Zealand Pharma Annual Report 2019

Plain-text annual report

Delivering on our commitment to patients Zealand Pharma Annual Report 2019 Company reg. no. 20045078 2 2 On the cover Crosby was born with congenital hyperinsulinism. Read more page 18 In consideration of our impact on the environment, the Zealand Pharma Annual Report will transition to electronic copy only. A limited number of printed copies will be made of the Annual Report 2019, and it will be the last publication produced in print. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019Contents Contents Management review Changing lives About Zealand Pharma Shareholder Letter 2019 Achievements and financial highlights Consolidated Key Figures 2020 Outlook and objectives Transforming peptides Pipeline overview Dasiglucagon: Severe hypoglycemia Dasiglucagon: Congenital hyperinsulinism Dasiglucagon: Automated diabetes management 4 5 6 8 10 11 12 14 16 18 20 Approaching commercialization Engaging partnerships Corporate matters Corporate Governance Corporate Responsibility Our People Risk Management and Internal Control Financial Review Shareholder Information Board of Directors Corporate Management 26 28 31 32 35 36 38 40 43 45 47 Dasiglucagon: Hypoglycemia following bariatric surgery 21 Glepaglutide and ZP7570: Short bowel syndrome Pre-clinical projects 22 25 33 50 50 51 52 52 53 54 88 88 89 90 90 91 100 101 102 107 107 Financial statements Consolidated financial statements Income statement Statement of comprehensive income Statement of financial position Statement of cash flows Statement of changes in equity Business overview Notes Financial statements of the parent company Income statement Statement of comprehensive income Statement of financial position Statement of cash flows Statement of changes in equity Notes Alternative performance measures for the group (non-audited) Statement of the Board of Directors and Executive Management Independent auditor’s report Other information Sources Addresses (company information) Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 4 4 CL - COVER Changing lives We work every day with patient communities and thought leaders to change the lives of people with severe medical conditions Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019CL - About Zealand Pharma 55 About Zealand Pharma We are passionate about changing the lives of people with severe medical conditions through targeted development of next generation peptide therapeutics. Our ambition is to be a world leader in treating specialty gastrointestinal and metabolic diseases. We intend to deliver best-in-class treatment options that meet patient medical needs and ease the burden on the health care system. We utilize a business model with two approaches. First, we aim to retain full ownership and control of product candidates all the way to market in selected geographies. Second, we also engage in licensing partnerships that expand the opportunity and probability of success for selected products and/or indications. Our agile organization engages with partners across the value chain, such as leading Clinical Research Organizations (CROs) and Contract Manufacturing Organizations (CMOs). Fully integrated biotech company Founded 1998 in Copenhagen, locations in Boston and New York Leading peptide platform A world leading peptide platform, with two medicines on the market Find out more about Zealand on zealandpharma.com/about-us Four potential launches in four years Accelerating late stage programs to launch new products into major markets beginning in 2021 Experienced team 179 employees of which 85% are in R&D Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 20196 6 CL - Shareholder letter Shareholder Letter Poised to deliver on our commitment to patients Over the past year, Zealand Pharma successfully operated an acceleration in strategy to become a fully integrated biotech company, maintaining highly productive research and development, while building our own commercial and medical operations. By maintaining control over our proprietary products, we will maximize value for our shareholders while simultaneously supporting access to our innovative treatments for patients in need. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201977 Execution on our first new drug application In 2019, the clinical program for the dasiglucagon HypoPal® rescue pen was completed. The program includes four Phase 3 clinical studies that demonstrat- ed a consistent median time of 10 minutes to recovery from severe hypoglycemia for both adults and children when treated with dasiglucagon. These clinical results provide a solid foundation for our new drug application to the U.S. FDA, which we remain on-track to submit in the first quarter of 2020. Progression of all pre-clinical and clinical programs Driven by an ambition to transform management of type 1 diabetes, we created dasiglucagon: a fast-acting glucagon analog that is stable in solution. This mole- cule allows us to envision multiple novel drug-device combinations: a rescue treatment for severe hypogly- cemia in a ready-to-use auto-injector or a prefilled sy- ringe, a multi-dose pen for mini dosing hypoglycemia, a chronic treatment with a continuous delivery pump for patients suffering from the rare disease congenital hyperinsulinism, and in an artificial pancreas in com- bination with insulin for type 1 diabetic patients (which received Breakthrough Device designation from the U.S. Food and Drug Administration in 2019). We also progressed glepaglutide, a long-acting GLP-2 analog delivered in a ready-to-use auto-injector to help short bowel syndrome (SBS) patients improve absorption of nutrients and electrolytes. In our early pipeline, we advanced innovative dual pep- tides to improve patient outcomes, including a GLP-1/ GLP-2 agonist to also treat SBS, and a GLP-1/GLU agonist for type 2 diabetes/obesity. Building independent U.S. operations Establishing commercial and medical operations is the final step of our transformation. In the second half of 2019, we successfully onboarded key personnel, selected a site in the Boston-area to complement our New York office, and commenced the early build of our infrastructure. The momentum of these activities has carried into 2020, where we continue to execute a fast-paced plan to ensure our U.S. organization is fully operational by year end and ready to launch Zealand’s dasiglucagon HypoPal® rescue pen in 2021. An acquisition to grow our strategic assets For the first time, Zealand brought an external asset into our peptide platform by acquiring Encycle Thera- peutics. The acquisition further strengthens our lead- ership in peptide therapeutics and novel treatments for gastrointestinal diseases, and reinforces our commit- ment to investing in both internal and external innova- tion to address significant unmet medical needs. Validation from partnering industry leaders We formed a new partnership with Alexion Pharma- ceuticals to collaborate in the discovery and devel- opment of peptide therapeutics for complement mediated diseases. This new partnership was followed by Boehringer Ingelheim’s decision to advance the GLP-1/glucagon dual agonist licensed from Zealand, BI 456906, into Phase 2 development for treatment of obesity and type 2 diabetes. We are thrilled these collaborations are expanding opportunities for our next generation peptide therapeutics to reach even more patients. been among the top three shareholders of Zealand Pharma since early 2018. The placement raised Van Herk’s percent of share capital to 19% and added DKK 559.6 million to Zealand’s existing cash resources. It is an honor to be recognized by an investor with a track record of success in biotech, and to receive substantial support from all shareholders who are keeping per- spective on our long term value creation. Transforming to deliver on our commitment The combination of dense news flow, clarification of our strategic intent, and acceleration on our road to commercialization have been positively recognized by the market and have supported an historical increase in valuation to our long time shareholders. In addition to the mentioned achievements, Zealand experienced other transformational changes during 2019. Transition of executives introduced Chief Financial Officer Matt Dallas and myself to the company. Also, we initiated a relocation in Denmark from the offices in which Zea- land has thrived for twenty years, to a new facility that can accommodate our success-driven growth. Our team continues to work hard, with the Zealand spirit that is distinct, collaborative, and determined. On behalf of the Board of Directors, the Manage- ment team, and all Zealand colleagues: thanks to our shareholders, partners and patients for placing trust in our company. We are focused on achieving our ambitions, and delivering on the commitment that we make to patients: we will change lives by addressing severe medical needs with our next generation peptide therapeutics. Additional support from institutional shareholders A private placement of shares was made with Van Herk Investments, a long-term investor in biotech who has Emmanuel Dulac President and Chief Executive Officer Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 20198 8 CL - 2019 Achievements 2019 Achievements In addition to advancing nearly every pipeline program, we realized two other significant accomplishments in 2019: a new license partnership with an industry leader, and Zealand's first acquisition. Accelerated our late-stage pipeline • Dasiglucagon HypoPal® rescue pen: Clinical program completed and NDA submission early 2020 • Dasiglucagon for dual-hormone pump: Phase 2 completed and Phase 3 planned for late 2020 • Dasiglucagon for congenital hyperinsulinism: Two pivotal Phase 3 trials initiated • Glepaglutide for short bowel syndrome: continued progress in Phase 3 Advanced our early pipeline • Once-weekly GLP-1/GLU for obesity/type 2 diabetes¹: Phase 1 completed and Phase 2 to be initiated early 2020 • Long-acting GLP-1/GLP-2 dual agonist (ZP7570) for SBS: Phase 1 initiated Expanded our strong financial and organizational position • Entered agreement with Alexion Pharmaceuticals to develop complement C3 inhibitor • Completed the company's first acquisition: Encycle Therapeutics, securing pre-clinical α4β7 integrin inhibitor and access to screening library of approximately 5,000 peptide-like macrocycles • Accelerated build-up of U.S. operations to prepare for first product launch anticipated in 2021 • Secured DKK 560 million in private placement with existing investor Van Herk Group ¹ BI456906, partnered with Boehringer Ingelheim Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019CL - Financial highlights 99 Financial highlights R&D investment, DKK 561.4 m +28% (v. 2018) Employees (FTE) 179 85% in R&D Administrative expenses, DKK 67.9 m (+56% v. 2018) Revenue, DKK ZEAL share price, DKK at Dec. 31, 2019 Cash position, DKKm 299 41.3 m (+9% v. 2018) 235.40 (+186% since Dec. 31, 2018) Find out more about Zealand at zealandpharma.com/investor Net operating expenses, DKK 628.9m (+31% v. 2018) 300 250 200 150 100 K K D , e c i r p e r a h S 299 1081 861 319 21 538 419 323 75 6 589 Dec 2018 Jul 2019 Dec 2019 2014 2015 2016 2017 2018 2019 Securities Restricted cash Cash and equivalents Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 10 10 CL - Consolidated key figures Consolidated key figures DKK ’000 2019 Restated6 Restated6 Restated6 Restated6 2015 2017 2016 2018 Income statement and comprehensive income Revenue Royalty expenses Research and development expenses Administrative expenses Other operating income Operating result Net financial items Result before tax Corporate tax Net result for the year Comprehensive income/loss Earnings/loss per share – basic (DKK) Earnings/loss per share – diluted (DKK) Statement of financial position 41,333 -415 37,977 -3,356 136,322 -14,163 230,864 -30,931 182,573 -21,578 -561,423 -67,881 -438,219 -43,543 444 1,099,526 652,385 -27,334 625,051 -43,773 581,278 581,278 -587,942 11,265 -576,677 5,136 -571,541 -571,541 -323,949 -47,343 607 -248,526 -31,387 -279,913 5,500 -274,413 -274,413 -261,387 -50,514 1,697 -110,271 -43,764 -154,035 5,500 -148,535 -148,535 -214,711 -38,793 12,828 -79,681 -38,505 -118,186 5,875 -112,311 -112,311 -16.91 18.94 -9.85 -6.11 -4.87 -16.91 18.94 -9.85 -6.11 -4.87 Cash and cash equivalents Restricted cash¹ Marketable securities Total assets Share capital (‘000 shares) Equity Equity ratio² Royalty bond 1,081,060 0 299,448 860,635 0 298,611 1,599,514 1,229,797 30,787 1,242,673 1,116,281 0.91 0 0.78 0 36,055 588,718 5,892 75,111 721,285 30,751 514,669 0.71 135,734 323,330 318,737 0 683,116 26,142 267,381 0.39 332,243 418,796 21,403 0 627,621 24,353 244,803 0.39 312,951 DKK ’000 2019 2018 2017 2016 2015 Cash flow Cash outflow/inflow from operating activities Cash outflow/inflow from investing activities Cash outflow/inflow from financing activities Purchase of property, plant and equipment Free cash flow³ Other Share price (DKK) Market capitalization (DKKm)⁴ Equity per share (DKK)⁵ Average number of employees Number of full time employees at the end of the year -409,455 -461,420 -278,746 40,904 -224,767 -51,666 882,925 221,351 -299,958 -1,594 674,480 -155,449 337,930 157,146 96,413 -21,036 -430,491 -4,038 -463,418 -7,226 -285,972 -2,600 38,304 -4,040 -228,807 235.40 8,487 34.52 173 82.40 2,537 36.33 146 85.00 2,614 16.77 128 106.50 2,784 11.24 124 151.50 3,689 10.29 110 179 149 133 108 106 ¹ ² ³ ⁴ ⁵ ⁶ Restricted cash serves as collateral for the royalty bond issued in 2014. No cash has been restricted since Zealand has redeemed the outstanding royalty bond in 2018. Equity ratio is calculated as equity at the balance sheet date divided by total assets at the balance sheet date. See page 100 regarding alternative performance measures. Market capitalization is calculated as outstanding shares at the balance sheet date times the share price at the balance sheet date. Equity per share is calculated as shareholders’ equity divided by total number of shares less treasury shares. Warrant expenses have been restated for the period 2015-2018. See note 1 to the consolidated financial statements. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 CL - 2020 Outlook and objectives 2020 Outlook and Objectives Financial guidance In 2020, Zealand expects revenue from existing license agreements. However, since such revenue is uncertain in terms of amount and timing, Zealand does not guide on such revenue. We expect to achieve several significant milestones in our dasiglucagon and glepaglutide programs in 2020, all advancing toward becoming a fully integrated biotech, so we can deliver on our commitment to changing patient lives and create additional value for shareholders. Net operating expenses in 2020 are expected to be within the DKK 790-810 million range. The increase compared to 2019 is due to a rise in administrative expenses as the Company prepares for the product launch and subsequent commercialization for the dasi- glucagon HypoPal Rescue Pen as well as the clinical development costs associated with glepaglutide and the dasiglucagon CHI and DHAP programs in Phase 3. 1111 DKKm 2020 guidance 2019 2019 realized guidance¹ Net operating expenses2 1 As revised on August 15, 2019. 790-810 629 580-600 2 For definition of net operating expenses, refer to page 100. Estimate guidance for 2019 was exceeded due to increased levels of support needed in internal staffing as well as from professional advisors and external service providers as the Company prepares for a product launch and subsequent commercialization. 2020 Objectives Advance our early pipeline and strategic alliances • Complement C3 inhibitor¹: pre-clinical development towards Phase 1 initiation • ZP 10000 α4β7 integrin inhibitor: pre-clinical development towards Phase 1 initiation Execute on the clinical pipeline • Dasiglucagon HypoPal® rescue pen: submit new drug application to U.S. FDA • Dasiglucagon for congenital hyperinsulinism: Phase 3 clinical results expected in 2020, on track for 2021 new drug application • Dasiglucagon for dual-hormone artificial pancreas pump: Phase 3 study initiation • Glepaglutide for short bowel syndrome: complete patient enrollment in Phase 3 study in 2020, with results and new drug application in 2021 • ZP 7570 for short bowel syndrome: Phase 1 program advancement • BI 456906 for obesity/type 2 diabetes²: Phase 2 initiation • Amylin analog for obesity/type 2 diabetes2: Phase 1 initiation • Establish Boston-area office for Zealand Pharma U.S. operations • Execute launch readiness program for dasiglucagon HypoPal rescue pen • Disciplined financial management with tight cost control Build Zealand Pharma U.S. and advance launch readiness Maintain a strong financial and organizational position ¹ Partnered with Alexion Pharmaceuticals. ² Partnered with Boehringer Ingelheim. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 12 12 TP - COVER Zealand's pipeline has never been more robust than it is today, and we have an amazing team capable of expanding our leadership in the discovery and development of next generation peptide therapeutics.” Adam Steensberg Executive Vice President, Research & Development and Chief Medical Officer Transforming peptides Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019TP - Transforming peptides Transforming Peptides Discovering and optimizing peptides to create new medicines Peptides represent a therapeutic modality with over 60 approved and marketed peptide drugs and many more in clinical development.¹ We leverage more than 20 years of experience discovering and developing peptide drugs to transform peptide projects into next generation therapeutics. Find out more about Zealand on zealandpharma.com/strategy For more than twenty years, Zealand has been successfully optimizing native peptide hormones to confer the necessary properties to be a safe and effective drug. Native peptides are composed of amino acids (fifty or less) in a linear or cyclic form, have powerful biological functions but are inherently unstable and short-lived. To convert these native peptides into an effective peptide therapeutic requires the instability and thus duration of action to be corrected while maintaining or enhancing the biological activity. This requires modifications to the amino acid sequence of the peptide, generally using substitution with another amino acid. Zealand uses its unique in depth understanding of peptide chemistry and biology to focus the substitu- tion process on key amino acids to remove the weak points that result in poor solubility, stability or activity, and thus create new drug candidates. We have successfully applied this approach to glucagon, amylin, GLP-1, and GLP-2. Enhancing their natural properties or combining their activities in single peptides has presented multiple therapeutic opportunities and led to lixizenatide, the first mar- keted peptide drug discovered by Zealand’s peptide platform. 1313 Strategic expansion In 2019, Zealand Pharma completed its first acquisi- tion with the purchase of Encycle Therapeutics, Inc. The acquisition centered on a pre-clinical lead asset that is being developed to target integrin α4β7, which is involved in the pathogenesis of inflammatory bow- el disease (IBD). Notably, this macrocycle technology, derived from peptides, has enhanced potential for penetration of membranes, thus creating poten- tial for orally-delivered peptide drugs. Zealand also gained access to a screening library of approximately 5,000 unique macrocycles that could provide addi- tional targets for research using Zealand’s expertise in peptide development. Working with external innovation In line with Zealand’s strategy to access cutting-edge technology, we have a range of research collabora- tions providing us with access to novel peptide librar- ies (e.g. Orbit Discovery UK, the Torrey Pines Institute for Molecular Studies U.S.A) or new technologies for peptide stabilization and delivery. All are focused on identifying peptides that act on disease-relevant targets. 20 years of experience ¹ J. Lau and M. Dunn, Therapeutic peptides: Historical perspectives, current development trends, and future directions. Bioorganic & Medicinal Chemistry, version 26, issue 10, 1 June 2018, p. 2700-2707. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201914 14 TP - Pipeline overview Pipeline Overview Zealand has a robust pipeline, including one registration-ready program, two Phase 3 programs with one more entering Phase 3 this year, and several promising early development projects. Find out more about Zealand’s pipeline at zealandpharma.com/product-pipeline Product Candidate Indication Pre- clinical Phase 1 Phase 2 Phase 3 Regi- stration Development Programs Dasiglucagon HypoPal® Rescue Pen Severe hypoglycomia Read more page 16 Dasiglucagon S.C. Continuous infusion Congenital hyperinsulinism Read more page 18 Dasiglucagon Dual-hormone Pump Diabetes management Read more page 20 Glepaglutide GLP-2 Analog Read more page 23 Short bowel syndrome ZP7570 GLP-1/GLP-2 Dual Agonist Short bowel syndrome Read more page 23 BI 456909 GLP-1/GLU Dual Agonist Obesity/Type 2 diabetes1 Read more page 24 Amylin Analog Read more page 24 Obesity/Type 2 diabetes2 Pre-Clinical Programs Complement C3 Inhibitors Read more page 25 Undisclosed³ ZP10000 α4β7 integrin inhibitor Read more page 25 Inflammatory bowel disease⁴ Ion Channel Blockers Read more page 25 Undisclosed GIP/GLP-1/Glucagon Mono/Dual/Triple Undisclosed Read more page 25 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019Three patient stories We are honored to present three profiles of people living with severe unmet medical needs. Each story provides a backdrop for how a disease can affect every day life for a patient, their family and caregivers, and illustrates why we are committed to delivering next generation therapeutics to help change their lives. TP - Three patient stories 1515 Severe hypoglycemia Anders lives with Type 1 diabetes. When his blood glucose levels crashed unexpectedly, he experienced severe hypoglycemia. Onset of severe hypoglycemia was unpredictable despite diligent management of Anders' blood glucose levels. Read more page 16 Congenital Hyperinsulinism Crosby was born with congenital hyper- insulinism. His parents were warned that having a CHI baby was "going to be a really tough journey." They tell about the chal- lenges they have faced: from receiving a rare prenatal diagnosis of the condition, to trying to manage his volatile blood gluclose levels. Read more page 18 Short bowel syndrome Will was diagnosed with short bowel syn- drome at age 13. He began receiving total parenteral support, a lifesaving therapy for patients with intestinal failure that provides all the elements of nutrition and hydration needed to live via intravenous infusion. Read more page 22 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201916 16 TP - Severe hypoglycemia Severe hypoglycemia Severe hypoglycemia is an acute, life-threatening condition resulting from a critical drop in blood glucose levels. Among the most feared complications of diabetes treatment1, severe hypoglycemia requires another person for rescue.² Read more of Anders’ story at zealandpharma.com/anders-story 6 million people With diabetes are on insulin therapy in the U.S.3 ~300,000 hospitalizations Occur annually in the U.S. due to severe hypoglycemia4 Dasiglucagon HypoPal® Rescue Pen The Dasiglucagon HypoPal® Rescue Pen is a ready- to-use auto-injector containing 0.6 mg dasiglucagon, and is designed to offer diabetes patients fast and effective treatment for severe hypoglycemia. 2019 Achievements The clinical program was concluded in 2019. In the pivotal and confirmatory Phase 3 trials, the primary and all key secondary endpoints were successfully achieved with a median time to blood glucose recovery of 10 minutes. Results from a pediatric Phase 3 study demonstrate that the median time to blood glucose recovery was 10 minutes for dasiglucagon also in children. Next steps The submission of the New Drug Application with the U.S. FDA is on track for early 2020. Build-up of U.S. commercial operations is on track to support the anticipated launch in 2021. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 20191717 “Diabetes affects me all the time, and I have to think about it no matter what I do.” Anders Anders lives with type 1 diabetes. He constantly mon- itors his blood glucose levels to maintain glycemic control and good health. Despite wearing an insulin pump to improve management of insulin injections, he has experienced severe hypoglycemia multiple times and it remains on the most feared challenges of living with his type 1 diabetes. Dasiglucagon HypoPal® rescue pen for potential fast treatment of severe hypoglycemia; on track for early 2020 NDA submission. Pivotal Phase 35 Confirmatory Phase 36 Pediatric Phase 37 40 min 35 min 30 min For illustration only 10 min 12 min 10 min 10 min 12 min Dasiglucagon 0.6 mg Placebo GlucaGen® 1.0 mg Dasiglucagon 0.6 mg Placebo Dasiglucagon 0.6 mg Placebo GlucaGen® 1.0 mg y r e v o c e r e s o c u g d o o b o t e m l l i i t n a d e M Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 18 18 TP - Congenital hyperinsulinism Congenital Hyperinsulinism 300 newborns Are diagnosed every year with genetically determined CHI in the U.S. and EU1,2 Congenital hyperinsulinism (CHI) is an ultra-rare and devastating congenital disorder in newborns. It is caused by a defect in pancreatic beta cells, resulting in insulin overproduction. This leads to persistently and dangerously low blood sugar levels (hypoglycemia). Substantial burden of disease High resistance to existing medical treatment3 High risk of seizures and permanent brain injury4 Most severe cases require pancreatic surgery5 Prolonged hospitalization and intolerable burden to patients, families, caregivers, and healthcare systems2,6 Dasiglucagon Subcutaneous Continuous Infusion Dasiglucagon is a potential first-in-class glucagon analog for the treatment of children with congenital hyperinsulinism. The potential of chronic dasiglucagon infusion delivered via a pump to prevent hypoglycemia in children with CHI is being evaluated in a Phase 3 program. The aim is to reduce or eliminate the need for intensive hospital treatment, reduce the frequen- cy of dangerous low blood glucose and need for constant feeding, and to potentially delay or elimi- nate the need for pancreatectomy. The U.S. FDA and the European Commission both granted orphan drug designation to dasiglucagon for the treatment of CHI. Read more of Crosby’s story at zealandpharma.com/crosbys-story Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 20191919 2019 Achievements The first Phase 3 trial with 32 CHI children aged 3 months to 12 years is ongoing and, the second Phase 3 trial with 12 CHI children from 7 days up to one year of age was initiated in December 2019. Next Steps Based on strong progress in patient enrollment, results from the Phase 3 studies are expected in 2020. “Even though he appears to be such a normal kid, any moment his blood sugar can drop to a really dangerous level. Crosby needs to have a nurse with him at school because his blood sugar, even on medication, is extremely volatile.” Julie, Crosby’s mother Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201920 20 TP - Automated diabetes managment Automated diabetes management Currently, maintaining blood glucose levels requires continuous intervention with insulin. The amount of insulin administered is subject to continuous adapta- tion dictated by the individual’s blood glucose levels, food intake, activities such as exercise, sickness, prior insulin injections, etc. A person with type 1 diabetes depends on multiple daily insulin injections to maintain plasma glucose in the normal ranges.1,2 When too much insulin is injected, dangerously low blood glucose levels can develop and rapid intake of sugar-rich food is needed to prevent development of severe hypoglycemia. Conversely, injecting too little insulin will lead to dangerously high blood glucose, which is also associated with significant acute and chronic complications. Despite progress with faster acting modern insu- lins and novel insulin pumps connected to glucose sensors, current therapies require considerable effort by the people with diabetes and their caregivers. As such, type 1 diabetes remains one of the most bur- densome diseases to manage. When a person with type 1 diabetes experiences dangerously low blood glucose, they produce an insufficient amount of the counteracting hormone glucagon, and depend on frequent ingestion of excessive food to re-establish normal glucose levels. Moreover, most people with type 1 diabetes keep blood glucose levels in the higher ranges; only 17% of children and 21% of adults diagnosed with diabetes in the U.S. achieved the glycemic targets recommended by American Diabetes Association.3 Dasiglucagon for dual hormone artificial pancreas pump systems Zealand is developing a 1 ml cartridge contain- ing 4 mg/ml dasiglucagon, intended for use in dual-hormone artificial pancreas pumps. We are collaborating with Beta Bionics, develop- er of the iLet™, a pocket-sized, dual-chamber, autonomous, glycemic control system. The iLet mimics a biological pancreas by calculating and dosing insulin and/or glucagon (dasiglucagon) as needed, based on data from the diabetic person’s continuous glucose monitor. Zealand has invest- ed USD 5 million in Beta Bionics. 