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Investment Research

Company update 8 February 2017 Novo Nordisk Buy

(Unchanged)

Pharmaceuticals, Denmark Meet-the-management event in Boston Key data On the day of the FY release, there was much focus on risks due to the changed Price (DKK)* 234 Target price, 12 mth (DKK) † 300 guidance range. The meet-the-management event in Boston on Tuesday had Market cap (DKKm) 606,998 more focus on opportunities. Our impression is that management is talking more Market cap (EURm) 81,652 towards the high end of guidance but that the low end was changed if something Reuters NOVOb.CO unexpected (not very likely) should occur. We keep our DKK300 12M TP and Buy. Bloomberg NOVOB DC

No. of shares (m) 2,599.6  Clearer message. Novo has had time to digest how its FY release was received Net debt (current Y/E) (m) -14,353 and its communication has become clearer. The EBIT guidance of -2% to +3% Free float 73.0% Avg. daily vol, 12M (000) 3,376.6 growth in 2017 includes a 4% headwind from Vagifem generics and a tough Norditropin comp. Adjusting for this implies 2-7% growth, which makes it Price performance 400 380 comfortable to deliver 5%-plus after 2017. Cost savings in 2017 from layoffs in 2016 360 340 come to DKK1bn and Novo is set to save a further DKK500m from procurements 320 300 280 in 2017 (and 2018) – savings that have been invested in other parts of Novo. 260 240 220  US. Novo does not seem that concerned about a Trump effect short term (although Feb 16 May 16 Aug 16 Nov 16 Feb 17 NOVOb.CO STOXX 600/Health Care rebased it is included in the low end of its 2017 guidance). It believes deregulation, tax Error!AutoText notdefined. entry reforms and affordability are on the table. A central price regulation for Medicare 1M 3M 12M 5Y Part D seems unlikely. It is pleased with the current access for its US products and Absolute -9% 4% -26% 54% Rel. local market -9% -6% -32% -24% the strong SWITCH/DEVOTE data on Tresiba puts it in a strong position ahead of Rel. EU sector -8% -4% -30% -6% the 2018 negotiations. Novo still expects a 5% annual US market share gain for Source: FactSet Tresiba but with the current trend, we believe it will end 2017 above 10%. Estimate changes 17E 18E 19E

 M&A. Novo is clear that M&A activity to revitalise its Biopharma franchise is on the Sales 0.0% 0.0% 0.0% table. Maybe already in 2017. It looks at possibilities in the region of USD1-3bn. EBITDA 0.0% 0.0% 0.0% EBIT (adj.) 0.0% 0.0% 0.0%  Valuation. We base 12M target price on a blend of DCF and relative valuation. EPS (adj.) 0.0% 0.0% 0.0% Source: Danske Bank Markets estimates

Key financials Next event Q1 3-May Year-end Dec (DKK) 2015 2016 2017E 2018E 2019E * Price as at close on 7 February 2017 Revenues (m) 107,927 111,780 116,006 121,838 130,154 † Includes dividends Revenues growth 21.5% 3.6% 3.8% 5.0% 6.8% EBITDA (m) 52,403 51,625 53,116 56,240 60,528 EBIT adj. (m) 46,619 48,432 50,102 52,703 56,506 EBIT growth 35.2% 3.9% 3.4% 5.2% 7.2% Pre-tax profit (m) 43,483 47,798 47,688 52,771 56,562 EPS adj. 12.4 15.0 15.2 17.3 19.1

DPS 6.40 7.60 7.80 8.60 9.80 Dividend yield 1.6% 3.0% 3.3% 3.7% 4.2% FCF yield (incl. recurr capex) 3.3% 6.2% 5.4% 6.4% 7.3% EBIT margin (adj.) 43.2% 43.3% 43.2% 43.3% 43.4% Net debt/EBITDA (x) -0.3 -0.4 -0.3 -0.2 -0.2 ROIC 100.1% 98.7% 97.0% 88.2% 84.2% Analyst(s) EV/sales (x) 9.4 5.6 4.9 4.5 4.1 Martin Parkhøi EV/EBITDA (adj.) (x) 20.0 11.9 10.4 9.6 8.6 +45 45 12 80 46 EV/EBIT (adj.) (x) 21.7 13.0 11.2 10.4 9.4 [email protected] P/E (adj.) (x) 32.2 17.0 15.4 13.5 12.2 P/BV (x) 21.7 14.1 12.0 10.5 9.3 Thomas Bowers +45 45 12 80 44 Source: Company data, Danske Bank Markets estimates [email protected]

1Important | Novo disclosuresNordisk Buy and certifications are contained from page 12 of this report. www.danskemarketsequities.com

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Meet-the-management event in Boston

Novo hosted a meet-the-management event in Boston Tuesday, in which we participated. Novo gave a brief plenum introduction by its CEO and then hosted three separate Q&A sessions with the top management of the company.

