Zealand Pharma
Annual Report 2016

Plain-text annual report

Annual Report 2016 Entering a new era Zealand Pharma A/S Company reg. no. 20045078 We are a Danish biotech company discovering and developing novel peptide- based medicines. We are passionate about improving patients’ lives and committed to delivering value for all our stakeholders. We intend to be a world leader in medicines focusing on specialty gastrointestinal and metabolic diseases 2 Zealand Pharma A/SAnnual Report 2016Management reviewContents Management review About In brief Letter from the CEO Financial highlights Consolidated key figures 2016 key events 4 6 8 9 10 Strategy and partnerships Own clinical pipeline Corporate matters Financial statements Financial statements Strategy and roadmap Value creation Adlyxin®/Lyxumia® 12 13 14 Soliqua™ 100/33/Suliqua™ 15 Collaborations with Boehringer Ingelheim and Helsinn 16 Building the future pipeline 17 Product pipeline Disease focus Glepaglutide for short bowel syndrome Dasiglucagon for acute, severe hypoglycemia Dasiglucagon for type 1 diabetes care 19 20 21 23 25 Corporate governance 28 Income statement Risk management and internal control Corporate social responsibility (CSR) Human resources Financial review Shareholder information Board of Directors Senior Management 30 32 33 34 36 38 40 Statement of comprehensive income Statement of financial position Statement of cash flows Statement of changes in equity Notes Statement of the Board of Directors and Executive Management Independent auditor's report 43 43 44 45 46 47 79 80 3 Front page: Louise from Molecular Pharmacology, working in one of Zealand's laboratories. Zealand Pharma A/SAnnual Report 2016Management reviewIn brief Branded products in diabetes care commercialized by Sanofi under an exclusive worldwide license Our approach Lixisenatide is marketed as Adlyxin® in the U.S. and is approved as Lyxumia® in more than 60 countries worldwide and marketed in over 40 of these by Sanofi. Commercial launches include most EU countries, Japan, Brazil, Mexico and India. Soliqua™ 100/33 is a combination of lixisenatide and Lantus® and is marketed by Sanofi in the U.S. The product was approved as Suliqua™ in the EU in January 2017. Suliqua™ will be delivered in two pre-filled SoloSTAR® pens, providing different dosing options. Product pipeline 3 fully owned product candidates in Phase 2 3 product candidates in partnerships • Glepaglutide* for short bowel syndrome (SBS) • Dasiglucagon* for acute, severe hypoglycemia • Dasiglucagon* for type 1 diabetes care • Elsiglutide for chemotherapy-induced diarrhea • A dual GLP1-GLU for obesity/type 2 diabetes • An undisclosed target for obesity/type 2 diabetes Scientific focus and platform Drug discovery Peptides We invent and develop medicines focusing on specialty gastrointestinal and metabolic diseases. Zealand has a successful 18-year history of discovering and optimizing peptide therapeutics as novel drugs. * Glepaglutide and dasiglucagon are proposed International Nonproprietary Names (pINN). 4 We build for success by maintaining a lean and agile organization and by partnering with the best in their fields, leading to greater efficiency and better results. We have a history of successful outlicensing partnerships. Going forward, we will engage in partnerships across all stages of the value chain, but we will retain greater control and profitability. In 2016, we partnered with high-quality device and drug manufacturers and leading centers and hospitals to run our clinical development. Zealand Pharma A/SAnnual Report 2016Management review Financials 2016 year-end cash position 2012-2016 revenue DKKm 319 642 323 Restricted cash Cash and cash equivalents DKKm 250 200 150 100 50 0 2012 2013 2014 2015 2016 2016 revenue DKKm Lyxumia® royalties 25 235 210 Milestone payments Employees are one of our biggest assets We aspire 122 employees to attract, develop and retain the best people and to be a company where employees thrive, regardless of their background. More than 80% of our employees work in R&D, and 36 of our employees hold a PhD. Other Research 23 46 53 Development How we work We have strengthened our organization with competencies enabling us to advance our product candidates through to registration and we will continue to expand our organization with relevant skills to fulfill our ambition, while maintaining our agility and leanness. Zealand Pharma A/S Based in Denmark – home to a world-leading healthcare industry. – and the country with the largest commercial drug development pipeline in Europe, according to investindk.com. Founded in 1998 to design and develop peptide-based medicines. Listed on Nasdaq Copenhagen: ZEAL 5 Zealand Pharma A/SAnnual Report 2016Management reviewLetter from the CEO Zealand enters a new era Dear Zealand stakeholders, 2016 was an outstanding year for Zealand Pharma. We took major steps toward significant value creation and evolved Zealand into a more sustainable biotech company. Two products based on Zealand’s invention lixisenatide were approved in the U.S. and made available to patients with type 2 diabetes by Sanofi. These important milestones will reward Zealand with a steadily growing revenue stream in the form of milestone payments and royalties. Within the scope of our new strategy of bringing selected medicines all the way to market ourselves, we successfully progressed the development of our clinical programs: glepaglutide for patients with short bowel syndrome (SBS) and dasiglucagon for insulin shock and in combination with insulin for use in a dual-chamber pump. Two products approved and launched in the U.S. Zealand entered into a partnership with Sanofi more than a decade ago. 2016 was a determining year for our partnership, with both Adlyxin® and Soliqua™ 100/33 being approved in the U.S. We are reassured by the strong commitment of our partner Sanofi, which is responsible for development and commercialization, in making Soliqua™ 100/33 a success in the U.S. Soliqua™ 100/33 was made available in U.S. pharmacies in the first week of 2017. The U.S. healthcare market was in the spotlight in 2016 due to the focus on price pressure, particularly in the insulin market. We are pleased by Sanofi’s pragmatic approach to ensuring that Soliqua™ 100/33 is accessible to a large number of patients. Diabetes is, unfortunately, a growing disease with a continued need for better treatment. In fact, 50% of people with diabetes do not achieve their target blood sugar levels. Finally, we are excited about the EU approval of Suliqua™ in early 2017, with launches expected from Q2 2017 by Sanofi. 6 Solid progress on our Phase 2 gastrointestinal and metabolic programs In 2015, we launched a strategy based on the ambition to become a fully integrated biotechnology company. In 2016, we continued to strengthen the organization to successfully develop and make new and better medicines available to patients in the years to come. We build on our strong R&D platform, taking greater ownership of product candidates through late-stage clinical development and registration, and play an active part in bringing products to market. This will give us increased control and enable us to retain and significantly increase the future value for patients, Zealand and our shareholders. Glepaglutide, a GLP-2 analogue, targets patients with short bowel syndrome (SBS). This is a severe disease affecting more than 40,000 patients globally. In 2016, we initiated a Phase 2 trial, working with one of the leading specialists in this field, and we expect the results in mid-2017. We are committed to helping patients suffering from SBS and are working with patients, physicians and payers to understand how to best address their needs. In addition to this program, our R&D organization is working on other projects to improve the lives of patients suffering from gastrointestinal diseases. In the field of diabetes, we reported positive Phase 2 results with dasiglucagon, which is a user-friendly treatment solution for insulin shock, an underappreciated life- threatening condition and one of the greatest fears of insulin-dependent patients and their relatives. In 2016, Zealand entered into a collaboration with Beta Bionics, a Boston-based company, whereby dasiglucagon will be delivered in combination with insulin in a pump, thereby mimicking a healthy pancreas as this pump releases both Zealand Pharma A/SAnnual Report 2016Management reviewinsulin and glucagon for optimal blood sugar control. We believe that this dual-hormone artificial pancreas has the potential to transform the treatment of diabetes and are dedicated to advancing dasiglucagon, since we believe it is the best glucagon for this application. In 2016, we had to discontinue a clinical project program. Danegaptide, a gap junction modifier to address reperfusion injuries in connection with heart attacks, unfortunately did not show the intended effect in a 600-patient Phase 2 trial. Based on this result, we decided to discontinue the program. Building success through partnerships and maturing the organization We build for success by maintaining a lean and agile organization and by establishing partnerships with the best in their fields, leading to greater efficiency and better results. We have a history of successful outlicensing partnerships and will continue to rely on external partnerships across all stages of the business. In 2016, we partnered with high- quality device and drug manufacturers and leading centers and hospitals to run our clinical development. Our partnership with Boehringer Ingelheim (BI) achieved significant project milestones in 2016, and the two programs currently in development are scheduled to enter Phase 1 in 2017. Elsiglutide, run by our partner Helsinn, failed to meet the primary endpoint in reducing chemotherapy-induced diarrhea, but Helsinn will continue the development of this treatment to hopefully find a way to help the many patients who suffer from diarrhea after chemotherapy. Strong financial outlook and the beginning of a new era 2015 saw us embark on a diligent growth strategy. 2016 showed that we are evolving into a sustainable biotech company that can deliver. In 2017, we aim to create more value through increased revenues from marketed products, moving our own medicines toward Phase 3 development and expanding our portfolio of new medicines addressing specialty gastrointestinal and metabolic diseases with significant unmet needs. We are well positioned financially, with a solid cash base. This means that we can pursue increased investment in our own pipeline programs over the next few years to advance products that will benefit patients. Our employees are fundamental to our success, and we continue to be able to attract and retain people with vast experience and talent. We have a unique culture, characterized by excellent teamwork and strong engagement across the organization. I am therefore confident that we will successfully take the transformational step to the next level and deliver on our ambitions. I would like to thank all our shareholders for their support and confidence in us. We ended 2016 in excellent shape, both financially and operationally. In 2017, we will move into a new era. Together with my colleagues, I look forward to making a difference to patients’ lives and creating value for all stakeholders. Britt Meelby Jensen President and Chief Executive Officer We intend to be a world leader in medicines focusing on specialty gastrointestinal and metabolic diseases. We will further exploit our peptide platform to deliver innovation and life-changing impact for people suffering from these diseases. 7 Zealand Pharma A/SAnnual Report 2016Management reviewFinancial highlights Financial highlights of 2016 Revenue Zealand's revenue in 2016 amounted to DKK 234.8 million (2015: DKK 187.7 million), which was an increase of 25% on 2015. The main revenue component consisted of milestone payments of DKK 210.4 million (2015: DKK 159.1 million) from Sanofi in connection with the U.S. approvals of lixisenatide as Adlyxin® amounting to DKK 33.5 million, and Soliqua™ 100/33 amounting to DKK 169.9 million. Royalty revenue to Zealand from Sanofi's sales of Lyxumia® amounted to DKK 24.3 million (2015: DKK 28.6 million), corresponding to a 15% decrease on the previous year. Research, development and administrative expenses Total research, development and administrative expenses amounted to DKK 320.7 million (2015: DKK 259.5 million), up 24% on 2015. The increase is due to higher research and development expenses as a result of accelerated development activities. These included the costs of the dasiglucagon Phase 2 trial conducted in Germany and toxicology studies for glepaglutide. In addition, costs were impacted by an increase in the number of employees in our clinical development organization. Financial guidance for 2017 For 2017, Zealand expects a continued increase in royalty payments from Sanofi. No specific guidance on the level of royalties can be provided, as Sanofi has not given any guidance on expected 2017 sales. Additional revenue of up to DKK 100 million is expected from event-driven partner-related milestones. DKK 70 million of this was received in January 2017. Net operating expenses in 2017 are expected to be within the range DKK 390-410 million. The increase compared with 2016 is explained by higher levels of clinical development costs associated with the advancements of glepaglutide and dasiglucagon. The operating loss before royalty income/expenses is therefore expected to be within the range DKK 290-310 million, excluding royalty revenue. Revenue DKKm 250 200 150 100 50 0 R&D and administrative expenses DKKm 2017 guidance 2016 realized DKKm 350 300 250 200 150 100 50 0 Milestone revenue Net operating expenses¹ Operating loss before royalty income/expenses 100 390-410 290-310 210 319 109 ¹ Net operating expenses consist of research, development and administrative expenses less operating income. 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Milestone income Royalty income 8 R&D expenses Administrative expenses Zealand Pharma A/SAnnual Report 2016Management review Consolidated key figures DKK ’000 Restated¹ 2015 2016 2014 2013 2012 DKK ’000 Restated¹ 2015 2016 2014 2013 2012 Income statement and comprehensive income Revenue Royalty expenses 234,778 187,677 153,773 6,574 223,565 Cash outflow/inflow from investing activities -299,958 -1,594 19,763 96,808 13,448 -31,459 -22,267 -13,776 -872 -15,933 Cash inflow from financing activities 157,146 96,413 272,170 0 0 Cash outflow/inflow from operating activities 40,904 -224,767 -42,183 -169,618 68,537 Cash flow Research and development expenses -268,159 -217,741 -180,036 -164,467 -182,759 Purchase of property, plant and equipment -2,600 -4,040 -4,497 -4,569 -8,849 -52,503 -41,824 -39,826 -34,155 -27,611 Free cash flow⁵ 38,304 -228,807 -46,680 -174,187 59,688 Administrative expenses Other operating income Operating result Net financial items Result before tax Income tax benefit² 1,697 12,828 6,328 7,302 35,135 -115,646 -81,327 -73,537 -185,618 32,397 -43,764 -38,505 1,047 1,942 3,975 -159,410 -119,832 -72,490 -183,676 36,372 5,500 5,875 7,500 0 0 Net result for the year -153,910 -113,957 -64,990 -183,676 36,372 Comprehensive income/loss -153,910 -113,957 -64,990 -183,676 36,372 Earnings/loss per share – basic (DKK) Earnings/loss per share – diluted (DKK) -6.33 -6.33 -4.94 -4.94 -2.87 -2.87 -8.10 -8.10 1.61 1.60 Statement of financial position Cash and cash equivalents Restricted cash³ 323,330 Securities Total assets 323,330 418,796 538,273 286,178 358,922 318,737 21,403 0 0 0 0 0 0 0 24,383 126,940 694,626 636,208 596,756 346,913 520,983 Share capital (‘000 shares) 26,142 24,353 23,193 23,193 23,193 Equity Equity ratio⁴ Royalty bond 278,194 252,231 252,828 316,141 491,015 0.40 0.40 0.42 332,243 312,951 272,170 0.91 0 0.94 0 Other Share price (DKK) Market capitalization⁶ (DKKm) Equity per share⁷ (DKK) Average number of employees Products in clinical development (year-end)⁸ Products in registration phase (year-end)⁹ Medicines on the market¹⁰ 106.50 151.50 2,784 11.69 124 6 1 1 3,689 10.60 110 6 2 1 83.00 1,925 11.17 103 5 0 1 59.00 1,368 13.97 107 6 0 1 84.00 1,948 21.70 104 7 0 0 ¹ Figures for the year ended December 31, 2015 have been restated due to certain misstatements. See Note 1 to the financial statements. ² According to Danish tax legislation, Zealand is eligible to receive DKK 5.5 million in cash relating to the tax loss in 2016. ³ Restricted cash serves as collateral for the royalty bond issued in 2014. ⁴ Equity ratio is calculated as equity at the balance sheet date divided by total assets at the balance sheet date. ⁵ Free cash flow is calculated as cash flow from operating activities less purchase of property, plant and equipment. ⁶ Market capitalization is calculated as outstanding shares at the balance sheet date times the share price at the balance sheet date. ⁷ Equity per share is calculated as shareholders’ equity divided by total number of shares less treasury shares. ⁸ Please refer to our pipeline on page 19. ⁹ On January 17, 2017, Suliqua™ was approved in the EU by the European Commission, and the launch is expected in Q2 2017. ¹⁰ In November 2016, the FDA approved Soliqua™ 100/33, and the product was launched in January 2017. 9 Zealand Pharma A/SAnnual Report 2016Management review 2016 key events First dosing of patients in Phase 2 with glepaglutide First dosing of patients in Phase 2 with glucagon analogue, dasiglucagon Phase 2b trial with elsiglutide failed to meet primary endpoint Positive Phase 2 results for dasiglucagon in a ready-to-use hypo pen Phase 2 proof-of- concept trial with danegaptide failed to meet primary endpoint Collaboration between Zealand and Beta Bionics on a first-in-class dual- hormone bionic pancreas system Zealand raises USD 22m from a private placement of shares Start of Phase 2a microdose clinical trial with dasiglucagon Start of Phase 2a clinical trial with dasiglucagon in a dual-hormone bionic pancreas system February March May June July August September November December January April October FDA acceptance of Sanofi's NDA for iGlarLixi (lixisenatide and insulin glargine) FDA Advisory Committee vote to recommend approval of iGlarLixi (lixisenatide and insulin glargine) in the U.S. Three-month delay in FDA decision on lixisenatide and insulin glargine FDA approval of Soliqua™ 100/33, triggering USD 25m milestone payment CHMP recommends approval of Suliqua™ in the EU FDA approval of Adlyxin® in the U.S., triggering USD 5m milestone payment 10 Zealand Pharma A/SAnnual Report 2016Management reviewStrategy and partnerships Ditte from Pharmacology, working in one of Zealand's laboratories. Contents Strategy and roadmap Value creation Adlyxin®/Lyxumia® Soliqua™ 100/33/Suliqua™ Collaborations with Boehringer Ingelheim and Helsinn Building the future pipeline 12 13 14 15 16 17 11 Zealand Pharma A/SAnnual Report 2016Management reviewStrategy and roadmap The U.S. launch of Soliqua™ 100/33 confirms growing revenues for many years to come – an important precondition of our strategy. We aim to realize the value of some of our own product candidates ourselves, to retain full control and increase profitability. To successfully advance products through clinical development and registration, we have significantly strengthened our competencies. Successful implementation of our strategy will propel Zealand forward to being a fully integrated biotechnology company, building on our strong R&D platform while expanding relationships with our customers. Our pipeline will focus on addressing the needs of patients suffering from specialty gastrointestinal and metabolic diseases, at the same time as incorporating opportunities in other specialty diseases that match our competencies and ambitions. Building the future pipeline Zealand has a successful history of discovering and optimizing peptide therapeutics as novel drugs. We will continue to grow our pipeline through internal research, but also through inlicensing and/or acquisitions. We have built a strong organization and secured solid partnership agreements for clinical trial execution and manufacturing in order to advance our Phase 2 product candidates: the GLP-2 analogue glepaglutide, targeting short bowel syndrome, and the two glucagon analogue programs with dasiglucagon. All three programs are progressing at full speed. We will engage in commercialization for selected product candidates, for example glepaglutide, and we will therefore gradually expand our commercial capabilities and establish a local presence in relevant markets, while relying on partnerships in other markets. 2016 2017-2019 2020+ Entering a new era Accelerating value creation Integrated biotech company Advance and expand the pipeline • Two U.S. product approvals • Three Phase 2 product candidates Enhance our peptide competencies • Engagement in new research partnerships • Continued investments in innovation Enter partnerships to support the pipeline • Partnerships with Beta Bionics and device partners • Working with leading CMOs and CROs Solid financial position • Strengthened cash position • Milestone payments and royalties 12 Confirming the value of the product portfolio • Growing revenues from marketed Commercialization of own products in the U.S. and Europe products • Milestone payments • Own late-stage development and registration Engage in synergistic partnerships • Inlicensing to expand portfolio • Commercial partnerships Building stakeholder relations • Dialogue with patients, key opinion leaders and payers intensified Continued solid revenues from partnered products Portfolio from internal innovation, partnering and acquisitions “2016 was a year of significant achievements for Zealand, with solid progress on the execution of the strategy that was defined in 2015. Two U.S. approvals of products licensed to Sanofi will ensure increasing revenues so that we can bring product candidates in our pipeline all the way through registration and, ultimately, make them available to patients. Zealand’s ambition to play an active part in commercialization represents a major transformation of the company. It requires new competencies, and I am pleased to report that organizational developments are on track to realize the full value of this ambition.” Martin Nicklasson Chairman Zealand Pharma A/S Zealand Pharma A/SAnnual Report 2016Management reviewValue creation Pipeline projects: full control and value retained by Zealand Partnered products and projects: revenue model Glepaglutide* Dasiglucagon* Partner/product Milestone payments Royalties Target indication Short bowel syndrome (SBS) Phase 2 recruitment completed USD > 0.5bn market potential assuming current treatment paradigm 20,000-40,000 SBS patients in the U.S. and the EU 2016 sales of GLP-2 SBS treatment, teduglutide, of USD 219.4m¹ (55% growth) – treating less than 1,000 patients Target indication Severe hypoglycemia Target indication Dual-hormone artificial pancreas Phase 2 results available Phase 2a ongoing USD > 0.5bn market potential assuming market expansion due to improved offering 1.25m type 1 diabetes patients in the U.S. have the highest risk of severe hypoglycemia 2016 sales in the U.S. of USD 314m². Market currently under- penetrated (less than 25% of at-risk patients) USD > 3bn market potential assuming 30% of U.S. type 1 diabetes patients use glucagon in a pump 1.25m type 1 diabetes patients in the U.S., of which 35%³ on insulin pumps (growing) Dual-hormone artificial pancreas with glucagon, with the potential to offer better blood glucose control * Glepaglutide and dasiglucagon are proposed International Nonproprietary Names (pINN). 1 Shire 2016 full-year report and Zealand estimate. 2 3 Consultation response MT 11 ToR – Juvenile Diabetes Research Foundation PDF and Zealand estimate. IMS Health data and Zealand estimate. Received Outstanding % of global sales Adlyxin®/Lyxumia® 135m 100m Low double-digit USD Soliqua™ 100/33/ Suliqua™ Elsiglutide Glucagon/ GLP Undisclosed target EUR 16m EUR 21m EUR 8m DKK 124m High single- to low double-digit 365m 287m High single- to low double-digit High single- to low double-digit Total outstanding milestones 6.5bn 13 Zealand Pharma A/SAnnual Report 2016Management review Adlyxin®/Lyxumia® – a GLP-1 receptor agonist for type 2 diabetes Zealand's first invented medicine, lixisenatide, a once-daily prandial GLP-1 receptor agonist for the treatment of type 2 diabetes, is licensed to Sanofi. Lixisenatide is available as Adlyxin® in the U.S. and is approved as Lyxumia® in more than 60 countries worldwide and marketed in over 40 of these by Sanofi. Adlyxin®/Lyxumia® is a glucagon-like peptide-1 (GLP-1) receptor agonist indicated as an adjunct to diet and exercise to improve glycemic control in adults with type 2 diabetes. Status GLP-1 market value 2016 GLP-1 market growth Approved in 60 countries worldwide and marketed in over 40 of these by Sanofi Commercial launches as of January 2017 include most EU countries, Japan, Brazil, Mexico, India and the U.S. Worldwide USD 4.9bn 26% since 2015 Based on 2016 annual results from Sanofi, Novo Nordisk, Eli Lilly, AZ and GSK for Lyxumia®, Victoza®, Bydureon™, Trulicity®, Syncria® and Byetta®. • The contract with Sanofi includes the GLP-1 receptor agonist lixisenatide and any combination product • Zealand pays 13.5% of its revenue from all lixisenatide products to third parties • The patent expires on different dates in different countries, but in most cases it is in 2025. The common number for all the patents in the Lixi patent family is the international publication no. WO 01/04156. The U.S. no. is US RE45,313 and the EU no. is EP 1196444 14 Zealand Pharma A/SAnnual Report 2016Management reviewSoliqua™ 100/33/Suliqua™ – a combination of GLP-1 and insulin Soliqua™ 100/33 is a combination of lixisenatide, a GLP-1 receptor agonist, and insulin glargine (Lantus®) in a once-daily injection marketed in the U.S. by Sanofi. The product has been approved in the EU under the brand name Suliqua™ for type 2 diabetes patients. • Soliqua™ 100/33 has been approved in the U.S. as an adjunct to diet and exercise to improve glycemic control in adults with type 2 diabetes inadequately controlled on basal insulin (with a daily dose range from 15 to 60 units) or lixisenatide. Soliqua™ 100/33 is marketed in the U.S. by Sanofi. • Soliqua™ 100/33 is delivered in the U.S. in a single pre-filled pen for once-daily dosing using SoloSTAR® technology, the most frequently used disposable insulin injection pen in the world. • Suliqua™ has been approved in the EU for type 2 diabetes patients for use in combination with metformin to improve glycemic control when this has not been provided by metformin alone or metformin combined with another oral glucose-lowering medicinal product or with basal insulin. Suliqua™ will be marketed in the EU by Sanofi. • Suliqua™ will be delivered in two pre- filled SoloSTAR® pens, providing different dosing options that may address individual market and patient insulin needs. Status Type 2 diabetes patients Launched in the U.S. and approved in the EU in January 2017 50% of relatively new-onset patients require a second drug after three years of treatment United Kingdom Prospective Diabetes Study (UKPDS). 