenditures in the Biotherapeutic segment.