The FY release from the company was not received very well by the equity market (- 7% on the day for the shares) as the company broadened its guidance range for both sales and EBIT. Although the sales guidance range was both lowered in the bottom and lifted in the top, the market seemed to focus entirely on the risks (reason for lowering of the low-end of the guidance range). We also believe Novo had significant difficulties in coming across with its message. That led to increased uncertainty. However, we believe the message was sharper and clearer at the meet-the- management event. Focus was also less on the risks and more on obvious opportunities.

In general, we believe Novo is now downplaying the risk of a US political impact of major character in 2017 and it seems to see a low risk of central price regulation of Medicare Part D (a third of Novo’s US sales goes through Medicare). On the other hand, Novo seems to be very excited by the recent trend for Tresiba in US and it is difficult for us to see its market share not being somewhat above the guided 10% level at the end of 2017. So, if these things play out, Novo should be able to deliver towards the high end of the guidance range (-1% to +4% for sales and -2% to +3% for EBIT, both in local currencies). It is naturally quite important for the equity story that Novo is as far

away as possible from delivering negative growth.

Error!AutoText notdefined. entry We remain confident in our Buy rating and our 12M target price of DKK300. We realise it could be a bumpy ride as we expect a weak Q1 (due to tough comps) and uncertainty ahead of the outcome of the 2018 price negotiations (we expect a conclusion from Novo in its Q2 report in August). However, in H2, we expect much stronger growth due to easier comps and increased benefit from its many new products.

Below, we highlight key topics from the Q&A meetings in which we participated at the event in Boston (we participated in all three).

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Mads Krogsgaard Thomsen, CSO

The meeting with Mr. Krogsgaard was focused entirely on R&D. We discussed various topics like Tresiba, Semaglutide, Oral Semaglutide and Haemophilia.

With respect to Tresiba, Novo is convinced that this is a paradigm shift in basal insulins

as big as the paradigm shift was when Lantus was launched by Sanofi 15-16 years ago. It in particular highlights the DEVOTE data as being very important (more than the SWITCH data). This data will be presented at a symposium at ADA in San Diego in June and simultaneously be published in high impact scientific papers.

Novo is also very excited by its once-weekly GLP-1, Semaglutide. It expects a US approval late this year. Semaglutide showed a very strong CV benefit in Sustain-6 (26% reduction versus 13% for Victoza in the LEADER trial). However, Novo still “only” expects the data for CV to be included in the data section of Semaglutide’s label and not as a separate indication. This is due to the size and design (non-inferiority) of the Sustain-6. Novo’s key competitor in GLP-1 is Lilly’s once-weekly Trulicity. Besides having a similar clinical profile as Novo’s once-daily Victoza, it has the convenience benefit of being once-weekly and a very good pen device. Novo is currently conducting a head-to-head (data available in Q3) between Semaglutide and Trulicity. It appears confident that Semaglutide will beat Trulicity on both glucose control and weight. Semaglutide will be launched initially in a Flextouch-like device, but we believe Novo is also looking at a new device. However, while Trulicity’s device plays a role in the competition versus Victoza, it will play a smaller role versus Semaglutide if Novo can

show the superiority of Semaglutide versus Trulicity in the Sustain-7 trial.

Error!AutoText notdefined. entry Novo is also right now conducting phase 2 trials for Semaglutide as a once-daily injection in both diabetes (headline data has been published) and obesity (headline data in H2 2017). We, however, get a clear impression that Semaglutide as a once- daily injection will not be the way forward. We expect the phase 2 obesity data on Semaglutide to be strong and we then expect Novo to start a phase 3 obesity trial in 2018 for Semaglutide as a once-weekly injection. Novo stated that it does not need to make a new phase 2 trial for Semaglutide in obesity, despite deciding on a once-weekly injection. Novo also indicated that it would potentially initiate a landmark study for Semaglutide in obesity in order to convince the medical community that obesity needs

a medical treatment.

There were also many questions on oral Semaglutide, where we believe some have misunderstood the strategy of this product. Novo is currently conducting ten phase 3 trials in some 9,000 patients. The aim for oral Semaglutide is to obtain an efficacy on least at par with Victoza, but not as strong as the once-weekly subcutaneous, Semaglutide. It was questioned in the rationale of making oral Semaglutide as it would only lead to a convenience benefit. This is, however, a bit of a misunderstanding as the aim of oral Semaglutide is naturally to compete with the current tabled-based treatment forms (like DPP-IV, SGLT-2 etc). Indeed, oral Semaglutide to some extent will cannibalise Victoza (could also be good as the US patent of Victoza expires in 2023), but more importantly it could significantly expand the GLP-1 market.