2019 Achievements Top-line results from a Phase 2 trial in patients with Type 1 diabetes demonstrated that the bihormonal iLet using dasiglucagon provided superior glycemic control over the insulin- only iLet. During the bihormonal period, 90% of participants had a mean CGM glucose level of < 154 mg/dL, whereas only 50% of participants on the insulin-only iLet achieved this. Importantly these glycemic targets were achieved while time spent with low blood glucose levels < 54 mg/dL was only 0.3% in the bihormonal and 0.6% in the insulin-only arm. Next Steps Zealand and Beta Bionics are in dialogue with the FDA and expect to initiate the pivotal Phase 3 trial in late 2020. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019TP - Hypoglycemia following bariatric surgery 2121 Hypoglycemia following bariatric surgery Dasiglucagon mini dose Dasiglucagon mini dose may provide an attractive treatment solution for people with type 1 diabe- tes who experience hypoglycemic events, and for whom eating or drinking carbohydrates is not an option, similar to the post-bariatric patients. A number of patients who have undergone bariatric surgery as a treatment for obesity, experience reactive hypoglycemia after eating a meal. Thus, ingesting additional food or drink to increase plasma glucose is not an option. There is no approved treatment option for the estimated 6,000 patients in the U.S. who suffer from this serious condition. 2019 Achievements In October, a new clinical program was initiated for dasiglucagon to evaluate its potential as a novel treatment for patients with post bariatric surgery hypoglycemia. Next Steps Results from the Phase 2 clinical proof of concept dose-finding trial expected in 2020. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201922 22 TP - Short bowel syndrome Short bowel syndrome Underlying causes for SBS include inflammatory bow- el syndrome, intestinal infarction, radiation damage or trauma, and recurrent intestinal obstruction or con- genital disorders.1,2,3 SBS affects an estimated 20,000- 40,000 people in the U.S. and Europe.4 Patients with SBS have undergone massive intestinal surgery resulting in significantly reduced or complete loss of intestinal function. Read more of Will’s story at zealandpharma.com/wills-story SBS patients cannot absorb adequate fluids and nu- trition taken orally, and those most severely affected become dependent on home parenteral support to sur- vive. Home parenteral support is delivered through daily infusion of intravenous fluids and nutrition via a central venous catheter.1,2 Long-term use of parenteral support carries a risk of catheter-related blood stream infec- tions, blood clots, and organ impairment including liver and kidney damage.2 Patients are required to connect to the infusion lines and pumps for up to 16 hours every day, which can pose significant restrictions on ability to engage in normal daily activities.5 Limitations of current treatments Management of SBS is a complex multidisciplinary task with a focus on optimizing the patient’s hydra- tion and nutritional status. It includes striking the right balance between parenteral support and oral intake of fluids and nutrition. Treatment with GLP-2 analogs has been demonstrated to increase the absorptive capacity of the remaining intestines, and thus enables the patient to realize their full potential for intestinal rehabilitation following surgery. Despite the clear benefits of reducing the dependency on parenteral support, people treated with the only currently available short-acting GLP-2 therapy have shown high levels of treatment discontinuation,1,2 which Zealand views as an opportunity for more ef- fective, less complex and better tolerated treatments tailored to the needs of SBS patients. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 20192323 “As a thirteen year old, the hardest part for me was that I wasn’t able to participate in sports. At the time, that was my biggest concern. I realized later… it was a lot bigger than just that.” Will Will has had short bowel syndrome since he was 13 years old. When first diagnosed, he was receiving infusions of total parenteral nutrition (TPN) for 12 hours, every night of the week. Being connected to the TPN infusion limited his ability to leave the house and attend school. He has worked hard to regain his freedom and quality of life by optimizing his TPN and being connected fewer hours and days per week. His goal is to be completely free from receiving TPN. Glepaglutide Glepaglutide is a long-acting GLP-2 analog being developed in an auto-injector with potential for convenient weekly administration. GLP-2 molecules stimulate the growth of intestinal tissue, increase nu- trient and fluid absorption, increase intestinal blood flow, and reduce gastric secretion and emptying. ZP7570 ZP7570 is a potential first-in-class and long- acting GLP-1R/GLP-2R dual agonist. ZP7570 is designed to improve management of SBS beyond what is achievable with mono GLP-2 treatments, and may represent a next level of innovation for helping SBS patients to further realize full potential for intestinal rehabilitation. 2019 Achievements Phase 3 pivotal trial progress and ramp up in patient enrollment. 2019 Achievements The clinical program was started in June 2019 with a Phase 1a single-ascending dose, safety and tolerability trial. Next steps Patient enrollment is expected to be completed in 2020, and results are expected in the first half of 2021. Next Steps Following good progress in the Phase 1a trial, we expect to initiate a Phase 1b multiple-ascending dose, safety and tolerability trial in 2020. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 24 24 TP - Obesity Type 2 diabetes Obesity / There are insufficient therapeutic options available, resulting in a high unmet medical need for safe and effective treatments that achieve significant weight loss. Type 2 Diabetes Excessive weight and obesity are amongst the leading risk factors for heart disease, ischemic stroke, liver diseases and type 2 diabetes as well as for a number of cancers. Find out more about our research at zealandpharma.com/our-approach Long-acting amylin analog with Boehringer Ingelheim Amylin is a pancreatic peptide hormone that plays an important role in decreasing food intake and in the regulation of postprandial plasma glucose levels. The compound is a long-acting analog of amylin and has demonstrated significant weight loss in pre-clinical models of obesity.² In pre-clinical studies, Zealand and Boehringer In- gelheim observed that the novel, long-acting amylin analog may prevent the development of obesity in pre-clinical models, suggesting its potential use in treating obesity and obesity-related comorbidities. Long-acting GLP-1/GLU dual agonist with Boehringer Ingelheim The GLP-1/glucagon dual agonist activates two key gut hormone receptors simultaneously and may offer better blood sugar and weight-loss control than current single-hormone receptor agonist treatments. The lead molecule BI 456906 is targeting treatment of diabetes and obesity. A Phase 2 trial will be initiated in early 2020, based on the safety, tolerability, and favorable weight loss potential in individuals with a BMI up to 40 kg/m² observed in Phase 1.¹ The Phase 2 trial is a randomized, parallel group, dose-finding study of subcutaneously administered BI 456906, compared with placebo and open-la- bel semaglutide in 410 patients with Type 2 dia- betes mellitus. The main objective of the trial is to demonstrate a dose-relationship of BI 456906 on HbA1c from baseline to 16 weeks relative to placebo. Secondary objectives are to assess the effect of BI 456906 on change in body weight. An open-label comparator (semaglutide) will allow for comparison of the effects against a pure GLP-1R agonist. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019Pre-Clinical Projects We continually look for opportunities to enhance native peptides, expand current Zealand drugs into new indications, or discover novel peptide therapeutics to address unmet needs in specialty gastrointestinal and metabolic diseases. Find out more about our research at zealandpharma.com/our-approach TP - Pre-clinical projects 2525 We have in-depth knowledge of the role of GLP-2 in physiology and disease through our work on glep- aglutide, and we see exciting opportunities beyond short bowel syndrome. We have recently optimized a single peptide, ZP7570, which has activity at both the GLP-1 and GLP-2 receptors, with the potential to treat specialty gastrointestinal and liver diseases. This program will enter clinical development in the first half of 2019. We further utilize our understanding to discover peptides that act as agonists and antagonists of other endogenous hormones and their receptors. Our pre-clinical pipeline includes programs focused on analogs of endogenous peptide hormones, as well as exploration of peptides as therapeutics acting on components of the complement cascade, ion chan- nels and other target classes. Integrin α4β7 Inhibitor ZP10000 (formerly ET3764) is being developed as an orally-delivered peptide drug to target integrin α4β7, which is involved in the pathogenesis of inflammatory bowel disease (IBD). The target’s mode of action has been clinically validated in IBD by vedolizum- ab, an approved, infusion-only α4β7 integrin inhibitor. Ion Channel Blockers Ion channels are transmem- brane proteins that control ion flow across cell membranes in almost all living cells. Their dysregulation is implicated in many diseases includ- ing inflammatory diseases, metabolic disorders and rare channelopathies, and modify- ing their function is likely to be therapeutically relevant. We have identified novel peptides that are potent and selective blockers of ion chan- nels that may play roles in in- flammation. Further optimiza- tion is required and we expect these programs to contribute to the clinical pipeline in the future. GIP analogs Expanding on our GLP-1 ex- perience, we have discovered potent selective analogs of gastric inhibitory peptide (GIP) and extended this to single peptides that have dual activity at both GIP and GLP-1 as well as single peptides with triple activity (GIP/GLP-1/glucagon). These peptides have therapeu- tic potential to treat meta- bolic diseases such as type 2 diabetes and obesity with early clinical validation of GIP/ GLP-1 dual agonist provided by a Phase 2 study reported in 2018 (Frias et al, The Lancet 392:2180-2193). Complement C3 inhibitors Altered activation of the com- plement cascade is implicated in many immune mediated diseases and in particular rare diseases such as paroxysmal nocturnal hemoglobinuria, cold agglutinin disease, myas- thenia gravis and C3 glomeru- lopathy. There is currently only one approved drug to treat complement mediated diseas- es: an antibody that blocks the complement cascade at C5, the final step in complement activation. We have identified novel pep- tides that are potent, selective, long-acting inhibitors of the complement cascade acting at factor C3, upstream of C5 and thus offering potential differentiation and broader utility than current therapy. A candidate will be selected for pre-clinical toxicology in 2020 and progression to clinical de- velopment is expected in 2021. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201926 26 AC - COVER Through new partnerships with industry leaders and strategic investments in innovation, we are creating opportunities to help more patients with our novel therapeutics while maximizing shareholder value." Marino Garcia, Senior Vice President, Business Development, International Commercial & New Product Planning Approaching commercialization Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019AC - Approaching commercialization Approaching commercialization Establishing our presence in the U.S. Zealand is on a journey to transform into a fully integrated biotech company including commercial operations. We are building a fully integrated commercial biotech company with U.S. operations to market our own therapies for rare diseases. From our humble beginning in 1998, we have worked to establish and strengthen our peptide platform. Our skilled experience in transforming peptides into novel therapeutics is proven by two products that have been brought to market, and the licensed partner- ships in which we have engaged during the past 20 years. A strategic shift in 2015 was made to enable Zealand to retain a greater portion of the value creation, by commercializing fully-owned products. The period immediately following saw our emphasis on late stage clinical development, while maintaining our strength in discovery and research. This incredibly 2727 productive period built the robust pipeline that we have today, with four late-stage programs followed by high potential early- and pre-clinical candidates. As we are approaching commercialization, Zealand entered into the final stage of transformation in 2019. We are on the verge of four potential exciting prod- uct launches in four years. With the decision made last year to independently launch the dasiglucagon HypoPal® rescue pen in the United States in 2021, we quickly took action to begin building U.S. opera- tions and infrastructure which will be launch-ready in 2021. Delivering to patients globally Our team is further dedicated to making Zealand products available in markets outside the U.S., and currently assessing the optimal way to best deliver these much-needed therapeutics to patients. Our strategy has consistently been to transform into a fully integrated biotech company with commercial operations in the U.S. Accelerating late stage development Robust pipeline including three late stage programs Establishing our Peptide Platform Founded 1998 World-leading peptide platform with two medicines brought to market Licensed partnerships Approaching commercialization Establishing operations in the U.S. NDA submission for dasiglucagon HypoPal® rescue pen planned U.S. leadership, commercial, medical and corporate infrastructure Boston facility to open Glepaglutide for short bowel syndrome Dasiglucagon for congenital hyperinsulinism Dasiglucagon dual hormone artificial pancreas Dasiglucagon HypoPal® Rescue Pen for severe hypoglycemia 4 potential product launches in 4 years 1998 2019 2020 2021 2022 2023+ Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201928 28 EP - COVER "We leverage agility, collaboration and boldness to create and foster strong partnerships across our value chain." Ivan Møller Senior Vice President, Technical Development and Operations Engaging Partnerships Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019EP - Engaging partnerships 2929 Boehringer Ingelheim Zealand has a long-term and productive partnership with Boehringer Ingelheim, to develop an amylin analog and GLP-1/GLU product candidates for obesity and/or type 2 diabetes. Alexion Pharmaceuticals In March 2019, Zealand entered into a license, research and development agreement with Alexion Pharmaceuticals to develop novel therapies to treat complement mediated diseases. Zealand has licensed two product candidates to Boehringer Ingelheim, both with potential for once-weekly administration. Under the terms of the two agreements, Boehringer Ingelheim funds all research, development and commercialization activ- ities. For the GLP-1/glucagon dual agonist, Zealand is entitled to receive up to EUR 365 million in outstand- ing milestone payments. The agreement also carries high-single digit to low-double digit percentage royal- ties on global sales. The other collaboration compound is a long-acting amylin analog for which Zealand is entitled to receive up to EUR 283 million in outstanding milestone payments, and mid-single digit to low-dou- ble digit percentage royalties on global sales. Boehringer Ingelheim’s track record of excellence in research and development in cardiometabolic diseas- es is evidence of its innovation which has resulted in important breakthroughs in recent years, especially in thromboembolic diseases and type 2 diabetes. Peptides offer a number of advantages, including be- ing highly selective and potent, allowing low dosage volumes for ease of administration, and having the potential to treat a broad range of complement-me- diated diseases. Under the Alexion license, research and develop- ment agreement, we received an immediate upfront non-refundable payment of USD 25 million for the C3 program and a concurrent USD 15 million equity investment in Zealand at a premium to the market price. The agreement also provides the potential for development-related milestones of up to USD 115 million, as well as up to USD 495 million in sales-re- lated milestones and high single- to low double-digit royalty payments. Additional programs will provide further non-refundable upfront payments, develop- ment and sales milestone and royalties. Engaging Partnerships We engage with development and commercial partners to enhance innovation and expand opportunities across markets and therapeutics areas. Find out more about our research at zealandpharma.com/our-approach Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201930 30 Beta Bionics Beta Bionics and Zealand have a non-exclusive development partnership with the primary goal of obtaining regulatory approval to use dasiglucagon in the bihormonal configuration of the iLet1. The iLet, developed by Beta Bionics, is the world’s first autonomous bionic pancreas device. This bihor- monal system leverages lifelong machine learning and artificial intelligence to deliver insulin and gluca- gon analogs for automated management of Type 1 diabetes. In addition to dosing insulin, the iLet doses dasiglucagon — Zealand's glucagon analog with a unique stability profile in a ready-to-use aqueous solution. 1 Caution: the iLet is an investigational device, limited by federal law to investigational use. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019CM - COVER 3131 "Conscientious cost management and operational efficiency will enable us to deliver on our current programs, and complete our transformation in a revenue- generating provider of treatments." Matt Dallas Senior Vice President and Chief Financial Officer Corporate matters Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201932 32 CM - Corporate Governance 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. Read the full report on corporate governance at zealandpharma.com/corporate-governance As a company incorporated under the laws of Den- mark, and with its shares admitted to trading and offi- cial listing on Nasdaq Copenhagen, as well as having American Depositary Shares representing Zealand shares trading on Nasdaq Global Select Market in New York, Zealand is subject to various applicable legis- lations, standards and other regulations for publicly traded companies. These include Danish and U.S. securities law and the recommendations on corpo- rate governance issued by the Danish Committee on Corporate Governance (in the below ‘‘the Recom- mendations’’). Management structure Zealand has a two-tier management structure com- posed of the Board of Directors (“the Board”) and the Corporate Management. The Board is responsible for the overall visions, strategies and objectives, the financial and managerial supervision of Zealand as well as for regular evaluation of the work of the Corporate Management. In addition, the Board provides general oversight of Zealand's activities and ensures that it is managed in a manner and in accordance with applica- ble law and Zealand's articles of association. The Board approves the policies and procedures, and Corporate Management is responsible for the day-to- day management of Zealand in compliance with the guidelines and directions set by the Board of Directors. The allocation of responsibilities between the Board and the Corporate Management is stipulated in the Rules of Procedure. Board of Directors The Board of Directors plays an active role in setting Zealand's strategies and goals and in monitoring the operations and results. The Board of Directors func- Corporate governance structure Annual General Meeting Board of Directors Nomination Committee¹ Audit Committee Remuneration and Compensation Committee Corporate Management Organization ¹ Shareholder elected board members act as Nomination committee. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 20193333 Evaluation of the Board of Directors In the first two months of 2020 the annual evaluation of the Board of Directors was car- ried out by an independent vendor, PwC. The process included electronic questionnaires and one on one interviews with members of the Board and members of the Corporate Management. There were also one on one meetings between the chairman and each board member. In general there was a good level of satis- faction reported with the operation of the Board and its interaction with members of the Corporate Management. tions according to its rules of procedure. Board duties include establishing Zealand’s strategy, policies and activities to achieve Zealand's objectives in accordance with the Articles of Association. In line with the Recommendations, the Board of Directors annually reviews and determines the qual- ifications and experience needed on the Board. The chairman supervises the Board of Director's annual self-evaluation of its performance. The Board of Directors met thirteen times in 2019, of which seven meetings were physical meetings. Board Committees The Board has established committees to support the Board in its duties: Audit Committee, Remunera- tion and Compensation Committee, and Nomination Committee. The full board acts as its own Nomination Committee. Audit Committee The Audit Committee assists the Board of Directors with oversight of financial reporting, internal control and risk management related to finance, and other activities delegated by the Board of Directors. Specific topics discussed in 2019 included accounting treatment of agreement with Alexion Pharmaceuticals and acquisition of Encycle Therapeutics, auditor’s re- ports, accounting policies, internal controls, including SOX (Sarbanes-Oxley Act) compliance, risk manage- ment, insurance policy, year-end topics and external financing. The Audit Committee met nine times in 2019, of which four meetings were physical meetings. Overview of meetings in 2019 Attended Absent Martin Nicklasson Kirsten A. Drejer Jeffrey Berkowitz1 Bernadette Connaughton1 Alain Munoz Leonard Kruimer Michael J Owen Hanne Heidenheim Bak Jens Peter Stenvang Rosemary Crane2 Catherine Moukheibir2 1 Elected at the Annual General Meeting on April 4, 2019 2 Stepped down at the Annual General Meeting held on April 4, 2019 Board Audit Committee Remuneration and Compensation Committee Nomination Committee - - - - - - - - - - - - Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 34 34 Remuneration and Compensation Committee The Remuneration and Compensation Committee proposes the remuneration policy and general guide- lines for incentive pay for the Board of Directors and the CEO of Zealand as well as targets for compa- ny-operated performance-related incentive programs. These policies and guidelines set out the various com- ponents of the remuneration, including fixed and vari- able remuneration such as pension schemes, benefits, retention bonuses, severance and incentive schemes as well as the related bonus and evaluation criteria. Specific topics discussed in 2019 included warrant programs, long-term incentive programs in general, company goals, employee salary levels, employee pensions, and CEO and Board compensation. The Remuneration and Compensation Committee met physically three times in 2019. Nomination committee The Nomination Committee consists of all of the sev- en shareholder-elected board members. The Nomination Committee make recommendations for decisions to the Board of Directors regarding board and CEO positions and identifies and recommend candidates for the Board of Directors. Specific topics discussed in 2019 included the re- placement of CEO, as Britt Meelby Jensen resigned in November 2018, and candidates for the Board of Directors. The Nomination Committee met physically two times in 2019. Compliance with the Corporate Governance Recommendations Zealand complies with the Recommenda- tions on Corporate Governance issued by the Danish Committee on Corporate Governance, November 23, 2017, with one exception: 3.4 Board committees (Recommendation, section 3.4.8): The Remuneration and Com- pensation Committee will be using the same external advisers as the Executive Manage- ment. The Board considers that the external advisers will provide professional and unbiased advice in both capacities: as advisers to the Executive Management and to the Remunera- tion and Compensation Committee. The charter of the Audit Committee is available at: www.zealandpharma.com/audit-committee