Kurt Anker Nielsen - Corporate Finance
Slide 35 - Selected financial issues
I will finalise our presentation with some short comments on selected financial issues.
On several occasions we have mentioned the forthcoming sharp reduction in year 2000 of the royalty income which Novo Nordisk receives from SmithKline Beecham's sales of Seroxat®/Paxil® outside the Nordic countries.
Due to this Novo Nordisk expects the increase in operating profit in year 2000 compared to 1999 to be considerably below the company's growth target of 15%.
This expectation is also based on a slower than earlier anticipated penetration of NovoNorm®/Prandin™ in the US, on the fact that NovoSeven® has not yet been approved by the FDA, and on the economic crises in Asia, Russia and Latin America.
For the years beyond 2000, Novo Nordisk maintains its goal of an annual increase in operating profit of 15% or more, based on sustained expectations of increasing revenue from existing and new products, income from existing and potential licensing agreements as well as continued productivity improvements.
As you may have noticed we have made some adjustments to our accounting principles to closer align these to the US GAAP principles. The changes as well as the effect of these principles are outlined on page 32 in the annual report 1998.
As you probably know we initiated a share re-purchase programme in August 1998, aiming at buying DKK 3 billion worth of our own shares. The reason behind this is that we knew that we would continue to be well capitalised and that we would generate a positive cash flow going forward. This initiative on its own has reduced the balance sheet by approximately DKK 2 billion in 1998 as marketable securities have been sold to finance the buy-back.
Also, we continue to increase the dividend pay-out ratio. In 1997, we increased dividend by 53% to DKK 5.75 per DKK 10 share. For 1998, the Board of Directors proposes to raise dividend by 35% to DKK 7.75 per DKK 10 per share. It remains Novo Nordisk's policy, over the coming years, to continue to increase the pay-out ratio, towards an industry average.
In 1998, we also made an employee share programme to further strengthen our employees' interest in the financial performance of the company.
We commenced a stock option programme during 1998. 22 top executives were granted stock options in February 1998, and the programme was expanded to include a total of approximately 400 executives at Novo Nordisk worldwide in February of this year. Options related to this second part of the programme will be granted on the day following the Annual General Meeting on March 24 1999.
Finally, let me summarise Novo Nordisk's expectations for 1999.
Events on the global political and economic scene since the end of 1997 have clearly shown that future developments are less predictable than they used to be. This situation is likely to persist in the coming years.
In 1999, Novo Nordisk plans to implement the most comprehensive product launch programme in the Group's history, including:
- Continued introduction of Prandin™/NovoNorm® (oral treatment for Type 2 diabetes) in Europe.
- Introduction of NovoRapid™ (rapid-acting insulin analogue) in Europe.
- Continued introduction of Activelle™ (low-dose HRT preparation) in Europe.
- Introduction of Norditropin® Simplexx™ (liquid human growth hormone) in Europe.
- Introduction of NovoSeven® (haemophilia preparation) in the US.
Such product introductions are very costly; however, a rapid and efficient global launch is a condition for maximising Novo Nordisk's earnings from these products in the long term.
In this connection, measures to improve productivity and reduce costs will be introduced in the Health Care business in the near future, aiming to achieve annual cost savings of approximately DKK 300 million from the year 2000. The resources thus liberated will be used for strengthening international sales and marketing, especially in relation to new products, in order to increase the prospects of fulfilling the financial objectives.
Novo Nordisk expects continued growth in sales of the company's existing products in 1999. Sales growth in Health Care is expected to continue at a satisfactory level, while the sales development in Enzyme Business is expected to be somewhat more moderate, especially due to the continuing economic recession in Asia, Central and Eastern Europe and Latin America.
Developments in Novo Nordisk's major invoicing currencies, international interest rates and the introduction of new products, as well as the uncertainty surrounding the purchasing patterns of our customers in connection with the millennium change, are also significant factors in relation to the Group's fulfilment of its financial objectives in 1999.
It is Novo Nordisk's goal, also in 1999, to achieve an increase in operating profit of at least 15%, although the challenge of meeting this goal will be greater than in previous years.
The free cash flow for 1999 is expected to develop satisfactorily and will be favourably affected by a major one-time payment at the beginning of the year relating to the sale of the Nordic marketing rights of Seroxat® in the first quarter of 1998.
The effective tax rate for 1999 is expected to be at the level of 35%.
Novo Nordisk's capital expenditure for property, plant and equipment is expected to be at the level of DKK 2 billion.
The major part of the increase in operating profit, excluding net one-time income, is expected to be realised during the second half of the year, primarily due to new product introductions and the continued introduction of existing products in new geographic markets. Further, operating profit for the first quarter of 1999 could be lower than operating profit, excluding net one-time income, in the first quarter of 1998.
Slide 37 - Outlook for the year 2000 and beyond
For the years beyond 2000, Novo Nordisk maintains its goal of an annual increase in operating profit of at least 15%, based on sustained expectations of increasing revenue from existing and new products, income from existing and potential licensing agreements as well as continued productivity improvements.
As announced in February 1998, Novo Nordisk's licence income from Seroxat®/Paxil® is expected to decrease significantly from the year 2000 and beyond.
Against this background, Novo Nordisk presently expects that the increase in operating profit in the year 2000 relative to 1999 will fall considerably short of the targeted growth of at least 15%. The company further bases this expectation on the following factors: slower penetration of NovoNorm®/ Prandin™ in the US than originally expected; FDA approval of NovoSeven® in the US is only expected in the first half of 1999; the adverse economic situation in Asia, Russia and Latin America.
Slide 38 - Forward-looking Statements
The Transcript contains forward-looking statements as the term is defined in the US Private Securities Litigation Reform Act of 1995.
Such forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially from expectations, including unexpected developments in the international currency exchange and securities markets, government-mandated or market-driven price decreases for Novo Nordisk's products in the company's major markets and the introduction of competing products within Novo Nordisk's core businesses.
These and other risks and uncertainties, except for "The Year 2000 issue", are more fully described in reports filed with the US Securities and Exchange Commission (SEC) by Novo Nordisk and readily available to the public, including the company's Form 20-F, which was filed on 29 June 1998.
In addition to the risk factors described in the company's Form 20-F, the economic situation in Asia, Russia and Latin America could have an adverse impact on unit sales and/or prices, including currency exchange rates, in 1999. The total group sales in Asia (excluding Japan), Russia and Latin America were approximately DKK 2 billion in 1998 corresponding to 11% of total group sales.
We are now ready to take your questions.