There was also some discussion on Novo’s haemophilia franchise and in particular the threat from Roche’s ACE910. ACE910 is a significant threat to Novo’s NovoSeven, but in recent months some safety issues with ACE910 have also been discussed. This has been done when ACE910 has been used in combination with Shire’s FEIBA. Shire has done some internal research where it has seen the same signal and Shire has said that it has also conducted a study showing an increased risk when ACE910 is used in combination with NovoSeven. If that is the case, then ACE910 would have no future as

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ment eventin ment Boston the product naturally could not be approved with a contraindication for both Feiba and NovoSeven (both are rescue drugs). Novo, however, says that the testing shows that NovoSeven is safe in combination with ACE910. It would naturally be better for Novo if ACE910 had no future, but it apparently does not see that as likely.

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Lars Fruergaard Jørgensen (CEO) and Jesper Brandgaard (CFO)

The meeting with Mr. Fruergaard Jørgensen and Mr. Brandgaard was focused primarily on overall strategy and financial issues.

Following the FY release, there has been significant focus on Novo’s 2017 guidance.

In particular, as Novo introduced the risk of negative growth in both sales and EBIT in 2017. This has created some uncertainty regarding the possibility of delivering 5%-plus EBIT growth after 2017. Novo however used the opportunity to address the extraordinary events affecting 2017. The Vagifem patent expiry will remove DKK1.5bn and Norditropin saw an extraordinary income of DKK600m in 2016. These two events combined will affect EBIT growth negatively by 4% in 2017. This means adjusted for this, the EBIT guidance in local currencies is +2% to +7%. This makes the company quite confident that 5%-plus can be achieved after 2017.

Novo also addressed cost savings. In 2016, it announced the layoff of 1,000 employees. This had a negative impact on costs of DKK500m in 2016 but a positive annual impact of DKK1bn from 2017. Furthermore, Novo has taken initiatives to save costs in procurement. They normally aim to reduce procurement costs by DKK500m annually, but the bar has been lifted to DKK1bn in 2017 (and 2018). That basically means that Novo sees a net cost savings of DKK2bn in 2017 versus 2016. These savings are, however, reinvested in other parts of Novo Nordisk.

Novo makes it quite clear that it aims to increase its M&A activity. It looks for M&A opportunities to revitalise its biopharmaceutical franchise. It indicated that it is looking

for opportunities at a value of USD 1-3bn. We find it quite likely that Novo has some Error!AutoText notdefined. entry very clear targets, which means a deal is very likely already in 2017. That means however that its DKK16bn share repurchase programme could be at risk.

We also had a brief discussion on the use of big data. Novo is already working on pen devices that can communicate with apps on the smartphone. In addition, output from blood glucose measuring can be sent directly to the phone. All the data can therefore be analysed and the treatment for the patient can be optimised. Novo believes this could lead to increased insulin volumes as many patients today are not in good enough control. However, if the patients could be better monitored and thereby could be brought into better control, then it would lead to more insulin use.

Two other risk factors were also addressed. Novo does not see a near-term risk of price declines in the GLP-1 segment. They simply do not see what should trigger it as we have seen that the arrival of biosimilar Lantus has triggered price declines in the basal segment. Our view is, however, that GLP-1 prices are now likely to be flat, while it has enjoyed net price increases in the past. Furthermore, Novo does not expect a significant effect either from the arrival of biosimilar Humalog (Sanofi to file this year). The reason is that pricing in the short-acting segment is already quite low, as most formularies are exclusive (with either Humalog or NovoLog). Rebates in short-acting in 2016 were at 70%+, while it is around 55-60% (except for Tresiba) in the basal segment in 2016 (which will change in 2017).

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Jakob Riis (EVP, North America) and Doug Langa (SVP US Market access)

This meeting focused solely on the US market. Mr. Riis clearly downplays the short- term political risk in the US. As they see it, three items are on the agenda in the US. This includes deregulation, tax reform and affordability. The tax reform item is naturally

a risk for Novo as it is for several other non-US companies operating in US. However, Novo does not believe that a central price regulation of Medicare Part D is on the table. That would naturally had been bad news for Novo as a third of its US sales goes through Medicare. Novo is currently in discussions with multiple PBMs to resolve the affordability issue. For 90% of diabetics, affordability is not an issue as they have full insurance coverage, but the remaining 10% include non-covered patients or insurance- covered patients with a high-deductible plan. These 10% have been hit by the strong increase in list prices over the past decade. Although this will probably have some financial impact on the PBMs, they appear willing to find a solution. Lilly has made a deal with Express Script, but Novo aims to include multiple PBMs.