15 Zealand Pharma A/SAnnual Report 2016Management reviewCollaborations with Boehringer Ingelheim and Helsinn Our collaboration with Boehringer Ingelheim Our collaboration with Helsinn Zealand has a long-term and productive partnership with Boehringer Ingelheim developing two molecules targeting type 2 diabetes and/or obesity. Zealand has a partnership with Helsinn relating to elsiglutide, a potential first-ever treatment for the prevention of chemotherapy-induced diarrhea (CID). The first collaboration began in 2011, and in 2014 a second partnership agreement was signed for a different target. During our collaboration, we have invested time and effort in the discovery and development of clinical lead candidates. The 2011 collaboration covered dual-acting GLP-1/glucagon molecules and included a once-daily clinical lead molecule, ZP2929. At the same time as taking this molecule into the clinic, significant preclinical work was put into the development of candidates. In 2016, Boehringer Ingelheim selected a new clinical lead and announced that it planned to initiate a Phase 1 trial with this molecule in 2017. All rights to ZP2929 were returned to Zealand. The 2014 collaboration covered a novel biological target, and in 2016 Boehringer Ingelheim selected a clinical lead with potential for diabetes and/or obesity, which it also planned to take into Phase 1 clinical testing in 2017. The partnership relating to elsiglutide, a novel GLP-2 analogue invented by Zealand, began in 2008. Global development and commercial rights in the field of cancer-supportive care are licensed to Helsinn, which is developing elsiglutide as a potential first-ever treatment to help prevent chemotherapy-induced diarrhea in cancer patients. Chemotherapy-induced diarrhea is a severe and potentially life-threatening condition affecting cancer patients undergoing chemotherapy, primarily with regimens containing 5-fluorouracil (5-FU). 5-FU-based chemotherapy regimens result in up to 50-80% of cancer patients developing CID1. Currently, no effective treatments are available for these patients. The condition is often associated with dehydration, hospitalization, reduced quality of life and suboptimal cancer treatment. 1 Stein, Voigt and Jordan, Ther. Adv. Med. Oncol. 2010. 16 Zealand Pharma A/SAnnual Report 2016Management reviewBuilding the future pipeline Zealand has a successful history of developing peptide-based therapeutics and is accelerating pipeline growth through internal research and inlicensing opportunities. We are continuing to build on our 18-year track record to accelerate the growth of our pipeline through internal research as well as external partnerships, inlicensing and/ or acquisitions that bring additional value to our clinical development portfolio. We have an established and experienced clinical development organization that has successfully advanced promising product candidates through Phase 2 development, and we have secured the necessary competencies and infrastructure to pursue late-stage clinical development and product registration. Our research team holds significant expertise in applying our peptide platform to core specialty disease areas to bring forward novel therapies for the treatment of specialty gastrointestinal and metabolic diseases. Our peptide platform and technology The strength of our peptide platform lies in our deep understanding of the role of peptides in normal physiology and disease. This enables us to select and modify native peptides using our expertise in peptide chemistry and computational drug design to identify potential novel therapeutics. It is underpinned by our extensive knowledge of peptide formulation, half-life extension technologies and strong intellectual property platform bringing together excellence in research, formulation and drug discovery. Aside from diabetes, there are hundreds of metabolic diseases, many of which are very rare and have no treatment. We are focused on those where peptides represent an attractive therapeutic option. In addition, building on our success with glepaglutide, we are researching novel therapies addressing patient needs in rare gastrointestinal diseases. Inlicensing and partnership focus Our Business Development team has been strengthened in alignment with our increased focus on the acquisition of pipeline assets. We are progressing multiple internal preclinical programs alongside seeking inlicensing opportunities in specialty gastrointestinal and metabolic disease areas that will complement and expand our existing research and development pipeline. 5,000 peptides synthesized 10 projects advanced to clinical development 400 patents 20% is the regulatory approval rate for peptides¹ Peptides are biological molecules that offer advantages in terms of therapeutic administration and cost. ¹ The emergence of peptides in the pharmaceutical business: From exploration to exploitation – http://www.elsevier.com/locate/euprot. 17 Zealand Pharma A/SAnnual Report 2016Management reviewOwn clinical pipeline Contents Product pipeline Disease focus 19 20 Glepaglutide for short bowel syndrome 21 Dasiglucagon for acute, severe hypoglycemia Dasiglucagon for type 1 diabetes care 23 25 Kennet from Molecular Pharmacology, working in one of Zealand's laboratories. 18 Zealand Pharma A/SAnnual Report 2016Management reviewProduct pipeline Clinical pipeline and preclinical partnered programs Compound Indication Development stage 2017 milestone Intended product Unmet needs Glepaglutide*,1 Short bowel syndrome Phase 2 Phase 2 results Repeat-use injection pen Preclinical Phase 1 Phase 2 Phase 3 Registration Dasiglucagon*,1 Acute, severe hypoglycemia (insulin shock) Pump-based diabetes management Phase 2 Phase 2a Elsiglutide2 Chemotherapy- induced diarrhea Phase 2 Phase 3 initiation Ready-to-use hypo pen • Reduce parenteral support • Reduce diarrhea/stoma output • Improve quality of life • Easy-to-use rescue treatment • Faster recovery • Less fear of insulin treatment Phase 2a results Component of a dual-hormone artificial pancreas • Achieve glycemic target with lower risk of hypoglycemia • Easier diabetes care New Phase 2 trials Injection • No effective treatment available • Prevent chemotherapy-induced diarrhea GLP1-GLU3 Obesity/type 2 diabetes Preclinical Phase 1 initiation Once-weekly injection pen • Metabolic control Undisclosed3 Obesity/type 2 diabetes Preclinical Phase 1 initiation Undisclosed • Metabolic control * Glepaglutide and dasiglucagon are proposed International Nonproprietary Names (pINN). 1 Fully owned by Zealand. 2 Global development and commercial rights are owned by Helsinn. 3 Global development and commercial rights are owned by Boehringer Ingelheim. 19 Zealand Pharma A/SAnnual Report 2016Management reviewDisease focus Zealand discovers and develops novel peptide-based medicines focusing on specialty gastrointestinal and metabolic diseases. Specialty medicines Gastrointestinal (GI) diseases Metabolic diseases We use our internal research capabilities to discover peptide-based specialty medicines focusing on specialty gastrointestinal and metabolic diseases. We believe we have the capabilities and expertise to progress new drugs through development to registration ourselves, to retain control and realize significant value. There are over 1,000 rare diseases and disorders affecting more than 300 million people. Many of these diseases are life- threatening, with no available therapy to help these patient groups. Peptides have proven to be effective drugs in a number of different diseases, with significant untapped potential across many therapy areas. We are committed to delivering innovation and life-changing impact for people suffering from some of these specialty and rare diseases. 20 Zealand is building on its experience with glepaglutide to further exploit its peptide platform and develop additional therapies addressing patient needs in GI diseases. Diseases of the digestive system affect multiple organs, including the esophagus, stomach, small and large intestines as well as the liver, gallbladder and pancreas. More than 180 GI diseases affect many millions of people. Some of these diseases have a high prevalence, such as ulcerative colitis, Crohn’s disease and irritable bowel syndrome (IBS), but the majority of GI diseases affect smaller patient populations. There remains a significant need for innovation, as most GI diseases are not served well by current therapies. We have a solid and advancing understanding of the molecular and cellular mechanisms dysregulated in GI diseases. Multiple regulatory peptides and secretory factors are produced by the gastrointestinal tract, and these represent high- potential novel therapeutic targets. 60 million people in the U.S. suffer from GI diseases1 Zealand has already had considerable success in developing novel treatments for metabolic diseases, with two products on the market with our partner Sanofi providing benefit to diabetes patients. Our pipeline includes dasiglucagon, which completed a successful Phase 2 study in 2016, as well as two programs with Boehringer Ingelheim. The world is facing a major obesity problem, increasing the prevalence of metabolic diseases, including diabetes. These diseases are associated with deleterious changes in the body’s ability to transform the food we eat into the fuel required to keep us alive. There is a complex interplay between the digestive system, liver, pancreas, endocrine system, body fat and muscles which, if altered, can result in the body having too much or too little of an essential element. Aside from diabetes, there are hundreds of metabolic diseases, many of which are very rare and have no therapy available. 36.5% of U.S. adults are obese2 1 National Institutes of Health, U.S. Department of Health and Human Services. Opportunities and Challenges in Digestive Diseases Research: Recommendations of the National Commission on Digestive Diseases. Bethesda, MD: National Institutes of Health; 2009. NIH Publication 08–6514. 2 https://www.cdc.gov/nchs/data/databriefs/db219.pdf Zealand Pharma A/SAnnual Report 2016Management reviewGlepaglutide* for short bowel syndrome Short bowel syndrome (SBS) is a life-threatening and complex chronic disease associated with reduced or complete loss of intestinal function.1 The main underlying causes of SBS are major intestinal surgery following Crohn’s disease, ischemia, radiation damage and surgery in adults. In pediatrics, congenital intestinal atresia, necrotizing enteric colitis and intestinal volvulus are the most common causes. In older children and adolescents, SBS is mainly due to volvulus or trauma. Current treatment options are insufficient The most severely affected people are dependent on parenteral support for up to 16 hours every day. This requires them to be connected to infusion lines and pumps, posing significant restrictions on daily activities.² Glepaglutide for treatment of SBS Zealand is developing glepaglutide, a novel GLP-2 analogue with a half-life in humans of 14-17 hours. In preclinical studies, significant effects on small and large intestinal function have been demonstrated, and glepaglutide was concluded to be safe and well tolerated in Phase 1 clinical trials. The molecule has been designed to be stable in liquid formulations for easy and convenient daily dosing in an injection pen. Ready for Phase 3 in 2017 In 2016, Zealand initiated a Phase 2 clinical trial. The trial is a randomized, double-blind, dose-finding trial with cross- over design testing the clinical efficacy and safety of three doses of glepaglutide in 18 patients with SBS. Pending the outcome of this Phase 2 clinical trial, a dialogue with the FDA and the EMA regarding a Phase 3 trial will be initiated later in 2017. Existing treatment Market potential Our aspiration Most patients are on parenteral nutrition, and our goal is to reduce or eliminate their dependence on this.2 USD > 0.5bn market assuming the current treatment paradigm for GLP-2 treatments. Market expansion to be fueled by broader applications.³ Glepaglutide, GLP-2 analogue, proven efficacy in a liquid formulation in a broader patient population than current treatment option. * Glepaglutide is a proposed International Nonproprietary Name (pINN). 1 http://www.ccfa.org/assets/short-bowel-syndrome-and.pdf 2 Carlsson E BB, Nordgreen S. Living with an ostomy and short bowel syndrome: practical aspects and impact on daily life. J Wound Ostomy Continence Nurs 2001;28(2):96-105. ³ Zealand estimate. “Short bowel syndrome is a complex disease where we need better medicines to manage care for patients. A significant focus of my work is to improve intestinal absorption in patients.” Palle Jeppesen Principal Investigator Professor MD Department of Gastroenterology Copenhagen University Hospital, Denmark Short bowel syndrome (SBS) People with SBS cannot absorb sufficient water, vitamins, minerals, protein, fat, calories and other nutrients from food, and the most severely affected patients are dependent on parenteral support (intravenous infusion of fluids, minerals, vitamins and other nutrients). Most people with SBS also suffer from significant diarrhea due to malabsorption and excessive loss of fluids into the gastrointestinal tract. 1 2 3 Glepaglutide in an injection pen – for illustration purposes only. 21 Zealand Pharma A/SAnnual Report 2016Management reviewEvery day is a struggle to live a “normal” life Andrew Jablonski was born with short bowel syndrome in 1986 and is the Founder and Executive Director of the Short Bowel Syndrome Foundation. “When I was born with short bowel syndrome in 1986, and growing up, there was no known support for me or my family. Malnourishment plays a big role in cognition and personality development – why we act the way we do. Many patients have trouble with cognition, memory, focus, school, work, defiant behavior and anger/irritability, both in childhood and as adults. I saw a need to create more support and education for the short bowel syndrome population and, in 2010, started my mission to provide services to patients and providers in this disease area. Living with short bowel syndrome is a constant daily struggle of trying to manage your condition while trying to live a ‘normal’ life. My hope for the future is that we can improve quality of life for people living with this rare disease and provide more patient-to-patient support.” Andrew Jablonski Founder and Executive Director of the Short Bowel Syndrome Foundation shortbowelfoundation.org Many patients have trouble with cognition, memory, focus, school and work. 22 Zealand Pharma A/SAnnual Report 2016Management reviewDasiglucagon* for acute, severe hypoglycemia Severe hypoglycemia is an acute, life-threatening condition resulting from a critical drop in blood sugar levels associated primarily with insulin therapy. family members should know where it is and when and how to administer it. The effects of glucagon are the opposite of insulin – it helps to increase blood sugar levels when a person’s blood sugar decreases. Severe hypoglycemia is most frequently seen in people with type 1 diabetes, since they inject themselves with insulin multiple times a day. Severe hypoglycemic events occur when blood sugar levels get critically low and are still the biggest concern for insulin-dependent patients. It is a condition characterized by confusion, seizures and often loss of consciousness which, if left untreated, can result in death. Glucagon treatment underutilized due to complexity¹ The American Diabetes Association (ADA) recommends in their guidelines from 2017 that glucagon should be prescribed for all individuals at increased risk of clinically significant hypoglycemia. Caregivers, school personnel and Treatment of severe hypoglycemia requires assistance from others. Today, there are glucagon kits available in the form of lyophilized powder which needs to be dissolved in water before injecting. This requirement can be complex and challenging, especially in a stressful situation, and may lead to errors and delays in injecting glucagon. Positive top-line results from Phase 2 trial In 2016, Zealand reported positive top-line results from a Phase 2 clinical trial with dasiglucagon in people with type 1 diabetes. Following injection, dasiglucagon induced a clinically relevant blood glucose increase as fast as a marketed glucagon product, and the product was observed to be safe and well tolerated. Existing treatment U.S. market 2016 Our aspiration Current glucagon kits contain powder that needs to be dissolved in water before injecting. This can be complex in a stressful situation and may lead to errors and delays in treatment. Events per patient range from 115 to 320 per 100 patient-years for patients with type 1 diabetes and from 35 to 70 per 100 patient- years in patients with type 2 diabetes.² A ready-to-use dasiglucagon hypo-pen to allow patients an efficacious, reliable and intuitive treatment for severe hypoglycemia. “Diabetes patients and their families unfortunately learn quickly that hypoglycemia is physically aversive, potentially dangerous and a source of possible social embarrassment.” Finn Kristensen Director and Founder of JDRF Denmark Finn’s son has type 1 diabetes Ready-to-use dasiglucagon hypo pen Zealand is developing a ready-to-use dasiglucagon hypo pen to offer people with diabetes and their families a fast treatment solution for severe hypoglycemia. Dasiglucagon is an analogue of human glucagon designed to be stable in liquid formulations but otherwise have the same biological effects. * Dasiglucagon is a proposed International Nonproprietary Name (pINN). 1 Kedia N. Treatment of severe diabetic hypoglycemia with glucagon: an underutilized therapeutic approach. Diabetes, Metabolic Syndrome and Obesity: Targets and Therapy. Dasiglucagon in a ready-to-use hypo pen – for illustration purposes only. 2011;4:337-346. ² Seaquist ER 2013: p3A. 23 Zealand Pharma A/SAnnual Report 2016Management reviewUnderstanding the impact of severe hypoglycemia T1D Exchange, a U.S.-based nonprofit organization, was founded on the belief that people with type 1 diabetes need better solutions faster, and focuses on research that can positively impact the lives of people with type 1 diabetes. “T1D Exchange is committed to understanding the impact of severe hypoglycemia in the community of people living with type 1 diabetes. In our study of 7,012 participants aged 26-93 with type 1 diabetes for at least two years, higher frequencies of severe hypoglycemia were associated with lower socioeconomic status. Severe hypoglycemia was strongly associated with diabetes duration, with 18.6% of those with diabetes for 40 years or more having had an event in the past 12 months. A key conclusion from this analysis is that severe hypoglycemia in adults who have had diabetes for more than 40 years cannot be eliminated, given the limitation of current therapies.” Henry Anhalt Doctor of Osteopathic Medicine, Chief Medical Officer T1D Exchange In 2011, according to the Centers for Disease Control and Prevention, hypoglycemia was the first-listed diagnosis in 300,000 emergency room visits for adults aged 18 years and over. 24 Zealand Pharma A/SAnnual Report 2016Management reviewDasiglucagon* for type 1 diabetes care People with type 1 diabetes suffer from insulin deficiency and inappropriate glucagon secretion. Both hormones are essential to ensure stable and healthy blood glucose levels. Consequently, patients must monitor and adjust their blood sugar levels to remain in proper glycemic control, as both hyperglycemia (high blood glucose) and hypoglycemia (low blood glucose) may affect their health, both in the short and long term. Despite advances in both technology and medication, type 1 diabetes remains a disease with increased mortality and severe complications. In the U.S., approximately 35%1 of people with type 1 diabetes use an insulin pump, often accompanied by continuous glucose monitoring that guides the insulin infusion. However, as glucagon is not yet available in liquid formulation, pumps that mimic a healthy pancreas are not commercially available today. Working with Beta Bionics Zealand is working with partners on a next-generation artificial pancreas device. These devices contain both insulin and glucagon (dasiglucagon) and can therefore both decrease and increase blood sugar levels, guided by an algorithm developed to maintain and control blood glucose levels without the intervention of the patient. In June 2016, Zealand initiated a collaboration with Beta Bionics, which is developing a dual- hormone artificial (bionic) pancreas system based on advanced technology conceived and refined at Boston University. Dasiglucagon in Phase 2 Dasiglucagon is a Zealand-invented glucagon analogue with a unique stability profile in liquid formulation. Two Phase 2a trials were initiated in 2016 to assess the efficacy, safety and tolerability of microdoses of dasiglucagon, one of them in collaboration with Beta Bionics, using its technology platform. Existing treatment U.S. market 2016 Our aspiration In the U.S., 35% of people with type 1 diabetes use an insulin pump, often accompanied by continuous glucose monitoring. However, no pump that fully mimics a healthy pancreas is commercially available today. Approximately 1.25m Americans have type 1 diabetes according to the American Diabetes Association. An artificial pancreas device that automates insulin and glucagon infusion for better diabetes management. * Dasiglucagon is a proposed International Nonproprietary Name (pINN). 1 Consultation response MT 11 ToR – Juvenile Diabetes Research Foundation PDF. 2 The Lancet, 2016. “Our previous studies have shown that a dual-hormone bionic pancreas can provide very effective management of glycemia in people with type 1 diabetes2. Demonstrating the effectiveness of a stable glucagon analogue such as dasiglucagon is an essential step toward making a dual- hormone bionic pancreas available to patients.” Steven J. Russell Principal Investigator, MD Massachusetts General Hospital Diabetes Center, Boston, U.S. Artificial pancreas device An artificial pancreas in the form of a dual-hormone pump has the potential to significantly improve glucose control in diabetes. The iLET™ from Beta Bionics. 