Also from a financial point of view, 1997 was a very satisfactory year for Novo Nordisk. Operating income and income before tax increased 28% and 25% respectively compared with 1996, to DKK 3,055 million and DKK 3,162 million. Net income increased 23% to DKK 2,212 million, corresponding to DKK 29.48 per share of DKK 10 (DKK 14.74 per ADS).
The strong financial performance was driven primarily by adherence to Novo Nordisk's focused business strategy; improved production economy; streamlining of the company's staff and service activities; and favourable developments in the Group's key invoicing currencies in 1997. The results thus exceed the expectations for the year communicated in November 1997.
Throughout 1997, optimisation of production processes has been in focus; as a result, the contribution ratio rose from 82% in 1996 to 83% in 1997. Total costs, excluding net financials and tax, rose 12%. Adjusted for restructuring costs in 1996, the increase was 13%. No restructuring costs are included in the 1997 accounts.
The Group's operating income margin rose from 16.0% in 1996 to 18.0% in 1997. The return on non-financial assets for 1997 - RONFA - rose to 17.1% from 14.8% in 1996, bringing both the operating income margin and RONFA closer to the Group's financial objectives of an operating income margin and a RONFA of at least 20%.
Despite a considerably higher level of capital expenditure in 1997 compared with last year, the Group's free cash flow was positive, at DKK 583 million.
Development in sales, licence fees and other operating revenues
Consolidated sales increased 14% in 1997 to DKK 16,932 million compared with 1996, primarily driven by larger sales volumes, improved product mix, and a favourable impact from currency exchange rates.
The average value, measured in DKK, of Novo Nordisk's invoicing currencies was approximately 5% higher in 1997 than in 1996. Measured in local currencies, sales thus increased 9% compared with 1996. With respect to the Group's major invoicing currencies, the average value of GBP against DKK increased by 19%, USD increased by 14%, and JPY increased by 3%.
Health Care (HC) sales rose 13% from DKK 11,078 million in 1996 to DKK 12,528 million in 1997. Sales were favourably affected by an increase in Health Care's average invoicing currencies of 4%. Developments in volume and product mix affected Health Care's sales favourably by 11%, while average prices were 2% lower than in 1996. The increase in volume and product mix is especially attributable to Diabetes Care products and NovoSeven®, partially offset by a decline in sales of Seroxat® in the Nordic countries.
Sales of Diabetes Care products rose 14% to DKK 8,889 million in 1997. The increase is due to increased sales of Penfill® for NovoPen® and of the disposable pen NovoLet®. Especially sales in Japan, France, Russia, Brazil and the markets in Central Europe contributed to the increase. The growth in sales volume within Diabetes Care was 11% in 1997. Sales in the US, which accounted for approximately 10% of total Diabetes Care sales in 1997, rose 3% compared with 1996. Measured in USD, however, sales in the US were 9% lower than last year.
This unsatisfactory development in the US was primarily due to a shift in customer mix towards relatively larger sales to wholesalers. Other contributing factors include: the use of Penfill® insulin preparations by users of NovoPen® injection systems was lower than expected; sales of insulin in vials were lower than expected; and during a period in early 1997, Novo Nordisk lost a number of sales representatives in the US. The newly established co-promotion agreement with Schering-Plough is expected to considerably increase the sales effort in connection with Novo Nordisk's Diabetes Care products in the US.
Sales of Women's Health Care products rose 9% to DKK 1,012 million in 1997, primarily due to larger volumes sold. The growth rate was lower than in previous years due to continued strong competition, especially in the UK, Italy and Germany. In addition, these markets, which are important for Novo Nordisk, continue to be characterised by lower than expected growth. However, the sales growth in the Czech Republic, Hungary and Australia was higher than in previous years.
Sales of products within Growth Disorders rose 7% to DKK 1,569 million in 1997. Measured in volume, the increase was 9%. The limited sales increase was primarily due to intensified competition in Japan and to the effect of mandatory price reductions on Norditropin® in 1996 in Japan and in 1997 in France.
Sales of other Health Care products rose 19% to DKK 1,058 million. The high growth rate was led by sales of NovoSeven®, which rose to DKK 369 million in 1997 from DKK 150 million in 1996. However, sales of Seroxat® in the Nordic countries did not develop as expected, dropping by 25% to DKK 234 million in 1997. This development was due to strong competition in Norway and Sweden and parallel imports in Norway.
Enzyme Business (EB) sales rose 16% to DKK 4,347 million from DKK 3,745 million in 1996. The sales growth reflects an increase in volume/product mix of 9% and a favourable impact from currency exchange rates of 7%, primarily due to the appreciation of the USD against DKK. As in 1996, prices remained stable. The sales increase was primarily driven by increased sales within the detergent, baking and brewing industries, whereas sales to the textile industry were characterised by lower demand.
The increase in volume/product mix for the detergent industry was higher than that of Enzyme Business overall. This favourable development is due to increased enzyme dosage by detergent producers and a generally increased use of enzymes.
The sales increase for the process industries was rather more modest, reflecting a significant decrease, measured in volume/product mix, in sales to the textile industry from 1996 to 1997 following a shift in fashion away from blue jeans towards darker garments, and competition from cheaper substitution products. Sales to the baking and brewing industries rose significantly, primarily due to rising sales of the enzyme products Novamyl(TM) and Maturex(TM).
For other businesses, sales amounted to DKK 57 million in 1997 compared with DKK 50 million in 1996.
Novo Nordisk's licence fees and other operating revenues rose 42% to DKK 728 million in 1997 from DKK 514 million in 1996. A significant part of this increase was due to the favourable development in licence income from Seroxat®/Paxil®, which in 1997 accounted for 85% of total licence fees and other operating revenues. A contributing factor was the increase in the GBP rate. The financial result for 1997 is not affected by the out-licensing of Gabitril® to Sanofi in December 1997, as the agreement only took effect from January 1998.