Although Novo has implemented a US political risk in its 2017 guidance (in the low end of the range), we do not get the impression that it sees this as very likely.

Novo still aims to launch Xultophy in US in H1 (early May). The launch has been postponed as Novo has decided to have full focus on Tresiba. Novo does not expect to have much access at launch as both CVS and United Healthcare block new products automatically. Xultophy is the combination of Tresiba and Victoza, which makes the

price negotiations a bit interesting. Victoza is covered by CVS and United Healthcare, while Tresiba is covered by CVS and Express Script. That means only at CVS are both Error!AutoText notdefined. entry products covered. Novo, however, gave the impression that Xultophy will be seen as a new product, which means it has a chance of access in all plans.

Novo will increase its marketing focus on Victoza in the US in 2017. Hopefully, Victoza will also be supported by a CV label update in August. Towards the end of 2017, Novo will start preparing for a 2018 launch of Semaglutide. However, it emphasises that Victoza will still have focus in 2018 and the sales reps will clearly be incentivised by the development in the combined market share development for the two products.

Novo is in general quite content with the market access it has for its US product portfolio. The aim going forward is to maintain the access level but of course at the right price points. Novo made it clear that ahead of the 2018 negotiations for Tresiba it is better positioned with the strong data from the DEVOTE trial and the SWITCH data. Hopefully, that could convince United Healthcare, where Tresiba is currently blocked. Our greatest concern regarding the 2018 price negotiations is how Sanofi will act. Although we tried to discuss that with Novo, it is still in the dark on this matter. Novo could, however, confirm that the savings card that Sanofi has offered on Lantus and Toujeo for 2017 has so far not had an effect. The negotiations for Medicare pricing in 2018 have started and the negotiations on the commercial plans are due to start in March. However, we do not expect an overall conclusion from Novo Nordisk before the H1 report.

Novo is quite happy about the recent development for Tresiba in the US. However, it is sticking to its ambition of a 10% basal insulin market share by the end of 2017. However, with the current trend, we believe it will land somewhat above that. Positively, Novo has already been allowed to use the data from the SWITCH trials in the marketing on Tresiba, despite the PDUFA date for the label update not being before July. Novo’s sales reps started using the SWITCH data ten days ago and it will be interesting to see if there will be a visible impact on prescription trends.

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Valuation and methodology for deriving 12M target price

Based on our forecasts, we end up with a 12-month fair value of DKK344/share. A valid question would naturally be if there is any risk of a further guidance downgrade. We can of course not rule that out. However, we believe that guidance has been taken down so far now that we could rather see potential upside than downside.

Figure 1. Novo Nordisk: 12M DCF value of DKK344/share

CALCULATION OF DCF DKKm Per share Firm Value Composition Firm value: 25% Explicit forecast period 169,643 65.3 22% 23% 22% Growth period 1 187,293 72.0 20% 20% Growth period 2 189,670 73.0 Growth period 3 185,651 71.4 15% Fade period 74,690 28.7 Sustainable period 27,838 10.7 10% 9% Firm value 834,784 321.1 5% 3% Equity value adjustments: 97%

ND inc off-BS & Hybrids 12,401 4.8 0% Mkt value Pref stock 0 0.0 FY1-5 FY6-10 FY 11-15 FY 16-20 FY 21-25 Term. Mkt value Associates 0 0.0 Mkt value Minorities 0 0.0 DCF per share composition, DKK Surpl val & def tax -4,834 -1.9 Other adjustments 0 0.0 Total adjustments 7,567 2.9 350 Equity value according to DCF: 300

DCF equity value 842,351 324.0 250 DCF Value 12-mths 893,313 343.6 200 Mkt Cap / share price 601,279 231.3 Number shares (m): 2599.564 150 100

12-month potential (%): 48.6 50

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310 5 0 0 - 324 0 FY1-25 Term Net debt Min Ass Oth DCF WACC COMPONENTS, %

Cost of equity: ROIC & Present value FCFF Risk-free interest rate 2.0 Market risk premium 4.5 Equity risk adjustment factor 0.9 45,000 140% Implicit asset beta 0.9 40,000 120% 35,000 Small cap premium 0.0 100% 30,000 Cost of equity 6.05 25,000 80% Cost of debt: 20,000 60% Cost of debt 5.00 15,000 40% Tax-rate 21 10,000 Weighted average cost of capital: 5,000 20% Equity weight 100 0 0%

WACC 6.05 PV(FCFF), DKKm ROIC (RHS) WACC (RHS)