25 Zealand Pharma A/SAnnual Report 2016Management reviewA joint commitment to a paradigm shift in diabetes care Edward Damiano, Professor of Biomedical Engineering at Boston University, U.S., and President and CEO of Beta Bionics, has been dedicated to automating the treatment of type 1 diabetes ever since his infant son was diagnosed with the condition 17 years ago. “After my son was diagnosed with type 1 diabetes, I began to dedicate more and more of my lab’s resources toward the problem of building a bionic pancreas, which would provide fully autonomous glycemic control in diabetes. Beginning with mathematical modeling, followed by animal studies, and then inpatient and outpatient clinical trials in adults and children with type 1 diabetes, we worked for almost 15 years on the system in an academic setting – testing and optimizing the algorithm and design elements needed for making the system as user-friendly as possible. We have long awaited and eagerly anticipated the development of a stable glucagon analogue suitable for chronic use in our dual-hormone bionic pancreas. This has proven to be a challenging task. We are therefore very pleased that Beta Bionics now has access to Zealand's novel investigational glucagon analogue, and that Zealand can leverage our bionic pancreas platform to administer it. Our collaboration is fueled by a common commitment to a paradigm shift in diabetes management, and to fulfill the promise and potential that our partnership holds for the health and well-being of people with type 1 diabetes and their families.” Edward Damiano President and CEO Beta Bionics 26 The FDA has established a multidisciplinary group of scientists and clinicians, in partnership with the National Institutes of Health, to address the clinical, scientific and regulatory challenges related to artificial pancreas device development. Zealand Pharma A/SAnnual Report 2016Management reviewCorporate matters Charlotte from Pharmacology and Nina from Medicinal Chemistry, working together in Zealand's laboratories. Contents Corporate governance Risk management and internal control Corporate social responsibility (CSR) Human resources Financial review Shareholder information Board of Directors Senior Management 28 30 32 33 34 36 38 40 27 Zealand Pharma A/SAnnual Report 2016Management reviewCorporate governance Zealand’s approach to corporate governance is founded on ethics and integrity, and forms the basis of our efforts to ensure strong confidence from our shareholders, partners, employees and other stakeholders. Open and transparent communication is the best way to maintain the confidence of our shareholders, and we achieve this through company announcements, investor meetings, company presentations, our company website and social media. As a company listed on Nasdaq Copenhagen, Zealand follows Danish securities law and is guided by the Corporate Governance Recommendations issued by Nasdaq Copenhagen A/S. We are committed to providing reliable and transparent information about our business, development programs and scientific results in a clear and timely manner. At Zealand, we regularly review our rules, policies and practices within Risk Management and internal control with the purpose of improving guidelines and policies for corporate governance, so that we meet our obligations to shareholders, employees, regulatory authorities and other stakeholders while maximizing long-term value. Nomination Committee The Nomination Committee acts within the corporate governance area of Zealand Pharma. The current Nomination Committee consists of three members; the General Meeting elects up to two members from among the members of the Company's Board of Directors as well as up to three shareholder representatives. 28 The Nomination Committee specifies the qualifications required and evaluates the skills, knowledge and experience of the individual members of the Board of Directors and the CEO of the Company. It also considers proposals submitted by relevant persons, including shareholders, for Board and CEO positions, and identifies and recommends candidates for the Board of Directors. The rules of procedure for the Nomination Committee are available at: www.zealandpharma.com/nomination-committee/ Board of Directors The Board of Directors plays an active role in setting the Company's strategies and goals and in monitoring its operations and results. The Board of Directors functions according to its rules of procedure. Board duties include establishing Zealand’s strategy, policies and activities to achieve the Company’s objectives in accordance with its Articles of Association. These also define the responsibilities of the Board of Directors, for example ensuring that Zealand’s bookkeeping, accounting, asset management, information technology systems, budgeting and internal control are properly organized. The Board of Directors meets at least six times a year and whenever the chairman decides that it is necessary. Audit Committee The Audit Committee assists the Board of Directors with oversight of financial reporting, internal control and risk management systems, and external auditing of the annual report and control of the auditor's independence, including Corporate governance structure Annual General Meeting Nomination Committee Board of Directors Audit Committee Remuneration and Compensation Committee Senior Management Organization Zealand Pharma A/SAnnual Report 2016Management reviewoversight of nonaudit services and other activities delegated by the Board of Directors. Specific topics discussed in 2016 included warrant programs, company goals, employee salary levels, employee pensions, and CEO and Board compensation. Specific topics discussed in 2016 included auditor's reports, accounting policies, internal controls and risk management, finance policy, insurance policy, year-end issues and external financing. The charter of the Audit Committee is available at: www.zealandpharma.com/audit-committee/ Remuneration and Compensation Committee The Remuneration and Compensation Committee proposes the remuneration policy and general guidelines for incentive remuneration for the Board of Directors and the CEO of the Company, as well as targets for company-operated performance-related incentive programs. These policies and guidelines set out the various components of the remuneration, including fixed and variable remuneration such as pension schemes, benefits, retention bonuses, severance and incentive schemes, as well as the related bonus and evaluation criteria. The charter of the Remuneration and Compensation Committee, the Remuneration Policy and the Guidelines for Incentive Pay are available at: www.zealandpharma.com/remuneration-and- compensation-committee/ Zealand’s Statutory report on Corporate Governance, which has been prepared in accordance with the Danish Financial Statements Act, section 107b, is available in full at: www.zealandpharma.com/corporate-governance/ Overview of meetings in 2016 Physical meetings Telephone meetings 6 7 1 0 3 2 3 0 Board of Directors Nomination Committee Audit Committee Remuneration and Compensation Committee Louise from Molecular Pharmacology, working in Zealand's laboratories. 29 Zealand Pharma A/SAnnual Report 2016Management review Risk management and internal control We constantly monitor and assess both the overall risk of doing business in the pharmaceutical/biotech industry and the particular risks associated with our current activities and corporate profile. This section contains a summary of Zealand’s key risk areas and how we attempt to address and mitigate such risks. Environmental and ethical risks are covered in our corporate social responsibility reporting. Doing business in the pharmaceutical/biotech industry involves major financial risks. The development period for novel medicines lasts several years; costs are high, and the probability of reaching the market is relatively low due to developmental and regulatory hurdles. Zealand’s Management is responsible for implementing adequate systems and policies in relation to risk management and internal control, and for assessing the overall and specific risks associated with Zealand’s business and operations. Furthermore, Zealand’s Management seeks to ensure that such risks are managed optimally and in a responsible and efficient manner. Risks of particular importance to Zealand are scientific and development risks, commercial risks, intellectual property risks, partner interest risks, financial risks and risks relating to financial reporting. Risk and mitigation plans are monitored by Management, and the continuous risk assessment is an integral part of the quarterly reporting to the Board of Directors. Risk related to: Risk description Risk mitigation Commercial activities – launched products Commercial activities – products in research and development Research and development Intellectual property Risks relating to market size, competition, pricing and reimbursement. Risks relating to market size, competition, development time and costs, partner interest and pricing of products in development. Research and development of new pharmaceutical medicines is inherently a high-risk activity. The probability of discovering and developing an efficient and safe new medicine with strong IP protection is very low. If Zealand or its partners were to face infringement claims or challenges by third parties, an adverse outcome could subject Zealand or its partners to significant liabilities to such third parties. This could lead Zealand or its partners to curtail or cease the development of some or all of their candidate drugs, or cause Zealand’s partners to seek legal or contractual remedies against Zealand, potentially involving a reduction in the royalties due to Zealand. The commercial success of the products licensed to Sanofi (Soliqua™ 100/33/Suliqua™ and Adlyxin®/Lyxumia®) is important to Zealand. Zealand closely monitors the commercial uptake of these products in order to align its operations based on expected future revenue. Zealand’s partner Sanofi is responsible for managing these commercial risks. However, Zealand maintains close contact with Sanofi in order to assess these risks and their impact on Zealand. From early in the research phase and throughout development, commercial potential and risks are assessed to ensure that final products have the potential to be commercially viable. Any major changes in the commercial potential of a drug candidate can lead to reduced value prospects and, ultimately, discontinued development. Throughout the research and development process, Zealand regularly assesses these risks by means of a quarterly risk assessment of all the Company’s research and development projects, conducted by Management together with the department heads and project managers. This assessment, which is presented to the Board of Directors, describes each project and measures its progress based on milestones. It analyzes the individual risks of each project and prioritizes the project portfolio. Zealand’s patent department works closely with external patent counsels and partners’ patent counsels to minimize the risk of patent infringement claims as well as to prepare any patent defense should this be necessary. Zealand’s employees receive training and updates on policies regarding the correct and lawful management of external intellectual property. Future partnerships Entering into collaborations with partners can bring significant benefits as well as involving risks. In addition, full control of the products is often given to the partner. Financial Financial risks relate to cash and treasury management, liquidity forecasts and financing opportunities. Zealand has taken a decision to increase its focus on proprietary programs in order to decrease its dependency on partners in the development process and capture more of the value of its projects. However, partnerships may still be relevant in the future and, in order to maximize the value of such partnerships, Zealand strives to foster a close and open dialogue with its partners, thereby building strong partnerships that work effectively. Financial risks are managed in accordance with the Finance Policy, regularly assessed by the Company’s Management and reported to the Audit Committee and the Board of Directors. See also p. 75, Note 22 – Financial and operational risks. 30 Zealand Pharma A/SAnnual Report 2016Management reviewRisk management and internal control related to financial reporting Zealand has a number of internal control and risk management systems in place to ensure that its financial statements provide a true and fair view and comply with the International Financial Reporting Standards (IFRS) adopted by the EU and additional requirements under the Danish Financial Statements Act. An annual evaluation – with particular emphasis on risk management and internal control related to financial reporting – is carried out to ensure that risks are managed in a responsible and efficient manner. Zealand has several policies and procedures in key areas of financial reporting. The internal control and risk management systems are designed to mitigate, detect and correct material misstatements rather than eliminate the risks identified in the financial reporting process. A review and prioritization of material accounting items is also performed. Items in the financial statements that are based on estimates or that are generated through complex processes carry a relatively higher risk of error. Zealand performs continual risk assessments to identify such items and assess their scope and related risks. The Board of Directors approves the policies and procedures, and Senior Management is responsible for implementing them on a day-to-day basis. The Board of Directors has established an Audit Committee to advise the Board of Directors. The Board of Directors has concluded that it is not necessary to establish an internal audit function at Zealand in view of the Company’s legal structure and size and the fact that operations are carried out at a single site. Description of management reporting systems and internal control systems Zealand has management reporting and internal control systems in place that enable it to monitor performance, strategy, operations, business environment, organization, procedures, funding, risk and internal control. The Company believes that the reporting and internal controls are adequate to avoid misstatements in the financial reporting. A description of the risk management and internal control system relating to financial reporting is included in the Statutory report on Corporate Governance, cf. section 107b of the Danish Financial Statements Act, which can be found at: www.zealandpharma.com/corporate-governance/ Maria from Bioanalysis and Pharmacokinetics at Zealand. 31 Zealand Pharma A/SAnnual Report 2016Management reviewCorporate social responsibility (CSR) Acting as a responsible part of society is a cornerstone of the way we conduct business. Our behavior should benefit the patients we strive to help, our employees, shareholders and the wider community. At Zealand, we are passionate about improving care for patients and are committed to delivering value for our shareholders. In our operations, we are socially and environmentally responsible and comply with relevant laws, standards and guidelines. At the same time, we focus on the well-being of our employees, as they are the foundation of our success. Our CSR efforts are based on the most common elements of some of the most widely implemented CSR initiatives in the world, notably the Global Reporting Initiative (GRI) and the United Nations Global Compact. Within these two systems, Zealand has found complementary frameworks for both guiding and reporting its CSR activities, along with several principles in the areas of labor, the environment, human rights and anticorruption. In addition to these, we have added a provisional category for animal rights, given the unique requirements of our industry. Emphasis on selected areas At Zealand, our particular emphasis in terms of our CSR work is on the areas that are most relevant to our business and operations: • Employee well-being, including health, safety and labor practices • Diversity across all levels of the organization • Ethics and quality in all research and development activities • Animal welfare • Environmental sustainability Our corporate social responsibility agenda is an area of continued focus, with new initiatives being added as our business develops. Engaging with our community – locally and nationally We play an active role in the local community. We have established a collaboration with local job centers to offer “on-the-job training” opportunities at Zealand for refugees in order to strengthen their integration into Danish society. To benefit our employees and the environment, we are part of a coalition with other companies, governmental institutions and municipalities to ensure better access to public transportation. At national level, we work closely with academic institutions, in various ways, to improve job opportunities for graduates, for example by offering short-term assignments, internships and mentoring of master's and PhD students. We work to create a better life for patients and are proud to be working with the following patient organizations within our disease focus areas: • Short Bowel Syndrome Foundation, U.S. • Association for Crohn's and Colitis, Denmark • Association for Users of Home Parenteral Nutrition, Denmark • Juvenile Diabetes Research Foundation, Denmark • DiaTribe, U.S. • T1D Exchange, U.S. 32 Read more Zealand’s Statutory report on Corporate Social Responsibility, which has been prepared in accordance with the Danish Financial Statements Act, sections 99a and 99b, is available in full on the Company’s website: www.zealandpharma.com/csr/ Zealand Pharma A/SAnnual Report 2016Management reviewHuman resources Zealand employs 122 full-time employees and is focused on maintaining a lean and agile organization with an efficient and engaging way of working. Over the last few years, we have expanded our clinical development organization and optimized alignment across R&D. We have strengthened business development and we have started to build a competent commercialization team with, for example, market access and product supply knowledge. We continue to engage with high-quality partners in areas such as manufacturing and clinical trial execution. Our employees are one of our biggest assets Zealand’s employees are one of its most important assets, and we aspire to attract, develop and retain the best people and to be a company where employees thrive, regardless of their background or nationality. Key to our success are the competencies and innovative drive of our employees, coupled with an organizational culture and structure that supports open and dynamic interactions across functions. A diverse workforce is also good for business; it enhances innovation, increases our ability to work cross-culturally and gives us a better understanding of the communities in which we operate so that we can create value for our stakeholders. We have an even distribution of female and male employees at all levels of the organization. 18% of our employees are non-Danish. Approximately 80% of our employees work in R&D, and 36 of our employees hold a PhD. We work to ensure our employees’ well-being and have a number of policies in place to ensure the physical and psychological health and well-being of all employees as well as the safety of Zealand’s working environment. Betina from Molecular Pharmacology and Henrik from Medical Chemistry in discussion at Zealand. Key employee ratios Other employee figures 2016 Male 2016 Female 2015 Male 2015 Female 2016 2015 Zealand total Senior Management Department heads Other employees 44% 75% 48% 42% 56% 25% 52% 58% 48% 60% 59% 46% 52% 40% 41% 54% Employees in R&D Employees in administration Average age of workforce Non-Danish employees (%) Employees holding a PhD PhD students Other trainees 100 22 45.9 18% 36 3 3 91 21 46,1 19% 37 3 3 Average numbers of employees 124 110 33 Zealand Pharma A/SAnnual Report 2016Management review Financial review Financial review for the period January 1 – December 31, 2016. Since there is no significant difference in the development of the Group and the parent company, except for the royalty bond, the financial review is based on the Group’s consolidated financial information for the year ended December 31, 2016, with comparative figures for 2015 in brackets. Income statement The net result for the financial year 2016 was a loss of DKK 153.9 million (loss of 114.0). The decrease in net result is mainly Revenue DKKm 250 200 150 100 50 0 a consequence of increased research and development expenses and administrative expenses, partly offset by increased revenue. Revenue Revenue in 2016 amounted to DKK 234.8 million (187.7). Revenue from milestone payments amounted to DKK 210.4 million (159.1), corresponding to a 32% increase versus the previous year. The milestone payments comprised payments from Sanofi in connection with the U.S. approvals of lixisenatide as Adlyxin® amounting to DKK 33.5 million, and Soliqua™ 100/33 amounting to DKK 169.9 million. There was also a milestone payment of DKK 1.6 million received from the license agreement with Protagonist. R&D and administrative expenses DKKm 350 300 250 200 150 100 50 0 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Sanofi Boehringer Ingelheim Helsinn Other Royalty income R&D expenses Administrative expenses 34 Royalty revenue from sales of Lyxumia® amounted to DKK 24.3 million (28.6), corresponding to a 15% decrease versus the previous year. Royalty expenses Royalty expenses for the year amounted to DKK 31.5 million (22.3) and relate to royalties paid to third parties on milestone payments received and royalty income relating to the license agreement with Sanofi. Research and development expenses Research and development expenses amounted to DKK 268.2 million (217.7). The increase in research and development expenses for the year ended December 31, 2016 was primarily related to external costs of DKK 26.7 million from accelerated development activities, mainly development costs for the dasiglucagon Phase 2 trial conducted in Germany and toxicology studies for glepaglutide, as well as increased personnel expenses of DKK 15.1 million. The R&D share of the personnel expenses for the year ended December 31, 2016 was DKK 109.5 million (94.4). The increase is mainly related to an increase in the number of employees in the clinical development organization. Administrative expenses Administrative expenses amounted to DKK 52.5 million (41.8). The increase is mainly due to an increase in the number of employees as well as external consulting costs. Other operating income Other operating income amounted to DKK 1.7 million (12.8) and mainly consists of government grants. In 2015 and the first quarter of 2016, it also included funding from Boehringer Ingelheim covering the development costs for a research collaboration that has now ended. Operating loss The operating loss for the year was DKK 115.6 million (loss of 81.3). Net financial items Net financial items amounted to DKK -43.8 million (-38.5) and consist of interest income and expenses, amortized costs relating to the royalty bond financing, banking fees and exchange rate adjustments. Of the net financial items, DKK 32.2 million (32.4) relates to interest on the royalty bond, and DKK 8.4 million (9.7) relates to amortized costs of the royalty bond financing. Loss before tax Loss before tax was DKK 159.4 million (loss of 119.8). Income tax benefit With a negative result, no tax has been recorded for the period. However, according to Danish tax legislation, Zealand is eligible to receive DKK 5.5 million (5.9) in cash relating to the tax loss for 2016. Zealand Pharma A/SAnnual Report 2016Management reviewNo deferred tax asset has been recognized in the statement of financial position due to uncertainty as to when and whether tax losses can be utilized. Net loss and comprehensive loss The net loss and comprehensive loss both amounted to DKK 153.9 million (loss of 114.0), in both cases due to the factors described above. Allocation of result No dividend has been proposed, and the year’s net loss of DKK 153.9 million (loss of 114.0) has been transferred to retained losses. Statement of financial position Cash and cash equivalents As of December 31, 2016, cash and cash equivalents amounted to DKK 323.3 million (418.8). In addition, DKK 318.7 million (21.4) was held as restricted cash as collateral for the royalty bond. Equity Equity amounted to DKK 278.2 million (252.2) at December 31, 2016, corresponding to an equity ratio of 40% (40%). The increase in equity is a result of the net loss for the year of DKK 153.9 million (loss of 114.0), offset by: • New equity of DKK 135.2 million (0.0) from a private placement of new shares with biotech specialist investors and other institutional investors in the U.S. and Europe term liability of DKK 3.4 million. The increase is a result of the strengthening of the U.S. dollar versus the Danish krone. Investments in plant and equipment for the period amounted to DKK 2.6 million (4.0), mainly related to new laboratory equipment. • Equity of DKK 21.9 million (96.4) relating to the exercise of warrants by employees during the year • Warrant compensation expenses of DKK 22.7 million (16.9) Royalty bond On December 12, 2014, Zealand raised USD 50.0 million, or DKK 298.7 million, in a non-dilutive and non-recourse bond financing arrangement, backed by 86.5% of the future annual royalties and other payments to which the Company is entitled on Lyxumia® and Adlyxin® under its license agreement with Sanofi. Repayment of the bond is based solely on this royalty revenue with no recourse to future royalty revenue on Soliqua™ 100/33 or Suliqua™. As part of the financing arrangement, regulatory milestone payments to which Zealand has been entitled on Adlyxin®, Soliqua™ 100/33 and Suliqua™ have been placed in a collateral reserve account, not exceeding the remaining loan principal, which will be released to Zealand upon full repayment of the bond. The outstanding loan principal at December 31, 2016 was DKK 352.6 million (341.5), of which DKK 20.4 million (28.5) has been offset as transaction costs. The loan amount has been recorded as a long-term liability of DKK 328.9 million and a short- The bond carries an annual interest rate of 9.375% and, upon full repayment, all further revenue from Lyxumia® and Adlyxin® will be retained in full by Zealand. The royalty bond has been renegotiated and partly redeemed as of March 15, 2017, see Note 26 to the financial statements. Cash flow from financing activities Cash flow from financing activities amounted to DKK 157.1 million (96.4) and relates to net proceeds of DKK 135.2 million (0.0) from the private placement of shares and a capital increase of DKK 21.9 million (96.4) due to exercise of warrants. The total cash flow for the full-year 2016 amounted to DKK -101.9 million (-129.9). Cash flow Cash flow from operating activities Cash flow from operating activities amounted to DKK 40.9 million (-224.8), mainly as a result of a change in working capital of DKK 153.5 million (-140.8), partly offset by a negative