HOW NOVOZYMES MEASURES R&D

Per Falholt, EVP and Chief Scientific Officer of Novozymes A/S

At International Alliance of Research Universities (IARU) workshop: The Value of Research Universities. April 2012

NOVOZYMES IN BRIEFWORLD LEADER IN BIO-INNOVATION

WE GREEN THE WORLD: Enzymes save energy, chemicals, raw-

materials and water Microorganisms in agriculture improve

yield and reduce the need for pesticides In 2011, Novozymes helped customers

save 45 million tons of CO2

BASED ON INNOVATION: 14% of sales re-invested in R&D 7000 patents granted or pending >1100 employees in R&D

“If you are not keeping score, you are only practicing”

Jan LeschlyFormer CEO of SmithKline Beecham

But it is challenging to measure differentbusiness areas or university faculties by the same criteria...

e.g. varying cost associated with regulatory approval of enzymes

…if the prerequisites are not the same.

NOVOZYMES PRESENTATION22/08/20126

So how do we do it in Novozymes ?

Internal Rate of Return

of

New Product & Concept Sales

Model overviewInternal Rate of Return of New Product & Concept Sales

Model description Internal Rate of Return

• The objective of this model is to estimate the value of the R&D resources, spend in the previous year.

• This model is based on a model developedby McKinsey in 2006, and improved severaltimes.

• The model calculates IRR (internal rate of return) values based on a simple lifecycle model for the Industry Subgroups (ISG) in Novozymes Enzyme Business

• The IRR is set in relation to the ratio: R&D spend in % of total Industry Subgroup Sales

• IRR is the other side of Net Present Value (NPV), where NPV is the discounted value of a stream of cash flows, generated from an investment, IRR thus computes the break-even rate of return

• Internal Rate of Return provides a simple ‘hurdle rate’:

• Hurdle Rate (IRR)>WACC Continue R&D spend in ISG

• Hurdle Rate (IRR)<WACC Avoid R&D Spend in ISG

... Unless it’s a strategic decision

NOVOZYMES PRESENTATION 22/08/20127

Calculated IRR without cannibalization Past performance 2007-2011

40%

30%

20%

10%

0%

-5%

R&D spend for product innovation (% of total sales of ISG)

1312%

IRR product innovation

60%

50%

5% 11%10%9%8%7%6%4%3%2%1%0%

Circles represent industrysubgroups. Size of circlesrepresents relative turnover in 2011.

Average: 6,7%

WACC: 15%

8 22/08/2012 NOVOZYMES PRESENTATION

Average: 21.1%

NZ overall IRR = 21.1%

Thank you for your attention