5-YEAR DRIVERS, % Growth Growth Growth Sustainable Historical Explicit period 1 period 2 period 3 Fade period period Sales growth, CAGR 11.0 6.3 6.0 5.0 5.0 3.0 1.5 EBIT-margin (estimates are end-of-period) 41.1 43.4 43.4 43.4 43.4 2.1 2.1 Capex/depreciation, x 1.60 2.38 1.50 1.30 1.20 1.10 1.10 Capex/sales 5.1 7.0 5.0 5.0 5.0 5.0 5.0 NWC/sales -1.6 -5.7 -5.7 -5.7 -5.7 -5.7 -5.7 RONIC -17.3 41.5 96.3 158.0 200.0 -100.0 6.89 ROIC 91.6 92.7 89.2 94.3 107.8 51.5 6.06

Source: Danske Bank Markets

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On relative valuation, Novo now trades on a P/E 2017E of 15.3x, which is slightly above global pharmaceutical peers. We still believe Novo will deliver EPS growth slightly above peers. So, on a PEG ratio, it still trades 31% below peers. However, before Novo is able to again show above-industry growth, it will be difficult to see a significant premium. That is also why our 12M target price of DKK300 is below our DCF-based

12M value of DKK 344/share Investment case

We remain positive on Novo Nordisk, with a 12M target price of DKK300 per share and a Buy recommendation. No doubt, 2016 was a significant disappointment with two revisions to the long-term EBIT target. We now believe expectations have been reset and made it less difficult for the CEO change that took place on 1 January 2017. We still believe Novo is uniquely positioned in the diabetes market and has a very competitive product portfolio. We expect growth to be driven by the five potential launches of diabetes drugs in the US over the coming four years on top of the entry into obesity through the Saxenda launch in 2015. There is no doubt in our minds that the pricing environment for insulin products has become tougher but we believe the best way to mitigate this is through innovation. Valuation

Our DCF model for Novo Nordisk suggests a 12M value of DKK344 per share, which is the main basis for our 12-month target price of DKK300 per share. However, we have adapted a discount until Novo has returned to above-industry growth. Our DCF model uses a WACC of 6.05% and a risk-free interest rate of 2.0%. We have decided to apply

Error!AutoText notdefined. entry a slight discount when setting our 12M target price due to the increased risk following the long-term EBIT target revision.

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Company summary

Sales breakdown, geographical areas Sales breakdown, divisions

Biopharmac euticals, 20%

Diabetes Care, 80%

Company description Main shareholders

Novo Nordisk is a world leader in the insulin market (56% of total sales in 2016) Name Votes (%) Capital (%) and also the leader in the GLP-1 market through Victoza (18%). It also holds Novo A/S 75.0% 27.0% strong positions in human growth hormone deficiency treatments (HGH, 8%) and haematology/NovoSeven (8%). It is currently also building a presence in obesity Institutional and private investors 25.0% 73.0% through Saxenda (1%). Novo Nordisk employs more than 40,000 people worldwide.

Company information Management

Novo Nordisk CEO: Lars Fruergaard Jørgensen

Novo Allé, 2880 Bagsværd CFO: Jesper Brandgaard

Denmark Error!AutoText notdefined. entry IR: Peter Hugreffe novonordisk.com

Net sales and EBITDA margin (DKKm) EBIT and EBIT margin (DKKm)

150,000 50% 60,000 60%

100,000 40,000 40% 45%

50,000 20,000 20%

0 40% 0 0% 12 13 14 15 16 17E 18E 19E 12 13 14 15 16 17E 18E 19E

Net sales EBITDA margin EBIT EBIT margin

P/E - 12 months forward (x) P/BV - 12 months forward (x)

32 22 30 20 28 18 26 16 24 14 22 12 20 10 18 8 16 6 14 4 12 2 07 08 09 10 11 12 13 14 15 16 17 07 08 09 10 11 12 13 14 15 16 17

Source: Company data, FactSet, Danske Bank Markets estimates [all charts and tables]

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Summary tables

INCOME STATEMENT Year end Dec, DKKm 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Net sales 60,776 66,346 78,026 83,572 88,806 107,927 111,780 116,006 121,838 130,154 Cost of sales & operating costs -39,418 -41,235 -45,859 -49,280 -50,879 -55,524 -60,155 -62,890 -65,598 -69,626 EBITDA 21,358 25,111 32,167 34,292 37,927 52,403 51,625 53,116 56,240 60,528