Cost development
Total costs, excluding net financials and tax, rose 12% over 1996 to DKK 14,605 million in 1997. Adjusted for restructuring costs in 1996, the increase was 13%. Currency exchange rate developments, primarily the strengthening of USD and GBP against DKK, caused costs to increase.
Direct production costs increased 12% to DKK 2,941 million. The growth rate of production costs in 1997 was affected by measures to improve productivity which, among other things, resulted in increased production yields.
Indirect production costs increased 11% over 1996 to DKK 2,905 million. Part of this increase is attributable to the insulin filling and packaging plant in Clayton, North Carolina, US, which started operations in August 1996.
Sales and distribution costs rose 19% to DKK 3,927 million. A major reason for this increase is the expansion of the Japanese Health Care organisation in preparation of the switch to self-distribution by the end of the first quarter of 1998. In addition, several of the emerging markets were characterised by generally higher cost levels due to the expansion of the organisation in these markets.
Research and development expenditure rose 23% to DKK 2,761 million in 1997. This corresponds to 16.3% of consolidated sales, which is 1.2 percentage points higher than in 1996. The increase reflects the fact that several development projects in Health Care are in the late and costly stages of clinical development. The increase in total research and development expenditure primarily results from the development of Insulin Aspart (short-acting insulin analogue) and levormeloxifene (osteoporosis treatment) as well as an increase in costs associated with external research collaborations.
Administrative expenses decreased 3% to DKK 2,071 million, partly due to cost savings in Novo Nordisk's staff and service activities.
Total employee costs rose 11% to DKK 5,604 million. At the end of 1997, the number of employees was 14,175, an increase of 6% compared with 1996. The increase in the number of employees was primarily due to preparations for starting up production in China and the switch to self-distribution of Novo Nordisk's health care products in Japan, as well as the strengthening of the sales and marketing organisation in emerging markets.
Total depreciations in 1997 were DKK 1,139 million, an increase of 7%. The increase was chiefly due to the opening of Novo Nordisk's new insulin filling and packaging plant in Clayton, North Carolina, US, and of a new NovoLet® factory in Hillerød, Denmark, in 1996 and 1997, respectively. In addition, depreciation on the research and administrative facility in Beijing, China, has begun.
Net financials and tax
Net financials in 1997 amounted to a net financial income of DKK 107 million compared with DKK 135 million in 1996.
Net interest income rose from DKK 40 million in 1996 to DKK 94 million in 1997, since the Group's net interest-bearing assets in 1997 were higher than in 1996. In addition, the rescheduling in 1996 of high-interest loans to less expensive sources of finance had a favourable effect on 1997.
The total net gain on marketable securities in 1997 was DKK 135 million compared with DKK 96 million in 1996.
In 1997, Novo Nordisk had a net foreign exchange loss of DKK 86 million compared with a net foreign exchange gain of DKK 84 million in 1996. This development was primarily due to hedging of Novo Nordisk's currency exposure, especially with respect to USD and GBP. In addition, the economic situation in the Far East in the latter part of 1997 had a negative impact of DKK 27 million. The total negative currency adjustment, however, should be seen in the context of the favourable impact of currency on operating income. Overall, the Group was favourably affected by the development in currency exchange rates in 1997.
Other financial costs were DKK 34 million in 1997 compared with DKK 94 million in 1996. Taxes expensed in 1997 were DKK 950 million, corresponding to an effective tax rate of 30. The increase relative to 1996 in the effective tax rate of 1.2 percentage points is primarily due to the phasing out of tax relief for foreign income.
Capital expenditure
Total capital expenditure (net) for property, plant and equipment in 1997 was DKK 2,411 million compared with DKK 1,791 million in 1996, an increase of 35%. This increase is partly due to the fact that several plants and production facilities currently under construction have entered the final and more costly phases.
Cash flows and financial reserves
Novo Nordisk's free cash flow in 1997 was DKK 583 million, compared with a negative free cash flow of DKK 70 million in 1996. The improvement primarily reflects an increase in operating income, partially offset, however, by a significant increase in capital expenditure for property, plant and equipment.
The Group's available funds at the end of 1997 rose to DKK 2.8 billion from DKK 1.6 billion at the end of 1996. Besides the positive free cash flow, the increase reflected the fact that throughout 1997 it has been possible to take up long-term bank loans on very favourable terms. Committed credit facilities increased by USD 100 million in 1997, bringing the total unused committed credit facilities to DKK 6.3 billion. Hence the total financial reserves at the end of 1997 were DKK 9.1 billion.
Stockholders' equity
Stockholders' equity was DKK 18,063 million at the end of 1997, corresponding to 71% of total assets. Thus the level of equity funding is still higher than Novo Nordisk's targeted level of 60-65%.
Stockholders' equity increased in 1997 by net income less proposed dividends, a total of DKK 1,784 million. In addition, adjustment of investments in subsidiary companies etc, primarily due to currency movements, had a favourable impact on equity of DKK 297 million.
In connection with Novo Nordisk's change of accounting policies as of 1 January 1997 concerning valuation of marketable securities classified as current assets, a revaluation of DKK 53 million was charged directly to stockholders' equity at the beginning of 1997.
The Board of Directors proposes to raise the dividend for 1997 to DKK 5.75 (DKK 2.88 per ADS) from DKK 3.75 per share of DKK 10 (DKK 1.88 per ADS) in 1996, an increase of 53%. This corresponds to 19% of net income being paid to shareholders in the form of dividend, compared with 16% in 1996. No dividend has been calculated on Novo Nordisk's holding of its own shares.