The charter of the Remuneration and Compensation Committee, the remuneration report, the remuneration policy and the guidelines for incentive pay are available at: www.zealandpharma.com/remuneration- and- compensation-committee The rules of procedure of the Nomination Committee are available at: www.zealandpharma.com/nomination- committee Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019CM - Corporate responsibility Zealand’s guiding principles for operating responsibly include: • Enabling health, well-being, and competency de- velopment of our employees, while ensuring a safe workplace, • Focusing collaboration with advocacy groups to consolidate relations and obtain better treatment options for patients, • Conducting business according to the highest ethical standards, • Working actively and systematically to minimize our impact on the environment and climate, and • Communicating our corporate responsibility ac- tions openly and honestly to external collaboration partners, including our suppliers. Commitment to Sustainable Development Goals Zealand is committed to addressing global challeng- es through support of the Sustainable Development Goals established by the United Nations. Six goals that are relevant to our business were placed into fo- cus last year, and we continue to identify and imple- ment initiatives and metrics to evaluate our progress in these areas. Additional goals may be considered as our company continues to grow and evolve. Reporting framework Our corporate responsibility efforts are based on the requirements of the Danish Financial Statements Act, and we comply with relevant laws, standards and guidelines for reporting on corporate social responsi- bility (CSR) activities. We have incorporated selected UN Sustainable Development Goals that are aligned to our business to further connect Zealand’s efforts with those of other companies to address global challenges. Corporate responsibility As we work toward improving care for patients and delivering value for our shareholders, we further recognize the importance of protecting the world around us. We believe in operating as a responsible company that serves broader economic, societal, and environmental interests. Read the full report at zealandpharma.com/csr 3535 Addressing global challenges Zealand is focused on supporting six of the UN Sustainable Development Goals that are relevant to our business. SDG 3: Ensure healthy lives and promote well-being for all at all ages SDG 5: Achieve gender equality and empower all women and girls SDG 10: Reduce inequality within and among countries SDG 12: Ensure sustainable consumption and production patterns SDG 16: Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels SDG 17: Strengthen the means of implementation and revitalize the global partnership for sustainable development Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201936 36 CM - Our people Our People Highly qualified and motivated employees are a prerequisite for achieving the ambitious Zealand business goals. We aspire to attract, develop and retain the best people and to be a company where employees thrive, regardless of their background or nationality. Read about Zealand as a workplace at zealandpharma.com/zealand-as-a-work-place Engagement Highly qualified and motivated employees are a pre- requisite for achieving the ambitious Zealand busi- ness goals. Zealand’s annual employee engagement survey helps leaders and employees to continuously improve the working environment, and results from the 2019 survey show that Zealand employees are both dedicated and motivated. Competency development Ensuring every employee has opportunity to both improve upon their existing strengths while develop- ing skills is critical to attracting and retaining qualified and engaged employees. An analysis of all compe- tency development plans made in 2019 showed that the quantity and quality of competency development plans has increased compared to previous years. Health and well-being We work to ensure our employees’ well-being and have a number of policies in place to promote phys- ical and psychosocial health as well as the safety of Zealand’s working environment. Zealand has tak- en Danish Labor Law as a starting point for related policies and, in many cases, has gone beyond what is required of public companies in order to be more considerate of and responsive to the needs of its workforce. Safe work environment Zealand works systematically to maintain a safe and healthy work environment. We maintain numerous procedures to support our work environment, and train all Zealand employees in standard safety proto- cols to enable self-management of their own occu- pational safety. Diversity Zealand total % 42 2019 Men Women 58 Zealand Board of Directors % 33 2019 Men Women 67 Other key employee numbers 46.1 Average age of work force 17% Non-Danish employees 3 Ph.D. students 1 Other trainees Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019"Everyday, our team approaches discovery and research projects with a unique combination of curiosity, determination and enthusiasm. This is the core of Zealand's success." Rie Schultz Hansen Vice President, Discovery and Innovation 3737 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201938 38 CM - Risk management Risk management and internal control 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 cov- ered in our corporate social responsibility reporting, and risks related to financial reporting are covered in our corporate governance reporting. We constantly monitor and assess the overall risk of doing business in the pharmaceutical/biotech industry and the particular risks associated with our current activities and corporate profile. Doing business in the pharmaceutical/biotech indus- try involves major financial risks. The development of novel medicines takes 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 imple- menting 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 scientif- ic and development risks, commercial risks, intellec- tual property risks, clinical trial risks, regulatory risks, partner interest risks, and financial risks. Risk and mitigation plans are monitored by Management, and the continuous risk assessment is an integral part of the yearly reporting to the Board of Directors. Zealand risk and mitigation Commercial activities – products in research and development Research and development Risks relating to mar- ket size, competition, development time and costs, partner interest and pricing of products in development. k s i R From early in the research phase and throughout development, commer- cial potential and risks are assessed to ensure that final products have the potential to be commer- cially viable. Any major changes in the commer- cial potential of a drug candidate can lead to reduced value prospects and, ultimately, discontin- ued development. n o i t a g i t i M Research and develop- ment of new pharma- ceutical medicines is inherently a high-risk activity. The probabil- ity of discovering and developing an efficient and safe new medicine with strong IP protection is very low. Throughout the research and development pro- cess, Zealand regularly assesses these risks by means of a quarterly risk assessment of all the Company’s research and development projects, conducted by Manage- ment 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 mile- stones. It analyzes the individual risks of each project and prioritizes the project portfolio. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019Zealand risk and mitigation – continued 3939 Clinical trials Intellectual property Regulatory Future partnerships Financial k s i R Our product candidates will need to undergo time-consuming and expensive trials to document efficacy and safety, the outcome of which is unpredictable, and for which there is a high risk of failure. If clinical trials of our product candidates fail to satisfactorily demonstrate safety and efficacy to the FDA, the EMA and other comparable regulatory authorities, Zealand may incur additional costs or experience delays in complet- ing, or ultimately not be able to complete, the development of these product candidates. If Zealand or its partners were to face infringement claims or chal- lenges 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 rem- edies against Zealand, potentially involving a reduction in the royal- ties due to Zealand. The regulatory approval processes of the FDA, the EMA and other comparable regulatory authori- ties are lengthy, time consuming and inherently unpredictable, and if Zealand or its collaboration partners are ultimately unable to obtain regulatory approval for their internal or outlicensed product candidates, Zealand’s business could be substantially harmed. Entering into collaborations with partners can bring significant benefits as well as involve risks. In addition, full control of the prod- uct is often given to the partner. Financial risks relate to cash and treasury management, liquidity forecasts and financing opportu- nities. Zealand’s clinical project teams work closely with external expert clinicians and product develop- ment experts within the industry to design, set up and conduct the clinical programs. Zealand’s employees have been selected due to their extensive experience within their field of expertise, receive training and are continuously de- veloped to fulfill requirements. n o i t a g i t i M 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 intellec- tual property. Zealand’s regulatory department works closely with external con- sultants and regulatory agents to develop regulatory strategies and frequently interacts with regulato- ry agencies. Zealand has taken a decision to increase its focus on proprietary programs in order to decrease its dependence 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 ac- cordance with the Finance Policy, regularly assessed by the Com- pany’s Management and reported to the Audit Committee and the Board of Directors. Zealand is continuously working to design and implement an Internal Control Framework responding to current business risks and the require- ments of the Sarbanes-Oxley Act. See also p. 84, note 26 - Financial risks. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 40 40 CM - Financial review Financial review Financial review for the period January 1 – December 31, 2019 Since there is no significant difference in the devel- opment of the Group and the Parent Company, the financial review is based on the Group’s consolidated financial information for the year ended December 31, 2019, with comparative figures for 2018 in brack- ets. Income statement The net result for the financial year 2019 was DKK -571.5 million (581.3). Further developing the late stage clinical programs and expansion of the early pipeline together with the commercialization efforts are driving the cost base of Zealand. These factors have increased R&D by DKK 123.2 million and in- creased administrative expenses by DKK 24.3 million in G&A compared to the year before. The 2018 result was mainly a consequence of an increase in Other operating income from the sale of future milestones and royalties relating to the Sanofi license having a net gain of DKK 1,098.9 million. Revenue Revenue in 2019 amounted to DKK 41.3 million (38.0). Revenue from research and development activities amounted to DKK 41.3 million (0.0) that comprised DKK 38.0 million Alexion Pharmaceuticals and DKK 3.3 million from an undisclosed counterpart in con- nection with a Material Transfer Agreement. Revenue related to the Alexion agreement is recognized over the duration of the project based on the percentage of completion. No milestone payments were received in 2019 (13.1). The milestone payments in 2018 comprised a payment of DKK 9.8 million from an undisclosed counterpart in connection with a Material Transfer Agreement and a payment of DKK 3.3 million from a license agreement with Protagonist Therapeutics Inc. No royalty revenue were received in 2019 (24.9). The royalty revenues in 2018 were earned before the sale of future Sanofi royalties and milestones from sales of Lyxumia®/Adlyxin® and Soliqua® 100/33 that con- tributed with DKK 1,098.9 million in Other Operating Income in 2018. Royalty Expenses Royalty expenses for the year amounted to DKK 0.4 million (3.4) paid to third parties relating to the license agreement with Sanofi. Research and development expenses Research and development (R&D) expenses amount- ed to DKK 561.4 million (438.2). The increase in R&D expenses for the year ended December 31, 2019, was primarily related to external costs of DKK 71.6 million from the planned development activities across the Zealand programs. The amount comprises costs for the three dasiglucagon programs, with main part on the Phase 3 trials and launch preparations relating to the rescue pen for severe hypoglycemia. It also includes costs for the Phase 3 trial with glepaglutide and clinical cost for the GLP-1/GLP-2 Dual agonist as well as costs relating to pre-clinical activities. The R&D share of the personnel expenses for the year ended December 31, 2019, was DKK 178.1 million (153.6). The increase is mainly related to an increase in the number of employees in the clinical development organization. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019During Q1 2019, it was determined that warrants comprised by the 2010 and 2015 employee incentive programs granted in the period 2014 until Q4 2018 should be recognized over the vesting period (typ- ically 3 years) and not when granted, and therefore expenses have been overstated in this period. Such misstatements have been corrected with retrospec- tive impact and thus comparable periods as of and for the years ended December 31, 2018 and 2017 have been restated as presented in note 1 to the con- solidated financial statements. Administrative expenses Administrative expenses amounted to DKK 67.9 million (43.5). As the company becomes a fully inte- grated biotech with commercial and medial opera- tions, there are increased levels of support needed in internal staffing as well as from professional advisors and external service providers. There is an increase in administrative expenses as a result and as the Com- pany prepares for a product launch and subsequent commercialization. Other operating income Other operating income amounted to DKK 0.4 million (1,099.5) and mainly consists of government grants. 2018 was heavily impacted by the net gain from the agreement to sell future royalty streams and USD 85 million of potential commercial milestones for Soliqua® 100/33/ Suliqua® and Lyxumia®/Adlyxin® to Royalty Pharma. Operating result The operating result for the year was DKK -587.9 million (652.4). Net financial items Net financial items amounted to DKK 11.3 million (-27.3). The increase in financial income is mainly due to the fair value adjustment of the investment in Beta Bionics as well as an increase in interest and favora- ble currency exchange rates. The majority of the de- crease in financial expense is due to the redemption of the royalty bond in 2018, which also saw interest expense and amortized costs related to that bond in the period totaling DKK 33.4 million. In 2019, inter- est expenses were mainly comprised of the negative return on cash balances in DKK and EUR. Result before tax Result before tax was DKK -576.7 million (625.1). Corporate tax With a net loss, no tax expense has been recorded for the period. However, under Danish tax legisla- tion, Zealand is eligible to receive DKK 5.5 million in cash relating to the tax loss that originates from R&D expenses for 2019. Corporate tax benefit amount to DKK 5.1 million (-43.8) including a minor tax expense in Zealand US. No deferred tax asset has similar to prior years been recognized in the statement of financial position due 4141 R&D and administrative expenses DKKm 700 600 500 400 300 200 100 0 2013 2014 2015 2016 2017 2018 2019 R&D expenses Administrative expenses to uncertainty as to when and whether tax losses carried forward will be utilized. Net result and comprehensive result The net result and comprehensive result both amounted to DKK -571.5 million (581.3), in both cases due to the factors described above. Allocation of result No dividend has been proposed, and the net result for the year of DKK -571.5 million (581.3) has been transferred to retained losses. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201942 42 Cash and cash equivalents, restricted cash and securities DKKm 1,500 1,200 900 600 300 0 2013 2014 2015 2016 2017 2018 2019 Securities Restricted cash Cash and equivalents Statement of financial position Marketable securities, cash and cash equivalents At December 31, 2019, marketable securities, cash and cash equivalents amounted to DKK 1,380.5 mil- lion (1,159.2). The increase in cash and cash equiv- alents is mainly due to the net proceeds from the issue of shares in the year of DKK 683.2 million, and the upfront cash and equity investment the company received, USD 40 million, from the initiation of the partnership program with Alexion Pharmaceuticals. Equity Equity amounted to DKK 1,242.7 million (1,116.3) at December 31, 2019, corresponding to an equity ratio of 78% (91%). The increase in equity is a result of the capital increase including share premium of DKK 683.2 million in total (2.8) partly set off by the net re- sult for the year of DKK -571.5 million (581.3) and the recognition of warrants of DKK 14.8 million (17.5). Cash flow Cash outflow/inflow from operating activities Cash flow from operating activities amounted to DKK -409.5 million (-461.4), mainly due to the loss for the year adjusted for the upfront cash and equity invest- ment from the Alexion agreement. The cash outflow from operating activities for 2018 was adjusted by the cash net gain from the agree- ment to sell future royalty streams and USD 85 mil- lion of potential commercial milestones for Soliqua® 100/33/ Suliqua® and Lyxumia®/Adlyxin® and for other non-cash items. Cash outflow/inflow from investing activities Cash flow from investing activities amounted to DKK -51.7 million (882.9), mainly comprising purchase of other investment and property, plant and equip- ment. 2018 was driven by the cash net gain from the agreement to sell future royalty streams and USD 85 million of potential commercial milestones for Soliqua® 100/33/ Suliqua® and Lyxumia®/Adlyxin of DKK 1,105.5 million. Cash flows related to other investments for the peri- od amounted to DKK 22.8 million (0.0). Investment is related to Beta Bionics, Inc. committed in 2018, but not paid until early 2019. Investments in plant and equipment for the period amounted to DKK -21.0 million (-4.0), mainly related to improvement of the new leased headquarter in Denmark paid in cash. No additional investments in marketable securities has been made in 2019 (225.6). Zealand’s marketable securities portfolio comprises listed short term bonds in Danish Kroner to reduce interest expenses, while still having the cash readily available for R&D activities and other business opportunities. Cash outflow/inflow from financing activities Cash flow from financing activities amounted to DKK 674.5 million (-155.4), mainly related to capital contri- bution from Van Herk Investments, Alexion Pharma- ceuticals and proceeds from employees exercising warrants. 2018 mainly related to the repayment of the royalty bond. The total cash flow for full-year 2019 amounted to DKK 213.4 million (266.1). Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019CM - Shareholder information 4343 Shareholder information At December 31, 2019, the nominal value of Zea- land’s share capital was DKK 36,054,661, divided into 36,054,661 shares with a nominal value of DKK 1 each. The share capital has remained unchanged as of March 12, 2020. Zealand is dual listed on Nasdaq Copenhagen and Nasdaq Global Select Market, New York, under the ticker symbol ZEAL. Find out more about our investor relations at zealandpharma.com/investor The share capital has increased by a nominal value of DKK 5.3 million in 2019 mainly as a result of the subscription of shares by Van Herk Investments and Alexion Pharmaceuticals (DKK 4.8 million in total) and exercise of employee warrants (DKK 0.5 million). All Zealand shares are ordinary shares and belong to one class. Each share listed by name in Zealand’s share- holder register represents one vote at the annual general meeting and other shareholders’ meetings. Change in number of shareholders during 2019 The number of registered Zealand shareholders decreased from 16,227 registered shareholders at December 31, 2018, the number decreased to 14,567 at December 31, 2019. In addition, 2,726,647 shares were represented by ADSs traded on Nasdaq Global Select Market, New York. At March 6, 2020, Zealand had 15,179 registered shareholders, representing a total of 34,754,967 shares. Ownership The following shareholders are registered in Zea- land’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) at March 9, 2020: • Van Herk Investments, Netherlands (19.3% of votes/19.3% of capital). Total shareholder composition % 18 <1 5 15 43 2019 19 Institutional Strategic Investor Domestic retail Non-Institutional Company related Miscellaneous Institutional shares by investment style % 27 5 8 31 2019 9 20 Value Growth GARP Hedge fund Index Other Institutional shares by geography 6 % 7 11 2 9 43 2019 22 United States Denmark United Kingdom Sweden France Rest of Europe Rest of World Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201944 44 • Wellington Management Group LLP, U.S. (9.8% of votes/9.8% of capital). Analyst coverage Zealand is followed by the financial institutions and analysts listed below: • Sunstone LSV Management A/S, Denmark (6.0% of votes/6.0% of capital). Share price performance The price of Zealand’s shares increased by 186% during the year, which was above relevant indices, such as the OMX Copenhagen Mid Cap index and the NASDAQ Biotechnology index. The share price at year-end 2019 was DKK 235.40, compared to DKK 82.40 at year-end 2018. Annual General Meeting The annual general meeting is scheduled to be held on Thursday, April 2, 2020 at 3:00 PM CET, at Zealand Pharma, Sydmarken 11, DK-2860 Søborg. Additional information will become available at www.zealand- pharma.com/annual-general-meeting no later than 3 weeks before the annual general meeting. Nasdaq charting 2019 of Zealand's share price Institution Analyst’s name U.S. Guggenheim Morgan Stanley Needham Etzer Darout David N. Lebowitz Alan Carr United Kingdom Goldman, Sachs & Co. Graig C. Suvannavejh Jefferies Peter Welford France Bryan, Garnier & Co Oddo Securities Eric Le Berrigaud Oussama Denguir Netherlands Kempen Denmark Carnegie Danske Bank Handelsbanken Nordea Suzanne van Voorthuizen Jesper Ilsøe Thomas Bowers Peter Sehested Michael Novod Core share data Number of shares and ADSs at Dec. 31, 2019 Listing Denmark U.S. 36,054,661 2,726,647 Nasdaq Copenhagen Nasdaq Global Select Market, New York Ticker symbol ZEAL ZEAL Index membership OMXC Copenhagen Midcap STOXX Europe TMI Pharm Financial calendar 2020 Event Date April 2 May 14 August 13 November 12 Annual General Meeting Interim report for Q1 2020 Interim report for H1 2020 Interim report for Q3 2020 All dates are subject to NASDAQ deadlines and reporting re- quirements and are subject to change. Index 300 275 250 225 200 175 150 125 100 January February March April May June July August September October November December Zealand Pharma OMX Copenhagen Mid Cap NASDAQ Biotech Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Board of Directors and Corporate Management CM - BoDo and CM Zealand Board of Directors at March 12, 2020 4545 Martin Nicklasson Kirsten A. Drejer Jeffrey Berkowitz Position Chairman Vice Chairman Board member Year of birth 1955 Nationality Swedish Gender First elected Committee Male 2015 AuC, RemCo chair and NomCo chair Independent Yes 1956 Danish Female 2018 Yes 1966 American Male 2019 AuC Yes Special competencies Extensive general management and research and development experience from AstraZeneca Plc and Swedish Orphan Biovitrum AB More than 30 years of interna- tional experience in the phar- maceutical and biotech industry. Before co-founding Symphogen A/S in 2000, held several scientific and managerial positions at Novo Nordisk A/S. Global executive with extensive branded and generic pharmaceu- tical, retail pharmacy, wholesale drug distribution, specialty, payor and healthcare services leadership experience in P&L accountable roles. Current positions Chairman of the board of Orexo AB and Kymab Ltd. Board mem- ber of Basilea Pharmaceutica Ltd. Find out more about the Board of Directors at zealandpharma.com/ board-of-directors-and-nomination-committee Zealand shares at December 31, 2019 1,000 Zealand warrants at December 31, 2019 Change in owner- ship in 2019 0 0 Member of the Board of Directors of H. Lundbeck A/S, Esperion Theraptics, Inc. and Infinity Phar- maceuticals, Inc. Chairman of the board of Bioneer A/S, Antag Therapeutics ApS, and ResoTher Pharma ApS. Board member of Bioporto A/S, Lyhne & Co, and Alligator Bioscience. Advisory board member of The Faculty of Pharmaceutical Scienc- es, Univ. of Copenhagen, and DTU Bioengineering. Expert panel member for InnoBooster grants. 500 0 0 0 0 0 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 46 46 Zealand Board of Directors at March 12, 2020, continued Bernadette Connaughton Leonard Kruimer Alain Munoz Michael John Owen Position Board member Board member Board member Board member Year of birth Nationality Gender First elected Committee Independent Special competencies Current positions 1958 American Female 2019 Yes More than 30 years of global strategic, com- mercial and leadership expertise, and a broad per- spective on the strategy, capabilities and govern- ance required for success- ful execution in U.S. and international markets. 1958 Dutch Male 2019 AuC Chair Yes More than 30 years of experience in corporate finance, planning and strategy, including 15 years in senior executive positions in private and publicly listed biotechnol- ogy companies. Board member of Halozyme Therapeutics, Inc. and Syneos Health, Inc. Board member of Boys and Girls Club of Mercer County. Chairman of the Board of BioInvent International AB and independent board member of Oncolytics. Member of the investment advisory council of Karmijn Kapitaal. 1949 French Male 2005² RemCo No Physician qualified cardi- ology and intensive care. Experience in the phar- maceutical industry at senior management level. Served as SVP for interna- tional development in the Sanofi Group and in the pharmaceutical division of Fournier Laboratories. Independent board member of Amryt Pharma, Auris Medical and Oxthera Member of the Scientific advisory board of Valneva SE. Zealand shares at December 31, 2019 Zealand warrants at December 31, 2019 Change in owner- ship in 2019 500 0 +500 4,000 0 +1,500 5,250 0 0 Hanne Heidenheim Bak Employee-elected board member¹ 1953 Danish Female 2012³ Jens Peter Stenvang Employee-elected board member¹ 1954 Danish Male 2014⁴ No No Project management ex- perience in drug develop- ment from lead to launch, focusing on CNS disease and orphan drugs. Experi- ence in disease awareness and customer relationship management. Senior Director, Medical Affairs Operations. Laboratory Technician (Biology). 