EBITDA, adj 21,358 25,111 32,167 34,292 37,927 49,578 51,625 53,116 56,240 60,528 Depreciation -2,467 -2,737 -2,693 -2,799 -3,435 -2,959 -3,193 -3,013 -3,537 -4,022 EBITA 18,891 22,374 29,474 31,493 34,492 49,444 48,432 50,102 52,703 56,506 EBIT incl eo, bef ass 18,891 22,374 29,474 31,493 34,492 49,444 48,432 50,102 52,703 56,506 EBIT, adj 18,891 22,374 29,474 31,493 34,492 46,619 48,432 50,102 52,703 56,506 Associated income 2,140 -8 Financial items, net -1,675 -445 -1,663 1,046 -396 -5,961 -634 -2,415 68 56 Pre-tax profit 18,286 21,925 27,811 32,539 34,096 43,483 47,798 47,688 52,771 56,562 Taxes -3,883 -4,828 -6,379 -7,355 -7,615 -8,623 -9,873 -10,014 -11,082 -11,878 Net profit, rep 14,403 17,097 21,432 25,184 26,481 34,860 37,925 37,673 41,689 44,684 Net profit, adj 13,303 17,097 21,432 25,184 26,481 32,035 37,925 37,673 41,689 44,684

CASH FLOW DKKm 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E EBITDA 21,358 25,111 32,167 34,292 37,927 52,403 51,625 53,116 56,240 60,528 Change in working capital 297 434 274 -265 -2,148 -2,157 -3,708 240 332 473 Net interest paid -1,675 -445 -1,663 1,046 -396 -5,961 -634 -2,415 68 56 Taxes paid -3,436 -5,391 -10,891 -9,807 -7,907 -9,374 -2,899 -10,014 -11,082 -11,878 Other operating cash items 3,135 1,665 2,327 676 4,216 3,376 3,930 Cash flow from operations 19,679 21,374 22,214 25,942 31,692 38,287 48,314 40,927 45,558 49,179 Capex -3,889 -3,332 -3,622 -3,644 -4,335 -4,112 -8,353 -10,000 -10,000 -10,000 Free cash flow 15,790 18,042 18,592 22,298 27,357 34,175 39,961 30,927 35,558 39,179 Disposals/(acquisitions) 68 70 53 60 39 47 30

Free cash flow to equity 15,858 18,112 18,645 22,358 27,396 34,222 39,991 30,927 35,558 39,179

Dividend paid -4,400 -5,700 -7,742 -9,715 -11,866 -12,905 -23,830 -19,264 -19,370 -20,771 Error!AutoText notdefined. entry Share buy-backs -9,498 -10,595 -11,896 -13,924 -14,667 -17,196 -15,057 -16,000 -17,000 -19,500 New issue common stock Incr/(decr) in debt -466 -2 -502 Minorities and other financing CF 1,731 -316 981 235 -918 18,184 16,824 Cash flow from financing -12,633 -16,613 -19,159 -23,404 -27,451 -11,917 -22,063 -35,264 -36,370 -40,271 Disc ops and other 12,905 23,830 Incr/(decr) in cash 3,225 1,499 -514 -1,046 -55 988 1,767 -4,337 -812 -1,092

BALANCE SHEET DKKm 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash and cash equivalents 16,051 17,550 17,036 15,990 15,935 16,923 18,690 14,353 13,541 12,449 Inventory 9,689 9,433 9,543 9,552 11,357 12,758 14,341 14,883 15,631 16,698 Trade receivables 11,553 12,608 13,584 16,516 19,001 25,459 26,735 27,746 29,141 31,130

Other current assets Goodwill Other intangible assets 1,458 1,489 1,495 1,615 1,378 2,158 2,714 2,714 2,714 2,714 Fixed tangible assets 20,507 20,931 21,539 21,882 23,136 25,545 30,179 37,166 43,628 49,606 Associated companies Other non-current assets 2,144 2,687 2,472 4,782 6,255 8,956 4,880 4,880 4,880 4,880 Total assets 61,402 64,698 65,669 70,337 77,062 91,799 97,539 101,742 109,535 117,477 Shareholders' equity 36,965 37,448 40,632 42,569 40,294 46,969 45,269 47,678 52,997 57,410 o/w Minority interests Current liabilities 2,906 3,291 3,859 4,092 4,950 4,927 6,011 6,238 6,552 6,999 Interest bearing debt 504 502 Pension liabilities Oth non-curr liabilities 5,457 5,969 3,399 3,543 3,079 3,957 4,834 4,834 4,834 4,834 Total liabilities 24,437 27,250 25,037 27,768 36,768 44,830 52,270 54,063 56,538 60,067 Total liabilities and equity 61,402 64,698 65,669 70,337 77,062 91,799 97,539 101,742 109,535 117,477 Net debt -15,547 -17,048 -17,036 -15,990 -15,935 -16,923 -18,690 -14,353 -13,541 -12,449 Working capital 2,766 1,262 1,489 1,843 -3,331 -2,656 -6,360 -6,600 -6,932 -7,405 Source: Company data, Danske Bank Markets estimates