result for the year adjusted for non-cash items. The positive effect from the change in working capital is explained by a milestone payment of DKK 136.6 million that was recognized as a trade receivable at December 31, 2015 and where the cash was received in January 2016. Cash flow from investing activities Cash flow from investing activities amounted to DKK -300.0 million (-1.6), as milestone revenues received from Sanofi during the year have been transferred to restricted cash. Cash, cash equivalents, restricted cash and securities DKKm 700 600 500 400 300 200 100 0 2012 2013 2014 2015 2016 Securities Restricted cash Cash and equivalents 35 Zealand Pharma A/SAnnual Report 2016Management reviewShareholder information Zealand is listed on Nasdaq Copenhagen under the ticker symbol ZEAL. On December 31, 2016, the nominal value of Zealand’s share capital was DKK 26,142,365, divided into 26,142,365 shares with a nominal value of DKK 1 each. The share capital has remained unchanged in 2017 (at March 15, 2017). December 31, 2015, the number grew to 15,425 at December 31, 2016. At March 14, 2017, Zealand had 15,623 registered shareholders, representing a total of 26,142,365 shares. Ownership The following shareholders are registered in Zealand’s register of shareholders as being the owners of a minimum of 5% of the voting rights or a minimum of 5% of the share capital (one share equals one vote): In September 2016, the share capital was increased by a nominal value of DKK 1,475,221 as a result of a private placement with specialist biotech investors and other institutional investors in the U.S. and Europe. Approximately two-thirds of the offering was subscribed by U.S. investors and the rest by European investors. Sunstone LSV Management A/S Copenhagen, Denmark LD Pension (Lønmodtagernes Dyrtidsfond) Copenhagen, Denmark In addition, the share capital increased by a nominal value of DKK 314,375 in 2016 as a result of the exercise of employee warrants. Legg Mason (Royce) Inc. Maryland, U.S. All Zealand shares are ordinary shares and belong to one class. Each share listed by name in Zealand’s shareholder register represents one vote at the annual general meeting and other shareholders' meetings. Increased number of shareholders since the start of 2016 The number of registered Zealand shareholders increased during 2016. From 9,689 registered shareholders at Share price performance The price of Zealand’s shares decreased by 30% during the year, which was below relevant indexes. The share price at year-end 2016 was DKK 106.50, compared with DKK 151.50 at year-end 2015. The decrease in the share price was despite reaching several major milestones during the year, with the approval of Soliqua™ 100/33 in the U.S. being the most significant. The decrease in the share price was partly caused by a general downturn in biotech shares during the 36 Core share data Number of shares, end of 2016 26,142,365 Listing Ticker symbol Nasdaq Copenhagen ZEAL Index membership OMX Copenhagen Midcap Geographical distribution and ownership % 11 11 19 Shares 26m 59 Denmark Europe North America Non-registered Financial calendar 2017 Date April 5 May 17 Aug. 24 Nov. 8 Event Annual General Meeting Interim report for Q1 2017 Interim report for H1 2017 Interim report for Q3 2017 Zealand Pharma A/SAnnual Report 2016Management reviewyear, but also by sales pressure due to the third-quarter liquidation of several of the funds managed by Sunstone LSV Management A/S, corresponding to 13% of Zealand’s total share capital. Analyst coverage Zealand is followed by the financial institutions and analysts listed below: Institution Analyst's name Positive development in share liquidity Zealand's share liquidity remained strong in 2016, with an average daily turnover on Nasdaq Copenhagen of 121,919 shares, or DKK 14.3 million. In the first months of 2017 liquidity has continued to increase to a daily turnover of approximately DKK 16.8 million. Bryan, Garnier & Co Danske Bank Handelsbanken Jefferies Nordea Eric le Berrigaud Thomas Bowers Peter Sehested Peter Welford Michael Novod Oddo Securities – Oddo & Cie Sébastien Malafosse Share price Index 400 350 300 250 200 150 100 50 0 2010 2011 2012 2013 2014 2015 2016 Zealand Pharma A/S Nasdaq/Biotechnology Euro STOXX Pharmaceuticals & Biotechology OMX Copenhagen Midcap Zealand product candidate. 37 Zealand Pharma A/SAnnual Report 2016Management review Board of Directors Martin Nicklasson Chairman of the Board Chairman of the Remuneration and Compensation Committee Chairman of the Nomination Committee Elected to the Board in 2015 and regarded as an independent board member. Qualifications Certified pharmacist. PhD in Pharmaceutical Technology from the University of Uppsala, where he is an Associate Professor in the Department of Pharmaceutics. Competencies Martin Nicklasson has held various executive vice president positions at AstraZeneca PLC and has served as President and CEO of Biovitrum AB and Swedish Orphan Biovitrum AB. Prior to this, he held a number of leadership positions at AB Astra and Kabi Pharmacia AB. Martin Nicklasson is chairman of the boards of Orexo AB and Farma Investment A/S. He serves as a board member of Basilea Pharmaceutica Ltd., BioInvent International AB and Biocrine AB. 38 Rosemary Crane Vice Chairman of the Board Elected to the Board in 2015 and regarded as an independent board member. Qualifications BA in Communication from the State University of New York and MBA from Kent State University. Competencies Rosemary Crane has been CEO of Mela Sciences and Epocrates and has held a number of leading positions at Johnson & Johnson and BMS. She has a background in marketing and a knowledge base in diabetes and cardiovascular disease, among others. Rosemary Crane is a member of the boards of Teva Pharmaceutical Industries Ltd. and Unilife (a medical technology company). Catherine Moukheibir Board member Chairman of the Audit Committee Elected to the Board in 2015 and regarded as an independent board member. Qualifications MBA from Yale University. Competencies After a career in strategy consulting and investment banking in Boston and London, Catherine Moukheibir has held senior management positions at several European biotech companies. Her particular experience is in aligning corporate and financial strategy at various stages of a biotech’s development. Catherine Moukheibir is chairman of the board of MedDay Pharmaceuticals S.A. and a board member of Ablynx NV and Cerenis Therapeutics Holding SA. She is also a member of the advisory board of Imperial College Business School, UK. Alain Munoz Board member Elected to the Board in 2005 (resigned in 2006 and was re-elected in 2007) and regarded as an independent board member. Qualifications MD in Cardiology and Anesthesiology, head of the clinical department of cardiology at the University Hospital of Montpellier. He has numerous publications to his name and has been a member of the scientific committee of the French Drug Agency (ANSM). Competencies Alain Munoz is CEO and founder of Amistad Pharma S.A.S. and Science, Business and Management SARL (France), and has more than 20 years' experience in the pharmaceutical industry at senior management level. He served as SVP for international development within the Sanofi Group and as SVP for the pharmaceutical division of Fournier Laboratories. Alain Munoz is chairman of the board of Hybrigenics, a board member of Valneva SE and adviser to Kurma Biofund. Michael J. Owen Board member Elected to the Board in 2012 and regarded as an independent board member. Qualifications PhD in Biochemistry from Cambridge University and BA in Biochemistry from Oxford University. Competencies Michael J. Owen is co-founder and former CSO of Kymab Ltd. Before joining Kymab, he held several leading positions at GlaxoSmithKline (GSK), latterly as SVP and head of biopharmaceuticals research. Prior to joining GSK in 2001, he headed the Lymphocyte Molecular Biology group at the Imperial Cancer Research Fund. He has more than 20 years' research experience with a focus on the immune system. He has more than 150 publications to his name, and is a member of the European Molecular Biology Organization and a Fellow of the Academy of Medical Sciences. Michael J. Owen is a board member of Blink Biomedical SAS, Ossianix Inc, Avacta Group plc, ReNeuron Group plc and GammaDelta Therapeutics. He is also adviser to Kymab Ltd and CRT Pioneer Fund LP. Zealand Pharma A/SAnnual Report 2016Management reviewJens Peter Stenvang Employee-elected board member Elected to the Board in 2014. Hanne Heidenheim Bak Employee-elected board member Elected to the Board in 2012-2014 and re-elected in 2016. Rasmus Just Employee-elected board member Elected to the Board in 2016. Qualifications Laboratory Technician (Biology). Jens Peter Stenvang is a senior application specialist and has worked on cancer and diabetes research at leading universities, including UC Berkeley, California. Before joining Zealand in October 2010, he worked for Dako and Beckman Coulter in global flow cytometry support. Qualifications M.Sc. (Pharm) from the Danish University of Pharmaceutical Sciences. Hanne H. Bak is Senior Project Director and R&D Operations Manager and previously worked as project leader of late-phase development programs at H. Lundbeck A/S, followed by a position as Executive Director at the Lundbeck Institute. Qualifications PhD in Molecular Pharmacology from the University of Copenhagen and Executive MBA from AVT Business School in Copenhagen. Rasmus Just is Director of Business Development and Innovation Sourcing and has previously held positions as Principal Scientist, Head of Cardiometabolic Innovation and been responsible for the collaboration with Boehringer Ingelheim GmbH. Zealand’s Board of Directors Name Position Year of birth Nationality First elected Zealand shares at Zealand warrants at Committee December 31, 2016 December 31, 2016 Martin Nicklasson Chairman Rosemary Crane Vice Chairman Catherine Moukheibir Chairman of Audit Committee Alain Munoz Michael J. Owen Board member Board member Jens Peter Stenvang Employee-elected** Hanne Heidenheim Bak Employee-elected** Rasmus Just Employee-elected** 1955 1960 1959 1949 1951 1954 1953 1976 Swedish American British French British Danish Danish 2015 2015 2015 2005* 2012 2014 2012*** Danish 2016 1,000 0 0 5,250 0 3,500 21,221 4,500 0 0 0 0 0 4,750 22,500 9,000 Movement in ownership in 2016 +1,000 0 0 0 0 +2,500 +6,500 +1,233 * Resigned in 2006 and re-elected in 2007. ** Employee-elected board members are elected for a period of four years. *** Elected term ended in 2014; re-elected in 2016. Audit Committee Remuneration and Compensation Committee Nomination Committee 39 Zealand Pharma A/SAnnual Report 2016Management review Senior Management Britt Meelby Jensen President and Chief Executive Officer (CEO) Education Britt has an M.Sc. from Copenhagen Business School, Denmark, and an MBA from Solvay Business School in Brussels, Belgium. Experience Britt joined Zealand as President and CEO in January 2015. Prior to joining Zealand, she headed the Agilent-owned Danish diagnostics company Dako as the company’s CEO. Britt has extensive experience from a range of managerial positions within the life science industry, including 11 years' international experience with Novo Nordisk. At Novo Nordisk, she held various global leadership positions, including prelaunch commercial project lead, Diabetes Marketing Nordic, Global Diabetes Lifecycle Management, prelaunch commercial projects and, more recently, Corporate Vice President for Global Marketing, Market Access and Commercial Excellence. Previously, Britt worked for McKinsey & Company and within the EU institutions in Brussels. From left to right: Mats Blom, Britt Meelby Jensen, Adam Steensberg and Andrew Parker 40 Zealand Pharma A/SAnnual Report 2016Management reviewMats Blom Adam Steensberg Andrew Parker Senior Vice President and Chief Financial Officer (CFO) Senior Vice President and Chief Medical and Development Officer (CMDO) Senior Vice President and Chief Scientific Officer (CSO) Education Mats holds a BA in Business Administration and Economics from the University of Lund, Sweden, and an MBA from IESE University of Navarra, Barcelona, Spain. Experience Prior to joining Zealand, Mats served as CFO of Swedish Orphan International, a leading European orphan drug company. Mats has extensive managerial experience and has held CFO positions at Active Biotech and Anoto, both publicly listed on Nasdaq Stockholm. Previously, Mats worked for several years as a management consultant at Gemini Consulting and for Ernst & Young’s transaction services division. Mats is chairman of the board of Medical Need AB. Education Adam is a certified medical doctor and holds a Doctor of Medical Sciences degree (D.M.Sc./dr.med.) from the University of Copenhagen, Denmark, and an MBA from IMD, Switzerland. Adam has published more than 45 peer-reviewed scientific papers in renowned international journals. Experience Prior to joining Zealand, Adam led clinical research teams as Medical Director at Novo Nordisk and worked as a clinician at the University Hospital of Copenhagen, Denmark. Adam has served as a medical and scientific adviser within endocrinology, cardiology, gastroenterology and rheumatology. Adam has significant experience of leading regulatory strategies and has been instrumental in implementing a patient-centric discovery and development process at Zealand. Education Andrew holds a PhD from the National Institute for Medical Research in Mill Hill, London, UK. He conducted postdoctoral research at Johns Hopkins School of Medicine, Baltimore, U.S., and also has an MBA from the University of Warwick Business School, UK. Andrew has published more than 25 peer-reviewed scientific papers in renowned international journals. Experience Prior to joining Zealand, Andrew was General Partner and Scientific Director for the life science investment fund Eclosion2 & Cie SCPC in Switzerland. At the same time, he was CEO of Arisgen SA, an Eclosion2 portfolio company developing an oral peptide drug delivery technology. Andrew has more than 20 years’ experience from senior leadership and managerial positions in international pharmaceutical, biotech and start- up companies, including several years at Shire Pharmaceuticals, Opsona Therapeutics and AstraZeneca. Name Position Year of birth Nationality Joined Zealand Zealand shares at December 31, 2016 Zealand warrants at December 31, 2016 Movement in ownership in 2016 Britt Meelby Jensen Mats Blom Adam Steensberg Andrew Parker President and CEO SVP, CFO SVP, CMDO SVP, CSO 1973 1965 1974 1965 Danish Swedish Danish British 2015 2010 2010 2016 15,000 113,000 25,000 0 200,000 131,019 118,500 40,000 +15,000 +3,000 +13,500 0 41 Zealand Pharma A/SAnnual Report 2016Management review Financial statements Contents Income statement Statement of comprehensive income Statement of financial position Statement of cash flows Statement of changes in equity Notes Statement of the Board of Directors and Executive Management Independent auditor's report 43 43 44 45 46 47 79 80 42 Zealand Pharma A/SAnnual Report 2016Financial statementsFinancial statements Financial statements Income statement DKK thousand Revenue Royalty expenses Statement of comprehensive income Note Group 2016 Group 2015 Restated Parent 2016 Parent 2015 Restated 2 3 234,778 187,677 1,748 22,491 -31,459 -22,267 0 0 DKK thousand Note Group 2016 Group 2015 Parent 2016 Parent 2015 Net loss for the year -153,910 -113,957 -123,274 -215,773 Other comprehensive income (loss) 0 0 0 0 Comprehensive loss for the year -153,910 -113,957 -123,274 -215,773 Research and development expenses 4, 5, 6 -268,159 -217,741 -266,614 -216,947 Administrative expenses Other operating income Operating loss Income from subsidiaries Financial income Financial expenses Loss before tax Income tax benefit Net loss for the year Loss per share – DKK Basic loss per share Diluted loss per share 4, 5, 6 -52,503 -41,824 -51,988 -41,158 7 1,697 12,828 1,697 12,828 -115,646 -81,327 -315,157 -222,786 13 8 9 0 592 0 180,000 0 3,889 6,730 141,444 -44,356 -42,394 -347 -306 -159,410 -119,832 -128,774 -221,648 10 5,500 5,875 5,500 5,875 -153,910 -113,957 -123,274 -215,773 11 11 -6.33 -6.33 -4.94 -4.94 -5.07 -5.07 -9.36 -9.36 43 Zealand Pharma A/SAnnual Report 2016Financial statements Financial statements Statement of financial position at December 31 Statement of financial position at December 31 DKK thousand Assets Non-current assets Plant and machinery Other fixtures and fittings, tools and equipment Leasehold improvements Investment in subsidiaries Deposits Restricted cash Note Group 2016 Group 2015 Restated Parent 2016 Parent 2015 Restated 12 12 12 13 12,081 14,672 12,081 1,154 1,153 1,154 408 0 628 0 0 408 380 14,672 1,153 628 380 DKK thousand Equity and liabilities Share capital Share premium Retained losses Equity Note Group 2016 Group 2015 Restated Parent 2016 Parent 2015 Restated 18 26,142 24,353 26,142 24,353 1,441,263 1,263,179 1,438,578 1,260,494 -1,189,211 -1,035,301 -1,266,297 -1,143,023 278,194 252,231 198,423 141,824 2,690 2,666 2,690 2,666 Royalty bond 17 305,120 0 0 0 Non-current liabilities 19 328,878 312,951 328,878 312,951 0 0 0 0 Total non-current assets 321,453 19,119 16,713 19,499 Current assets Trade receivables Receivables from subsidiaries Prepaid expenses Income tax receivable Other receivables Restricted cash Cash and cash equivalents Total current assets 14 11,510 158,158 0 13,837 5,500 5,379 13,617 0 2,430 5,875 10,427 21,403 15 10 16 17 17 27 76 13,837 5,500 5,017 0 313 3,521 2,430 5,875 10,314 0 Trade payables Royalty bond Other liabilities Current liabilities Total liabilities 19 20 19,739 21,676 19,739 21,580 3,365 64,450 87,554 0 49,350 71,026 416,432 383,977 0 29,406 49,145 49,145 0 19,331 40,911 40,911 Total equity and liabilities 694,626 636,208 247,568 182,735 323,330 418,796 206,398 140,783 373,173 617,089 230,855 163,236 Significant accounting policies, and significant accounting estimates and assessments Fees to auditors appointed at the Annual General Meeting Total assets 694,626 636,208 247,568 182,735 Information on staff and remuneration Lease commitments Financial and operational risks Related parties Significant events after the balance sheet date 44 1 5 6 21 22 23 26 Zealand Pharma A/SAnnual Report 2016Financial statements Financial statements Statement of cash flows DKK thousand Net loss for the year Adjustments for non-cash items Change in working capital Financial income received Financial expenses paid Income tax receipt Note Group 2016 Group 2015 Restated Parent 2016 Parent 2015 Restated -153,910 -113,957 -123,274 -215,773 24 25 57,685 47,474 20,142 14,158 153,452 -140,834 5,855 -14,715 592 1,269 -22,790 -24,969 10 5,875 6,250 344 -784 5,875 132 -308 6,250 Cash outflow/inflow from operating activities 40,904 -224,767 -91,842 -210,256 Transfer to restricted cash related to the royalty bond -305,120 0 Transfer from restricted cash for royalty bond interest payments Change in deposit Purchase of property, plant and equipment 7,786 -24 -2,600 Cash outflow from investing activities -299,958 2,419 27 -4,040 -1,594 0 0 -24 -2,600 -2,624 0 0 27 -4,040 -4,013 Proceeds from issue of shares related to exercise of warrants 21,935 96,413 21,935 96,413 Proceeds from private placement of new shares, net 135,211 0 135,211 0 Cash inflow from financing activities 157,146 96,413 157,146 96,413 Decrease/increase in cash and cash equivalents -101,908 -129,948 62,680 -117,856 Cash and cash equivalents at January 1 418,796 516,849 140,783 255,335 Exchange rate adjustments 6,442 31,895 2,936 3,304 Cash and cash equivalents at December 31 323,330 418,796 206,399 140,783 45 Zealand Pharma A/SAnnual Report 2016Financial statements Financial statements Statement of changes in equity Statement of changes in equity DKK thousand Group Equity at January 1, 2015 Comprehensive loss for the year Net loss for the year Warrant compensation expenses Capital increases Share capital Share premium Retained losses Total DKK thousand Share capital Share premium Retained losses Total Parent company 23,193 1,150,979 -921,344 252,828 Equity at January 1, 2015 23,193 1,148,294 -927,250 244,237 0 0 1,160 0 -113,957 -113,957 Net loss for the year Comprehensive loss for the year 16,947 95,253 0 0 16,947 96,413 Warrant compensation expenses Capital increases 0 0 1,160 0 -215,773 -215,773 16,947 95,253 0 0 16,947 96,413 Equity at December 31, 2015 24,353 1,263,179 -1,035,301 252,231 Equity at December 31, 2015 24,353 1,260,494 -1,143,023 141,824 Equity at January 1, 2016 Comprehensive loss for the year Net loss for the year Warrant compensation expenses Capital increases 0 0 24,353 1,263,179 -1,035,301 252,231 Equity at January 1, 2016 24,353 1,260,494 -1,143,023 141,824 0 -153,910 -153,910 Net loss for the year Comprehensive loss for the year 0 -123,274 -123,274 0 0 22,727 1,789 155,357 0 0 22,727 157,146 Warrant compensation expenses Capital increases 22,727 1,789 155,357 0 0 22,727 157,146 Equity at December 31, 2016 26,142 1,441,263 -1,189,211 278,194 Equity at December 31, 2016 26,142 1,438,578 -1,266,297 198,423 46 Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 1 – Significant accounting policies and significant accounting estimates and assessments Significant accounting policies For financial reporting purposes, fair value Implementation of new and revised Amendments to IAS 12 “Recognition of measurements are categorized into Level 1, 2 standards and interpretations Deferred Tax Assets for Unrealized Losses,” Basis of preparation or 3 based on the degree to which the inputs The IASB has issued new standards and effective for annual periods beginning on or The consolidated and parent financial to the fair value measurements are observable revisions to existing standards and new after January 1, 2017. Zealand has assessed statements of Zealand have been prepared and on the significance of the inputs to the fair interpretations that are mandatory for the impact of the standard and it is not in accordance with International Financial value measurement in its entirety. The inputs accounting periods commencing on or after expected to have any material impact on the Reporting Standards (IFRS) as adopted by the are described as follows: January 1, 2016. The implementation of these financial statements, as the Company does EU and additional requirements under the new or revised standards and interpretations not currently or in the near future expect to Danish Financial Statements Act. • Level 1 inputs are quoted prices (unadjusted) has not resulted in any significant impact recognize deferred tax assets for unrealized The Board of Directors considered and liabilities that the entity can access at the position. in active markets for identical assets or on the net loss for the year or the financial losses. approved the 2016 Annual Report of Zealand measurement date IFRS 15 “Revenue from Contracts with on March 15, 2017. The Annual Report will be Standards and interpretations not yet in effect Customers” (“IFRS 15”), effective for annual submitted to the shareholders of Zealand for • Level 2 inputs are inputs, other than quoted At the date of the approval of the annual periods beginning on or after January 1, 2018. approval at the Annual General Meeting on prices included within Level 1, that are report, the following new and revised Under the new standard, entities will apply a April 5, 2017. observable for the asset or liability, either standards and interpretations have been five-step model to determine when, how and directly or indirectly issued but are not yet effective. Therefore, at what amount revenue is to be recognized, The consolidated and parent financial they have not been adopted in these financial depending on whether certain criteria are statements are presented on a historical cost • Level 3 inputs are unobservable inputs for statements: basis. the asset or liability met. Zealand has assessed the impact of the standard and it is not expected to have IFRS 9 “Financial Instruments,” effective for any material impact on current revenue Historical cost is generally based on the fair The consolidated and parent financial annual periods beginning on or after January from contracts with customers, but will be value of the consideration given in exchange statements are presented in Danish kroner 1, 2018. IFRS 9 Financial Instruments is part of considered with regard to the impact of any for goods and services. (DKK), which is the functional currency of the the IASB’s project to replace IAS 39 Financial contracts signed in the future on the financial Fair value is the price that would be received and the new standard will change the Company. Instruments: Recognition and Measurement, statements. to sell an asset or paid to transfer a liability In the narrative sections of the financial classification, presentation and measurement IFRS 16 “Leases” (“IFRS 16”), effective for annual in an orderly transaction between market statements, comparative figures for 2015 are of financial instruments and hedging periods beginning on or after January 1, 2019. participants at the measurement date, shown in brackets. requirements. Zealand has assessed the impact In the consolidated financial statements of regardless of whether that price is directly observable or estimated using another valuation technique. of the standard, and no material impact on the the lessees, IFRS 16 requires all leases (except financial statements is expected. for short-term leases and leases of low-value assets) to be recognized as a right-of-use 47 Zealand