9,684 14,000 -15,000 2,800 4,000 -700 1951 British Male 2012 RemCo Yes Research experience focusing on the immune system and more than 150 publications. Has held several leading positions at GlaxoSmithKline, most recently as SVP and head of biopharmaceuticals research. Chairman of the board of Ossianix Inc., and is a member of the board of Avacta Group plc, ReNeuron Group plc, Sareum Holdings plc, Iksuda Therapeutics and GammaDelta Therapeutics. Adviser to the CRT Pioneer Fund. 300 0 +300 ¹ Employee-elected board members are elected for a period of four years. ² Resigned in 2006 and re-elected in 2007. ³ Elected term ended in 2014; re-elected in 2016 for a period of four years. ⁴ Elected term ended in 2018; re-elected in 2018 for a period of two years. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019CM - Management 4747 Zealand Corporate Management at March 12, 2020 Emmanuel Dulac Matthew Dallas Adam Steensberg Ivan Møller Marino Garcia Position Year of birth Nationality Gender Joined Zealand Experience Executive Management President and Chief Executive Officer (from April 22, 2019) 1969 French Male 2019 Prior to joining Zealand, Em- manuel was Chief Commercial Officer for Alnylam Pharmaceu- ticals, a biopharmaceutical com- pany based in Boston, where he was responsible for establishing country operations and building commercial capabilities to successfully launch their first commercial drug. Emmanuel is a board member of Proteostasis Therapeutics, Inc. Executive Management Senior Vice President and Chief Financial Officer (from October 7, 2019) 1975 American Male 2019 Prior to joining Zealand, Matt served as chief financial officer at Aveo Pharmaceuticals, leading finance for the publicly traded biotechnology company and was additionally responsible for investor relations, facilities and information technology. He was previously CFO at CoLucid Phar- maceuticals, which was acquired by Eli Lilly. His earlier career included positions at Genzyme, NEN Life Science Products, and Kimberly Clark. Zealand shares at December 31, 2019 Zealand warrants at December 31, 2019 Zealand PSUs at December 31, 2019 Change in ownership in 2019 0 74,933 8,835 0 0 27,277 0 0 Executive Management Executive Vice President, Research and Development, and Chief Medical Officer 1974 Danish Male 2010 Prior to joining Zealand, Adam led clinical research teams as medical director at Novo Nor- disk and worked as a clinician at Rigshospitalet, University of Copenhagen. Adam was a medical and scientific advisor in the areas of endocrinology, cardiology, gastroenterology and rheumatology, and has significant experience of leading regulatory strategies. Senior Vice President, Technical Development and Operations 1972 American/Danish Male 2018 Prior to joining Zealand, Ivan worked for Novartis in both generics and pharmaceutical manufacturing, as well as in strategy, quality assurance, con- tract manufacturing and supply chain leadership in Germany, the U.S. and Switzerland. Ivan was project leader at The Boston Consulting Group in the pharmaceutical R&D and manu- facturing areas. Senior Vice President, Business Development, International Commercial and New Product Planning 1966 Canadian/Spanish Male 2018 Marino has almost 25 years of global pharma and biotech ex- perience in senior commercial, corporate strategy, and business development roles. He has held various U.S. and international leadership positions of increas- ing responsibility at pharma- ceutical companies, including Synergy Pharma, Aptalis Pharma, Vifor Pharma, Aspreva Pharma- ceuticals, Pfizer and Eli Lilly & Co. Adam is a board member of Beta Bionics, Inc. 17,011 0 269,961 5,065 -5,789 63,778 2,803 0 0 65,976 3,062 0 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 48 48 Financial statements Financial statements Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019Con Fin – Content Contents – consolidated financial statements Consolidated financial statements Income statement Statement of comprehensive income Statement of financial position Statement of cash flows Statement of changes in equity Business overview Notes 1 Significant accounting policies, and significant accounting estimates and assessments 2 Revenue 3 Royalty expenses 50 50 51 52 52 53 54 61 64 4 Research, development and administrative expenses 64 5 Fees to auditors appointed at the Annual General Meeting 6 Information on staff and remuneration 7 Other operating income 8 Financial income 9 Financial expenses 10 Income tax benefit 11 Basic and diluted earnings per share 12 Licenses, rights and patents 13 Property, plant and equipment 14 Right-of-use assets 15 Other investments 65 65 73 74 74 75 76 77 78 79 80 4949 80 80 80 80 81 81 82 83 83 83 84 86 86 86 86 86 16 Trade receivables 17 Prepaid expenses 18 Other receivables 19 Marketable securities 20 Cash and cash equivalents 21 Share capital 22 Royalty bond 23 Deferred revenue 24 Other liabilities 25 Contingent assets, liabilities and other contractual obligations 26 Financial risks 27 Related parties 28 Adjustments for non-cash items 29 Change in working capital 30 Significant events after the balance sheet date 31 Approval of the annual report Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201950 50 Con Fin – Income Statement Consolidated financial statements Consolidated income statement for the years ended December 31, 2019, 2018 and 2017 Consolidated statements of comprehensive income for the years ended December 31, 2019, 2018 and 2017 DKK thousand Revenue Royalty expenses Research and development expenses Administrative expenses Other operating income Operating result Note 2 3 4,6 4,5,6 7 Restated1 Restated1 2017 2018 2019 DKK thousand Note Restated1 Restated1 2017 2018 2019 41,333 -415 -561,423 -67,881 37,977 -3,356 -438,219 -43,543 444 1,099,526 652,385 -587,942 136,322 -14,163 -323,949 -47,343 607 -248,526 Net result for the year Other comprehensive income (loss) Comprehensive result for the year 1 See note 1 to the consolidated financial statements. -571,541 0 -571,541 581,278 0 581,278 -274,413 0 -274,413 The Business overview on page 53 and the accompanying notes on pages 54 to 86 form an integral part of these financial statements. Financial income Financial expenses Result before tax Income tax Net result for the year Earnings/loss per share – DKK Basic earnings/loss per share Diluted earnings/loss per share 1 See note 1 to the consolidated financial statements. 8 9 14,655 -3,390 -576,677 9,988 -37,322 625,051 2,122 -33,509 -279,913 10 5,136 -571,541 -43,773 581,278 5,500 -274,413 11 11 -16.91 -16.91 18.94 18.94 -9.85 -9.85 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Con Fin – Financial position 5151 Consolidated financial statements Consolidated statements of financial position as of December 31, 2019, 2018 and 2017 DKK thousand Note Restated1 Restated1 2017 2018 2019 DKK thousand Note Restated1 Restated1 2017 2018 2019 Assets Non-current assets Licenses, rights and patents Plant and machinery Other fixtures and fittings, tools and equipment Leasehold improvements Fixed assets under construction Right-of-use assets Deposits Restricted cash Other investments Total non-current assets Current assets Trade receivables Prepaid expenses Corporate tax receivable Other receivables Marketable securities Cash and cash equivalents Total current assets Total assets 1 See note 1 to the consolidated financial statements 12 13 13 13 13 14 15 16 17 18 19 20 2,480 13,457 8,337 3,913 14,001 85,632 9,012 0 35,632 172,464 0 13,650 1,794 186 0 0 2,762 0 32,582 50,974 0 14,855 953 304 0 0 2,729 5,892 9,312 34,045 751 3,274 30,755 11,740 7,101 1,195 7,935 3,368 299,448 298,611 860,635 1,081,060 1,427,050 1,178,823 5,679 7,253 5,500 4,979 75,111 588,718 687,240 1,599,514 1,229,797 721,285 Liabilities and equity Share capital Share premium Retained losses Equity Royalty bond Deferred revenue Lease liabilities Non-current liabilities Trade payables Corporate tax payables Royalty bond Lease liabilities Deferred revenue Other liabilities Current liabilities 21 30,787 36,055 30,751 2,650,142 1,957,477 1,937,179 -871,983 -1,453,261 -1,443,524 514,669 1,242,673 1,116,281 22 23,26 26 0 83,639 78,068 161,707 0 0 0 0 132,986 0 0 132,986 57,533 614 0 7,692 56,251 73,044 195,134 32,652 0 0 0 0 80,864 113,516 29,428 0 2,748 0 0 41,454 73,630 22 26 23 24 Total liabilities 356,841 113,516 206,616 Total equity and liabilities 1 See note 1 to the consolidated financial statements 1,599,514 1,229,797 721,285 Significant accounting policies, and significant accounting estimates and assessments Fees to auditors appointed at the Annual General Meeting Information on staff and remuneration Contingent assets, liabilities and other contractual commitments Financial risks Related parties Significant events after the balance sheet date 1 5 6 25 26 27 30 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 52 Total Con Fin – Equity Con Fin – Cash Flow 52 Consolidated financial statements Consolidated statements of cash flows for the years ended December 31, 2019, 2018 and 2017 Consolidated statements of changes in equity at December 31, 2019, 2018 and 2017 DKK thousand Net result for the year Adjustments for non-cash items Change in working capital Deferred revenue Financial income received Financial expenses paid Sale of future royalties and milestones Income tax receipt Income tax paid Cash (outflow)/inflow from operating activities Note 28 29 23 8 9 7 Transfer to restricted cash related to royalty bond Transfer from restricted cash related to royalty bond Transfer from restricted cash for royalty bond, interest Sale of future royalties and milestones Royalty expenses related to sale of future royalties and milestones Change in deposit Purchase of other investments Purchase of marketable securities Sale of securities Purchase of property, plant and equipment Purchase of intangible assets Sale of fixed assets Dividends on securities Cash (outflow)/inflow from investing activities 7 7 24 13 12 8 Proceeds from issuance of shares related to exercise of warrants Proceeds from issuance of shares (2017: IPO) Costs related to issuance of shares (2017: IPO) Leasing installments Repayment of royalty bond Cash (outflow)/inflow from financing activities 22 Restated1 Restated1 2017 2018 2019 -571,541 9,207 10,873 139,890 5,413 -3,390 93 0 -409,455 581,278 101,930 12,785 0 4,263 -16,705 0 -1,105,471 5,500 -45,000 -461,420 -274,413 24,534 -11,304 0 2,048 -25,111 0 5,500 0 -278,746 0 0 6,124 0 0 0 0 1,275,802 -60,675 365,795 7,725 0 0 -6,250 -22,803 0 0 -21,036 -2,480 25 878 -51,666 52,468 645,145 -14,444 -8,689 0 674,480 -170,331 -33 0 -299,849 74,230 -4,038 0 0 1,020 882,925 2,884 0 -22 0 -158,311 -155,449 266,056 588,718 5,861 860,635 0 -39 -9,312 -75,037 0 -7,226 0 120 0 221,351 6,790 567,076 -59,576 0 -176,360 337,930 280,535 323,330 -15,147 588,718 Increase/(Decrease) in cash and cash equivalents Cash and cash equivalents at January 1 Exchange rate adjustments Cash and cash equivalents at December 31 1 See note 1 to the consolidated financial statements 213,359 860,635 7,066 1,081,060 DKK thousand Equity at January 1, 2019 as originally presented Correction of error (net of tax)1 Restated equity at January 1, 2019 Comprehensive result for the year Net result for the year Warrant compensation expenses Capital increases Cost related to capital increases Equity at December 31, 2019 Equity at January 1, 2018 as originally presented Correction of error (net of tax)1 Restated equity at January 1, 2018 Comprehensive result for the year Net profit for the year (restated)¹ Warrant compensation expenses Capital increases Restated equity at December 31, 2018 Equity at January 1, 2017 as originally presented Correction of error (net of tax)1 Restated equity at January 1, 2017 Comprehensive loss for the year Net loss for the year Warrant compensation expenses Capital increases Cost related to capital increases Equity at December 31, 2017 1 See note 1 to the consolidated financial statements. Share capital premium Share Retained losses 30,787 1,979,493 -22,016 30,787 1,957,477 0 -893,999 1,116,281 0 -871,983 1,116,281 22,016 0 0 5,268 0 -571,541 14,764 697,613 -14,444 36,055 2,650,142 -1,443,524 1,242,673 -571,541 0 0 0 0 14,764 692,345 -14,444 30,751 1,959,199 -1,475,281 22,020 -22,020 30,751 1,937,179 -1,453,261 0 514,669 0 514,669 0 0 36 0 17,472 2,826 30,787 1,957,477 581,278 0 0 581,278 17,472 2,862 -871,983 1,116,281 26,142 1,441,263 -1,200,023 21,175 -21,175 26,142 1,420,088 -1,178,848 0 267,382 0 267,382 0 0 4,609 0 -274,413 0 0 19,311 0 569,041 0 -71,261 30,751 1,937,179 -1,453,261 -274,413 19,311 573,650 -71,261 514,669 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Con Fin – Business overview 5353 Consolidated financial statements Business overview Zealand (the “Company”, the “Group”, “Zealand” and “we”) was founded in 1998 and is a bio- technology company focused on the discovery and development of innovative peptide-based medicines. More than 10 drug candidates invented by Zealand have advanced into clinical de- velopment, of which two have reached the market. Zealand’s current pipeline of internal prod- uct candidates focus on specialty gastrointestinal and metabolic diseases. Zealand’s portfolio also includes two clinical license collaborations with Boehringer Ingelheim and one discover and develop collaboration with Alexion Pharmaceuticals. In September 2018 we entered into an agreement with Royalty Pharma to transfer all the royal- ties that we were due to earn from our 2003 agreement with Sanofi in exchange for an upfront one-time payment of USD 205 million. Excluded from this agreement was a potential milestone payment from Sanofi of up to USD 15 million. Please refer to note 7. We have four fully owned programs in late clinical development: 4 Dasiglucagon for Congenital hyperinsulinism Congenital hyperinsulinism, or CHI, is an ultra-rare but devastating disease caused by inap- propriately elevated insulin secretion irrespective of glucose levels. This leads to frequent and often severe hypoglycemia and long-term irreversible damage to health. In January 2018, the FDA issued a safe-to-proceed letter. Two pivotal Phase 3 trials were initiated in 2019. In addition to the late stage clinical programs we also have a pipeline of pre-clinical programs with the potential to enter into the clinic in 2020 and the years to come. Other significant events during 2019 are the agreement with Alexion Pharmaceuticals to collab- orate on developing a complement C3 Inhibitor and the acquisition of Encycle Therapeutics securing pre-clinical 4 7 integrin inhibitor and access to screening library of approximately 5,000 peptide-like macrocycles. Both being part of the pre-clinical expansion of the pipeline. 1 Glepaglutide, a long-acting GLP-2 analog in development for the treatment of short bowel Company summary syndrome (SBS). The pivotal Phase 3 trial in 129 patients has continued in 2019 with expected full enrolment in 2020. On track for 2021 results and new drug application. Dasiglucagon, a Zealand-invented proprietary glucagon analog currently in development for three different indications: 2 Dasiglucagon HypoPal® Rescue Pen for severe hypoglycemia Ready-to-use dasiglucagon may offer diabetes patients and their families a fast treatment solution for severe hypoglycemia that is easier to use than currently marketed glucagon kits. The pivotal Phase 3 clinical program with dasiglucagon for the treatment of severe hypogly- cemia was completed and New Drug Application submission is planned for first part of 2020. 3 Dasiglucagon in Dual-hormone pump therapy for diabetes treatment Zealand has already reported positive results from two Phase 2a trials in 2017. In 2019 Phase 2 trial was completed and Phase 3 is planned for late 2020. Zealand Pharma A/S subsidiaries ZP Holding SPV K/S ZP General Partner 1 ApS Zealand Pharma US Inc. Encycle Therapeutics Inc. ZP SPV 3 K/S ZP General Partner 3 ApS ZP Holding SPV K/S subsidiaries ZP SPV 1 K/S ZP General Partner 2 ApS Domicile Owner- ship Voting rights Denmark Denmark United States Canada Denmark Denmark 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Denmark Denmark 100% 100% 100% 100% Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 54 Notes Con Fin – Note 1 54 Note 1 – Significant accounting policies, and significant accounting estimates and assessments Significant accounting policies Basis of preparation The consolidated financial statements of Zealand have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as adopted by the EU and additional requirements under the Danish Financial Statements Act. The Board of Directors considered and approved the 2019 Annual Report of Zealand on March 12, 2020. The Annual Report will be submitted to the shareholders of Zealand for approval at the Annual General Meeting on April 2, 2020. The consolidated financial statements are presented on a historical cost basis, except for cer- tain financial assets and liabilities measured at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. For financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and on the significance of the inputs to the fair value measurement as a whole. The inputs are described as follows: Implementation of new and revised standards and interpretations The Group has adopted the following new and amended standards as described below. Other amendments effective for 2019 have no impact on the financial statements for Zealand. IFRS 16 Leases IFRS 16 replaces IAS 17 and requires all leases to be recognized as a right-of-use asset and lease liability, measured at the present value of future lease payments. The right-of-use asset is subsequently depreciated in a similar way to other depreciable assets over the lease term and interest calculated on the lease liability in a similar way to how it is calculated on finance leases under IAS 17. Consequently, the change impacts the presentation in the income statement and the statement of cash flows. The Group leases properties, equipment and cars. The Group recognizes leases as a right-of- use asset and a corresponding liability at the date at which the leased asset is available for use. We refer to note 14 regarding the right-of-use assets and liabilities. On adoption of IFRS 16, the Group recognized lease liabilities in relation to leases, which had previously been classified as “operating leases” under the principles of IAS 17, Leases. These li- abilities were measured at the present value of the remaining lease payments, discounted using the Lessee’s incremental borrowing rate as of January 1, 2019. The associated right-of-use assets were at the transition date measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to the leases recognized in the statement of financial position as at December 31, 2018. In the income statement, application of IFRS 16 results in recognition of a depreciation of the right-of-use asset and an interest expense rather than an operating lease expense. • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date • Implementation method • Level 2 inputs are inputs, other than quoted prices included within Level 1 that are observable spective approach whereby comparative figures are not restated. for the asset or liability, either directly or indirectly • The Group has adopted IFRS 16, Leases from January 1, 2019, using the modified retro- • Level 3 inputs are fair value measures derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). The consolidated financial statements are presented in Danish kroner (DKK), which is the func- tional currency of the Parent Company. In the narrative sections of the financial statements, comparative figures for 2018 and 2017 are shown in brackets. IFRIC 23, Uncertainty over income tax treatments IFRIC 23 provides guidance in respect of recognition and measurement of income tax balanc- es if uncertainty over the tax treatment exist. Implementation of the interpretation has had no impact on the income tax balances recognized in the financial statements. Annual improvements 2015-2017 Comprises minor changes to IFRS 3, IFRS 11, IAS 12 and IAS 23. The amendments have no impact on the accounting policies applied. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 20195555 Notes Note 1 – Significant accounting policies, and significant accounting estimates and assessments (continued) Standards and interpretations not yet applied IASB has issued a number of new and amended standards which are not yet effective. None of these new standards or amendments are expected to impact the Group’s accounting policies. Accounting policies The accounting policies are apart from the application of IFRS 16, Leases, unchanged from last year. The accounting policies for specific line items and transactions are included in the respec- tive notes to the financial statements except for basis and principles of consolidation, foreign currency translation, classification of income statement, segment reporting, classification of financial assets and the cash flow statement, which are included below. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities (including structured entities) controlled by the Company and its subsidiaries. Con- trol is achieved when the Company: • has power over the investee; the statement of financial position date and the rate at the date on which the receivable or pay- able arose are recognized in the income statement as financial income and financial expenses. Non-monetary assets purchased in foreign currencies are measured at the exchange rate on the transaction date. Consolidated financial statements Income statement The expenses recognized in the income statement is presented as an analysis using a classifica- tion based on their function. Segment reporting The Group is managed by a Corporate Management team reporting to the Chief Executive Officer. The Corporate Management team, including the Chief Executive Officer, represents the chief operating decision maker (CODM). No separate business areas or separate business units have been identified in connection with product candidates or geographical markets. Conse- quently, there is no segment reporting concerning business areas or geographical areas. • is exposed, or has rights, to variable returns from its involvement with the investee; and • has the ability to use its power to affect its returns. Statement of financial position The Company reassesses whether it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. Principles of consolidation The consolidated financial statements are prepared on the basis of the financial statements of the parent company and the individual subsidiaries, which are based on uniform accounting policies and accounting periods in all Group entities. Consolidation of Group entities is per- formed after elimination of all intra-Group transactions, balances, income and expenses. Foreign currency translation Transactions denominated in foreign currencies are translated at the exchange rates on the transaction dates. Exchange differences arising between the rate on the transaction date and the rate on the pay- ment day are recognized in the income statement as financial income or financial expenses. Receivables, payables and other monetary items denominated in foreign currencies that have not been settled at the statement of financial position date are translated by applying the ex- change rates at the statement of financial position date. Differences arising between the rate at Financial assets Financial assets include receivables, marketable securities and cash. Financial assets are divided into categories of which the following are relevant for the Group: 1. Financial assets at amortized cost comprising of receivables with contractual cash flows solely comprising of payment of principal and interest and which are held for the purpose of collecting the contractual cash flow. 2. Financial assets at fair value through the income statement, which are marketable securities held in a business model whose purpose is to regularly sell marketable securities within the portfolio. 3. Equity investments. These investments are measured at fair value through the income state- ment. Financial assets are assigned to the different categories by Management on initial recognition, depending on the cash flow characteristics and purpose for which the assets were acquired. All financial assets are recognized on their settlement date. All financial assets other than those classified at fair value through the income statement are initially recognized at fair value, plus transaction costs. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201956 Notes 56 Note 1 – Significant accounting policies, and significant accounting estimates and assessments (continued) Statement of cash flows The cash flow statement is prepared in accordance with the indirect method on the basis of the net loss for the year. The statement shows the cash flows broken down into operating, invest- ing and financing activities, cash and cash equivalents at the beginning and end of the year, and the impact of the calculated cash flows on cash and cash equivalents. Cash flows in foreign currencies are translated into Danish kroner at the exchange rate on the transaction date. affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The estimates used are based on assumptions assessed to be reasonable by Management. However, estimates are inherently uncertain and unpredictable. The assumptions may be incomplete or inaccurate, and unexpected events or circumstances may occur. Furthermore, we are subject to risks and uncertainties that may result in deviations in actual results compared with estimates. Cash flow from operating activities Cash flow from operating activities is presented indirectly and is calculated as the net result ad- justed for sale of royalties, non-cash operating items, changes in net working capital, financial items paid, and income tax benefits received and paid. No significant changes have been made to accounting estimates and assessments in 2019. The following are the most significant accounting judgements and estimates applied by Man- agement in these financial statements: Cash flow from investing activities Cash flow from investing activities includes cash flows from the sale of future royalties and milestone relating to the Sanofi license, purchase and sale of property, plant and equipment, investments and deposits, as well as transfers to and from restricted cash related to the royalty bond. Cash flow from financing activities Cash flow from financing activities includes proceeds from issuance of new shares and related costs, finance lease installments and loan financing. Cash and cash equivalents Cash and cash equivalents comprise cash and bank balances. Significant accounting estimates and judgments In applying our accounting policies, Management is required to make judgments based on the specific facts and circumstances relevant to the assessment. In preparing the financial statements, Management makes a number of accounting estimates that form the basis for the recognition and measurement of our assets and liabilities. In applying our accounting policies, Management is required to make judgements and esti- mates about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates including assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to ac- counting estimates are recognized in the period in which the estimate is revised if the revision Revenue recognition (management judgement) Revenue comprises license payments, milestone payments and royalty income. License payments which provide the buyer with the right to use the license as it exists at the date of transfer are recognized upon transfer of the associated licensing rights at the point at which the buyer obtains the right to use the license. Upon entering into agreements with multiple components, Management determines whether individual components are distinct, which is the case if the buyer can obtain benefits from the goods or service and the promise is distinct within the context of the contract. If no individual components are distinct, the contract is treated as a single performance obligation. When entering into licensing and development agreements, a critical judgment relates to whether the customer could continue development of the IP to the stage promised by Zealand under the promise to provide R&D services. If this is not the case, the IP and the R&D services are considered a single performance obligation. Milestone payments are related to the collaborative research agreements with commercial partners and are recognized when it is highly probable that Zealand Pharma will become enti- tled to the milestone which is generally when the milestone is achieved. Royalty income from licenses is based on third-party sales of licensed products and is recognized in accordance with contract terms in the period in which the sales occur. Revenue from transactions involving the rendering of services which are consumed by the cus- tomer simultaneously with delivery is recognized along with delivery of the services. Employee incentive programs (management estimates) In accordance with IFRS 2, Share-based Payment, the fair value of the warrants classified as equity settled is measured at the grant date and recognized as an expense in the income statement over the vesting period. The fair value of each warrant granted during the year is Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 20195757 Notes Note 1 – Significant accounting policies, and significant accounting estimates and assessments (continued) estimated using the Black– Scholes option pricing model. This requires the input of subjective assumptions such as: (cliff vesting). The vesting period is typically 3 years resulting in straight-line recognition of the cost over 3 years rather than up front. • The expected stock price volatility, which is based on the historical volatility of Zealand’s share price • The selection of the risk-free interest rate, which is determined as the interest rate on Danish government bonds with a maturity equal to the expected term • The duration of the warrants, which is assumed to be until the middle of the exercise period The total fair value of the warrants is recognized in the income statement over the vesting period. An adjustment is made to reflect an expected attrition rate during the vesting period. The attrition rate is re-estimated at year-end based on the historical attrition rate resulting in recognition of an expense equal to grant date fair value of the number of warrants which actually vest. Encycle Therapeutics, Inc. acquisition (management judgement) As of October 2019, Zealand acquired all outstanding shares in Encycle Therapeutics, Inc. and all its intellectual property, including all rights to develop and commercialize the lead asset. Zealand will not be acquiring any infrastructure or personnel costs with this transaction. The total future consideration for the acquisition could potentially reach USD 80 million in one-time contingent value rights (“earn-outs”), of which USD 10 million in earn-outs could be payable up to the successful completion of a Phase 2 study. All earn-outs are payable in cash and/or Zea- land equity at Zealand’s discretion, are linked to the lead asset only, and contingent on certain future successful development, regulatory, and commercial-related milestones. There is also a potential mid-single digit royalty on global net sales from the lead asset. Management has assessed that this acquisition is an asset acquisition, and thus will be accounted for in accord- ance with IAS 38, Intangible Assets and is not considered a business combination under IFRS 3, Business Combinations. Restatement (management judgement) During Q1 2019 a restatement related to warrants was identified by Management. The Com- pany grants, on a regular basis, equity settled warrants to Corporate Management and other employees. Historically, the warrants were deemed vested at grant date. Consequently, the full fair value at grant date has been recognized as an expense as of this date. Management has reconsidered the allocation of expenses of warrants. Management has concluded, the warrants vest at a future date as they become exercisable only upon continued employment during the time period from grant date up until the specified future date (i.e. the date upon which the warrants become exercisable). All warrants granted at one point in time vest on the same date The restatement affects reported profit/loss for the year ended December 31, 2018 and prior years. While the impact on interim periods is significant, the full year impact is insignificant as the impact between the quarterly interim periods primarily nets out the full year impact. Due to the fact that the warrants are equity settled, the counter-entry to the restated expense is equity. Consequently, the restatement has no impact on reported total equity in any periods. The value of warrants recognized in equity is presented as part of share premium. Consequent- ly, the restatement results in a reduction of the share premium and a corresponding decrease in accumulated loss equal to the cumulative effect on reported profit/loss in prior years for warrants not fully vested as at January 1, 2018. The impact of the restatements of warrants on the statement of cash flow is solely a reclassi- fication between “Net profit/loss for the period” and “Change in working capital”. Hence, there is no impact on the cash flow from operating activities. Therefore, the Company deemed it irrelevant to present restated statements of cash flow. The nature and impact of each restatement in 2017 and 2018 per line item in the consolidated income statement and consolidated statement of financial position for Zealand is presented on page 58 and 59. Income statement: Research and development expenses and Administrative expenses Warrant expenses recognized in staff expenses classified as Research and development expens- es and Administrative expenses, respectively, have been restated as described above. The restatement has an opposing tax impact of 22% in 2018 because of the positive taxable income, whereas there is no recognized tax impact in 2017 due to the negative taxable income. Statement of financial position: Share premium/Retained Losses (Equity) The counter-entry to the warrant expenses recognized in the income statement (debit) is Share Premium (credit) in Equity. The impact on the income statement is recognized in Retained losses (debit) in Equity, thus results in no net impact on Equity. The restatement of Share premium and Retained losses impact shows the cumulative impact. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201958 Notes 58 Note 1 – Significant accounting policies, and significant accounting estimates and assessments (continued) Consolidated income statement for the twelve month period ended December 31, 2018 Consolidated income statement for the twelve month period ended December 31, 2017 As most recently reported, December 31, 2018 Restate- ment Amount as adjusted, December 31, 2018 As most recently reported, December 31, 2017 Restate- ment Amount as adjusted, December 31, 2017 DKK thousand Revenue Royalty expenses Research and development expenses Administrative expenses Other operating income Operating result Financial income Financial expenses Result before tax Income tax Net result for the year 37,977 -3,356 -438,215 -43,542 1,099,526 652,390 9,988 -37,322 625,056 -43,774 581,282 0 0 -4 -1 0 -5 0 0 -5 1 -4 DKK thousand Revenue Royalty expenses Research and development expenses Administrative expenses Other operating income Operating result Financial income Financial expenses Result before tax Income tax Net result for the year 136,322 -14,163 -324,667 -47,470 607 -249,371 2,122 -33,509 -280,758 5,500 -275,258 0 0 718 127 0 845 0 0 845 0 845 37,977 -3,356 -438,219 -43,543 1,099,526 652,385 9,988 -37,322 625,051 -43,773 581,278 18.94 18.94 136,322 -14,163 -323,949 -47,343 607 -248,526 2,122 -33,509 -279,913 5,500 -274,413 -9.85 -9.85 Earnings per share - basic (DKK) Earnings per share - diluted (DKK) 18.94 18.94 0.00 0.00 Loss per share - basic (DKK) Loss per share - diluted (DKK) -9.88 -9.88 -0.03 -0.03 Consolidated statements of comprehensive income for the year ended December 31, 2018 Consolidated statements of comprehensive income for the year ended December 31, 2017 DKK thousand Net result for the year Other comprehensive income (loss) Net result for the year As most recently reported, December 31, 2018 581,282 0 581,282 Restate- ment -4 0 -4 Amount as adjusted, December 31, 2018 581,278 0 581,278 DKK thousand Net result for the year Other comprehensive income (loss) Net result for the year As most recently reported, December 31, 2017 -275,258 0 -275,258 Restate- ment 845 0 845 Amount as adjusted, December 31, 2017 -274,413 0 -274,413 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Notes Note 1 – Significant accounting policies, and significant accounting estimates and assessments (continued) Consolidated statement of financial position as of December 31, 2018 Consolidated statement of financial position as of December 31, 2017 5959 As most recently reported, December 31, 2018 Restate- ment Amount as adjusted, December 31, 2018 As most recently reported, December 31, 2017 Restate- ment Amount as adjusted, December 31, 2017 DKK thousand Equity and liabilities Share capital Share premium Retained losses Equity Royalty bond Deferred revenue Lease liabilities Non-current liabilities Trade payables Corporate tax payables Royalty bond Lease liabilities Deferred revenue Other liabilities Current liabilities Total liabilities 30,787 1,979,493 -893,999 1,116,281 0 -22,016 22,016 0 0 0 0 0 32,652 0 0 0 0 80,864 113,516 113,516 0 0 0 0 0 0 0 0 0 0 0 0 0 DKK thousand Equity and liabilities Share capital Share premium Retained losses Equity Royalty bond Deferred revenue Lease liabilities Non-current liabilities Trade payables Corporate tax payables Royalty bond Lease liabilities Deferred revenue Other liabilities Current liabilities 30,787 1,957,477 -871,983 1,116,281 0 0 0 0 32,652 0 0 0 0 80,864 113,516 30,751 1,959,199 -1,475,281 514,669 0 -22,020 22,020 0 132,986 0 0 132,986 29,428 0 2,748 0 0 41,454 73,630 0 0 0 0 0 0 0 0 0 0 0 0 0 30,751 1,937,179 -1,453,261 514,669 132,986 0 0 132,986 29,428 0 2,748 0 0 41,454 73,630 206,616 721,285 Total equity and liabilities 1,229,797 113,516 Total liabilities 206,616 1,229,797 Total equity and liabilities 721,285 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 60 Notes 60 Note 1 – Change in accounting policies (continued) Change in accounting policies Below is explained the impact of the adoption of IFRS 16, Leases on the Group’s financial state- ments. As indicated above, the Group has adopted IFRS 16, Leases retrospectively from January 1, 2019, but has not changed comparatives for the 2018 reporting period, as permitted under the specific transition provisions in the standard. The changes arise from the new leasing standard are therefore recognized in the opening statement of financial position on January 1, 2019. The new accounting policies are disclosed in note 14. On adoption of IFRS 16, the Group recognized lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of IAS 17, Leases. These lia- bilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of January 1, 2019. The weighted average lessee’s incremental borrowing rate applied to the lease liabilities was 2.1%. No leases were previously classified as finance leases under the principles of IAS 17. Practical expedients applied In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard: • applying a single discount rate to a portfolio of leases with reasonably similar characteristics • relying on previous assessments on whether leases are onerous as an alternative to perform- ing an impairment review – there were no onerous contracts as at January 1, 2019, and • using hindsight in determining the lease term where the contract contains options to extend or terminate the lease. The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date the Group relied on its assessment made applying IAS 17 and IFRIC 4, Determining Whether an Arrangement Contains a Lease. Measurement of lease liabilities DKK thousand Jan 1, 2019 Reconciliation Operating lease obligations disclosed at December 31, 2018 Discounted using the lessee’s incremental borrowing rate of at the date of initial application Initial recognition of lease liabilities during 2019 Adjustments as a result of recognition of non-lease components Adjustments as a result of a different treatment of extension and termination options Adjustments as a result of lease liabilities to be recognized in subsequent years Lease liabilities recognized at January 1, 2019 Of which are: – Current lease liabilities – Non-current lease liabilities 67,507 -11,723 -32,198 1,241 4,529 -19,308 10,048 7,118 2,930 10,048 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Con Fin – Note 2 6161 Notes Note 2 – Revenue Accounting policies Revenue comprises license payments, milestone payments and royalty income. License payments which provide the buyer with the right to use the license as it exists at the date of transfer are recognized upon transfer of the associated licensing rights at the point at which the buyer obtains the right to use the license. Milestone payments related to the collaborative research agreements with commercial partners are recognized when it is highly probable that Zealand Pharma will become entitled to the milestone which is generally when the milestone is achieved. Royalty income from licenses is based on third-party sales of licensed products and is recognized in accordance with contract terms in the period in which the sales occur. Revenue from transactions involving the rendering of services which are consumed by the cus- tomer simultaneously with delivery is recognized along with delivery of the services. Upon entering into agreements with multiple components, Management determines whether individual components are distinct, which is the case if the buyer can obtain benefits from the goods or service and the promise is distinct within the context of the contract. If no individual components are distinct, the contract is treated as having a single performance obligation. Accounting for the Alexion Pharmaceuticals, Inc. Agreement In March 2019, Zealand entered into a license, research and development agreement with Alexion Pharmaceuticals, Inc. (Alexion) to develop novel therapies to treat complement medi- ated diseases. This agreement provided Zealand an immediate cash injection as well as further external validation of Zealand’s peptide platform. The collaboration with Alexion is not limited to C3 but offers the potential to work on identifi- cation of peptide inhibitors to up to three additional components of the complement cascade. Zealand will have responsibility for the C3 project and other targets up to IND and Alexion will then progress the peptides into clinical development. Under the Alexion license, research and development agreement, Zealand has received an upfront non-refundable payment of USD 25 million for the C3 program and a concurrent USD 15 million equity investment in Zealand at a premium to the market price. The agreement also provides the potential for development-related milestones of up to USD 115 million, as well as up to USD 495 million in sales-related milestones and high single- to low double-digit royalty payments. The 3 additional programs will provide further non-refundable upfront payments (USD 15 million each), development and sales milestone and royalties. Accounting treatment The non-refundable up-front fee was allocated to the combined license, research and devel- opment services, and is being recognized as revenue along with provision of the research and development services under the lead program. Expenses incurred to provide the services is being recognized when incurred. Further, the premium over the market share price on the Zea- land shares subscribed by Alexion, DKK 12.7 million, is attributed to the Agreement as further consideration and consequently also recognized over the period over which the R&D servic- es are provided. Revenue is recognized based on the percentage of completion of the R&D services, which is estimated based on the expenses incurred during that period. In total, Alexion has paid USD 40 million, corresponding to DKK 262.9 million that as of December 31, 2019 has affected equity by DKK 85.6 million, deferred revenue by DKK 139.9 million, and revenue by DKK 37.4 million in 2019. Hence the cash flow from operating activities is DKK 177.3 million and the cash flow from financing activities is DKK 85.6 million. Milestone payments, if any, will be recognized as revenue when the relevant milestones are achieved as they relate to performance obligations already satisfied at this stage. Royalty pay- ments, if any, will be recognized along with the underlying sales. Significant judgment applied Determination of whether the license transferred and the research and development services constitute separate performance obligations, or form part a single performance obligation comprising a combined output has a significant impact on the accounting treatment. Zealand has applied significant judgment to determine whether the promised services are distinct and concluded that Alexion cannot benefit from the license alone. It is Zealand assessment that the R&D services under this agreement requires specific Zealand know-how and expertise which cannot be easily identified or sourced externally. Therefore, Alexion would not in the absence of the contractual provisions have had the practical ability to engage a third-party R&D service provider to provide the agreed R&D services. As the nature of the collaboration with Alexion may affect the accounting treatment of the agreement, Zealand has considered whether the agreement takes the form of a collaborative partnership with Alexion rather than a customer-vendor agreement. After consideration of all facts and circumstances, Zealand has assessed that the agreement takes the form of a custom- er-vendor relationship. Accordingly, the agreement is treated under the guidelines of IFRS 15 Revenue from Contracts with Customers. As any additional programs are optional and paid for separately, they are not considered part of the initial agreement. It has been considered whether the options for additional compo- nents represent a material right and, thus, a separate performance obligation under the initial agreement to which a portion of the initial upfront payment should be allocated. Zealand has determined that the probability of exercising the option is low and in combination with the fact that the development is significantly less advanced than the lead target, we have determined that the options do not represent a material right. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201962 Notes Note 2 – Revenue (continued) Accounting for the Sanofi License Agreement In 2003, Zealand entered into a license agreement with Sanofi (the Sanofi License Agreement), pursuant to which Zealand granted Sanofi exclusive rights to its patents, know-how and other intellectual property relating to lixisenatide, for all fields. Pursuant to the Sanofi License Agree- ment, which has been amended over the years, Sanofi assumed responsibility for the further development, manufacturing and marketing of lixisenatide, and we cannot research or develop lixisenatide while the Sanofi License Agreement remains in effect. Under the Sanofi License Agreement, Zealand were eligible to receive remaining milestone payments relating to commercialized products of up to USD 100 million, contingent on the achievement of certain sales levels, as well as royalties on global sales of such products. Royal- ties correspond to tiered, low-double-digit percentages of Sanofi’s global net sales of lixisenati- de (branded as AdlyxinR in the U.S. and as LyxumiaR in the EU and in other countries) plus a 10% royalty on global net sales of a combination of lixisenatide and insulin glargine 100 units/ml (LantusR) marketed under the brand name SoliquaR 100/33 in the U.S. and as SuliquaR in the EU. In 2016, Sanofi challenged the validity of certain patents owned by a competitor, AstraZeneca (and its affiliates), in both administrative and court proceedings in the U.S. and in certain other countries, and AstraZeneca brought counterclaims in the U.S. proceedings asserting that prod- ucts containing lixisenatide infringe its patents. Sanofi and AstraZeneca subsequently agreed to settle all claims and counterclaims between them in various proceedings relating to lixisenatide. Our financial obligations related to this now-resolved intellectual property dispute could reduce our net revenue from the original commercial milestone payments from Sanofi relating to Soli- qua R 100/33/SuliquaR. The amount and timing of any such reductions of future revenue are not currently known, but they will not exceed USD 15 million in total. Refer to note 25. Zealand pay Alkermes plc 13% of all payments received on lixisenatide while lixisenatide is sub- ject to a commercialization agreement such as the Sanofi License Agreement. Zealand 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 the SIP technology. Milestone payments have been recognized as revenue when the relevant milestones are achieved. All future royalties and all but up to USD 15 million of future milestone payments relating to the Sanofi License Agreement were sold to Royalty Pharma in September 2018. Refer to note 7. Accounting for the Boehringer Ingelheim License Agreements In 2011, Zealand entered into a license, research and development collaboration agreement with Boehringer Ingelheim International GmbH (BI) to advance novel GLP-1/glucagon du- al-acting peptide receptor agonists (GGDAs) for the treatment of patients with type 2 diabetes 62 and obesity. Under the terms of the 2011 BI License Agreement, BI paid a fixed amount per full-time employee and other costs related to all research, development and commercialization in respect of the compounds covered by the agreement. Zealand is eligible to receive license and milestone payments of up to EUR 386 million, of which EUR 365 million was outstanding at December 31, 2019, related to the achievement of pre-specified development, regulatory and commercial milestones for the lead product. We are also eligible to receive tiered royalties ranging from high single-digit to low double-digit per- centages on BI’s sales of all products stemming from this collaboration. In addition, we retain copromotion rights in Scandinavia. In 2014, Zealand entered into a second global license, research and development collaboration agreement with BI (the 2014 BI License Agreement). This agreement pertained to a collabo- ration on a specific therapeutic peptide project from our portfolio of preclinical programs for a period of up to four and a half years, with the aim of developing novel drugs to improve the treatment of patients with cardiometabolic diseases. In 2015, BI selected a novel peptide thera- peutic to be advanced into preclinical development under this agreement. Pursuant to this agreement, we have worked with BI to advance the therapeutic peptides stemming from this research collaboration into preclinical development. BI is responsible for conducting preclinical and clinical development as well as for the commercialization of products stemming from the agreement and funding all activities under the agreement. We are eligible to receive license and milestone payments of up to EUR 295 million for the first compound to be developed and marketed under the collaboration, of which EUR 283 million was outstanding at December 31, 2019. We are also eligible to receive tiered royalties ranging from high single-digit to low-double-digit percentages on global sales of products arising from this collaboration. We retain copromotion rights in Scandinavia and are not eligible for royalty payments in those countries if we exercise such rights. No product candidates out licensed to BI are currently marketed, and accordingly we have not received any royalty payments to date under our licensing agreements with BI. In September 2019, Boehringer Ingelheim and Zealand announced that Boehringer Ingelheim plans to initiate Phase 2 development of the GLP-1/glucagon dual agonist BI 456906. The Phase 2 trial for BI 456906 is expected to be initiated in first part of 2020 and will trigger a EUR 20 million milestone payment to Zealand at which time the revenue will be recognized. Milestone payments are recognized as revenue when the relevant milestones are achieved. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 20196363 Notes Note 2 – Revenue (continued) Accounting for other license agreements In 2019, Zealand recognized revenue related to a Material Transfer Agreement with an undis- closed counterpart. The revenue related to a license option has been recognized in the period in which the services were rendered. Zealand is managed and operated as one business unit, which is reflected in the organizational structure and internal reporting. No separate lines of business or separate business entities have been identified with respect to any of the product candidates or geographical markets and no segment information is currently disclosed in the internal reporting. In 2018, Zealand entered into a Material Transfer agreement with an undisclosed counterpart. A milestone payment was recognized as revenue, when the relevant milestone was achieved. Such Material Transfer agreement related to the delivery of an existing material to the undis- closed third party. No remaining performance obligations exist related to such agreement. Milestone payments are recognized as revenue when the relevant milestones are achieved. All Zealand revenue can be attributed to countries other than Denmark. Revenue from Alexion In 2019, we recognized DKK 37.4 million as income from the license, research and develop- ment agreement signed in March 2019 reflecting the progress on the lead project. Under the agreement DKK 139.9 million is accounted for as deferred revenue at December 31, 2019. Recognized revenue can be specified as follows for all agreements: DKK 0.6 million of other revenue is recognized related to other projects with Alexion. DKK thousand 2019 2018 2017 Alexion Pharmaceuticals Inc. Undisclosed counterpart Protagonist Therapeutics, Inc. Sanofi-Aventis Deutschland GmbH Boehringer Ingelheim International GmbH Total license and milestone revenue Sanofi-Aventis Deutschland GmbH Total royalty revenue 38,021 3,312 - - - 41,333 - 9,845 3,274 - - 13,119 - - 1,662 69,603 29,750 101,015 - 0 24,858 24,858 35,307 35,307 Total revenue 41,333 37,977 136,322 Royalty revenue can be specified as follows: Soliqua® Lyxumia® Total royalty revenue - - 0 17,786 7,072 24,858 18,655 16,652 35,307 On September 6, 2018, Zealand entered into an agreement under which all rights to sales based royalties and milestone payments under the Sanofi agreement were transferred to Royalty Pharma for a fixed consideration. The gain net of transaction costs and settlement of the liabili- ty to Alkermes plc and another investor is included in other operating income. Refer to note 7. Revenue from Sanofi In 2018, we recognized DKK 24.9 million as royalty income, reflecting sales of Lyxumia® of EUR 9.5 million and sales of Soliqua® 100/33 of EUR 23.8 million. No milestone revenue was received. In 2017, we recognized DKK 69.6 million in revenue from milestone payments from Sanofi under the Sanofi License Agreement in connection with the approval of Suliqua® in the EU in January 2017. In addition, in 2017 we recognized DKK 35.3 million as royalty income, reflecting sales of Lyxumia® of EUR 22.4 million and sales of Soliqua® 100/33 of EUR 25.1 million. Revenue from Boehringer Ingelheim No revenue was recognized from BI in 2019 or 2018, as no milestone event was achieved. In 2017, we recognized DKK 29.8 million in revenue from milestone payments from BI related to the initiation of the Phase 1 trial for the long-acting amylin analog. Revenue from other agreements In 2018 and 2019, we recognized DKK 9.8 million and DKK 3.3 million, respectively, in revenues from a milestone payment and license option payments, respectively, from undisclosed coun- terparts relating to two Material Transfer Agreements. In 2017 and 2018, we recognized DKK 1.7 million and DKK 3.3 million, respectively, in revenue from milestone payments from Protagonist Therapeutics in connection with the start of Phase 1 and 2, respectively, with the novel hepcidin mimetic PTG-300. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 64 Notes Note 3 – Royalty expenses Accounting policies Royalty expenses comprise contractual amounts payable 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 deferred payments or royalties to third parties. At the time of the dissolution of a former joint venture with Elan Corporation, plc (Elan) and certain of its subsidiaries that were party to the joint venture agreement with us, we agreed to pay royalties to Elan – now Alkermes plc, as successor in interest to a termination agreement between us and the Elan entities – including 13% of future payments we receive in respect of lixisenatide under the Sanofi License Agreement. In addition, we have agreed to pay a royalty of 0.5% of the total amounts we receive in connec- tion with our SIP-modified peptides, including lixisenatide, to one of the inventors of our SIP technology, who is one of our employees. The royalty to be paid to this inventor is calculated on the basis of all the amounts we receive, including license payments, milestone payments and sales. In 2019, the royalty expenses relate to mentioned inventor. In 2018 and 2017, the royalty expenses related to royalties from sales of Lyxumia® and Soliqua® 100/33 and milestone payments received from Sanofi. As further discussed in note 7, the arrangement was settled in 2018 as part of transferring the right to future royalty and milestone payments under the Sanofi agreement. Con Fin – Note 3-4 64 Note 4 – Research, development and administrative expenses Accounting policies 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 expens- es, including depreciation and amortization, directly attributable to the Group’s development activities. Development expenses are recognized in the income statement as incurred, except where the capitalization criteria is met. 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 adminis- trative expenses based on the number of employees in each department, determined accord- ing to the respective employees’ associated undertakings. Judgment applied 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 its effect on human beings, prior to obtaining the nec- essary 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 develop- ment expenses are therefore recognized in the income statement when incurred. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Con Fin – Note 5-6 6565 Notes Note 4 – Research, development and administrative expenses (continued) Note 5 – Fees to auditors appointed at the Annual General Meeting 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 administra- tive expenses but also development expenses. Zealand has not capitalized any development expenses in 2019, 2018 or 2017. Administrative expenses Administrative expenses include expenses for administrative personnel, expenses related to company premises, depreciation on right-of-use assets, investor relations, etc. Overhead ex- penses have been allocated to research and development or administrative expenses according to the number of employees in each department, based on the respective employees’ associat- ed undertakings. DKK thousand 2019 2018 2017 Audit Audit-related services and other assurance engagements Tax advice Other Total fees 1,847 1,731 0 12 3,590 1,661 718 106 0 2,485 1,199 2,418 114 196 3,927 The fee for audit-related services and other assurance engagements and other services provid- ed to the Group by Deloitte Statsautoriseret Revisionspartnerselskab in 2019 consisted of assis- tance work in relation to existing internal control processes, other auditor’s reports on various statements for public authorities, and other accounting advisory services. Note 6 – Information on staff and remuneration DKK thousand Total staff costs can be specified as follows: Wages and salaries Share-based payment costs Pension schemes (defined contribution plans) Other payroll and staff-related costs Total The amount is charged as: Research and development expenses Administrative expenses Total 2019 Restated 2018 Restated 2017 175,104 14,764 13,430 14,932 218,230 141,661 17,474 11,065 9,783 179,983 112,614 19,311 9,135 10,135 151,195 178,089 40,141 218,230 153,601 26,382 179,983 118,573 32,622 151,195 Average number of employees 173 146 128 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 66 Notes 66 Note 6 – Information on staff and remuneration (continued) DKK thousand 2019 2018 2017 Base board fee Committee Fees Total fees Base board fee Committee Fees Total fees Base board fee Committee Fees Total fees Remuneration to the Board of Directors Martin Nicklasson Kirsten Drejer¹ Alain Munoz Michael Owen Bernadette Mary Connaughton Jeffrey Berkowitz Leonard Kruimer Jens Peter Stenvang² Hanne Heidenheim Bak² Rosemary Crane⁵ Catherine Moukheibir⁵ Helle Haxgart², ⁴ Rasmus Just², ³ Total 1 2 3 4 5 The disclosed remuneration for board members excludes minor mandatory social security costs paid by the company. It also excludes reimbursed expenses incurred in connection with board meetings, such as travel and accomodation. Kirsten Drejer was appointed vice chairman at the General Meeting on April 4 in 2019. Employee-elected board members; the table only includes remuneration for board work. This board member resigned from the Board in 2017. This board member resigned from the Board in 2018. These board members resigned from the Board in 2019. 750 467 400 400 267 267 267 400 400 133 133 0 0 3,884 100 0 50 50 0 33 100 0 0 17 50 0 0 400 850 467 450 450 267 300 367 400 400 150 183 0 0 4,284 650 200 300 300 0 0 0 300 300 333 300 100 0 2,783 100 0 50 50 0 0 0 0 0 50 150 0 0 400 750 200 350 350 0 0 0 300 300 383 450 100 0 3,183 550 0 250 250 0 0 0 250 198 350 250 21 229 2,348 100 0 33 50 0 0 0 0 0 50 150 0 0 383 650 0 283 300 0 0 0 250 198 400 400 21 229 2,731 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Notes Note 6 – Information on staff and remuneration (continued) DKK thousand 2019 Remuneration to the Executive Management Emmanuel Dulac¹ Adam Sinding Steensberg² Matthew Donald Dallas³ Britt Meelby Jensen⁴ Mats Blom⁴ Total Other Corporate Management⁵ Total Total 2018 Remuneration to the Executive Management Britt Meelby Jensen Mats Blom Total Other Corporate Management⁵ Total Total 2017 Remuneration to the Executive Management Britt Meelby Jensen Mats Blom Total Other Corporate Management⁵ Total 6767 Total 14,479 6,917 1,209 2,399 2,707 27,711 11,546 11,546 Base salary Pension Bonus contribution Other Warrant short term compensation expenses benefits 3,100 2,807 588 1,745 655 8,895 6,559 6,559 9,072 1,032 534 419 248 11,305 2,580 2,580 620 505 0 175 66 1,366 389 389 855 269 5 60 61 1,250 46 46 832 2,304 82 0 1,677 4,895 1,972 1,972 15,454 13,885 1,755 1,296 6,867 39,257 4,189 2,621 6,810 6,689 6,689 2,513 1,031 3,544 2,653 2,653 419 262 681 604 604 320 273 593 1,035 1,035 Restated 0 1,888 1,888 Restated 7,441 6,075 13,516 4,471 4,471 15,452 15,452 13,499 6,197 1,285 1,628 6,359 28,968 3,915 2,496 6,411 4,416 4,416 2,482 999 3,481 1,787 1,787 392 250 642 442 442 231 271 502 388 388 Restated 4,554 1,747 6,301 Restated 11,574 5,763 17,337 3,125 3,125 10,158 10,158 9,426 27,495 Total ¹ Emmanuel Dulac was appointed as CEO at April 25, 2019. ² Former Interim CEO Adam Sinding Steensberg was appointed EVP, R&D and CMO at April 25, 2019. ³ Matthew Donald Dallas was appointed CFO at October 10, 2019. ⁴ Former CEO Britt Meelby Jensen and former CFO Mats Blom resigned from Zealand at February 28, 2019 and March 28, 2019, respectively. ⁵ Other Corporate Management in 2019 comprised three members (2018: Four and 2017: Two). 10,827 5,268 1,084 890 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 68 Notes 68 Note 6 – Information on staff and remuneration (continued) 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 employee benefit expense over the period in which the warrants vest. The offsetting entry to this is recognized under equity. An estimate is made of the number of warrants expected to vest. Subsequently, an adjustment is made for changes in the estimate of the number of warrants, which will vest, so the total expense is equal to fair value of the actual number of warrants which vest. The fair value of warrants granted is estimated using the Black– Scholes pricing model. The 2010 employee incentive program Number of warrants Outstanding at January 1, 2019 Forfeited during the year Exercised during the year Expired during the year Outstanding at December 31, 2019 Specified as follows: Executive Management Other employees Total Number of warrants Outstanding at January 1, 2018 Forfeited during the year Exercised during the year Expired during the year Outstanding at December 31, 2018 Specified as follows: Executive Management Other employees Total Program of 2010 10/Feb/12 Program of 2010 19/Nov/12 Program of 2010 08/Feb/13 Program of 2010 01/Apr/14 Program of 2010 25/Mar/15 Program of 2010 05/May/15 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 0 0 0 0 0 0 0 0 0 0 183,425 0 0 -183,425 0 0 0 0 72,000 0 -72,000 0 0 0 0 0 100,000 0 -28,000 0 72,000 0 72,000 72,000 100,000 0 -68,000 0 32,000 0 32,000 32,000 100,000 0 0 0 100,000 0 100,000 100,000 46,359 0 -36,000 0 10,359 0 10,359 10,359 46,359 0 0 0 46,359 0 46,359 46,359 Total 218,359 0 -176,000 0 42,359 0 42,359 42,359 429,784 0 -28,000 -183,425 218,359 0 218,359 218,359 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Notes Note 6 – Information on staff and remuneration (continued) The 2010 employee incentive program (continued) Number of warrants Outstanding at January 1, 2017 Forfeited during the year Exercised during the year Expired during the year Outstanding at December 31, 2017 Specified as follows: Executive Management Other employees Total Exercise period From Until Black–Scholes parameters Term (months) Share price Exercise price (DKK) Volatility* Risk-free interest rate Cost price Dividend * The volatility rate used is based on the actual volatility of the Zealand share price. Program of 2010 10/Feb/12 Program of 2010 19/Nov/12 Program of 2010 08/Feb/13 Program of 2010 01/Apr/14 Program of 2010 25/Mar/15 Program of 2010 05/May/15 6,250 0 0 -6,250 0 0 0 0 214,883 0 0 -214,883 0 0 0 0 261,137 0 -77,712 0 183,425 0 183,425 183,425 100,000 0 0 0 100,000 0 100,000 100,000 100,000 0 0 0 100,000 0 100,000 100,000 46,359 0 0 0 46,359 0 46,359 46,359 10/Feb/15 10/Feb/17 19/Nov/15 19/Nov/17 10/Feb/16 10/Feb/18 01/Apr/17 01/Apr/19 25/Mar/18 25/Mar/20 05/May/18 05/May/20 60 70.0 77.0 44.0% 0.37% 24.74 not expected 60 86.0 113.3 56.0% 0.86% 23.76 not expected 60 79.05 87.45 39.3% 0.66% 25.38 not expected 60 69.0 75.9 37.5% 0.71% 21.05 not expected 60 115.5 127.05 41.9% -0.21% 37.78 not expected 60 92.0 101.2 43.7% -0.10% 31.63 not expected 6969 Total 728,629 0 -77,712 -221,133 429,784 0 429,784 429,784 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 70 Notes Note 6 – Information on staff and remuneration (continued) The 2015 employee incentive program Program Program Program Program Program Program Program Program Program Program Program Program Program Program Program Program Program Program Program of 2015 of 2015 05/May/15 05/May/15 05/Apr/16 05/Apr/16 15/Jul/16 06/Apr/17 06/Apr/17 25/Aug/17 25/Aug/17 22/May/18 15/Oct/18 10/Apr/19 13/Jun/19 13/Jun/19 13/Jun/19 13/Jun/19 5/Dec/19 5/Dec/19 5/Dec/19 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 70 Total Number of warrants Outstanding at January 1, 2019 Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at December 31, 2019 Specified as follows: Executive Management Other employees Total Number of warrants 0 0 0 342,250 321,750 0 0 -9,050 -40,250 0 -242,550 -71,425 0 0 0 0 0 0 0 90,650 210,075 45,000 60,000 45,650 150,075 90,650 210,075 0 0 0 0 0 0 0 0 0 40,000 381,000 0 0 -40,000 -88,750 0 0 0 0 0 0 0 0 292,250 57,000 235,250 292,250 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 0 510,000 40,000 0 0 0 0 0 0 0 0 1,635,000 0 -92,000 0 0 0 0 0 0 397,750 168,388 8,659 8,659 8,658 16,304 16,304 16,307 641,029 -17,500 -26,716 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -314,266 0 -313,975 0 0 418,000 40,000 380,250 141,672 8,659 8,659 8,658 16,304 16,304 16,307 1,647,788 65,000 0 0 117,894 353,000 40,000 380,250 23,778 418,000 40,000 380,250 141,672 0 8,659 8,659 0 8,659 8,659 0 8,658 8,658 9,093 7,211 9,092 7,212 9,092 372,171 7,215 1,275,617 16,304 16,304 16,307 1,647,788 Outstanding at January 1, 2018 100,000 349,750 328,750 85,434 40,000 405,500 93,392 14,566 6,608 0 0 Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at December 31, 2018 Specified as follows: Executive Management Other employees Total 0 -100,000 0 0 0 0 -7,000 -85,434 0 0 0 0 0 0 -7,500 0 0 0 342,250 321,750 75,000 25,000 267,250 296,750 342,250 321,750 0 0 0 0 0 0 0 0 0 0 0 0 40,000 381,000 0 57,000 40,000 324,000 40,000 381,000 0 0 0 0 615,500 40,000 -24,500 -93,392 -14,566 -6,608 -105,500 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 510,000 40,000 60,000 0 450,000 40,000 510,000 40,000 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 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 0 0 0 0 1,424,000 0 655,500 0 -437,000 0 0 -7,500 0 0 1,635,000 0 217,000 0 1,418,000 0 1,635,000 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Notes Note 6 – Information on staff and remuneration (continued) The 2015 employee incentive program Program Program Program Program Program Program Program Program Program Program Program Program Program Program Program Program Program Program Program of 2015 of 2015 05/May/15 05/May/15 05/Apr/16 05/Apr/16 15/Jul/16 06/Apr/17 06/Apr/17 25/Aug/17 25/Aug/17 22/May/18 15/Oct/18 10/Apr/19 13/Jun/19 13/Jun/19 13/Jun/19 13/Jun/19 5/Dec/19 5/Dec/19 5/Dec/19 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 of 2015 7171 Total Number of warrants Outstanding at January 1, 2017 100,000 357,250 345,000 100,000 40,000 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 0 0 -7,500 -16,250 -14,566 0 0 0 0 0 0 0 0 0 0 424,000 93,392 14,566 6,608 -18,500 0 0 0 0 0 0 0 0 0 0 0 Outstanding at December 31, 2017 100,000 349,750 328,750 85,434 40,000 405,500 93,392 14,566 6,608 Specified as follows: Executive Management 100,000 75,000 25,000 85,434 0 57,000 93,392 14,566 6,608 0 274,750 303,750 0 40,000 348,500 0 0 0 100,000 349,750 328,750 85,434 40,000 405,500 93,392 14,566 6,608 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 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 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 942,250 0 538,566 0 0 0 -56,816 0 0 0 1,424,000 0 457,000 0 967,000 0 1,424,000 Other employees Total Exercise period From Until Black–Scholes parameters Term (months) Share price (DKK) Exercise price (DKK) Volatility* Cost price (DKK) Dividend 05/May/16 05/May/18 05/Apr/19 05/Apr/17 15/Jul/19 06/Apr/20 06/Apr/18 25/Aug/17 06/Apr/18 22/May/21 15/Oct/21 10/Apr/22 13/Jun/22 13/Jun/20 13/Jun/21 13/Jun/22 05/Dec/20 05/Dec/21 05/Dec/22 05/May/20 05/May/20 05/Apr/21 05/Apr/21 15/Jul/21 06/Apr/22 06/Apr/22 25/Aug/22 06/Apr/22 22/May/23 15/Oct/23 10/Apr/24 13/Jun/24 13/Jun/24 13/Jun/24 13/Jun/24 05/Dec/24 05/Dec/24 05/Dec/24 60 92.0 101.2 43.7% 60 92.0 101.2 43.7% 60 60 129.5 129.5 142.45 142.45 43.5% 43.5% 60 126.0 138.6 45.0% 60 123.0 135.3 43.6% 60 123.0 135.3 43.6% 60 118.5 142.45 43.0% 60 118.5 135.3 43.0% Risk-free interest rate -0.10% -0.10% -0.04% -0.04% -0.33% -0.24% -0.24% -0.16% -0.16% 31.63 31.63 44.42 44.42 44.23 41.92 41.92 36.74 38.58 60 100.8 100.8 42.6% 0.05% 36.98 60 90.0 90.0 42.5% 48 127.0 127.0 43.5% 48 138.6 138.6 43.0% 48 138.6 138.6 43.0% 48 138.6 138.6 43.0% 48 138.6 138.6 43.0% 48 220.0 220.0 41.9% 48 220.0 220.0 41.9% 48 220.0 220.0 41.9% -0.03% -0.45% -0.59% -0.59% -0.59% -0.59% -0.63% -0.63% -0.63% 32.83 41.94 45.04 45.04 45.04 45.04 69.52 69.52 69.52 not not expected expected expected expected expected expected expected expected expected expected expected expected expected expected expected expected expected expected expected not not not not not not not not not not not not not not not not not * The average traded share price on the exercise date(s) of the 2010 warrant program was 124.6 and the average traded share price on the exercise date(s) of the 2015 warrant program was 151.7. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 72 Notes 72 Note 6 – Information on staff and remuneration (continued) Employee warrant programs In order to motivate and retain key employees and encourage the achievement of common goals for employees, Management and shareholders, the Group has established an incentive plan based on warrant programs. Incentive programs have been offered in 2005, 2007 and in the 2009-2019 period. 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 Copenha- gen on the day prior to the grant date. For warrants granted before April 19, 2018, 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 vest either after 3 years of service, with 1/36 each month from the grant date, or with 1/3 after one year, 1/3 after two years and 1/3 after three years. The service cost is recognized over the respective vesting periods. 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. For warrants granted in 2015 and earlier, the volatility rate used is based on the actual volatility of the Zealand share price. For warrants granted after January 1, 2016, the volatility rate used is based on the 5-year historical volatility of the Zealand share price. For warrants granted after January 1, 2019, the volatility rate used is based on the 4-year historical volatility of the Zealand share price calculated as the vesting period of 3 years plus 50% of the exercise period (two years). The change in the accounting estimate is based on more information on the average length of time for which similar warrants in the past have remained outstanding. The change does only impact warrant expenses recognized in staff expenses in the current or future finan- cial period related to warrants granted since January 1, 2019. 2010 employee incentive program This program was established in 2010 for Zealand’s Board of Directors, Executive Management, employees and consultants. The Board of Directors was authorized to issue up to 2,750,000 warrants in the period until No- vember 2, 2015. The program has expired and a total of 2,355,495 warrants have been granted. As of December 31, 2019, 1,755,809 warrants have been exercised, 422,327 warrants have ex- pired without being exercised, and 135,000 warrants have forfeited. The total proceeds amount to DKK 145.1 million (2018: DKK 127.4 million and 2017: DKK 125.3 million). As of December 31, 2019, 42,359 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 in the period until April, 2020. As of December 31, 2019, 2,788,595 warrants have been granted, 321,475 warrants have been exercised, and 819,332 warrants have forfeited. This means that the remaining num- ber of warrants that can be granted is 780,737. The total proceeds amount to DKK 35.5 million (2018: DKK 0.8 million and 2017: DKK 0.0 million). As of December 31, 2019, 1,647,788 warrants can still be exercised. 2019 long-term incentive program (LTIP) for Corporate Management This program was established in 2019 for Zealand’s Corporate Management. Under the LTIP, the Executive Management and Other Corporate Management are eligible to receive a number of performance share units (“PSUs”) at no cost, as determined by the Board of Directors. Thereafter, PSUs are expected to be granted annually (together with any share-based long-term incentive program, up to a maximum of 10% of Zealand’s share capital). The targets for the first PSUs granted on June 13, 2019 under the LTIP are related to Zealand's filing of a submission for a New Drug Approval ("NDA") to the Food and Drug Administration ("FDA") in the United States and Zealand's receipt of an approval letter from the FDA for this NDA application. The PSUs will vest over a three-year period. The PSUs that have not vested will lapse without any compensation. Each vested PSU entitles the holder to receive one share in Zealand at no cost provided that the targets are met. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019Con Fin – Note 7 7373 Notes Note 6 – Information on staff and remuneration (continued) Note 7 – Other operating income The number of performance share units granted is 22,915 determined based on the average share price of the shares of the Company for the three-day trading period following the latest open trading window preceding the allotment. The program is initially valued at DKK 3.2 million. DKK thousand Number of shares At January 1 Granted during the year Vested during the year Forfeited during the year At December 31 2019 2018 0 22,915 0 -3,150 19,765 0 0 0 0 0 Effect on income statement In 2019, the fair value of warrants and PSUs recognized in the income statement amounts to DKK 14.8 million in total of which DKK 0.5 million relate to PSUs (2018: DKK 17.5 million and 2017: DKK 19.3 million), of which DKK 3.2 million relate to the Executive Management (2018: DKK 1.9 million and 2017: DKK 6.3 million). DKK thousand The amount is charged as: Research and development expenses Administrative expenses Total 2019 Restated 2018 Restated 2017 12,191 2,573 14,764 13,919 3,555 17,474 11,291 8,020 19,311 Accounting policies Other operating income comprises gains from sale of intangible assets, research funding from business partners and government grants. A gain from disposal of intangible assets is recog- nized when control over the asset is transferred to the buyer. The gain is determined as the disposal proceeds less the carrying amount, if any, and disposal costs. 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. 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 2019 2018 2017 Government grants Gross proceeds from sale of future royalties and milestones Royalty expenses regarding the above sale of future royalties and milestones Fee, advisors regarding the above sale of future royalties and milestones Research funding Total other operating income 444 630 567 0 1,310,237 0 -176,882 0 0 -34,459 0 444 1,099,526 0 0 0 40 607 Zealand entered in September 2018 into an agreement to sell future royalties and USD 85.0 mil- lion of potential commercial milestones for Soliqua® 100/33/ Suliqua® and Lyxumia®/ Adlyxin® to Royalty Pharma. Under the agreement, all rights and obligations under the Sanofi Licensing agreement apart from potential payments from Sanofi of up to USD 15.0 million, expected in 2020 and 2022 (refer to note 25) have been transferred to the buyer. Zealand had in 2018 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 74 Notes Con Fin – Note 7-9 74 Note 7 – Other operating income (continued) Note 9 – Financial expenses Accounting policies Financial expenses include interest expenses, as well as realized and unrealized exchange rate adjustments and fair value adjustments of securities. In addition, expenses related to the royalty bond until settlement in September 2018 were amortized over the expected duration of the bond and recognized as financial expenses until it was settled in September 2018. The royalty bond is described further in note 22. Interest expense is recognized in the income statement in accordance with the effective inter- est rate method. DKK thousand 2019 2018 2017 Interest expenses from financial liabilities measured at amortized costs Amortization of financing costs Fair value adjustments of Marketable securities Loss on sale of Marketable securities Other financial expenses Exchange rate adjustments Total financial expenses 3,205 0 0 0 185 0 3,390 15,080 18,347 1,389 881 1,625 0 37,322 18,913 5,748 0 0 949 7,899 33,509 received USD 205.0 million (DKK 1,310.2 million) upon closing of the transaction on September 17, 2018. In 2018, royalty expenses to third parties amounted to 13.5% or DKK 176.9 million and fees to advisors amounted to DKK 34.5 million. The Sanofi license agreement was classified as an intangible asset upon adoption of IFRS 15, and the agreement with Royalty Pharma was treated as a sale of this license. The payment to the third parties was considered additional cost price for a license forming part of the rights under the Sanofi agreement and therefore forming part of the gain. As part of the license agreements with Boehringer Ingelheim ('BI'), BI is responsible for con- ducting preclinical and clinical development, as well as for commercializing the products stem- ming from the agreement and funding all activities under the agreement. In addition, Zealand received government grants in 2019, 2018 and 2017. Note 8 – Financial income Accounting policies Financial income includes interest from trade receivables, as well as realized and unrealized exchange rate adjustments, fair value adjustments of marketable securities and dividends from marketable securities. Interest income is recognized in the income statement in accordance with the effective interest rate method. DKK thousand 2019 2018 2017 Interest income from financial assets measured at amortized costs Fair value adjustments of Other investments and Marketable securities Exchange rate adjustments Dividend, Marketable securities Total financial income 5,413 4,263 2,048 2,846 5,518 878 14,655 0 4,705 1,020 9,988 74 0 0 2,122 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Con Fin – Note 10 7575 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 de- ferred tax assets are recognized to the extent that it is probable that taxable profits will be avail- able against which deductible temporary differences can be utilized. Such deferred tax 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 differ- ence 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 statement of financial position 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 uncertain- ties. 