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Summary tables

PER SHARE DATA 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E No. of shares, fully diluted (y.e.) (m) 2,863.5 2,788.0 2,714.5 2,653.4 2,599.7 2,553.2 2,512.6 2,444.9 2,374.9 2,296.6 No. of shares, fully diluted (avg.) (m) 2,906.5 2,825.8 2,751.3 2,684.0 2,626.6 2,576.5 2,532.9 2,478.8 2,409.9 2,335.7

EPS (DKK) 4.96 6.05 7.79 9.38 10.1 13.5 15.0 15.2 17.3 19.1 ton EPS adj. (DKK) 4.58 6.05 7.79 9.38 10.1 12.4 15.0 15.2 17.3 19.1

DPS (DKK) 2.00 2.80 3.60 4.50 5.00 6.40 7.60 7.80 8.60 9.80 CFFO/share (DKK) 6.8 7.6 8.1 9.7 12.1 13.8 19.1 16.5 18.9 21.1 Book value/share (DKK) 12.9 13.4 15.0 16.0 15.5 18.4 18.0 19.5 22.3 25.0

MARGINS AND GROWTH 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E EBITDA margin 35.1% 37.8% 41.2% 41.0% 42.7% 48.6% 46.2% 45.8% 46.2% 46.5% EBITA margin 31.1% 33.7% 37.8% 37.7% 38.8% 45.8% 43.3% 43.2% 43.3% 43.4% EBIT margin 31.1% 33.7% 37.8% 37.7% 38.8% 45.8% 43.3% 43.2% 43.3% 43.4% EBIT adj margin 31.1% 33.7% 37.8% 37.7% 38.8% 43.2% 43.3% 43.2% 43.3% 43.4% Sales growth 19.0% 9.2% 17.6% 7.1% 6.3% 21.5% 3.6% 3.8% 5.0% 6.8% EBITDA growth 22.2% 17.6% 28.1% 6.6% 10.6% 38.2% -1.5% 2.9% 5.9% 7.6% EBITA growth 26.5% 18.4% 31.7% 6.9% 9.5% 43.3% -2.0% 3.4% 5.2% 7.2% EPS adj growth 27.4% 32.2% 28.7% 20.5% 7.4% 23.3% 20.4% 1.5% 13.8% 10.6%

PROFITABILITY 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E ROIC (after tax, incl. GW, adj.) 52.1% 57.7% 73.9% 73.6% 78.7% 100.1% 98.7% 97.0% 88.2% 84.2% ROIC (after tax, excl. GW, adj.) 52.1% 57.7% 73.9% 73.6% 78.7% 100.1% 98.7% 97.0% 88.2% 84.2% ROE (adj.) 36.6% 46.0% 54.9% 60.5% 63.9% 73.4% 82.2% 81.1% 82.8% 80.9% ROIC (adj.) - WACC 46.0% 51.6% 67.8% 67.6% 72.6% 94.1% 92.7% 90.9% 82.1% 78.2%

MARKET VALUE 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Share price (DKK) 126 132 183 199 260 400 255 234 234 234 No. shares reduced by buybacks (m) 2,863.5 2,788.0 2,714.5 2,653.4 2,599.7 2,553.2 2,512.6 2,444.9 2,374.9 2,296.6

Mkt cap used in EV (m) 360,228 368,016 497,568 527,496 676,702 1,021,025 639,959 570,885 554,540 536,250

Net debt, year-end (m) -15,547 -17,048 -17,036 -15,990 -15,935 -16,923 -18,690 -14,353 -13,541 -12,449 Error!AutoText notdefined. entry MV of min. and ass. comp. (m) 0 0 0 0 0 0 0 0 0 0 Enterprise value (m) 348,108 355,980 485,576 517,380 667,056 1,010,391 627,558 562,821 547,288 530,090