Pharma A/SAnnual Report 2016Financial statementsNotes Note 1 – Significant accounting policies and significant accounting estimates and assessments (continued) asset and lease liability, measured at the the accounting policies in the respective notes Group entities is performed after elimination of Consolidated financial statements present value of future lease payments. The to the financial statements. all intra-Group transactions, balances, income Income statement right-of-use asset is subsequently depreciated and expenses. The income statement is classified by function. in a similar way to other depreciable assets Basis of consolidation over the lease term and interest calculated The consolidated financial statements Foreign currency translation Segment reporting on the lease liability in a similar way to on incorporate the financial statements of the Transactions denominated in foreign The Group is managed by a senior finance leases under IAS 17. Consequently, the Company and entities (including structured currencies are translated at the exchange rates management team reporting to the Chief change will also impact the presentation in the entities) controlled by the Company and its on the transaction dates. income statement and the statement of cash subsidiaries. Control is achieved when the Executive Officer. The senior management team, including the Chief Executive Officer, flows. Zealand has assessed the impact of the Company: Exchange differences arising between the rate represents the chief operating decision maker standard, and it is not expected to have any on the transaction date and the rate on the (CODM). No separate business areas or material impact on the financial statements. • Has power over the investee payment day are recognized in the income separate business units have been identified statement as financial income or financial in connection with product candidates or Accounting policies • Is exposed, or has rights, to variable returns expenses. The accounting policies for specific line from its involvement with the investee geographical markets. Consequently, there is no segment reporting concerning business items and transactions are included in the Receivables, payables and other monetary areas or geographical areas. respective notes to the financial statements • Has the ability to use its power to affect its items denominated in foreign currencies that with the exception of basis of consolidation, returns have not been settled at the balance sheet Statement of financial position foreign currency translation and the cash flow date are translated by applying the exchange Financial assets statement, which are included below. The Company reassesses whether it controls rates at the balance sheet date. Differences Financial assets include receivables and an investee if facts and circumstances indicate arising between the rate at the balance sheet cash. Financial assets can be divided into the Recognition and measurement that there are changes to one or more of the date and the rate at the date on which the following categories: loans and receivables, Income is recognized in the income statement three elements of control listed above. receivable or payable arose are recognized in financial assets at fair value through the when generated. Assets and liabilities are the income statement as financial income and income statement, available-for-sale financial recognized in the balance sheet when it is Principles of consolidation financial expenses. probable that any future economic benefit The consolidated financial statements assets and held-to maturity investments. Financial assets are assigned to the different will flow to or from Zealand and the value can are prepared on the basis of the financial Non-monetary assets purchased in foreign categories by Management on initial be reliably measured. On initial recognition, statements of the parent company and the currencies are measured at the rate on the recognition, depending on the purpose for assets and liabilities are measured at cost. individual subsidiaries, which are based on transaction date. Subsequently, assets and liabilities are uniform accounting policies and accounting measured as described in the description of periods in all Group entities. Consolidation of which the assets were acquired. All financial assets are recognized on their settlement date. All financial assets other than those classified 48 Zealand Pharma A/SAnnual Report 2016Financial statementsNotes Note 1 – Significant accounting policies and significant accounting estimates and assessments (continued) at fair value through the income statement property, plant and equipment, investments are reviewed on an ongoing basis. Revisions discounts. The revenue is recognized when are initially recognized at fair value, plus and deposits, as well as transfers to and from to accounting estimates are recognized in it is probable that future economic benefits transaction costs. restricted cash related to the royalty bond. the period in which the estimate is revised if will flow to Zealand and these benefits can be the revision affects only that period, or in the measured reliably. Statement of cash flows Cash flow from financing activities period of the revision and future periods if The cash flow statement is prepared in Cash flow from financing activities includes the revision affects both current and future Agreements with commercial partners accordance with the indirect method on the new equity, loan financing and funds from periods. basis of the net loss for the year. The statement private placements. generally include non-refundable upfront license and collaboration fees, milestone shows the cash flows broken down into The estimates used are based on assumptions payments – the receipt of which is dependent operating, investing and financing activities, Cash and cash equivalents assessed to be reasonable by Management. on the achievement of certain clinical, cash and cash equivalents at year-end, and Cash and cash equivalents comprise cash and However, estimates are inherently uncertain regulatory or commercial milestones – as the impact of the calculated cash flows on the bank balances. and unpredictable. The assumptions may be well as royalties on product sales of licensed cash and cash equivalents. incomplete or inaccurate, and unexpected products, if and when such product sales Significant accounting estimates events or circumstances may occur. occur. For agreements that include multiple Cash flows in foreign currencies are translated and assessments Furthermore, we are subject to risks and elements, total contract consideration into Danish kroner at the exchange rate on In preparing the financial statements, uncertainties that may result in deviations in is attributed to separately identifiable the transaction date. In the cash flows from Management makes a number of accounting actual results compared with estimates. components on a reliable basis that reasonably operating activities, net loss is adjusted for estimates that form the basis for the reflects the selling prices that might be non-cash operating items and changes in presentation, recognition and measurement of No significant changes have been made in expected to be achieved in standalone working capital. our assets and liabilities. accounting estimates and assessments in 2016. transactions, provided that each component Cash flow from operating activities In applying our accounting policies, The following are the most significant The allocated consideration is recognized as Cash flow from operating activities is Management is required to make judgments, accounting estimates and assessments applied revenue in accordance with the principles presented indirectly and is calculated as the estimates and assumptions about the carrying by Management in these financial statements: described above. net loss adjusted for non-cash operating items, amounts of assets and liabilities that are not changes in net working capital, financial items readily apparent from other sources. The Revenue recognition Employee incentive programs paid and income tax benefits received. estimates and associated assumptions are Revenue comprises the fair value of the In accordance with IFRS 2 “Share-based based on historical experience and other consideration received and income derived Payment,” the fair value of the warrants Cash flow from investing activities factors that are considered to be relevant. from development services. Revenue is classified as equity settled is measured at grant Cash flow from investing activities includes Actual results may differ from these estimates. measured net of value added tax, duties, date and is recognized as an expense in the cash flows from the purchase and sale of The estimates and underlying assumptions etc. collected on behalf of a third party and income statement when the final right to the has value to the partner on a standalone basis. 49 Zealand Pharma A/SAnnual Report 2016Financial statementsNotes Note 1 – Significant accounting policies and significant accounting estimates and assessments (continued) warrant is obtained. Warrants are considered December 31, 2015 included restatements with and cash equivalents within the consolidated receivables of DKK 15,365 thousand and a vested at grant date, and the fair value is not respect to classification of certain items within statement of cash flow as of December 31, corresponding increase in Trade receivables as remeasured subsequently. The fair value the income statements, statement of financial 2015 of DKK 21,403 thousand. of December 31, 2015. of each warrant granted during the year is position and statement of cash flow. calculated using the Black–Scholes pricing In 2015, the Company used part of the D) VAT receivable model. This pricing model requires the input of The restatements had no impact on the Net restricted cash for royalty bond interest The Company has a receivable related to subjective assumptions such as: loss for the year or Loss per share for the year payments. The adjustment resulted in cash of VAT that the Company will receive from ended December 31, 2015. The nature and DKK 2,419 thousand being reclassified from the Danish tax authorities. The receivable • The expected stock price volatility, which impact of each restatement is described below, restricted cash. is based upon the historical volatility of including tickmarks linking the descriptions was previously presented in the line Prepaid expenses within the consolidated and parent Zealand’s share price to the restated statements of cash flow and B) Change in working capital statement of financial position and has now statements of financial position: The Company had previously not adjusted for been reclassified to Other receivables. The • The risk-free interest rate, which is all changes in working capital. The adjustment adjustment resulted in a decrease in Prepaid determined as the interest rate on Danish Statement of cash flow resulted in an increase of DKK 75,492 thousand expenses of DKK 2,262 thousand (DKK 2,242 government bonds with a maturity of five A) Restricted cash in “Increase in receivables” and a decrease of in the parent company) and a corresponding years The Company has restricted cash relating DKK 77,455 thousand in “Increase in payables” increase in Other receivables as of December • The duration of the warrants, which is amount was previously presented within impact was an increase in the negative balance to the royalty bond issue agreement. This as of December 31, 2015; see Note 25. The net 31, 2015. assumed to be until the end of the last the consolidated statement of cash flow as of Change in working capital of DKK 1,963 E) Sanofi withholding tax receivable exercise period a component of cash, restricted cash and thousand (decrease in the negative balance of The Company has a withholding tax receivable cash equivalents. The amount has been DKK 6,112 in the parent company), as stated in relating to the Sanofi royalty agreement. This The total costs of the warrants are recognized reclassified from this balance, and the activity the tables below. in the income statement at the grant date, in the restricted cash balance has been withholding tax receivable was previously treated as receivables from subsidiaries and adjusted for an expected attrition rate. The presented within Cash inflow from investing Statement of financial position was eliminated in the consolidation against attrition rate is re-estimated at year-end activities, specifically the line items “Transfer to C) Royalty receivable Other liabilities. However, as the receivable based on the historical attrition rate. Warrant restricted cash related to the royalty bond” and The Company has a receivable related to is from Sanofi, a third party, this elimination programs that terminate are adjusted based on “Transfer from restricted cash for royalty bond royalty income. As of December 31, 2015, has been reversed. The adjustment resulted the actual attrition rate at year-end. payments.” The line item reconciled from the the receivable was presented within the in an increase in Trade receivables and Restatements has been renamed “Cash and cash equivalents” under the line Other receivables and has now of December 31, 2015 in the consolidated The consolidated and parent financial to reflect the revised components it contains. been reclassified to Trade receivables. The statement of financial position. statements as of and for the year ended The adjustment resulted in a decrease in Cash adjustment resulted in a decrease in Other beginning of the period to the end of period consolidated statement of financial position Other liabilities of DKK 1,673 thousand as 50 Zealand Pharma A/SAnnual Report 2016Financial statementsNotes Note 1 – Significant accounting policies and significant accounting estimates and assessments (continued) F) Prepaid expenses have been reclassified to Other receivables. has resulted in a decrease in Deferred income Income statement The Company has prepayments related The adjustment resulted in a decrease in of DKK 2,091 thousand (DKK 2,063 thousand I) Allocation of overhead costs between to some of the Company’s vendors. Such Prepaid expenses of DKK 4,591 thousand and in the parent company), a decrease in Other Administrative expenses and Research and prepayments were previously presented a corresponding increase in Other receivables receivables of DKK 153 thousand (DKK 153 development expenses within the consolidated and parent statements in the consolidated and parent statements of thousand in the parent company) and an As of December 31 2016, Zealand corrected of financial position under the line Other financial position as of December 31, 2015. increase in Other liabilities of DKK 1,938 the allocation of overhead costs to be based receivables and have now been reclassified to thousand (DKK 1,910 thousand in the parent on the number of employees in the different Prepaid expenses. The adjustment resulted in G) Deferred income company) as of December 31, 2015. areas such as Research, Development and a decrease in Other receivables of DKK 2,430 The Company has certain prepayments from thousand (DKK 7,021 thousand in the parent customers within Deferred income that have H) Miscellaneous Administration. Previously, the allocation was based on total salary in the respective areas. company) and a corresponding increase in been paid by external contract research Certain individually immaterial adjustments This has resulted in DKK 2,781 thousand being Prepaid expenses in the consolidated and organizations (CROs) and will not flow to have been made to the consolidated and transferred from “Administrative expenses” to parent statements of financial position as the income statement, as the Company will parent statements of cash flow and statements “Research and development expenses” in the of December 31, 2015. The Company has not be performing the related research and of financial position as of December 31, 2015. consolidated and parent income statement also recognized certain expenses related to development, but will be sending the funds to clinical studies that have been refunded by external CROs. Thus, the amount of such items the Helmsley Charitable Trust. Such expenses has been reclassified within the consolidated were previously presented within the parent and parent statements of financial position company under the line Prepaid expenses and under the line Other liabilities. The adjustment for the year ended December 31, 2015. The restatement has no impact on the operating loss or net loss for the year. 51 Zealand Pharma A/SAnnual Report 2016Financial statementsNotes Note 1 – Significant accounting policies and significant accounting estimates and assessments (continued) Total impact The table below reflects the individual lines in the statements that are impacted by the restatements: Consolidated statement of cash flow for the year ended December 31, 2015 Statement of cash flow for the year ended December 31, 2015 Group DKK thousand Net loss for the year Adjustments for non-cash items Change in working capital Financial income received Financial expenses paid Income tax receipt As originally reported, 2015 Re- statement Amount as adjusted, 2015 Tickmark Parent DKK thousand As originally reported, 2015 Re- statement Amount as adjusted, 2015 Tickmark -113,957 43,553 -138,871 1,269 3,921 -1,963 H B -113,957 47,474 -140,834 1,269 Change in working capital Financial income received -23,657 -1,312 H -24,969 Financial expenses paid 6,250 Income tax receipt Net loss for the year -215,773 Adjustments for non-cash items 20,714 -6,556 -20,827 340 1,004 6,250 6,112 -208 -1,312 H B H H -215,773 14,158 -14,715 132 -308 6,250 Cash outflow from operating activities -225,413 646 Transfer from restricted cash related to the royalty bond interest payments Change in deposit Purchase of property, plant and equipment Cash outflow from investing activities Proceeds from issue of shares related to exercise of warrants Cash inflow from financing activities 2,419 A 2,419 0 27 -4,040 -4,013 96,413 96,413 6,250 -224,767 2,419 27 -4,040 -1,594 96,413 96,413 Cash outflow from operating activities -208,292 -1,964 -210,256 Net financing of subsidiaries Change in deposit Purchase of property, plant and equipment Cash outflow from investing activities Proceeds from issue of shares related to exercise of warrants Cash inflow from financing activities 28 27 -4,040 -3,985 96,413 96,413 -28 H -28 0 27 -4,040 -4,013 96,413 96,413 Decrease/increase in cash and cash equivalents -133,013 3,065 -129,948 Decrease/increase in cash and cash equivalents -115,864 -1,992 -117,856 Cash and cash equivalents at January 1 Exchange rate adjustments 538,273 -21,424 34,939 -3,044 Cash and cash equivalents at December 31 440,199 -21,403 A A A 516,849 31,895 418,796 Cash and cash equivalents at January 1 255,335 255,335 Exchange rate adjustments 1,312 1,992 H 3,304 Cash and cash equivalents at December 31 140,783 0 140,783 52 Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 1 – Significant accounting policies and significant accounting estimates and assessments (continued) Consolidated statement of financial position as of December 31, 2015 Statement of financial position as of December 31, 2015 Group DKK thousand Assets Plant and machinery Other fixtures and fittings, tools and equipment Leasehold improvements Deposits Total non-current assets Trade receivables Prepaid expenses Income tax receivable Other receivables Restricted cash Cash and cash equivalents Total current assets As originally reported, 2015 Re- statement Amount as adjusted, 2015 Tickmark 14,672 1,153 628 2,666 19,119 0 141,120 17,038 2,262 5,875 168 C,E D,F 26,113 -15,686 C,D,F,G 21,403 418,796 615,569 1,520 14,672 1,153 628 2,666 19,119 158,158 2,430 5,875 10,427 21,403 418,796 617,089 Parent DKK thousand Assets Plant and machinery Other fixtures and fittings, tools and equipment Leasehold improvements Investment in subsidiaries Deposits Total non-current assets Trade receivables Receivables from subsidiaries Prepaid expenses Income tax receivable Other receivables Cash and cash equivalents Total current assets As originally reported, 2015 Re- statement Amount as adjusted, 2015 Tickmark 14,672 1,153 628 380 2,666 19,499 313 3,549 2,242 5,875 10,627 140,783 163,389 14,672 1,153 628 380 2,666 19,499 313 3,521 2,430 5,875 0 -28 188 H D,F -313 D,F,G 10,314 -153 140,783 163,236 Total assets 634,688 1,520 636,208 Total assets 182,888 -153 182,735 53 Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 1 – Significant accounting policies and significant accounting estimates and assessments (continued) Consolidated statement of financial position as of December 31, 2015 Statement of financial position as of December 31, 2015 Group DKK thousand Equity and liabilities Share capital Share premium Retained losses Equity Royalty bond Non-current liabilities Trade payables Deferred income Other liabilities Current liabilities As originally reported, 2015 Re- statement Amount as adjusted, 2015 Tickmark Parent DKK thousand As originally reported, 2015 Re- statement Amount as adjusted, 2015 Tickmark 24,353 1,263,179 -1,035,301 252,231 312,951 312,951 21,676 0 0 2,091 -2,091 45,739 69,506 3,611 1,520 G E,G Equity and liabilities 24,353 1,263,179 -1,035,301 252,231 Share capital Share premium Retained losses Equity 312,951 312,951 21,676 0 49,350 71,026 Royalty bond Non-current liabilities Trade payables Deferred income Other liabilities Current liabilities 24,353 1,260,494 -1,143,023 141,824 0 0 0 0 21,580 2,063 -2,063 17,421 41,064 1,910 -153 G G 24,353 1,260,494 -1,143,023 141,824 0 0 21,580 0 19,331 40,911 40,911 Total liabilities 382,457 1,520 383,977 Total liabilities 41,064 -153 Total equity and liabilities 634,688 1,520 636,208 Total equity and liabilities 182,888 -153 182,735 54 Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 2 – Revenue ACCOUNTING POLICIES Revenue comprises license payments, milestone payments and royalty income. License payments are recognized upon transfer of the associated licensing rights at the point at which risks and rewards have been transferred. Milestone payments are related to the collaborative research agreements with commercial partners and are recognized in accordance with the agreements. Royalty income from licenses is based on third-party sales of licensed products and is recognized in accordance with contract terms in the period that the sales occur. When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction is recognized with reference to the stage of completion of the transaction at the end of the reporting period. The outcome of a transaction can be estimated reliably when all the following conditions are satisfied: • The amount of revenue can be measured reliably • It is probable that the economic benefits associated with the transaction will flow to the entity • • The stage of completion of the transaction at the end of the reporting period can be measured reliably The costs incurred for the transaction and the costs to complete the transaction can be measured reliably. Payments are recognized in accordance with the collaborative research agreements. The income from agreements with multiple components where the individual components cannot be separated is recognized over the period of the agreement. In addition, recognition requires all material risks and benefits related to the use of our intellectual property included in the collaboration to be transferred to the collaboration partner. If all risks and benefits have not been transferred, the transaction is recognized as deferred income until all components of the transaction have been completed. Accounting for the Sanofi License Agreement competitor, AstraZeneca (and its affiliates), in In June 2003, Zealand entered into a license both administrative and court proceedings in agreement with Sanofi (the Sanofi License the U.S. and in certain other countries, and Agreement), pursuant to which Zealand AstraZeneca brought counterclaims in the U.S. granted Sanofi exclusive rights to our patents, proceedings asserting that products containing know-how and other intellectual property lixisenatide infringe its patents. Sanofi and relating to lixisenatide, for all fields. Pursuant AstraZeneca subsequently agreed to settle all to the Sanofi License Agreement, which has claims and counterclaims between them in been amended over the years, Sanofi assumed various proceedings relating to lixisenatide. responsibility for the further development, Our financial obligations related to this now- manufacturing and marketing of lixisenatide, resolved intellectual property dispute could and we cannot research or develop lixisenatide have the effect of reducing our net revenue while the Sanofi License Agreement remains in effect. from commercial milestone payments from Sanofi relating to Soliqua™ 100/33/Suliqua™. The amount and timing of any such reductions Under the Sanofi License Agreement, we are not currently known, but they will not are eligible to receive remaining milestone exceed USD 15 million in total. payments relating to commercialized products of up to USD 100 million, contingent on the We pay Alkermes plc 13% of all payments achievement of certain sales levels, as well received on lixisenatide while lixisenatide is as royalties on global sales of such products. subject to a commercialization agreement, for Royalties correspond to tiered, low double- example the Sanofi License Agreement. We digit percentages of Sanofi’s global net sales of lixisenatide (branded as Adlyxin® in the U.S. and as Lyxumia® in the EU and other countries) plus a 10% royalty on global net sales of a combination of lixisenatide and insulin glargine 100 units/ml (Lantus®) marketed under the brand name Soliqua™ 100/33 in the U.S. and as Suliqua™ in the EU. In 2016, Sanofi challenged the validity of certain patents owned by a also pay one of the inventors of the Structure Induced Probe (SIP) technology employed in lixisensatide a 0.5% royalty on amounts received in connection with drug candidates that, like lixisenatide, are produced using our SIP technology. Milestone payments are recognized as revenue when the relevant milestones are achieved. 