1. 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

2. NOVOZYMES IN BRIEF
WORLD 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

3. “If you are not keeping score, you are only
practicing”
Jan Leschly
Former CEO of SmithKline Beecham

4. But it is challenging to measure different
business areas or university faculties by
the same criteria...

5. …if the prerequisites are not the same.
e.g. varying cost associated with regulatory approval of enzymes

6. 6 22/08/2012 NOVOZYMES PRESENTATION
So how do we do it in Novozymes ?
Internal Rate of Return
of
New Product & Concept Sales

7. 7 22/08/2012 NOVOZYMES PRESENTATION
Model overview
Internal Rate of Return of New Product & Concept Sales
Model description Internal Rate of Return
• The objective of this model is to estimate • IRR is the other side of Net Present Value
the value of the R&D resources, spend in (NPV), where NPV is the discounted value
the previous year. of a stream of cash flows, generated from
an investment, IRR thus computes the
• This model is based on a model developed break-even rate of return
by McKinsey in 2006, and improved several
times. • Internal Rate of Return provides a simple
‘hurdle rate’:
• The model calculates IRR (internal rate of
return) values based on a simple lifecycle  Hurdle Ratein ISG
•
R&D spend
(IRR)>WACC  Continue
model for the Industry Subgroups (ISG) in
Novozymes Enzyme Business
• The IRR is set in relation to the ratio:
• Hurdle Rate (IRR)<WACC  Avoid
R&D Spend in ISG
R&D spend in % of total Industry Subgroup
Sales ... Unless it’s a strategic decision

8. 8 22/08/2012 NOVOZYMES PRESENTATION
Calculated IRR without cannibalization
Past performance 2007-2011
Average: 6,7%
IRR product innovation
60%
NZ overall IRR = 21.1%
50% Circles represent industry
subgroups. Size of circles
represents relative turnover in
2011.
40%
30%
Average: 21.1%
20%
WACC: 15%
10%
0%
-5%
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13
R&D spend for product innovation (% of total sales of ISG)

9. Thank you for your attention