VALUATION 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E EV/sales (x) 5.7 5.4 6.2 6.2 7.5 9.4 5.6 4.9 4.5 4.1 EV/EBITDA (x) 15.7 13.7 14.7 14.7 17.1 20.0 11.9 10.4 9.6 8.6 EV/EBITA (x) 18.4 15.9 16.5 16.4 19.3 21.7 13.0 11.2 10.4 9.4 EV/EBIT (x) 18.4 15.9 16.5 16.4 19.3 21.7 13.0 11.2 10.4 9.4 P/E (reported) (x) 25.4 21.8 23.5 21.2 25.8 29.6 17.0 15.4 13.5 12.2 P/E (adj.) (x) 27.5 21.8 23.5 21.2 25.8 32.2 17.0 15.4 13.5 12.2 P/BV (x) 9.75 9.83 12.2 12.4 16.8 21.7 14.1 12.0 10.5 9.34 EV/invested capital (x) 11.5 11.3 15.2 14.4 19.8 25.1 16.6 12.7 10.8 9.5 Dividend yield 1.59% 2.12% 1.96% 2.26% 1.92% 1.60% 2.98% 3.34% 3.68% 4.20%

Total yield (incl. buybacks) 4.19% 4.96% 4.32% 4.87% 4.07% 3.27% 5.32% 6.10% 6.70% 7.77% Free cash flow yield 4.38% 4.90% 3.74% 4.23% 4.04% 3.35% 6.24% 5.42% 6.41% 7.31%

FINANCIAL RATIOS 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Net debt/EBITDA (x) -0.7 -0.7 -0.5 -0.5 -0.4 -0.3 -0.4 -0.3 -0.2 -0.2 Net debt/equity (x), year-end -0.4 -0.5 -0.4 -0.4 -0.4 -0.4 -0.4 -0.3 -0.3 -0.2 Dividend payout ratio 40.4% 46.3% 46.2% 48.0% 49.6% 47.3% 50.8% 51.3% 49.7% 51.2% Interest coverage (x) 38.3 35.9 114.3 48.9 190.4 334.7 323.5 Cash conversion (FCF/net profit) 109.6% 105.5% 86.7% 88.5% 103.3% 98.0% 105.4% 82.1% 85.3% 87.7% Capex/sales 6.4% 5.0% 4.6% 4.4% 4.9% 3.8% 7.5% 8.6% 8.2% 7.7% NWC/sales 4.6% 1.9% 1.9% 2.2% -3.8% -2.5% -5.7% -5.7% -5.7% -5.7%

QUARTERLY P&L Q1 16 Q2 16 Q3 16 Q4 16 Q1 17E Q2 17E Q3 17E Q4 17E Sales (m) 27,212 27,459 27,537 29,572 27,103 28,646 29,444 30,813 EBITDA (m) 12,933 13,214 13,156 12,322 12,531 13,788 14,532 12,264 EBIT before non-recurring items (m) 12,309 12,497 12,420 11,206 11,771 12,988 13,682 11,661 Net profit (adj.) (m) 9,455 9,968 9,803 8,699 9,062 9,866 10,256 8,489 EPS (adj.) (DKK) 3.70 3.90 3.84 3.43 3.61 3.93 4.08 3.42 EBITDA margin 47.5% 48.1% 47.8% 41.7% 46.2% 48.1% 49.4% 39.8% EBIT margin (adj.) 45.2% 45.5% 45.1% 37.9% 43.4% 45.3% 46.5% 37.8% Source: Company data, Danske Bank Markets estimates

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Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’). The author of this research report is Martin Parkhøi. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst’s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report.

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• Not Rated: Danske Bank Markets produces investment research on Danske Bank but does not have an investment recommendation to buy, hold or sell or any target price on the stock.

As at 8 February 2017, Danske Bank Markets had investment recommendations on 261 The proportion of issuers corresponding to each of the recommendation categories above securities. The distribution of recommendations is represented in the Securities ratings to which Danske Bank provided investment banking services in the past breakdown diagram below. 12 months is shown below. Sell Rating Investment banking relationships

15% Buy 54% Hold 36%

Buy Sell 7% Hold 53% 32%

No changes in recommendation in the past 12 months

Validity time period This communication as well as previous communications referred to below are valid until the earlier of (a) dissemination of a superseding communication by the author, or (b) significant changes in circumstances following its dissemination, including events relating to the market or the issuer, which can influence the price of the issuer or financial instrument. Investment recommendations disseminated in the preceding 12-month period A list of previous investment recommendations disseminated by the lead analyst(s) of this research report in the preceding 12-month period can be found in Danske Banks’ equity research database at www.danskemarketsequities.com. Select Research Library from the top menu, choose the relevant analyst and the results will be displayed at the bottom of the screen. Other previous investment recommendations disseminated by Danske Bank Markets, Equities Research are also available in the database.

General disclaimer

Error!AutoText notdefined. entry This research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) (‘Relevant Financial Instruments’). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in the research report. This research report is not intended for, and may not be redistributed to, retail customers in the United Kingdom or the United States. This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank’s prior written consent.

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Report completed: 8 February 2017 at 06:25 GMT Report disseminated: 8 February 2017 at 07:40 GMT

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