55 Zealand Pharma A/SAnnual Report 2016Financial statementsNotes Note 2 – Revenue Accounting for the Boehringer Ingelheim clinical programs for a period of up to four and Recognized revenue can be specified as follows: License Agreements a half years, with the aim of developing novel In June 2011, Zealand entered into a license, drugs to improve the treatment of patients research and development collaboration with cardio-metabolic diseases. In 2015, BI DKK thousand agreement with Boehringer Ingelheim selected a novel peptide therapeutic to be International GmbH (BI) to advance novel advanced into preclinical development under glucagon/GLP-1 dual-acting peptide receptor this agreement. agonists (GGDAs) for the treatment of patients with type 2 diabetes and obesity. Under the Pursuant to this agreement, we have terms of the 2011 BI License Agreement, BI worked with BI to advance the therapeutic Sanofi-Aventis Deutschland GmbH Boehringer Ingelheim International GmbH Helsinn Healthcare S.A. Protagonist Therapeutics, Inc. Total license and milestone revenue pays a fixed amount per full-time employee peptides stemming from this research Sanofi-Aventis Deutschland GmbH and other costs related to all research, collaboration into preclinical development. development and commercialization in respect BI is responsible for conducting preclinical of the compounds covered by the agreement. and clinical development, as well as for the Total royalty income Total revenue Group 2016 Group 2015 Parent 2016 Parent 2015 208,692 136,600 0 112 1,636 22,379 112 0 210,440 159,091 24,338 24,338 28,586 28,586 0 0 112 1,636 1,748 0 0 0 22,379 112 0 22,491 0 0 234,778 187,677 1,748 22,491 commercialization of products stemming All Zealand revenue can be attributed to other countries than Denmark. We are eligible to receive license and from the agreement and funding all activities milestone payments of up to EUR 386 million. under the agreement. We are eligible to of which EUR 365 million was outstanding receive license and milestone payments for as of December 31, 2016, related to the the first compound to be developed and Milestone payments are recognized as revenue commercialization, directly and/or through achievement of pre-specified development, marketed under the collaboration of up to when the relevant milestones are achieved. any third parties, of elsiglutide or of any other regulatory and commercial milestones for EUR 295 million, of which EUR 287 million GLP-2 analogue compounds in the field of the lead product. We are also eligible to was outstanding as of December 31, 2016. Accounting for the Licensing Agreement cancer supportive care and support licensed receive tiered royalties ranging from high We are also eligible to receive tiered royalties with Helsinn to Helsinn, unless undertaken on behalf of single-digit to low double-digit percentages ranging from low single-digit to low double- In 2008, we entered into a license agreement Helsinn as contract research. on BI’s sales of all products stemming from digit percentages on global sales of products with Helsinn (the Helsinn License Agreement). this collaboration. In addition, we retain arising from this collaboration. We retain Pursuant to the Helsinn License Agreement, The Helsinn License Agreement entitles us to copromotion rights in Scandinavia. copromotion rights in Scandinavia and are not we granted a worldwide, exclusive license mid to high single-digit percentage non- eligible for royalty payments in those countries to elsiglutide (referred to by us internally refundable royalty payments in respect of In 2014, Zealand entered into a second if we exercise such rights. as ZP1846) to Helsinn, which assumed net sales and milestone payments, upon the global license, research and development responsibility for all further development, achievement of specified development and collaboration agreement with BI (the 2014 BI No product candidates outlicensed to BI are regulatory approvals, manufacturing, regulatory milestone events and sales levels License Agreement). This agreement pertains currently marketed, and accordingly we have marketing and sales of elsiglutide, either on its reached (of which EUR 124 million is currently to collaboration on a specific therapeutic not received any royalty payments to date own or through its sublicensees. We cannot outstanding). We also have an option to peptide project from our portfolio of pre- under our licensing agreements with BI. undertake any investigation, development or obtain marketing and sales rights in the Nordic 56 Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 2 – Revenue (continued) countries if and when Helsinn obtains marketing approval in these. amounting to DKK 33.5 million, and in connection with the approval of Soliqua™ in November 2016 amounting to DKK 175.2 Revenue from Helsinn Revenue from other agreements In 2016 and 2015, we recognized DKK In 2016, we recognized DKK 1.6 million in 0.1 million in payments from Helsinn, revenue from a milestone payment from No product candidates outlicensed to million, both in the U.S. Further, in 2016 representing other contractual payments the Protagonist Therapeutics agreement Helsinn are currently marketed. Accordingly, we have not recognized any royalty payments to date under the Helsinn License we recognized DKK 24.3 million as royalty income, reflecting sales of Lyxumia® of EUR 32.7 million. Agreement. In 2015, we recognized DKK 136.6 million rather than milestone payments. in connection with its selection of a development candidate. Milestone payments are recognized as in revenue from milestone payments from revenue when the relevant milestones are Sanofi under the Sanofi License Agreement Note 3 – Royalty expenses achieved. in connection with the submission of a New Drug Application (NDA) for iGlarLixi to the Accounting for other license agreements FDA. The milestone payment less withholding In 2012, Zealand entered into an agreement taxes in Germany was received in January with Protagonist Therapeutics, Inc., but 2016, and the withholding taxes were this earlier research collaboration was received from the German tax authorities in terminated in 2014. In line with the terms April 2016. Further, in 2015 we recognized of the terminated agreement, Zealand is entitled to receive up to USD 15 million if DKK 28.6 million as royalty income, reflecting sales of Lyxumia® of EUR 38.3 million. certain milestone events occur. ACCOUNTING POLICIES Royalty expenses comprise contractual amounts due to third parties that are derived from the milestone payments and royalty income earned from the corresponding collaboration agreements. We have agreed to pay some of our revenue In addition, we have agreed to pay a royalty in deferred payments or royalties to third of 0.5% of the total amounts we receive in Revenue from Boehringer Ingelheim parties. At the time of the dissolution of a connection with our SIP-modified peptides, Milestone payments are recognized as No revenue was recognized from BI in 2016, former joint venture with Elan Corporation, including lixisenatide, to one of the inventors revenue when the relevant milestones are as no milestone event was reached. plc (Elan) and certain of its subsidiaries that of our SIP technology, who is one of our achieved. were party to the joint venture agreement employees. The royalty to be paid to this Revenue from Sanofi revenue from a milestone payment from BI Elan – now Alkermes plc, as successor in the amounts we receive, including license In 2016, we recognized DKK 208.7 million in connection with the selection of a first interest to a termination agreement between payments, milestone payments and sales. in revenue from milestone payments preclinical product candidate under the us and the Elan entities – including 13% In 2015, we recognized DKK 22.4 million in with us, we agreed to pay royalties to inventor is calculated on the basis of all from Sanofi under the Sanofi License 2014 BI License Agreement. Agreement in connection with the approval of lixisenatide as Adlyxin® in July 2016 of future payments we receive in respect of lixisenatide under the Sanofi License Agreement. In 2016 and 2015, the royalty expenses related to royalties from sales of Lyxumia® and milestone payments received from Sanofi. 57 Zealand Pharma A/SAnnual Report 2016Financial statementsNotes Note 4 – Research, development and administrative expenses ACCOUNTING POLICIES Research and development expenses Research expenses comprise salaries, contributions to pension schemes and other expenses, including patent expenses, as well as depreciation and amortization directly attributable to the Group’s research activities. Research expenses are recognized in the income statement as incurred. Development expenses comprise salaries, contributions to pension schemes and other expenses, including depreciation and amortization, directly attributable to the Group’s development activities. Development expenses are recognized in the income statement as incurred. No indirect costs that are not directly attributable to research and development activities are included in the disclosure of research and development expenses recognized in the income statement. Overhead expenses have been allocated to research and development or administrative expenses based on the number of employees in each department, determined according to the respective employees’ associated undertakings. Administrative expenses Administrative expenses include expenses for administrative personnel, expenses related to company premises, operating leases, investor relations, etc. Overhead expenses have been allocated to research and development or administrative expenses according to the number of employees in each department, determined based on the respective employees’ associated undertakings. ACCOUNTING ESTIMATES AND ASSESSMENTS RELATED TO RESEARCH AND DEVELOPMENT EXPENSES A development project involves a single product candidate undergoing a large number of tests to demonstrate its safety profile and the effect on human beings, prior to obtaining the necessary final approval for the product from the appropriate authorities. The future economic benefits associated with the individual development projects are dependent on obtaining such approval. Considering the significant risk and duration of the development period for biological products, Management has concluded that whether the intangible asset will generate probable future economic benefits cannot be estimated with sufficient certainty until the project has been finalized and the necessary final regulatory approval of the product has been obtained. Accordingly, Zealand has not recognized such assets at this time, and all research and development costs are therefore recognized in the income statement when incurred. Capitalization of development costs assumes that, in the Group’s opinion, the development of the technology or the product has been completed, all necessary public registrations and marketing approvals have been received, and expenses can be reliably measured. Furthermore, it must be established that the technology or the product can be commercialized and that the future income from the product can cover not only the production, selling and administrative expenses but also development expenses. As of December 31, 2016 and 2015, Zealand has not capitalized any development expenses. 58 Zealand Pharma A/SAnnual Report 2016Financial statementsNotes Note 5 – Fees to auditors appointed at the Annual General Meeting Note 6 – Information on staff and remuneration DKK thousand Audit Audit-related services and other assurance engagements Tax advice Other Total fees 2016 2015 DKK thousand 1,937 4,107 43 232 6,319 315 30 104 29 478 Total staff salaries can be specified as follows: Salaries Pension schemes (defined contribution plans) Other payroll and staff-related costs Total The amount is charged as: Research and development expenses Administrative expenses Total Average number of employees 2016 2015 restated 104,614 8,239 32,838 89,508 7,243 26,580 145,691 123,331 109,509 36,182 94,390 28,941 145,691 123,331 124 110 59 Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 6 – Information on staff and remuneration (continued) Remuneration DKK thousand Remuneration to the: Board of Directors Martin Nicklasson (1) Rosemary Crane Catherine Moukheibir Peter Benson (2) Alain Munoz Michael Owen Jens Peter Stenvang (3) Hanne Heidenheim Bak (3) Rasmus Just (3) Christian Thorkildsen (2) (3) Helle Størum (2) (3) Daniel Ellens (4) Jørgen Lindegaard (4) Florian Reinaud (4) Total Base board fee 2016 Base board fee 2015 2016 DKK thousand Base salary Bonus Pension contri- bution Warrant compen- sation benefits payment expenses Other Severance Total 750 400 400 104 250 250 250 167 167 83 83 0 0 0 450 200 250 150 150 150 150 0 0 150 150 150 150 13 Remuneration to the: Executive Management Britt Meelby Jensen Mats Blom Total 3,795 2,448 6,243 Other senior management (1) 6,422 6,422 683 526 1,209 833 833 380 245 625 642 642 231 268 499 0 0 0 4,442 1,111 9,531 4,598 5,553 14,129 1,324 1,324 1,782 1,782 7,322 18,325 7,322 18,325 12,665 2,042 1,267 1,823 1,782 12,875 32,454 DKK thousand Base salary Bonus restated Pension contri- bution Warrant compen- sation benefits payment expenses Other Severance Total Total Total 2015 2,904 2,113 Remuneration to the: (1) In addition to the base board fee, Martin Nicklasson received an observation fee for his period as Observer to the Board before being appointed at the Annual General Meeting in 2015. This fee amounted to DKK 150,000. (2) These board members resigned from the Board in 2016. (3) For the employee-elected board members, the table only includes remuneration for board work. (4) These board members resigned from the Board in 2015. Executive Management Britt Meelby Jensen Mats Blom Total Other senior management (1) Total Total 3,353 2,400 5,753 751 343 1,094 335 240 575 190 260 450 0 0 0 3,163 2,372 7,792 5,615 5,535 13,407 8,776 8,776 520 520 877 877 1,101 1,101 353 353 3,321 14,948 3,321 14,948 14,529 1,614 1,452 1,551 353 8,856 28,355 (1) Other senior management in 2016 comprised four members, including two members who resigned during the year. Other senior management in 2015 comprised six members, including three members who resigned during the year. 60 Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 6 – Information on staff and remuneration (continued) Employee incentive programs ACCOUNTING POLICIES The value of services received as consideration for granted warrants is measured at the fair value of the warrant. The fair value is determined at the grant date and is recognized in the income statement as staff costs over the period in which the final right to the warrant is obtained. Warrants are considered vested at grant date. The offsetting entry to this is recognized under equity. In respect of recognition of the warrants, an estimate is made of the number of warrants that the employees are expected to obtain rights to. Subsequently, an adjustment is made for changes in the estimate of the number of shares that the employees have obtained rights to so the total recognition is based on the actual number of shares that the employees have obtained rights to. The fair value of the granted warrants is estimated using the Black– Scholes pricing model. 2010 employee incentive program 02/Nov/10 10/Feb/11 17/Nov/11 10/Feb/12 19/Nov/12 08/Feb/13 01/Apr/14 25/Mar/15 05/May/15 Total Number of warrants Outstanding at January 1, 2015 595,406 403,000 227,085 220,250 214,883 343,512 100,000 0 0 2,104,136 Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at December 31, 2015 Specified as follows: Executive Management Other employees Total 0 0 0 -7,500 0 0 -589,237 -383,900 -121,826 -6,169 0 0 0 -3,750 -64,759 0 0 0 0 0 0 -17,500 0 0 0 0 0 0 100,000 46,359 0 0 0 0 0 0 146,359 -28,750 -1,159,722 -6,169 0 0 0 0 11,600 105,259 151,741 214,883 326,012 100,000 100,000 46,359 1,055,854 0 11,600 11,600 31,019 74,240 105,259 0 151,741 151,741 31,019 183,864 214,883 0 326,012 326,012 0 100,000 100,000 0 100,000 100,000 0 46,359 46,359 62,038 993,816 1,055,854 61 Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 6 – Information on staff and remuneration (continued) 2010 employee incentive program 02/Nov/10 10/Feb/11 17/Nov/11 10/Feb/12 19/Nov/12 08/Feb/13 01/Apr/14 25/Mar/15 05/May/15 Total Number of warrants Outstanding at January 1, 2016 Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at December 31, 2016 Specified as follows: Executive Management Other employees Total Exercise period From until Black–Scholes parameters Term (months) Volatility* Share price (DKK) Exercise price (DKK) Dividend Risk-free interest rate 11,600 105,259 151,741 214,883 326,012 100,000 100,000 46,359 1,055,854 0 0 0 0 0 0 0 0 0 0 0 0 -11,600 0 0 0 0 0 0 0 0 -105,259 -145,491 0 0 0 0 0 0 -1,250 -63,625 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 6,250 214,883 261,137 100,000 100,000 46,359 0 6,250 6,250 31,019 183,864 214,883 0 261,137 261,137 0 100,000 100,000 0 100,000 100,000 0 46,359 46,359 0 -1,250 -314,375 -11,600 728,629 31,019 697,610 728,629 03/Nov/13 10/Feb/14 17/Nov/14 10/Feb/15 19/Nov/15 10/Feb/16 01/Apr/17 25/Mar/18 05/May/18 03/Nov/15 10/Feb/16 17/Nov/16 10/Feb/17 19/Nov/17 10/Feb/18 01/Apr/19 25/Mar/20 05/May/20 60 56% 86.0 94.6 60 33% 70.0 77.0 60 34% 45.70 50.27 60 44% 70.0 77.0 60 56% 86,0 113.3 60 39.3% 79.50 87.45 60 37.5% 69.0 75.9 60 41.9% 115.50 127.05 60 43.7% 92.0 101.2 not expected not expected not expected not expected not expected not expected not expected not expected not expected 2.64% 3.09% 1.02% 0.37% 0.86% 0.66% 0.71% -0.21% -0.10% * The volatility rate used is based on the actual volatility of the Zealand share price. 62 Zealand Pharma A/SAnnual Report 2016Financial statementsNotes Note 6 – Information on staff and remuneration (continued) 2015 employee incentive program 05/May/15 05/May/15 05/Apr/16 05/Apr/16 15/Jul/16 Total Number of warrants Outstanding at January 1, 2015 Granted during the year Forfeited during the year Exercised during the year Expired during the year 0 0 100,000 366,250 0 0 0 -3,000 0 0 Outstanding at December 31, 2015 100,000 363,250 Specified as follows: Executive Management Other employees Total Number of warrants 100,000 0 100,000 75,000 288,250 363,250 Outstanding at January 1, 2016 100,000 363,250 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Granted during the year Forfeited during the year Exercised during the year Expired during the year 0 0 0 0 0 347,250 100,000 40,000 -6,000 -2,250 0 0 0 0 0 0 0 0 0 0 0 466,250 -3,000 0 0 463,250 175,000 288,250 463,250 463,250 487,250 -8,250 0 0 Outstanding at December 31, 2016 100,000 357,250 345,000 100,000 40,000 942,250 Specified as follows: Executive Management Other employees Total 100,000 0 100,000 75,000 282,250 357,250 25,000 100,000 320,000 345,000 0 100,000 0 40,000 40,000 300,000 642,250 942,250 63 Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 6 – Information on staff and remuneration (continued) Warrants may be exercised four times a year during a four-week period starting from the date of the publication of Zealand’s Annual Report or interim reports. 05/May/16 05/May/18 05/Apr/19 05/Apr/17 15/Jul/19 05/May/20 05/May/20 05/Apr/21 05/Apr/21 15/Jul/21 2010 employee incentive program This program was established in 2010 for Zealand’s Board of Directors, Executive Management, employees and consultants. Exercise period From until Black–Scholes parameters Term (months) Volatility* Share price (DKK) Exercise price (DKK) Dividend 60 43.7% 92.0 101.2 60 43.7% 92.0 101.2 60 43.5% 129.5 60 43.5% 129.5 142.45 142.45 60 45.0% 126 138.6 not expected not expected not expected not expected not expected Risk-free interest rate -0.10% -0.10% -0.04% -0.04% -0.33% * For warrants granted in 2015 and earlier, the volatility rate is based on the actual volatility of the Zealand share price. For warrants granted after January 1, 2016, the volatility rate is based on the five-year historical volatility of the Zealand share price. Employee warrant programs In order to motivate and retain key employees and encourage the achievement of common goals for employees, Management and shareholders, the Company has established an incentive plan based on warrant programs. Incentive programs were offered in 2005, 2007 and in the period 2009-2016. The warrants are granted in accordance with the authorizations given to the Board of Directors by the shareholders. The Board of Directors has fixed the terms of and size of the grants, taking into account authorizations from the shareholders, the Group’s guidelines for incentive pay, an assessment of expectations of the recipient’s work efforts and contribution to the Group’s growth, as well as the need to motivate and retain the recipient. Grant takes place on the date of establishment of the program. Exercise of warrants is by default subject to continuing employment with the Group. The warrants granted are subject to the provisions of the Danish Public Companies Act regarding termination of employees prior to their exercise of warrants in the case of recipients covered by the act. The exercise price is determined by the closing price of Zealand’s shares on Nasdaq Copenhagen on the day prior to the grant date plus 10%. Warrants expire automatically after five years. Warrants are considered vested at grant date and may be exercised after three years, except warrants granted to the Chief Executive Officer, which may be exercised after one year. 64 The Board of Directors was authorized to issue up to 2,750,000 warrants until November 2, 2015. The program has expired and a total of 2,355,495 warrants have been granted. As of December 31, 2016, 1,474,097 warrants have been exercised, and the total proceeds amount to DKK 116.3 million (2015: DKK 19.9 million). As of December 31, 2016, 482,270 warrants can still be exercised. 2015 employee incentive program This program was established in 2015 for Zealand’s Executive Management and employees. The Board of Directors was authorized to issue up to 2,750,000 warrants until April 20, 2020, of which 1,796,500 have not yet been granted. As of December 31, 2016, 953,500 warrants have been granted, of which 100,000 warrants can be exercised. Effect on income statement In 2016, the fair value of warrants recognized in the income statement amounted in total to DKK 22.7 million (2015: DKK 16.9 million), of which DKK 5.6 million (2015: DKK 5.5 million) related to Executive Management. Further, costs for the warrant programs have been adjusted at the end of the year by DKK 2.4 million (2015: DKK 0.2 million) due to the actual attrition rate and an adjustment to the warrant programs granted in 2015 to reflect the estimated attrition rate split between senior management and employees. DKK thousand 2016 2015 The amount is charged as: Research and development expenses Administrative expenses Total 14,290 8,437 9,504 7,443 22,727 16,947 Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 7 – Other operating income Note 8 – Financial income ACCOUNTING POLICIES ACCOUNTING POLICIES Other operating income comprises research funding from business partners and government grants. Research funding is recognized in the period when the research activities have been performed, and government grants are recognized periodically when the work supported by the grant has been reported. Financial income is recognized in the income statement in the period in which it is earned. Financial income includes interest from trade receivables, as well as realized and unrealized exchange rate adjustments. Government grants are recognized when a final and firm right to the grant has been obtained. Government grants are included in Other operating income, as the grants are considered to be cost refunds. DKK thousand Research funding Government grants Group 2016 Group 2015 Parent 2016 Parent 2015 920 777 11,576 1,252 920 777 11,576 1,252 DKK thousand Interest income Exchange rate adjustments Total financial income Group 2016 Group 2015 Parent 2016 Parent 2015 592 0 592 139 3,750 3,889 121 6,609 6,730 132 1,312 1,444 Total other operating income 1,697 12,828 1,697 12,828 Note 9 – Financial expenses As part of the license agreements with Boehringer Ingelheim International GmbH (BI), BI is responsible for conducting preclinical and clinical development, as well as for commercializing products stemming from the agreement and funding all activities under the agreement. In the first quarter of 2016, and the full year 2015, Zealand was entitled to research funding from BI amounting to DKK 0.9 million (2015: DKK 11.6 million). This funding related to the 2014 BI License Agreement, and ended in March 2016. In addition, Zealand received government grants in both 2016 and 2015. ACCOUNTING POLICIES Financial expenses are recognized in the income statement in the period in which they are incurred. Financial expenses include interest expenses, as well as realized and unrealized exchange rate adjustments. Further, expenses related to the royalty bond are amortized over the expected duration of the bond and recognized as financial expenses. The royalty bond is described further in Note 19. DKK thousand Interest expenses, royalty bond Amortization of financing costs Other financial expenses Exchange rate adjustments Total financial expenses Group 2016 Group 2015 Parent 2016 Parent 2015 32,157 32,372 8,369 255 3,575 9,689 333 0 44,356 42,394 0 0 347 0 347 0 0 306 0 306 65 Zealand Pharma A/SAnnual Report 2016Financial statements assets and liabilities are not recognized if the temporary difference arises from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. In addition, deferred tax liabilities are not recognized if the temporary difference arises from the initial recognition of goodwill. Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not be reversed in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interest are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to be reversed in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. This judgment is made on an ongoing basis and is based on recent historical losses carrying more weight than factors such as budgets and business plans for the coming years, including planned commercial initiatives. The creation and development of therapeutic products within the biotechnology and pharmaceutical industry is subject to considerable risks and uncertainties. Zealand has so far reported significant losses and, consequently, has unused tax losses. Management has concluded that deferred tax assets should not be recognized at December 31, 2016 and 2015. The tax assets are currently not deemed to meet the criteria for recognition, as Management determined that it was not probable that future taxable profit would be available against which the deferred tax assets could be utilized. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realized, based on tax laws and rates that have been enacted or substantively enacted at the balance sheet date. Income tax receivables are recognized in accordance with the Danish tax credit scheme (Skattekreditordningen). Companies covered by the tax credit scheme may obtain payment of the tax base of losses originating from research and development costs of up to DKK 25 million. Notes Note 10 – Income tax benefit ACCOUNTING POLICIES Income tax on results for the year, which comprises current tax and changes in deferred tax, is recognized in the income statement, whereas the portion attributable to entries in equity is recognized directly in equity. Current tax liabilities and current tax receivables are recognized in the statement of financial position as tax calculated on the taxable income for the year adjusted for tax on previous years’ taxable income and taxes paid on account/ prepaid. Deferred tax is measured according to the statement of financial position liability method in respect of temporary differences between the carrying amount and the tax base of assets and liabilities. Deferred tax liabilities are generally recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Such deferred tax 66 Zealand Pharma A/SAnnual Report 2016Financial statementsNotes Note 10 – Income tax benefit (continued) DKK thousand Group 2016 Group 2015 Parent 2016 Parent 2015 As a consequence of tax losses from previous years, no deferred net tax assets have been recognized. Deferred tax reductions (tax assets) have not been recognized in the consolidated statement of financial position due to uncertainty as to when and whether they can be utilized. The deferred tax for the parent company includes the tax positions of ZP Holding SPV K/S and ZP SPV 1 K/S, as these entities are transparent from a tax point of view. Hence, the activity of these entities is subject to taxation in the parent company. Under Danish tax legislation, Zealand is eligible to receive DKK 5.5 million (2015: DKK 5.9 million) in cash relating to the surrendered tax loss for 2016 of DKK 81.5 million (2015: DKK 151.4 million) originating from qualifying research and development expenditures. These tax receipts comprise the entire current tax benefit in 2016 and 2015 respectively. Net loss for the year before tax -159,410 -119,832 -128,774 -221,648 Tax rate 22.0% 23.5% 22.0% 23.5% Expected tax expenses/(benefit) -35,070 -28,161 -28,330 -52,087 Adjustment for nondeductible expenses Adjustment for exercised warrants Tax effect from subsidiaries Reduction of corporate tax rate from 23.5% to 22% Tax effect on exercise of warrants Tax effect on expired warrants Change in tax assets (not recognized) Total income tax benefit 100 54 -2,828 -8,357 0 0 0 0 0 1,558 -318 6,500 33 -2,828 -6,666 0 0 0 32,298 -5,500 22,849 32,292 -5,875 -5,500 54 -8,357 23,621 1,558 0 6,500 22,836 -5,875 Breakdown of unrecognized deferred tax assets Tax losses carried forward (available indefinitely) 722,186 742,771 722,101 742,716 Research and development expenses 145,822 31,054 145,822 Rights Non-current assets Other 43,019 62,953 43,019 57,543 43,019 62,953 102,074 58,890 102,074 31,054 43,019 57,543 58,890 Total temporary differences 1,076,054 933,277 1,075,969 933,222 Tax rate 22% 22% 22% 22% Calculated potential deferred tax asset at local tax rate 236,732 205,321 236,713 205,309 Write-down of deferred tax asset -236,732 -205,321 -236,713 -205,309 Recognized deferred tax asset 0 0 0 0 67 Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 11 – Basic and diluted loss per share The following potential ordinary shares are antidilutive and are therefore excluded from the weighted average number of ordinary shares for the purpose of diluted loss per share: ACCOUNTING POLICIES Basic loss per share Basic loss per share is calculated as the net result for the period that is allocated to the parent company’s ordinary shares, divided by the weighted average number of ordinary shares outstanding. Diluted loss per share Diluted loss per share is calculated as the net result for the period that is allocated to the parent company’s ordinary shares, divided by the weighted average number of ordinary shares outstanding, adjusted by the dilutive effect of potential ordinary shares. Potential ordinary shares excluded due to antidilutive effect related to: Outstanding warrants under the 2010 employee incentive program Outstanding warrants under the 2015 employee incentive program Group 2016 Group 2015 728,629 1,055,854 942,250 463,250 Total outstanding warrants, which are antidilutive 1,670,879 1,519,104 The loss and weighted average number of ordinary shares used in the calculation of basic and diluted loss per share are as follows: DKK thousand Group 2016 Group 2015 Restated Parent 2016 Parent 2015 Restated Net loss for the year -153,910 -113,957 -123,274 -215,773 Net loss used in the calculation of basic and diluted loss per share -153,910 -113,957 -123,274 -215,773 Weighted average number of ordinary shares 24,873,940 23,618,752 24,873,940 23,618,752 Weighted average number of treasury shares -564,223 -564,223 -564,223 -564,223 Weighted average number of outstanding ordinary shares used in the calculation of basic and diluted loss per share Basic loss per share (DKK) Diluted loss per share (DKK) 24,309,717 23,054,529 24,309,717 23,054,529 -6.33 -6.33 -4.94 -4.94 -5.07 -5.07 -9.36 -9.36 68 Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 12 – Property, plant and equipment ACCOUNTING POLICIES Plant and machinery, other fixtures and fittings, tools and equipment and leasehold improvements are measured at cost less accumulated depreciation. Cost comprises acquisition price and costs directly related to acquisition until the time when the Group starts using the asset. The basis for depreciation is cost less estimated residual value at the end of the useful life. Assets are depreciated under the straight-line method over the expected useful lives of the assets. The depreciation periods are as follows: • Leasehold improvements 5 years • Plant and machinery 5 years • Other fixtures and fittings, tools and equipment 3-5 years Profits and losses arising from disposal of plant and equipment are stated as the difference between the selling price less the selling costs and the carrying amount of the asset at the time of the disposal. Profits and losses are recognized in the income statement under Research and development expenses and Administrative expenses. At the end of each reporting period, the Company reviews the carrying amount of property, plant and equipment as well as non-current asset investments to determine whether there is an indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). If it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. If a reasonable and consistent basis of allocation can be identified, assets are also allocated to cash-generating units, or allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. The recoverable amount is the higher of fair value less costs of disposal and value in use. The estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. Impairments are recognized in the income statement as a separate line item. No impairments have been recognized for 2015 or 2016. DKK thousand Cost at January 1, 2015 Additions Cost at December 31, 2015 Depreciation at January 1, 2015 Depreciation for the year Depreciation at December 31, 2015 Other fixtures machinery and fittings Plant and Leasehold improve- ments 62,771 3,735 66,506 46,777 5,057 51,834 8,663 131 10,598 174 8,794 10,772 7,090 551 9,537 607 7,641 10,144 Carrying amount at December 31, 2015 14,672 1,153 628 Depreciation for the financial year has been charged as: Research and development expenses* Administrative expenses* Total Cost at January 1, 2016 Additions Retirements Cost at December 31, 2016 Depreciation at January 1, 2016 Depreciation for the year Retirements Transfer 5,057 0 5,057 436 115 551 480 127 607 66,506 1,965 8,794 515 -21,301 -5,697 10,772 120 -177 47,170 3,612 10,715 51,834 4,556 7,641 534 -21,301 -5,697 0 -20 10,144 320 -177 20 Depreciation at December 31, 2016 35,089 2,458 10,307 Carrying amount at December 31, 2016 12,081 1,154 408 Depreciation for the financial year has been charged as: Research and development expenses Administrative expenses Total 4,556 0 4,556 438 96 534 262 58 320 * Due to change in allocation, the figures for depreciation allocated to other fixtures and leasehold improvements have changed. 69 Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 13 – Investments in subsidiaries ACCOUNTING POLICIES Investments in subsidiaries are measured at cost in the parent company’s financial statements. Where the recoverable amount of the investment is lower than cost, the investments are written down to this lower value. DKK thousand Cost at January 1, 2015 Additions Transfers Cost at December 31, 2015 Revaluation at January 1, 2015 Depreciation for the year Write-off Revaluation at December 31, 2015 Carrying amount at December 31, 2015 Cost at January 1, 2016 Additions Transfers Cost at December 31, 2016 Revaluation at January 1, 2016 Depreciation for the year Write-off Revaluation at December 31, 2016 Carrying amount at December 31, 2016 70 Parent company 380 0 0 380 0 0 0 0 380 380 0 0 380 0 0 0 0 380 Company summary Zealand Pharma A/S subsidiaries: ZP Holding SPV K/S ZP General Partner 1 ApS ZP Holding SPV K/S subsidiaries: ZP SPV 1 K/S ZP General Partner 2 ApS Domicile Ownership Voting rights Denmark Denmark 100% 100% 100% 100% Denmark Denmark 100% 100% 100% 100% Pursuant to section 146(1) of the Danish Financial Statements Act, Management has chosen to submit an exemption declaration (“Undtagelseserklæring”) and has not issued annual reports for ZP SPV 1 K/S and ZP Holding SPV K/S. The financial statements of the two companies are fully consolidated in the consolidated financial statements of Zealand Pharma A/S. Income from subsidiaries relates to dividends from subsidiaries received during the year. Note 14 – Trade receivables ACCOUNTING POLICIES Trade receivables are recognized and derecognized on a settlement date basis. An allowance is recognized for trade receivables when objective evidence is received that the Group will not be able to collect all amounts due to it in accordance with the original terms of the receivables. The amount of the write-down is determined as the difference between the assets’ carrying amount and the present value of estimated future cash flows. Trade receivables are mainly related to milestone and royalty payments from our collaboration agreements, and are due in 30-60 days. There are no overdue receivables and there is no provision for bad debts, as no losses are expected on trade receivables. As of December 31, 2016, trade receivables related to accrued royalty income on sales of Lyxumia®. As of December 31, 2015, most of the trade receivables related to a DKK 136.6 million milestone payment from Sanofi under the Sanofi License Agreement in connection with the submission of a New Drug Application (NDA) for iGlarLixi to the FDA. Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 15 – Prepaid expenses Note 17 – Cash and cash equivalents ACCOUNTING POLICIES ACCOUNTING POLICIES Prepaid expenses comprise amounts paid in respect of goods or services to be received in subsequent financial periods. Prepayments are measured at cost and are tested for impairment as of the balance sheet date. Cash is measured at initial recognition at fair value and subsequently at amortized cost, usually equal to the nominal value. Note 16 – Other receivables ACCOUNTING POLICIES Receivables are measured at initial recognition at fair value and subsequently at amortized cost, usually equal to the nominal value. DKK thousand VAT Other Group 2016 4,464 915 Group 2015 Restated 3,667 6,760 Parent 2016 4,127 890 Parent 2015 Restated 3,594 6,720 Total other receivables 5,379 10,427 5,017 10,314 As of December 31, 2016, most other receivables related to VAT. As of December 31, 2015, Zealand had expenses of DKK 4.6 million to be refunded related to clinical studies under the grant from the Helmsley Charitable Trust. This made up the majority of the balance in “Other.” DKK thousand DKK USD EUR Group 2016 Group 2015 Parent 2016 Parent 2015 16,609 66,239 14,861 214,915 306,296 103,490 91,806 46,261 88,047 64,900 30,744 45,139 Total cash and cash equivalents 323,330 418,796 206,398 140,783 In addition, as of December 31, 2016, restricted cash amounted to DKK 318.7 million (2015: DKK 21.4 million). As of December 31, 2016, this balance comprised cash held in the Milestone Payments Reserve Account amounting to DKK 305.1 million and cash held in the Interest Reserve Account amounting to DKK 13.6 million, both relating to the USD 50 million senior secured notes (or the royalty bond; see also Note 19. As of December 31, 2015, restricted cash was held only in the Interest Reserve Account. According to the terms of the royalty bond indenture, funds in the Interest Reserve Account and Milestone Payments Reserve Account may only be used to fund the payment of interest in excess of the available amount generated from royalties received by ZP SPV 1 K/S pursuant to its 86.5% income under the License Agreement; see also Note 19. 71 Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 18 – Share capital ACCOUNTING POLICIES Costs and selling prices of treasury shares and dividends are recognized directly in equity within retained earnings. Capital reductions through cancellation of treasury shares reduce the share capital by an amount equal to the cost price of the shares. At December 31, 2016, the total number of authorized oridinary shares was 27,813,244 (2015: 25,871,873). The share capital at December 31, 2016 consisted of 26,142,365 (2015: 24,352,769) ordinary shares issued of DKK 1 each. The parent company has only one class of shares, and all shares rank equally. The shares are negotiable instruments with no restrictions on their transferability. All shares have been fully paid. On September 29, 2016, Zealand issued 1,475,221 shares in a private placements. The net proceeds amounted to DKK 135.2 million. Other capital increases in 2016 and 2015 related to exercise of warrant programs. Expenses directly related to capital increases are deducted from equity. Expenses related to the private placement on September 29, 2016 amounted to DKK 7.7 million, and DKK 0.1 million is related to the exercise of warrant programs. At December 31, 2016, there were 564,223 treasury shares (2015: 564,223), equivalent to 2.2% (2015: 2.3%) of the share capital and corresponding to a market value of DKK 60.1 million (2015: DKK 85.5 million). The treasury shares were purchased for DKK 1.3 million in 1999-2001 and DKK 0.4 million in 2011, giving a total cost of purchase of DKK 1.7 million. Rules on changing Articles of Association All resolutions put to the vote of shareholders at general meetings are subject to adoption by a simple majority of votes, unless the DCA (Selskabsloven) or our articles of association prescribes other requirements. Changes in share capital Share capital at December 31, 2010 Capital increase on December 12, 2011 Share capital at December 31, 2014 Share capital at January 1, 2015 Capital increase on March 21, 2015 Capital increase on April 11, 2015 Capital increase on June 2, 2015 Capital increase on June 20, 2015 Capital increase on September 8, 2015 Capital increase on September 26, 2015 Capital increase on November 4, 2015 Capital increase on November 13, 2015 Capital increase on December 4, 2015 Share capital at December 31, 2015 Share capital at January 1, 2016 Capital increase on March 30, 2016 Capital increase on April 14, 2016 Capital increase on May 26, 2016 Capital increase on June 16, 2016 Capital increase on September 6, 2016 Capital increase on September 23, 2016 Capital increase on September 29, 2016 Capital increase on November 17, 2016 Capital increase on November 25, 2016 Capital increase on December 8, 2016 Share capital at December 31, 2016 72 22,870,523 322,524 23,193,047 23,193,047 120,833 106,220 51,487 46,521 383,190 150,702 60,843 176,456 63,470 24,352,769 24,352,769 46,613 50,453 43,071 41,269 7,400 45,457 1,475,221 8,200 57,913 13,999 26,142,365 Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 19 – Royalty bond ACCOUNTING POLICIES The royalty bond was initially measured at the time of borrowing at fair value less any transaction costs. In subsequent periods, the royalty bond has been measured at amortized cost corresponding to the capitalized value using the effective interest method. Consequently, the difference between the proceeds of the loan and the amount to be repaid is recognized as a financial expense in the income statement over the term of the loan. In December 2014, Zealand established four 100%-owned subsidiaries: ZP Holding SPV K/S, ZP General Partner 1 ApS, ZP SPV 1 K/S, and ZP General Partner 2 ApS. The purpose of this structure was to make the royalty bond non recourse for Zealand and at the same time protect the bond investors from a parent company bankruptcy. On December 11, 2014, ZP SPV 1 K/S issued the royalty bond, which represents senior secured notes issued at par with a USD-denominated principal amount of USD 50 million (DKK 299.3 million at issue) and a stated fixed interest rate of 9.375% per annum. The royalty bond falls due on March 15, 2026. Concurrent with the issue of the royalty bond, Zealand contributed the Sanofi License Agreement to ZP Holding SPV K/S, among other things. See Note 2 Revenue, Accounting for the Sanofi License Agreement. Among the rights arising under the License Agreement are the rights to receive patent royalties, including relating to Adlyxin®/Lyxumia®, a single remaining milestone payment relating to Adlyxin®/Lyxumia® and three regulatory event milestone payments in 2016 and January 2017 relating to certain other products containing lixisenatide combined with one or more other active pharmaceutical ingredients (“Group 2 Products”). ZP Holding SPV K/S sold and transferred to ZP SPV 1 K/S an interest in such royalties and milestone payments equal to 86.5% of the amount of such royalties payable from and after December 11, 2014, and 86.5% of such milestone payments. Under the License Agreement, royalties are payable by Sanofi in EUR and at a varying percentage of annual net sales as defined in the License Agreement. Further, as of December 11, 2014, the aggregate remaining regulatory milestone payments (86.5% of which were transferred to ZP SPV 1 K/S) amounted to USD 60 million, plus value added taxes, payable subject to various terms and conditions of the License Agreement. The milestone payments serve as collateral for the royalty bond. Cash received for the milestone payments is held in a specific account (the “Milestone Payments Reserve Account”) and is restricted as to use. Specifically, cash held in the Milestone Payments Reserve Account may only be used in connection with the exercise of remedies in the event of default on the royalty bond, or for funding an optional redemption subject to the terms of the royalty bond indenture. As of December 31, 2016, Zealand has received DKK 305.1 million, equivalent to USD 43.3 million, as restricted cash held in the Milestone Payments Reserve Account. Further, as of December 31, 2016 and 2015, restricted cash held by the Company is also related to the Interest Reserve Account, established upon issue of the royalty bond. The source of payment of the principal of and interest on the royalty bond is ZP SPV 1 K/S’ interest in Adlyxin®/Lyxumia® royalties. Interest on the senior secured notes is payable semi-annually on March 15 and September 15 every year. The principal of the royalty bond was to be paid from available cash in ZP SPV 1 K/S commencing on the third payment date (March 15, 2016). Beginning with the third payment date, the royalty bond indenture states that available royalty revenue in ZP SPV 1 K/S in excess of interest payments is to be used for principal repayments of the royalty bond at each payment date. Upon full repayment of the royalty bond, the bondholders have no rights to future royalty payments. It is possible for ZP SPV 1 K/S to make voluntary repayments from March 2016, subject to various provisions and at various redemption premiums established in the royalty bond indenture. The total outstanding amount as of December 31, 2016 was DKK 352.6 million (2015: DKK 341.5 million), of which DKK 20.4 million (2015: DKK 28.5 million) has been offset as transaction costs. The change in the balance of the royalty bond from December 31, 2015 to December 31, 2016 is attributable to movements in the USD/DKK exchange rate. The royalty bond has been renegotiated and partly redeemed as of March 15, 2017, see Note 26. See Note 22 for further discussion of the risks associated with the royalty bond. 73 Zealand Pharma A/SAnnual Report 2016Financial statementsNotes Note 20 – Other liabilities ACCOUNTING POLICIES Financial liabilities are recognized initially at fair value less transaction costs. In subsequent periods, financial liabilities are measured at amortized cost corresponding to the capitalized value using the effective interest method. Consequently, the difference between the proceeds and the nominal value is recognized in the income statement over the maturity period of the loan. Provisions are measured as the best estimate of the costs needed at the balance sheet date to settle obligations. Provisions also include contingent payments at the conclusion of agreements, contracts, etc. DKK thousand Severance payments Employee benefits Royalty payable to third party Interest payable on royalty bond Other payables Total other liabilities Group 2016 3,854 20,431 25,222 9,753 5,190 Group 2015 Restated Parent 2016 Parent 2015 Restated 613 3,854 613 15,085 18,713 9,516 5,423 20,431 15,085 0 0 0 0 5,122 3,633 64,450 49,350 29,406 19,331 Note 21 – Contingent liabilities and other contractual obligations Contingent liabilities and other contractual obligations include contractual obligations related to agreements with contract research organizations and lease commitments. ACCOUNTING POLICIES Contingent liabilities are disclosed, unless the possibility of an outflow of resources embodying economic benefits is remote. 74 At December 31, 2016, total contractual obligations related to agreements with CROs amounted to DKK 39,849 thousand (DKK 37,335 thousand for 2017 and DKK 2,514 thousand for 2018 and 2019). At December 31, 2015, total contractual obligations related to agreements with CROs amounted to DKK 40,246 thousand (DKK 31,576 thousand for 2016 and DKK 8,670 thousand for 2017-2019 inclusive). ACCOUNTING POLICIES Lease agreements are classified as either finance or operating leases based on the criteria in IAS 17 Leases. Lease payments under operating leases and other rental agreements are recognized in the income statement over the term of the agreements. The Company has not entered into any finance leases. DKK thousand 2016 2015 Total future minimum lease payments related to operating lease agreements: Within 1 year 2 to 5 years After 5 years Total 4,005 776 0 3,940 1,241 0 4,780 5,181 Operating lease agreements include rental agreements for buildings, company cars and office equipment. Based on Management’s analysis according to the accounting policy, all leases have been determined to be operating lease commitments. The leases are no-cancelable for terms of between 6 and 60 months. In 2016, DKK 7.4 million (2015: DKK 7.6 million) was recognized as an expense in the income statement, with DKK 6.1 million (2015: DKK 6.0 million) allocated to Research and development expenses and DKK 1.3 million (2015: DKK 1.6 million) to Administrative expenses. Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 22 – Financial and operational risks Interest rate risk The objective of Zealand’s financial management policy is to reduce the Group’s sensitivity to fluctuations in exchange rates, interest rates, credit rating and liquidity. Zealand’s financial management policy has been endorsed by Zealand’s Audit Committee and ultimately approved by Zealand’s Board of Directors. Zealand receives milestone payments from its current partners in USD and EUR and royalty payments in EUR. Zealand is mainly exposed to research and development expenditures. In addition, Zealand has a USD loan as well as a significant USD cash position. As such, Zealand is exposed to various financial risks, including foreign exchange rate risk, interest rate risk, credit risk and liquidity risk. Capital structure It is Zealand’s aim to have an adequate capital structure in relation to the underlying operating results and research and development projects, so that it is always possible to provide sufficient capital to support operations and its long-term growth targets. The Board of Directors finds that the current capital and share structure is appropriate to the shareholders and to the Group. Exchange rate risk Most of Zealand’s financial transactions are in DKK, USD and EUR. Due to Denmark’s long-standing fixed exchange rate policy vis-à-vis the EUR, Zealand has evaluated that there is no transaction exposure or exchange rate risk regarding transactions in EUR. Zealand’s milestone payments have been agreed in foreign currencies, namely USD and EUR. However, as milestone payments are unpredictable in terms of timing, the payments are not included in the basic exchange risk evaluation. As Zealand from time to time conducts clinical trials and toxicology studies in the U.S., Zealand will be exposed to the exchange rate fluctuation and risks associated with transactions in USD. Until now, Zealand’s policy has been to manage the transaction and translation risk associated with the USD passively, placing the revenue received from milestone payments in USD in a USD account for future payment of Zealand’s expenses denominated in USD, covering payments for the next 12-24 months and thus matching Zealand’s assets with its liabilities. In December 2014, Zealand issued a royalty bond of USD 50 million, creating a large exposure against the USD. In order to hedge this, Zealand holds the same portion of its cash position in USD. At December 31, 2016, Zealand held USD 75.7 million (2015: USD 48.0 million) in cash, while the value of the royalty bond was USD 50.0 million. Zealand has a policy of avoiding any financial instrument that exposes the Group to any unwanted financial risk. Zealand is not exposed to interest rate risk because the Company borrows funds at fixed interest rates. The royalty bond has a fixed interest rate of 9.375%. During 2016, all cash has been held in current bank accounts in USD, EUR and DKK. Interest rates on bank deposits in DKK and EUR have been negative for most of 2016, while USD accounts have generated a low level of positive interest. Credit risks Zealand is exposed to credit risks in respect of receivables and bank balances. The maximum credit risk corresponds to the carrying amount. Management believes that credit risk is limited, as counterparties to the accounts receivable are large global pharmaceutical companies. Cash is not deemed to be subject to any credit risks, as the counterparties are banks with investment-grade ratings (i.e. BBB- or higher from Standard & Poor’s). Liquidity risk The purpose of Zealand’s cash management is to ensure that the Group has sufficient and flexible financial resources at its disposal at all times. Zealand’s short-term liquidity is managed and monitored through the Company’s quarterly budget revisions to balance the demand for liquidity and maximize the Company’s interest income by matching its free cash in fixed-rate, fixed-term bank deposits with its expected future cash burn. Sensitivity analysis The table shows the effect on the profit/loss and equity of reasonably likely changes in the financial variables on the statement of financial position. USD Interest rate 2016 Fluctuation 2016 Effect 2015 Fluctuation 2015 Effect +/- 10 % 9,531 +/- 10 % 6,574 +/- 100 basis point 4,728 +/- 100 basis point 4,735 75 Zealand Pharma A/SAnnual Report 2016Financial statements Parent company DKK thousand Restated Trade payables Royalty bond repayments Interest payments on royalty bond Other Total financial liabilities at December 31, 2015 Trade payables Royalty bond repayments Interest payments on royalty bond Other Total financial liabilities at December 31, 2016 < 6 months 6-12 months 1-5 years Total* 21,580 0 0 19,331 40,911 19,739 0 0 29,406 49,145 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 21,580 0 0 19,331 40,911 19,739 0 0 29,406 49,145 All cash flows are non-discounted and include all liabilities under contracts. Interest payments on the royalty bond is calculated using the fixed interest rate (9.375%) and the expected payback time. We expect interest payments on the royalty bond (interest rate 9.375%) of DKK 33.1 million in 2017 (2016: DKK 32 million). Notes Note 22 – Financial and operational risks (continued) Contractual maturity (liquidity risk) A breakdown of the Company’s aggregate liquidity risk on financial assets and liabilities is given below: The following tables detail the Company’s remaining contractual maturity for its financial liabilities with agreed repayment periods. The tables have been prepared using the undiscounted cash flows for financial liabilities, based on the earliest date on which the Company can be required to pay. The tables include both interest and principal cash flows. To the extent that the specific timing of interest or principal flows is dependent on future events, the table has been prepared based on Management’s best estimate of such timing at the end of the reporting period. The contractual maturity is based on the earliest date on which the Company may be required to pay. Group DKK thousand Restated Trade payables Royalty bond repayments Interest payments on royalty bond Other < 6 months 6-12 months 1-5 years Total* 21,676 0 16,000 22,226 0 0 0 21,676 341,486 341,486 16,000 76,000 108,000 0 0 22,226 Total financial liabilities at December 31, 2015 59,902 16,000 417,486 493,388 Trade payables Royalty bond repayments Interest payments on royalty bond Other 19,739 0 0 19,739 0 3,365 349,275 352,640 16,550 29,636 16,550 121,800 154,900 0 0 29,636 Total financial liabilities at December 31, 2016 65,925 19,915 471,075 556,915 76 Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 22 – Financial and operational risks (continued) Note 23 – Related parties Fair value measurement of financial instruments Zealand has no related parties with controlling interest. As of December 31, 2016 and 2015, there were no financial instruments carried at fair value. Zealand’s other related parties comprise the Company’s Board of Directors and senior management. DKK thousand Categories of financial instruments Trade receivables Receivable from subsidiaries Income tax receivable Other receivables Prepaid expenses Restricted cash Group 2016 Group 2015 Restated Parent 2016 Parent 2015 Restated Transactions with related parties Remuneration of the Board of Directors and senior management is described in Note 6. 11,510 158,158 0 5,500 5,379 0 5,875 10,427 27 76 313 3,521 5,500 53,5, 5,875 The parent company has receivables from group subsidiaries of DKK 76 thousand at December 31, 2016 (December 31, 2015: DKK 3.521 thousand). In 2016, interests paid from the parent company to subsidiaries amounted to DKK 151 thousand (2015: DKK 0). No further transactions with related parties were conducted during the year. 13,837 2,430 13,837 318,737 21,403 0 5,017 10,314 2,430 0 Ownership The following shareholders are registered in Zealand’s register of shareholders as owning minimum 5% of the voting rights or minimum 5% of the share capital (1 share equals 1 vote) as of December 31, 2016: Cash and cash equivalents 323,330 418,796 206,398 140,783 Financial assets measured at amortized cost 678,293 617,089 230,855 163,236 Royalty bond Trade payables Other liabilities 332,243 312,951 19,739 64,450 21,676 49,350 0 19,739 29,406 Financial liabilites measured at amortized cost 416,432 383,977 49,145 0 21,580 19,331 40,911 Except as detailed in the following table with respect to the royalty bond, as of December 31, 2016 and 2015, the carrying amount of financial assets and financial liabilities approximated the fair value. DKK thousand Royalty bond 2016 Carrying amount 2016 Fair value 2015 Carrying amount 2015 Fair value 332,243 356,626 312,951 386,912 The fair value of financial liabilities is determined as the discounted cash flows based on the market rates and credit conditions at the balance sheet date. The carrying amount of the royalty bond is based on amortized cost. The fair value of the royalty bond disclosed in the note is based on Level 3 in the fair value hierarchy. Sunstone LSV Management A/S, Copenhagen, Denmark LD Pension (Lønmodtagernes Dyrtidsfond), Copenhagen, Denmark Legg Mason (Royce) Inc., Maryland, US Note 24 – Adjustments for non-cash items DKK thousand Depreciation Warrant compensation expenses Income tax receipt Financial income Financial expenses Exchange rate adjustments Total adjustments Group 2015 Restated Parent 2016 Parent 2015 Restated 6,215 5,410 6,215 16,947 22,727 16,947 -5,875 -5,500 -5,875 Group 2016 5,410 22,727 -5,500 -592 40,781 42,394 -139 -121 347 -132 306 -5,141 -12,068 -2,721 -3,303 57,685 47,474 20,142 14,158 77 Zealand Pharma A/SAnnual Report 2016Financial statements Notes Note 25 – Change in working capital Note 27 – Approval of the annual report DKK thousand Group 2016 Group 2015 Restated Parent 2016 Parent 2015 The annual report is approved by the Board of Directors and Executive Management and authorized for issue on March 15, 2017. Increase/decrease in receivables 140,289 -140,102 -2,379 12,895 Increase/decrease in payables Change in working capital 13,163 -732 8,234 -27,610 153,442 -140,834 5,855 -14,715 Note 26 – Significant events after the balance sheet date On January 17, 2017, Zealand announced that Suliqua™ had been approved by the European Commission for marketing in Europe, which triggered a milestone payment of USD 10.0 million from Sanofi under the Sanofi License Agreement. As of March 15, 2017 Zealand has used restricted cash of USD 25 million (DKK 175 million) to repay half of the outstanding royalty bond. In addition, additional restricted cash of USD 25 million (DKK 175 million) held as collateral for the royalty bond has been released in exchange for a parent company guarantee. Following the transactions described above the outstanding royalty bond amounts to USD 25 million (DKK 175 million) and cash and cash equivalents has increased by USD 25 million (DKK 175 million). Except as noted above, there have been no significant events between December 31, 2016 and the date of approval of these financial statements that would require a change to or additional disclosure in the consolidated or parent financial statements. 78 Zealand Pharma A/SAnnual Report 2016Financial statements Statement of the Board of Directors and Executive Management The Board of Directors and Executive Management have today discussed and approved the Annual Report of Zealand Pharma A/S for the financial year January 1 – December 31, 2016. Executive Management The consolidated financial statements and parent company financial statements have Britt Meelby Jensen been prepared in accordance with International President and Financial Reporting Standards as adopted by Chief Executive Officer Mats Peter Blom Senior Vice President and Chief Financial Officer the EU and additional requirements under the Danish Financial Statements Act. We consider the accounting policies used to be appropriate. In our opinion, the financial statements give a true and fair view of the Group’s and the parent company’s financial position as of December 31, 2016, and of the results of the Group’s and the parent company’s operations and cash flows for the financial year January 1 – December 31, 2016. Board of Directors In our opinion, the Management’s review Chairman Alf Gunnar Martin Nicklasson Rosemary Crane Vice Chairman Catherine Moukheibir Board member includes a fair review of the development of the Group’s and the parent company’s operations and economic conditions, the results for the year, and the Group’s and the parent company’s financial position, as well as a review of the more significant risks and uncertainty the Group and parent company face, in accordance with the additional requirements under the Danish Financial Statements Act. We recommend that the Annual Report be approved at the Annual General Meeting. Glostrup, March 15, 2017 Alain Munoz Board member Michael John Owen Board member Jens Peter Stenvang Board member Employee elected Hanne Heidenheim Bak Board member Employee elected Rasmus Just Board member Employee elected 79 Zealand Pharma A/SAnnual Report 2016Financial statementsIndependent auditor’s report To the shareholders of Zealand Pharma A/S Opinion Basis for opinion Key audit matter However, due to the financial significance to We have audited the consolidated financial We conducted our audit in accordance with Milestone revenue from Sanofi the Group of milestone revenue from Sanofi, statements and the parent company International Standards on Auditing and (See Notes 1 and 2 in the consolidated we have identified this as a key audit matter. financial statements of Zealand Pharma A/S the additional requirements applicable in financial statements.) for the financial year January 1 – December Denmark. Our responsibilities under those How the matter was addressed in the audit 31, 2016, which comprise the income standards and requirements are further License and milestone revenue recognized Based on our risk assessment procedures statement, statement of comprehensive described in the Auditor’s responsibilities amounted to DKK 210 million in 2016. focused on the Group’s business process and income, statement of financial position, for the audit of the consolidated financial Milestone revenue primarily related to the internal controls for milestone revenue, we statement of changes in equity, statement statements and the parent company of cash flows and notes, including the financial statements section of this auditor’s summary of significant accounting policies. report. We are independent of the Group in The consolidated financial statements and accordance with the IESBA Code of Ethics Sanofi License Agreements, and the FDA regulatory U.S. approvals of Adlyxin® and Soliqua™. tested the appropriateness of the Group’s revenue recognition. We read the Sanofi License Agreements, the parent company financial statements for Professional Accountants and additional The Sanofi License Agreements include discussed them with Management and have been prepared in accordance with requirements applicable in Denmark, and we multiple elements, and recognition of revenue evaluated the related accounting treatment. International Financial Reporting Standards have fulfilled our other ethical responsibilities is complex and significant, and requires During the audit, using third-party sources, we as adopted by the EU and additional in accordance with these requirements. subjective evaluations. Management therefore tested whether the performance obligations requirements of the Danish Financial We believe that the audit evidence we have exercises judgment in determining whether for revenue recognized under the Sanofi Statements Act. obtained is sufficient and appropriate to the Group has fulfilled all of its performance License Agreements were met in 2016. In our opinion, the consolidated financial We also evaluated the disclosures in the statements and the parent company Key audit matters As the recognition event for the milestone financial statements related to revenue. provide a basis for our opinion. obligations. financial statements give a true and fair Key audit matters are those matters that, in revenue related to the Sanofi License view of the Group’s and Parent's financial our professional judgment, were of most Agreements recognized in 2016 was the position at December 31, 2016 and of their significance in our audit of the consolidated FDA regulatory approvals, there were limited financial performance and cash flows for financial statements and the parent company elements of judgment in determining the the financial year January 1 – December financial statements for the financial year appropriateness of recognition of milestone 31, 2016 in accordance with International January 1 – December 31, 2016. These revenue in 2016. Financial Reporting Standards as adopted matters were addressed in the context by the EU and additional requirements of of our audit of the consolidated financial the Danish Financial Statements Act. statements and the parent company financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 80 Zealand Pharma A/SAnnual Report 2016Financial statementsStatement on the Management’s review Management’s responsibilities for the Auditor’s responsibilities for the audit of the procedures responsive to those risks, and Management is responsible for the consolidated financial statements and the consolidated financial statements and the obtain audit evidence that is sufficient Management’s review. parent company financial statements parent company financial statements and appropriate to provide a basis for our Management is responsible for the preparation Our objectives are to obtain reasonable opinion. The risk of not detecting a material Our opinion on the consolidated financial of consolidated financial statements and assurance as to whether the consolidated misstatement resulting from fraud is higher statements and the parent company financial parent company financial statements that financial statements and the parent company than for one resulting from error, as fraud statements does not cover the Management’s give a true and fair view in accordance with financial statements as a whole are free may involve collusion, forgery, intentional review, and we do not express any form of International Financial Reporting Standards from material misstatement, whether due omissions, misrepresentations, or the assurance conclusion thereon. as adopted by the EU and additional to fraud or error, and to issue an auditor’s override of internal control. requirements of the Danish Financial report that includes our opinion. Reasonable In connection with our audit of the Statements Act. assurance is a high level of assurance, but • Obtain an understanding of internal control consolidated financial statements and the is not a guarantee that an audit conducted relevant to the audit in order to design parent company financial statements, our Management is also responsible for such in accordance with International Standards audit procedures that are appropriate in the responsibility is to read the Management’s internal control as Management determines on Auditing and additional requirements circumstances, but not for the purpose of review and, in doing so, consider whether is necessary to enable the preparation of applicable in Denmark will always detect expressing an opinion on the ef-fectiveness the Management’s review is materially consolidated financial statements and parent a material misstatement when it exists. of the Group’s and the parent company’s inconsistent with the consolidated financial company financial statements that are free Misstatements can arise from fraud or error internal control. statements and the parent company financial from material misstatement, whether due to and are considered material if, individually statements or our knowledge obtained in the fraud or error. or in the aggregate, they could reasonably • Evaluate the appropriateness of accounting audit, or otherwise appears to be materially be expected to influence the economic policies used and the reasonableness misstated. In preparing the consolidated financial decisions of users taken on the basis of these of accounting estimates and related statements and the parent company financial consolidated financial statements and parent disclosures made by Management. Moreover, it is our responsibility to consider statements, Management is responsible company financial statements. whether the Management’s review provides for assessing the Group’s and the parent • Conclude on the appropriateness of the information required under the Danish company’s ability to continue as a going As part of an audit conducted in accordance Management’s use of the going concern Financial Statements Act. concern; for disclosing, as applicable, matters with International Standards on Auditing and basis of accounting in the preparation of related to going concern; and for using the the additional requirements applicable in the consolidated financial statements and Based on the work we have performed, we going concern basis of accounting in the Denmark, we exercise professional judgment the parent company financial statements, conclude that the Management’s review preparation of the consolidated financial and maintain professional skepticism and, based on the audit evidence obtained, is in accordance with the consolidated statements and the parent company financial throughout the audit. We also: financial statements and the parent company statements unless Management either intends whether a material uncertainty exists related to events or conditions that may financial statements and has been prepared to liquidate the Group or the parent company • Identify and assess the risks of material cast significant doubt on the Group’s and in accordance with the requirements of the or to cease operations, or has no realistic misstatement of the consolidated financial the parent company’s ability to continue Danish Financial Statements Act. We did not alternative but to do so. statements and the parent company as a going concern. If we conclude that a identify any material misstatement of the Management’s review. financial statements, whether due to material uncertainty exists, we are required fraud or error, design and perform audit to draw attention in our auditor’s report to 81 Zealand Pharma A/SAnnual Report 2016Financial statementsthe related disclosures in the consolidated the parent company financial statements the planned scope and timing of the audit in the audit of the consolidated financial financial statements and the parent represent the underlying transactions and and significant audit findings, including any statements and the parent company financial company financial statements or, if such events in a manner that gives a true and fair significant deficiencies in internal control that statements of the current period and that are disclosures are inadequate, to modify our view. opinion. Our conclusions are based on the we identify during our audit. therefore the key audit matters. We describe these matters in our auditor’s report unless audit evidence obtained up to the date of • Obtain sufficient appropriate audit evidence We also provide those charged with law or regulation precludes public disclosure our auditor’s report. However, future events regarding the financial information of governance with a statement that we have about the matter or when, in extremely rare or conditions may cause the Group and the the entities or business activities within complied with relevant ethical requirements circumstances, we determine that a matter parent company to cease to continue as a the Group to express an opinion on the regarding independence, and communicated should not be communicated in our report going concern. consolidated financial statements. We are to them all relationships and other matters because the adverse consequences of responsible for the direction, supervision that may reasonably be thought to bear on doing so would reasonably be expected to • Evaluate the overall presentation, structure and performance of the Group audit. We our independence, and where applicable, outweigh the public interest benefits of such and content of the consolidated financial remain solely responsible for our audit related safeguards. communication. statements and the parent company opinion financial statements, including the From the matters communicated to those disclosures in the notes, and whether the We communicate with those charged with charged with governance, we determine consolidated financial statements and governance regarding, among other matters, those matters that were of most significance Copenhagen, March 15, 2017 Deloitte Statsautoriseret Revisionspartnerselskab Company Reg. No. 33 96 35 56 Martin Norin Faarborg Sumit Sudan State Authorized Public Accountant State Authorized Public Accountant 82 Zealand Pharma A/SAnnual Report 2016Financial statementsCompany information Zealand Pharma A/S Smedeland 36 2600 Glostrup Denmark Tel: +45 88 77 36 00 Fax: +45 88 77 38 98 info@zealandpharma.com www.zealandpharma.com CVR no.: 20 04 50 78 Established April 1, 1997 Registered office Albertslund Auditors Deloitte Statsautoriseret Revisionspartnerselskab CVR no.: 33 96 35 56 Proofreading: Borella projects Design and production: In-Mind Design 83 Zealand Pharma A/SAnnual Report 2016Financial statementsZealand Pharma A/S Smedeland 36 2600 Glostrup Denmark 

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