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, 2019. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities, they relate to income taxes levied by the same taxation authority and the Group 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 statement of financial position date. Income tax receivables are recognized in accordance with the Danish tax credit scheme (Skat- tekreditordningen). Companies covered by the tax credit scheme may obtain payment of the tax base of losses originating from research and development expenses of up to DKK 25 million (tax value of DKK 5.5 million). Under Danish tax legislation, Zealand is eligible to receive DKK 5.5 million (DKK 0.0 million in 2018 and DKK 5.5 million 2017) in cash relating to the surrendered tax loss of DKK 108 million (none in 2018 and DKK 156.5 million for 2017) based on qualifying research and development expenses. These tax receipts comprise the entire current tax benefit in 2019 and 2017, respec- tively. The income from sale of future royalties and milestones in 2018 resulted in a positive net result, meaning that Zealand was not eligible for similar tax income based on qualifying research and development expenses, but was able to utilize a portion of the unrecognized deferred tax asset. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201976 Notes Con Fin – Note 11 76 Note 10 – Income tax benefit (continued) Note 11 – Basic and diluted earnings per share DKK thousand Net result for the year before tax Corporate tax rate in Denmark Expected tax benefit/(expenses) Adjustment for non-deductible expenses Adjustment for non-taxable income Adjustment for exercised warrants Adjustment for R&D super deduction Tax effect on exercise of warrants Tax effect on expired warrants Warrant - share price development Change in tax assets (not recognized) Total income tax expense/benefit DKK thousand Breakdown of unrecognized deferred tax assets: Tax losses carried forward (available indefinitely) Research and development expenses Rights Non-current assets Liabilities Other Total temporary differences 2019 Restated 2018 Restated 2017 Accounting policies -576,677 22.0% 625,051 22.0% -279,913 22.0% 126,869 -947 964 -1,653 1,676 6,092 175 4,050 -132,090 5,136 -137,511 -65 0 -2,228 1,427 8 151 0 94,445 -43,773 61,581 -62 0 -1,732 0 688 -4,407 0 -50,568 5,500 2019 Restated 2018 Restated 2017 681,531 460,007 35,849 51,677 139,890 70,306 1,439,260 580,937 136,755 35,849 50,308 0 79,986 872,670 210,148 43,019 67,590 0 104,377 883,835 1,297,804 Basic result per share Basic result 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 out- standing. Diluted result per share Diluted result 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 and adjusted by the dilutive effect of potential ordinary shares. The result and weighted average number of ordinary shares used in the calculation of basic and diluted result per share are as follows: DKK thousand Net result for the year Net result used in the calculation of basic and diluted earnings/losses per share Weighted average number of ordinary shares Weighted average number of treasury shares Weighted average number of ordinary shares used in the calculation of basic earnings per share Weighted average number of ordinary shares used in the calculation of diluted earnings per share 2019 Restated 2018 Restated 2017 -571,541 581,278 -274,413 581,278 -571,541 -274,413 33,866,709 30,754,948 27,918,271 -64,223 -64,223 -64,223 33,802,486 30,690,725 27,854,048 33,802,486 30,696,404 27,854,048 Basic earnings/loss per share (DKK) Diluted earnings/loss per share (DKK) -16.91 -16.91 18.94 18.94 -9.85 -9.85 Corporate tax rate in Denmark Calculated potential deferred tax asset at local tax rate Write-down of deferred tax asset Recognized deferred tax asset 22.0% 316,637 -316,637 0 22.0% 194,444 -194,444 0 22.0% 285,517 -285,517 0 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Con Fin – Note 12 7777 Notes Note 11 – Basic and diluted earnings per share (continued) Note 12 – Licenses, rights and patents The following potential ordinary shares are anti-dilutive at December 31, 2019 (dilutive at December 31, 2018 and anti-dilutive December 31, 2017) and are therefore not included in the weighted average number of ordinary shares for the purpose of diluted earnings per share: Potential ordinary shares are excluded at December 31, 2019 due to anti-dilutive effect (included at December 31, 2018, but excluded at December 31, 2017) related to: DKK thousand 2019 2018 2017 Outstanding warrants under the 2010 employee incentive program Outstanding warrants under the 2015 employee incentive program Outstanding Performance Share Units (PSUs) under the LTIP 2019 program Total outstanding warrants 42,359 218,359 429,784 1,647,788 1,635,000 1,424,000 19,765 0 1,709,912 1,853,359 1,853,784 0 - out of which these warrants and PSUs are dilutive 0 - out of which these warrants and PSUs are anti-dilutive 1,709,912 1,781,359 1,853,784 72,000 0 Accounting policies Separately acquired licenses, rights and patents are initially measured at cost. Licenses, rights and patents acquired in connection with the purchase of a legal entity where substantially all of the fair value of the gross assets acquired is concentrated in a single asset are considered an asset acquisition and initially recognized at cost at the acquisition date. The cost will include the fair value on the date of acquisition of any contingent considerations. Any subsequent changes to the fair value will be recorded against the asset's cost. The acquired intangibles have a finite useful life and are subsequently carried at cost less accumulated amortizations using the straight-line method over the estimated useful life and impairment losses. Amortizations will recognized in the income statement as R&D expenses when the intangibles are available for use based on the determined useful life. If circumstances or changes in Zealand's operations indicate that the carrying amount of the intangibles may not be recoverable, Management will review the intangibles for impairment. At December 31, 2019 licenses, rights and patents comprises a right that will be included in a future development project originating from the acquisition of Encycle Therapeutics in October 2019. The right has been measured based on the overall cost of the transaction less the fair value of the cash balance and trade payables also acquired. The fair value of the contingent considera- tions related to Encycle Therapeutics was assessed to be zero as per the acquisition date based on the significant uncertainty of the outcome of the development to be performed by Zealand. DKK thousand Cost at January 1, 2019 Additions Cost at December 31, 2019 Amortization at January 1, 2019 Amortization at December 31, 2019 Carrying amount at December 31, 2019 Licenses, rights and patents - 2,480 2,480 - - 2,480 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 78 Notes Con Fin – Note 13 78 Note 13 – Property, plant and equipment Accounting policies Plant and machinery, other fixtures and fittings, tools and equipment and leasehold improve- ments 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. Tangible assets under construction are recorded as work in progress until construction has been completed and use of asset commenced. The basis for depreciation is cost less estimated residual value at the end of the useful life. As- sets are depreciated using the straight-line method over the expected useful lives of the assets. The depreciation periods are as follows: • Buildings 5-13 years • Plant and machinery 5-10 years • Other fixtures and fittings, tools and equipment 3-5 years Gains and losses arising from disposal of plant and equipment are stated as the difference between the selling price less the costs of disposal and the carrying amount of the asset at the time of the disposal. Gains and losses are recognized in the income statement under Research and development expenses and Administrative expenses. At the end of each reporting period, the Group 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 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 Group 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. No impairments have been recognized for 2019, 2018 and 2017. DKK thousand Cost at January 1, 2019 Transfer Additions Retirements Cost at December 31, 2019 Accumulated depreciation at January 1, 2019 Transfer Depreciation for the year Retirements Accumulated depreciation at December 31, 2019 Carrying amount at December 31, 2019 Depreciation for the financial year has been charged as: Research and development expenses Administrative expenses Total Cost at January 1, 2018 Adjustment to prior year Retirements Cost at December 31, 2018 Accumulated depreciation at January 1, 2018 Depreciation for the year Retirements Accumulated depreciation at December 31, 2018 Carrying amount at December 31, 2018 Depreciation for the financial year has been charged as: Research and development expenses Administrative expenses Total Plant and Other fixtures and fittings machinery Building improvements Assets under construction 55,545 0 3,419 -1,811 57,153 41,895 0 3,483 -1,682 43,696 13,457 3,483 0 3,483 53,629 2,748 -832 55,545 38,774 3,941 -820 41,895 13,650 5,130 27 7,630 -286 12,501 3,336 27 1,085 -284 4,164 8,337 926 159 1,085 4,382 1,290 -542 5,130 3,429 449 -542 10,800 -27 3,918 -918 13,773 10,614 -27 157 -884 9,860 3,913 134 23 157 10,800 - - 10,800 10,496 118 - 3,336 10,614 1,794 186 3,941 - 3,941 382 67 449 100 18 118 0 0 14,001 0 14,001 0 0 0 0 0 14,001 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Con Fin – Note 14 7979 Notes Note 14 – Right-of-use assets Accounting policies The Group leases an office building, equipment and vehicles. The rental contract for the office building has been made for a minimum period of 13 years (terminable by the landlord after 15 years). Management has assessed the lease period to be 13 years. Equipment and vehicles are leased over a period of 3-4 years with no extension option. Contracts may contain both lease and non-lease components. The group allocates the con- sideration in the contract to the lease and non-lease components according to the specific pricing of the services in the agreements. Lease payments are allocated between principal and finance cost. The finance cost is charged to the income statement over the lease period to ensure a constant periodic rate of interest on the remaining balance of the liability for each period. Right-of-use assets are measured at cost comprising the following: • the amount of the initial measurement of lease liability • any lease payments made at or before the commencement date less any lease incentives received • any initial direct costs and restoration costs. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants other than the security interests in the leased assets that are held by the lessor. Right-of-use assets are generally depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset’s useful life. Until the 2018 financial year, all leases were classified as operating leases, but are from January 1, 2019 recognized as a right-and-use asset and corresponding liability at the date at which the asset is available for use by Zealand. IFRS 16 determines whether a contract contains a lease on the basis of whether the customer has the right to control the use of an identified asset for a pe- riod of time in exchange for consideration. Zealand applies the definition of a lease and related guidance set out in IFRS 16 to all contracts entered into or changed on or after January 1, 2019. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: • fixed payments less any lease incentives receivable • variable lease payment that are based on an index or a rate, initially measured using the index or rate as at the commencement date Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability. Short-term and low value leases are also recognized as right-of-use assets. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the Group, the Group’s incremental borrowing rate is used, being the rate that the group would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions. The Group is exposed to potential future increases in variable lease payments based on an in- dex or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset. Amounts recognized in the statement of financial position The statement of financial position shows the following amounts relating to leases: DKK thousand Right-of-use assets Buildings Other fixtures and fittings Lease liabilities Current Non-current DKK thousand Depreciation charge of right-of-use-assets Land and buildings Other fixtures and fittings Interest expense (included in finance expenses) The total cash outflow for leases in 2019 was DKK 9.3 million. Dec 31, 2019 Jan 1, 2019 7,750 2,298 10,048 7,118 2,930 10,048 84,148 1,484 85,632 7,692 78,068 85,760 2019 7,724 1,094 8,818 621 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Con Fin – Note 15-19 80 80 Notes Note 15 – Other investments Accounting policies Other investments are measured on initial recognition at cost, and subsequently at fair value. Changes in fair value are recognized in the income statement under financial items. The Group’s other investments consist of a USD 5.3 million (2018: USD 5.0 million) investment in Beta Bionics, Inc., the developer of iLet™, a fully integrated dual-hormone pump (bionic pancreas) for autonomous diabetes care. The investment in Beta Bionics, Inc. is recorded at fair value through profit and loss. This investment represents 1.6% (2018: 2.0%) ownership of Beta Bionics, Inc., and is recorded at a fair value of DKK 35.6 million as of December 31, 2019 (DKK 32.6 million as of December 31, 2018). In determining fair value, Zealand considered the impact of any recent share capital issuances by Beta Bionics as an indicator of the fair value of the shares. In particular, Beta Bionics under- took a capital offering in June 2019 and the share price at that point was used as the basis for determining fair value. Management has determined that there has been no significant changes to fair value since then accordingly the fair value as at December 31, 2019 has been measured on a consistent basis. Measurement is considered a level 3 measurement. A fair value adjustment of DKK 2.2 million and currency conversion impact of DKK 0.8 million, respectively, have been recognized in financial income in 2019 (2018: DKK 0.0 million). Note 17 – Prepaid expenses Accounting policies Prepaid expenses comprise amounts paid in respect of goods or services to be received in subsequent financial periods. Clinical trials, which are outsourced to Clinical Research Organ- izations (“CROs”), take several years to complete. As such, Management is required to make estimates based on the progress and costs incurred to-date for the ongoing trials. Judgements are made in determining the amount of costs to be expensed during the period, or recognized as prepayments or accruals on the statement of financial position. Prepayments are measured at cost and are tested for impairment at the statement of financial position date. The increase by DKK 19.0 million from 2018 (DKK 11.7 million) to 2019 (DKK 30.8 million) is primarily related to an increase in prepaid insurance, taken as a result of higher insurance costs because of the increased liability risk from the late stage pipeline and ongoing clinical trials. Note 18 – Other receivables Accounting policies Other receivables are measured on initial recognition at fair value and subsequently at amor- tized cost, usually equal to the nominal value. Note 16 – Trade receivables Accounting policies Trade receivables are recognized and derecognized on a settlement date basis. They are measured at nominal value less expected credit losses based on historical experience. Zealand applies the simplified approach for determining expected credit losses. Trade receivables are mainly related to milestone and royalty payments from our collaboration agreements and are due in 30-60 days. DKK thousand VAT Other Total other receivables 2019 2018 5,437 2,498 7,935 2,980 388 3,368 There are no overdue receivables and the write-down for expected credit losses is not material. Note 19 – Marketable securities At December 31, 2019, Zealand had no trade receivables related to milestone payments. Accounting policies At December 31, 2018, Zealand had trade receivables related to the milestone from Protagonist Therapeutics, Inc. The Group’s Marketable securities portfolio comprises a bond portfolio. The investment strate- gy allows for regular sales and Management has determined that the “hold to collect” or “hold to collect and sell” criteria are not met. Consequently, the securities are classified at fair value through profit or loss. Refer to note 26, Financial risks. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Con Fin – Note 20-21 Notes Note 20 – Cash and cash equivalents Note 21 – Share capital (continued) Accounting policies Share capital Cash is measured on initial recognition at fair value and subsequently at amortized cost, usually equal to the nominal value. DKK thousand DKK USD EUR Total cash and cash equivalents Note 21 – Share capital Accounting policies 2019 2018 732,405 306,748 41,907 1,081,060 343,585 96,526 420,524 860,635 Consideration paid and proceeds from selling treasury shares recognized directly in equity within retained losses. Capital reductions through cancellation of treasury shares reduce the share capital by an amount equal to the original cost price of the shares. Dividend payments are recognized as a deduction of equity and a corresponding liability when declared. Share capital Share capital at January 1, 2019 Capital increase on March 15, 2019 Capital increase on March 20, 2019 Capital increase on April 5, 2019 Capital increase on May 28, 2019 Capital increase on June 14, 2019 Capital increase on August 23, 2019 Capital increase on September 5, 2019 Capital increase on September 13, 2019 Capital increase on November 22, 2019 Capital increase on December 13, 2019 Share capital at December 31, 2019 Share capital at January 1, 2018 Capital increase on September 14, 2018 Capital increase on December 14, 2018 Share capital at December 31, 2018 30,786,827 72,000 802,859 18,250 45,539 89,315 16,500 3,975,000 59,171 158,225 30,975 36,054,661 30,751,327 7,500 28,000 30,786,827 Share capital at January 1, 2017 Capital increase on March 23, 2017 Capital increase on April 13, 2017 Capital increase on May 30, 2017 Capital increase on June 15, 2017 Capital increase on August 14, 2017 Capital increase on August 18, 2017 Capital increase on September 1, 2017 Capital increase on September 22, 2017 Capital increase on November 20, 2017 Share capital at December 31, 2017 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 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 8181 26,142,365 9,500 22,000 5,000 8,537 4,375,000 156,250 1,500 28,675 2,500 30,751,327 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 23,193,047 120,833 106,220 51,487 46,521 383,190 150,702 60,843 176,456 63,470 24,352,769 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 82 Notes Con Fin – Note 22 82 Note 21 – Share capital (continued) The share capital solely consists of one class of ordinary shares all issued of DKK 1 each and all shares rank equally. The shares are negotiable instruments with no restrictions on their transfer- ability. All shares have been fully paid. On March 20, 2019, a total of 802,859 new shares have been subscribed through a direct share issue to Alexion Pharmaceuticals, Inc. in connection with entering into the license agreement with Zealand Pharma A/S with net proceeds of DKK 85.6 million, including costs of DKK 0 million. On September 5, 2019, a total of 3,975,000 new shares have been subscribed through a private placement and directed share issue to existing shareholder Van Herk Investments B.V. with net proceeds of DKK 545.6 million, including costs of DKK 14.0 million. Other capital increases in 2019 and 2018 related to exercise of warrant programs. Expenses directly related to capital increases are deducted from equity. In 2019 expenses of DKK 0.4 million (2018: DKK 0.1 million) related to the exercise of warrant programs. At December 31, 2019, there were 64,223 treasury shares (2018: 64,223), equivalent to 0.2% (2018: 0.2%) of the share capital and corresponding to a market value of DKK 15.1 million (2018: DKK 5.3 million). 22,915 treasury shares have been allocated to performance shares units (PSUs) as part of Zealand Pharma’s long-term incentive program (LTIP) granted June 13, 2019. Of these a total of 19,765 PSU’s remain. See note 6 for a further description of the LTIP program. Rules on changing the 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 Danish Companies Act (Selskabsloven) or our Articles of Association prescribe other requirements. Note 22 – Royalty bond Accounting policies The royalty bond was initially measured at the time of borrowing at fair value less any transac- tion costs and subsequently 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. On September 6, 2018 Zealand entered into an agreement to sell future royalties and USD 85 million of potential commercial milestones for Soliqua® 100/33/ Suliqua® and Lyxumia®/Adlyx- in® to Royalty Pharma. Zealand received USD 205.0 million (DKK 1,310.2 million) upon closing of the transaction on September 17, 2018. Zealand also redeemed the outstanding royalty bond of USD 24.7 million (DKK 157.6 million). Zealand will remain eligible for a payment from Sanofi up to USD 15.0 million in 2020 and 2022. Refer to note 25. The table below details changes in the Group’s liabilities arising from financing activities re- garding the royalty bond, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group’s consolidated statements of cash flows as cash flows from financing activities. DKK thousand January 1 Financing cash flows (repayment) Amortization of financing costs Exchange rate adjustments December 31 2019 2018 0 0 0 0 0 135,734 -158,311 18,347 4,230 0 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 8383 2019 2018 170 36,082 6,843 0 29,949 73,044 925 34,971 6,682 22,803 15,483 80,864 Con Fin – Note 23-25 Notes Note 23 – Deferred revenue Note 24 – Other liabilities (continued) The Group has recognized the following liabilities related to contracts with customers. DKK thousand DKK thousand 2019 2018 Deferred revenues at January 1 Customer payment received Revenue recognized during the year Total deferred revenue Non-current deferred revenue Current deferred revenue 0 177,315 -37,425 139,890 83,639 56,251 139,890 0 0 0 0 0 0 0 Deferred revenue occurred in connection with the agreement with Alexion Pharmaceuticals, Inc. as disclosed in Note 2. An up-front payment of USD 25 million (DKK 177.3 million) was received of which DKK 37.4 million has been recognized during 2019. Management expects that approx. DKK 56 million of the up-front payment received will be rec- ognized as revenue during 2020. The remaining payment is expected to be recognized during 2021 and 2022 according to the progress of the development project. Note 24 – Other liabilities Accounting policies Financial liabilities are recognized initially at fair value less transaction costs. In subsequent pe- riods, financial liabilities are measured at amortized cost corresponding to the capitalized value using the effective interest method. Provisions are measured as the best estimate of the costs needed at the statement of financial position date to settle obligations. Provisions also include accruals, and contingent payments on the conclusion of agreements, contracts, etc. Severance payment Employee benefits Royalty payable to third party Investment in Beta Bionics Other payables Total other liabilities Note 25 – Contingent assets, liabilities and other contractual obligations Contingent assets include potential future milestone payments. Contingent liabilities and other contractual obligations include contractual obligations related to agreements with contract research organizations (CROs), milestone payments and lease commitments. Accounting policies Contingent assets and liabilities are disclosed, unless the possibility of an inflow or outflow of resources embodying economic benefits is virtually certain. At December 31, 2019, Zealand is still eligible for a payment from Sanofi of up to USD 15.0 million in 2020 and 2022. However, it is Management’s opinion that the amount of any payment cannot be determined on a sufficiently reliable basis, and therefore have not recognized an asset in the statement of financial position of the Group. At December 31, 2019, total contractual obligations related to agreements with CROs amount- ed to DKK 318.9 million (DKK 230.2 million for 2020 and DKK 88.8 million for the years 2021 up to and including 2023). Zealand may be required to pay future development, regulatory and commercial milestones related to the acquisition of Encycle Therapeutics. Refer to note 12. Accounting policies Up until 2018, Lease agreements were classified as either finance or operating leases based on the criteria in IAS 17 Leases. Lease payments under operating leases and other rental agree- ments were recognized in the income statement over the term of the agreements. In 2018, none of the Group’s leases were classified as finance leases. Refer to note 1 for accounting policy for leases effective since January 1, 2019. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Con Fin – Note 26 84 84 Notes Note 26 – Financial risks 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. Interest rate risk Zealand has a policy of avoiding financial instruments that expose the Group to any unwanted financial risks. As of December 31, 2019, Zealand is free of interest bearing debt. Up until the redemption in September 2018 Zealand had a fixed rate royalty bond. Zealand is exposed to various financial risks, including foreign exchange rate risk, interest rate risk, credit risk and liquidity risk. Capital structure Zealand aims 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 long-term growth targets. The Board of Directors finds that the current capital and share structure is appropriate for the shareholders and 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 rate risk evaluation. As Zealand conducts clinical trials and toxicology studies around the world, Zealand will be exposed to exchange rate risks associated with the denominated currency, which is primarily USD based on volume and fluctuations against DKK. To date, Zealand’s policy has been to man- age 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 match- ing Zealand’s assets with its liabilities. Up until September 2018, a USD denominated royalty bond was outstanding which up until this point in time established a significant exchange rate risk vs. USD. After redemption of the remaining outstanding amount, USD 24.7 million, Zealand is debt free. As of December 31, 2019, Zealand holds DKK 306.7 million (DKK 96.5 million) of its cash in USD. During 2019, 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 since 2018, while USD accounts have generated a low level of interest income. During 2019 and 2018, Zealand has invested in low risk marketable securities. The Group’s mar- ketable securities portfolio comprises bonds in Danish kroner. The average weighted duration of the bond portfolio on the statement of financial position date was 3 years in both years. Credit risk Zealand is exposed to credit risk in respect of receivables, bank balances and bonds. The max- imum credit risk corresponds to the carrying amount. Management believes that credit risk is limited, as the counterparties to the trade receivables are large global pharmaceutical compa- nies. Cash and bonds are not deemed to be subject to credit risk, 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 by means of the Company’s quarter- ly 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 and bonds with its expected future cash burn. Sensitivity analysis The table shows the effect on profit/loss and equity of reasonably likely changes in the financial variables in the statement of financial position. DKK thousand Fluctuation Effect Fluctuation Effect 2019 2018 USD +/-10% 30,657 +/-10% 9,627 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 8585 DKK thousand 2019 2018 Categories of financial instruments Deposits Trade receivables Other receivables Cash and cash equivalents Financial assets at amortized cost Marketable securities Other investments Financial assets measured at fair value through profit or loss Lease liabilities Trade payables Other liabilities Financial liabilities measured at amortized cost 9,012 751 7,935 1,081,060 1,098,758 2,762 3,274 3,368 860,635 870,039 299,448 35,632 335,080 298,611 32,582 331,193 85,760 57,533 73,044 216,337 0 32,652 80,864 113,516 The fair value of securities is based on Level 1 in the fair value hierarchy. 138,269 23,359 54,709 216,337 The fair value of other investments is based on level 3 in the fair value hierarchy. Refer to note 15. 32,652 80,864 113,516 0 0 0 0 0 0 32,652 80,864 113,516 The carrying amount of financial assets and financial liabilities approximated the fair value. Notes Note 26 – Financial risks (continued) Contractual maturity (liquidity risk) A breakdown of the Group’s aggregate liquidity risk on financial assets and liabilities is given below. The following table details the Group’s remaining contractual maturity for its financial liabilities with agreed repayment periods. The table has been prepared using the undiscounted cash flows for financial liabilities, based on the earliest date on which the Group can be required to pay. The table includes 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 Group may be required to pay. With the exception of leasing, there are no interest cash-flows to be included in the table below for the existing financial liabilities as they are not interest-bearing financial liabilities. DKK thousand months 1-5 Years > 5 Years Total < 12 57,533 7,692 73,044 0 23,359 0 0 54,709 0 57,533 85,760 73,044 Trade payables Leasing Other liabilities Total financial liabilities at December 31, 2019 Trade payables Other liabilities Total financial liabilities at December 31, 2018 All cash flows are non-discounted and include all liabilities under contracts. Interest payments on the royalty bond redeemed in September 2018 were calculated using the fixed interest rate (9.375%) and the expected payback time as of each statement of financial position date. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Con Fin – Note 27-31 86 86 Notes Note 27 – Related parties Note 29 – Change in working capital Zealand has no related parties with controlling interest. DKK thousand 2019 2018 2017 Zealand’s other related parties comprise the Company’s Board of Directors and Corporate Management. Remuneration to the Board of Directors and Corporate Management is disclosed in note 6. No further transactions with related parties were conducted during the year. (Increase)/decrease in receivables Increase/(decrease) in payables Adjustment for non-cash investing activities Cash outflow for investment in Beta Bionics Change in working capital -21,059 17,061 -7,932 22,803 10,873 -471 13,256 0 0 12,785 1,306 -12,610 0 0 -11,304 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) at March 12, 2020: • Van Herk Investments, Rotterdam, Netherlands • Sunstone Capital A/S, Copenhagen, Denmark • Wellington Management Company LLP, Boston, U.S. Note 28 – Adjustments for non-cash items DKK thousand Depreciation Warrant compensation expenses Income tax income Income tax expense Financial income Financial expenses Non paid royalty expenses regarding sale of future royalties and milestones Exchange rate adjustments Total adjustments 2019 Restated 2018 Restated 2017 13,682 14,763 -5,999 614 -9,306 3,390 0 -7,937 9,207 4,508 17,474 0 43,773 0 19,736 4,757 19,311 -5,500 0 -2,048 25,610 6,575 9,864 101,930 0 -17,596 24,534 Note 30 – Significant events after the balance sheet date On February 10, 2020, Zealand announced a bid to acquire substantially all assets of Valeritas Holdings, Inc. for a total cash consideration of USD 23 million. On February 9, 2020, Valeritas Holdings, Inc. and its subsidiaries filed voluntary petitions under Chapter 11 of the US Bankrupt- cy Code in the US Bankruptcy Court. If Zealand's bid is selected, the sale will be subject to ap- proval by the Bankruptcy Court and certain other closing conditions. There can be no certainty that the transaction will be concluded. No other significant events have occurred after the end of the reporting period. Note 31 – Approval of the annual report The Annual Report has been approved by the Board of Directors and Executive Management and authorized for issue on March 12, 2020. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Par Fin – Contents Contents – Parent company Financial statements of the parent company Income statement Statement of comprehensive income Statement of financial position Statement of cash flows Statement of changes in equity Notes 1 Significant accounting policies, and significant accounting estimates and assessments 2 Revenue 3 Fees to auditors appointed at the Annual General Meeting 4 Information on staff and remuneration 5 Financial income 6 Financial expenses 7 Basic and diluted earnings per share 8 Investments in subsidiaries 9 Other investments 10 Prepaid expenses 11 Other receivables 12 Cash and cash equivalents 13 Share capital 8787 97 97 98 99 99 99 99 99 99 14 Other liabilities 15 Contingent assets, liabilities and other contractual obligations 16 Financial risks 17 Transactions with related parties 18 Adjustments for non-cash items 19 Change in working capital 20 Allocation of result 21 Significant events after the balance sheet date 22 Approval of the annual report 88 88 89 90 90 91 91 91 92 95 95 95 96 96 97 97 97 97 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 201988 88 Par Fin – Income Statement Financial statements of the parent company Income statement DKK thousand Revenue Research and development expenses Administrative expenses Other operating income Operating result Income from subsidiaries Financial income Financial expenses Result before tax Corporate tax Net result for the year Earnings per share – DKK Basic earnings/loss per share Diluted earnings/loss per share ¹ See note 1 to the consolidated financial statements. Statement of comprehensive income Note 2 4 3,4 Restated1 2018 2019 DKK thousand 41,333 -553,085 -75,977 444 -587,285 13,119 -437,955 -42,953 630 -467,159 Net result for the year Other comprehensive income (loss) Comprehensive result for the year ¹ See note 1 to the consolidated financial statements. Note Restated1 2018 2019 -570,167 0 -570,167 498,512 0 498,512 5 6 0 1,000,000 12,904 -3,512 542,233 14,755 -3,137 -575,667 5,500 -570,167 -43,721 498,512 7 7 -16.87 -16.87 16.24 16.24 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Par Fin – Financial position 8989 Financial statements of the parent company Statement of financial position at December 31 DKK thousand Note Restated1 Restated1 2017 2018 2019 DKK thousand Note Restated1 Restated1 2017 2018 2019 Assets Non-current assets Plant and machinery Other fixtures and fittings, tools and equipment Buildings Right-of-use asset Fixed assets under construction Investment in subsidiaries Deposits Other investments Total non-current assets 13,457 8,337 3,913 85,632 14,001 2,601 8,968 35,557 172,466 8 9 13,650 1,794 186 0 0 380 2,762 32,582 51,354 Current assets Trade receivables Receivables from subsidiaries Prepaid expenses Corporate tax receivable Other receivables Marketable securities Cash and cash equivalents Total current assets 10 733 3,271 30,494 6,682 7,936 299,448 12 1,019,811 3,274 0 11,698 1,278 3,103 298,611 804,303 1,368,375 1,122,267 11 Liabilities and equity Share capital Share premium Retained loss Equity Deferred revenue Lease liabilities Non-current liabilities Trade payables Payables to subsidiaries Lease liabilities Deferred revenue Other liabilities Current liabilities Total liabilities Total equity and liabilities ¹ See Note 1 to the consolidated financial statements. 14,855 953 304 0 0 380 2,729 9,312 28,533 0 127 7,253 5,500 4,950 75,111 493,575 586,516 13 36,055 30,787 30,751 2,646,418 1,954,721 1,934,494 -918,596 -1,417,107 -1,488,763 548,138 1,193,710 1,066,912 83,639 78,068 161,707 57,082 0 7,692 56,251 64,399 185,424 0 0 0 32,409 546 0 0 73,754 106,709 0 0 0 29,424 0 0 0 37,487 66,911 14 347,131 106,709 1,540,841 1,173,621 66,911 615,049 Total assets ¹ See Note 1 to the consolidated financial statements. 1,540,841 1,173,621 615,049 Significant accounting policies, and significant accounting estimates and assessments Contingent assets, liabilities and other contractual obligations Financial risks Transactions with related parties Allocation of result Significant events after the balance sheet date Approval of the annual report 1 15 16 17 20 21 22 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 90 Total Par Fin – Equity Par Fin – Cash flow 90 Financial statements of the parent company Statement of cash flows Statement of changes in equity DKK thousand Net result for the year Adjustments for non-cash items Change in working capital Financial income received Financial expenses paid Deferred revenue Income tax receipt Income tax paid Cash inflow/outflow from operating activities Change in deposit Investment in subsidiaries Purchase of other investments Purchase of marketable securities Sale of marketable securities Dividends on marketable securities Purchase of property, plant and equipment Sale of fixed assets Cash outflow from investing activities Note Restated1 2018 2019 DKK thousand Share capital premium Share Retained loss 18 19 8 9 -570,167 7,975 5,284 5,387 -3,137 139,890 93 0 -414,675 -6,206 -2,221 -22,803 0 0 878 -21,036 25 -51,363 52,468 645,145 -14,444 -8,689 674,480 498,512 58,505 11,250 3,269 -1,242 0 5,500 -45,000 530,794 -33 0 0 -299,849 74,230 1,020 -4,038 0 -228,670 2,884 0 -22 0 2,862 Equity at January 1, 2019 as originally presented Correction of error (net of tax)¹ Restated equity at January 1, 2019 Comprehensive income for the year Net result for the year Warrant compensation expenses Capital increases Costs related to capital increases Equity at December 31, 2019 Equity at January 1, 2018 as originally presented Correction of error (net of tax)¹ Restated equity at January 1, 2018 Comprehensive income for the year Net profit for the year (restated)¹ Warrant compensation expenses Capital increases Restated equity at December 31, 2018 1 See note 1 to the consolidated financial statements. 30,787 1,976,736 -22,016 30,787 1,954,720 0 -940,611 1,066,912 0 -918,595 1,066,912 22,016 0 0 -570,167 -570,167 0 5,268 0 13,796 697,613 -14,444 36,055 2,646,417 -1,488,762 1,193,710 13,796 692,345 -14,444 0 0 30,751 1,956,514 -1,439,127 22,020 -22,020 30,751 1,934,494 -1,417,107 548,138 0 548,138 0 0 498,512 498,511 0 36 17,400 2,826 30,787 1,954,720 0 0 17,401 2,862 -918,595 1,066,912 Proceeds from issuance of shares related to exercise of warrants Proceeds from issuance of shares Costs related to issuance of shares Leasing installments Cash inflow from financing activities Decrease/increase in cash and cash equivalents Cash and cash equivalents at January 1 Exchange rate adjustments Cash and cash equivalents at December 31 208,442 804,303 7,066 1,019,811 304,986 493,575 5,742 804,303 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Par Fin – Note 1-2-3 9191 Notes Note 1 – Significant accounting policies, and significant accounting estimates and assessments Note 2 – Revenue Significant accounting policies Basis of preparation The financial statements of the parent company have been prepared in accordance with Inter- national Financial Reporting Standards (IFRS) as adopted by the EU and additional requirements under the Danish Financial Statements Act. The accounting policies for the financial statements of the parent company are unchanged from the previous financial year except for a change of accounting policy for leases as de- scribed in note 1 to the consolidated financial statements. The accounting policies are the same as for the consolidated financial statements with the adjustments described below. For a description of the accounting policies of the group, please refer to the consolidated financial statements. Recognized revenue can be specified as follows: DKK thousand Alexion Pharmaceuticals, Inc. Undisclosed counterpart Protagonist Therapeutics, Inc. Total license and milestone revenue Please refer to note 2 to the consolidated financial statements. 2019 2018 38,021 3,312 - 41,333 - 9,845 3,274 13,119 Note 3 – Fees to auditors appointed at the Annual General Meeting Note disclosures have only been included in the consolidated financial statements where the amounts recognized in the separate financial statements for the parent company are identical. DKK thousand In the narrative sections of the financial statements, comparative figures for 2018 are shown in brackets. Investments in subsidiaries Please refer to note 8 Investments in subsidiaries. Restatement (management judgement) Management has reconsidered the allocation of expenses of warrants. For more details on the restatements and the description of the impact on the separate fi- nancial statements of the parent company for 2018, please refer to note 1 in the consolidated financial statements as the impact is identical to the consolidated financial statements. Audit Audit-related services and other assurance engagements Tax advice Other Total fees 2019 2018 1,783 1,731 0 12 3,526 1,661 718 106 0 2,485 The fee for audit-related services and other assurance engagements and other services provid- ed to the Parent Company by Deloitte Statsautoriseret Revisionspartnerselskab in 2019 consist- ed of assistance work in relation to existing internal control processes, other auditor’s reports on various statements for public authorities, and other accounting advisory services. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 92 Notes Par Fin – Note 4 92 Note 4 – Information on staff and remuneration DKK thousand Total staff salaries can be specified as follows: Wages and salaries Share based incentive payments 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 Restated1 2018 2019 168,237 13,715 13,420 14,227 209,599 141,661 17,478 11,065 9,779 179,973 170,575 39,024 209,599 153,525 26,458 179,983 169 146 For remuneration to the Board of Directors please refer to note 6 to the consolidated financial statements. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Notes Note 4 – Information on staff and remuneration (continued) DKK thousand Base salary Bonus Pension contribution Other short term benefits Warrant compensation expenses 2019 Remuneration to the Executive Management Emmanuel Dulac¹ Adam Sinding Steensberg² Britt Meelby Jensen³ Mats Blom³ Total Other Corporate Management⁴ Total Total 2018 Remuneration to the Executive Management Britt Meelby Jensen Mats Blom Total Other Corporate Management Total Total ¹ Emmanuel Dulac was appointed as CEO at April 25, 2019. ² Former Interim CEO Adam Sinding Steensberg was appointed EVP, R&D and CMO at April 25, 2019. 3 Former CEO Britt Meelby Jensen and former CFO Mats Blom resigned from Zealand at February 28, 2019 and March 28, 2019, respectively. 4 Other Corporate Management in 2019 comprised three members (2018 and 2017: Two). 13,499 3,100 2,807 1,745 655 8,307 3,889 3,889 9,072 1,032 419 248 10,771 1,512 1,512 12,196 12,283 4,189 2,621 6,810 6,689 6,689 2,513 1,031 3,544 2,653 2,653 6,197 620 505 175 66 1,366 389 389 1,755 419 262 681 604 604 1,285 855 269 60 61 1,245 5 5 1,250 320 273 593 1,035 1,035 1,628 832 2,304 0 1,677 4,813 1,074 1,074 5,887 Restated 0 1,888 1,888 4,471 4,471 6,359 9393 Total 14,479 6,917 2,399 2,707 26,502 6,869 6,869 33,371 Restated 7,441 6,075 13,516 15,452 15,452 28,968 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 94 Notes Note 4 – Information on staff and remuneration (continued) The 2010 employee incentive program Please refer to the consolidated financial statements, note 6. The 2015 employee incentive program 94 Number of warrants Outstanding at January 1, 2019 Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at December 31, 2019 Specified as follows: Executive Management Other employees Total Number of warrants Outstanding at January 1, 2018 Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at December 31, 2018 Specified as follows: Executive Management Other employees Total Program of 2015 05/may/15 Program of 2015 05/may/15 Program of 2015 05/Apr/16 Program of 2015 05/Apr/16 Program of 2015 15/Jul/16 Program of 2015 06/Apr/17 Program of 2015 06/Apr/17 Program of 2015 25/Aug/17 Program of 2015 25/Aug/17 Program of 2015 22/May/18 Program of 2015 10/Apr/19 Program of 2015 13/Jun/19 Total 0 0 0 0 0 0 0 0 0 342,250 321,750 0 -9,050 -242,550 0 0 -40,250 -71,425 0 90,650 210,075 45,000 45,650 90,650 60,000 150,075 210,075 0 0 0 0 0 0 0 0 0 40,000 381,000 0 0 -40,000 -88,750 0 0 0 0 0 0 0 0 292,250 57,000 235,250 292,250 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 0 510,000 0 -92,000 0 0 0 397,750 -17,500 0 0 0 1,595,000 168,388 -26,716 0 0 566,138 -314,266 -313,975 0 418,000 380,250 141,672 1,532,897 65,000 353,000 418,000 0 117,894 344,894 380,250 380,250 23,778 1,188,003 141,672 1,532,897 100,000 349,750 328,750 85,434 40,000 405,500 93,392 14,566 6,608 0 0 0 -7,000 -85,434 0 0 0 0 615,500 -24,500 -93,392 -14,566 -6,608 -105,500 0 -100,000 0 0 0 0 0 0 0 0 -7,500 0 0 0 342,250 321,750 75,000 267,250 342,250 25,000 296,750 321,750 0 0 0 0 0 0 40,000 381,000 0 40,000 40,000 57,000 324,000 381,000 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 0 510,000 60,000 450,000 510,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,424,000 655,500 -437,000 -7,500 0 1,635,000 217,000 1,418,000 1,635,000 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Par Fin – Note 5-7 9595 Notes Note 4 – Information on staff and remuneration (continued) Note 7 – Basic and diluted earnings per share The 2019 long-term incentive program (LTIP) for Corporate Management The result and weighted average number of ordinary shares used in the calculation of basic and diluted result per share are as follows: Number of shares At January 1 Granted during the year Vested during the year Forfeited during the year At December 31 Note 5 – Financial income 2019 2018 0 19,853 0 -3,150 16,703 0 0 0 0 0 DKK thousand 2019 2018 Interest income from financial assets measured at amortized costs Fair value adjustments of Other investments and Marketable securities Dividend, Marketable securities Exchange rate adjustments Total financial income 5,387 2,846 878 5,644 14,755 3,269 0 1,020 8,615 12,904 Note 6 – Financial expenses DKK thousand Other financial expenses Fair value adjustments of Marketable securities Loss on sale of Marketable securities Exchange rate adjustments Total financial expenses 2019 2018 3,137 0 0 0 3,137 1,242 1,389 881 0 3,512 DKK thousand Net result for the year Net result used in the calculation of basic and diluted earnings/losses per share Weighted average number of ordinary shares Weighted average number of treasury shares Weighted average number of ordinary shares used in the calculation of basic earnings/losses per share Weighted average number of ordinary shares used in the calculation of basic and diluted earnings/losses per share Basic earning/loss per share (DKK) Diluted earning/loss per share (DKK) Restated1 2018 2019 -570,167 498,512 -570,167 498,512 33,866,709 30,754,948 -64,223 -64,223 33,802,486 30,690,725 33,802,486 30,696,404 -16.87 16.24 -16.87 16.24 Regarding a specification of potential ordinary shares, which are dilutive or antidilutive, please refer to note 11 to the consolidated financial statements. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Par Fin – Note 8-9 96 Notes Note 8 – 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 writ- ten down to this lower value. DKK thousand Cost at January 1, 2019 Additions Cost at December 31, 2019 Value adjustments at January 1, 2019 Value adjustments for the year Value adjustments at December 31, 2019 Carrying amount at December 31, 2019 Cost at January 1, 2018 Additions Cost at December 31, 2018 Value adjustments at January 1, 2018 Value adjustments for the year Value adjustments at December 31, 2018 Carrying amount at December 31, 2018 380 2,221 2,601 0 0 0 2,601 380 0 380 0 0 0 380 96 Voting rights 100% 100% 100% 100% 100% 100% Company summary Domicile Ownership Zealand Pharma A/S subsidiaries: ZP Holding SPV K/S ZP General Partner 1 ApS Zealand Pharma US, Inc. Encycle Therapeutics, Inc. ZP SPV 3 K/S ZP General Partner 3 ApS ZP Holding SPV K/S subsidiaries: ZP SPV 1 K/S ZP General Partner 2 ApS Denmark Denmark United States Canada Denmark Denmark 100% 100% 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' in Danish) 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 finan- cial statements of Zealand Pharma A/S. No income has been received from subsidiaries during the year (2018: Dividend of DKK 1,000.0 million). Note 9 – Other investments Please refer to note 15 to the consolidated financial statements. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Par Fin – Note 10-15 9797 2019 2018 170 34,446 0 29,783 64,399 925 34,940 22,803 15,086 73,754 Note 14 – Other liabilities DKK thousand Severance payment Employee benefits Investment in Beta Bionics Other payables Total other liabilities 2019 2018 5,448 2,488 7,936 2,771 332 3,103 Note 15 – Contingent assets, liabilities and other contractual obligations Zealand Pharma A/S is part of a Danish joint taxation. Consequently, referring to the Danish Corporation Tax Act regulations, Zealand Pharma A/S is liable for any income taxes, etc. for the jointly taxed companies and Zealand Pharma A/S is likewise liable for any obligations to with- hold tax at source on interest, royalties and returns for the jointly taxed companies. 2019 2018 Please refer to note 25 to the consolidated financial statements for information on contractual obligations. 698,666 299,695 21,450 1,019,811 309,482 95,025 399,796 804,303 Notes Note 10 – Prepaid expenses The increase in Prepaid expenses of DKK 18.8 million from 2018 to 2019 is primarily related to higher insurance costs because of the increased liability risk from the late stage pipeline and ongoing clinical trials. Note 11 – Other receivables DKK thousand VAT Other Total other receivables Note 12 – Cash and cash equivalents DKK thousand DKK USD EUR Total cash and cash equivalents Note 13 – Share capital Please refer to note 21 to the consolidated financial statements. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 98 Notes Par Fin – Note 16 98 Note 16 – Financial risks Please refer to note 26 to the consolidated financial statements. Contractual maturity (liquidity risk) A breakdown of the Company’s aggregate liquidity risk on financial assets and liabilities is given below. The following table details the Company’s remaining contractual maturity for its financial liabil- ities with agreed repayment periods. The table has 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 table includes 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. There are no interest cash-flows to be included in the table below for the existing financial liabilities as they are not interest-bearing financial liabilities. DKK thousand months 1-5 Years >5 years Total < 12 57,082 7,692 64,399 0 23,359 0 0 54,709 0 57,082 85,760 64,399 DKK thousand Categories of financial instruments Deposits Trade receivables Receivables from subsidiaries Other receivables Cash and cash equivalents Financial assets measured at amortized cost Marketable securities Other investments Financial assets measured at fair value through profit or loss Trade payables Payables to subsidiaries Lease liabilities Other liabilities Financial liabilities measured at amortized cost 2019 Restated 2018 8,968 733 3,271 7,936 1,019,811 1,040,719 2,762 3,274 0 3,103 804,303 813,442 299,448 35,557 335,005 298,611 32,582 331,193 57,082 0 85,760 64,399 207,241 32,409 546 0 73,754 106,709 The fair value of marketable securities is based on Level 1 in the fair value hierarchy. 129,173 23,359 54,709 207,241 The fair value of other investments is based on level 3 in the fair value hierarchy. 32,409 546 73,754 106,709 0 0 0 0 0 0 0 0 32,409 546 73,754 106,709 At December 31, 2019 and 2018, the carrying amount of other financial assets and financial liabilities approximated the fair value. Trade payables Leasing Other liabilities Total financial liabilities at December 31, 2019 Trade payables Payables to subsidiaries Other liabilities Total financial liabilities at December 31, 2018 All cash flows are undiscounted and include all liabilities under contracts. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Par Fin – Note 17-22 9999 Notes Note 17 – Transactions with related parties Note 20 – Allocation of result The parent company had receivables from Group subsidiaries of DKK 3,271 thousand at De- cember 31, 2019 (2018: payables of DKK 546 thousand). In 2019, interest paid by the parent company to subsidiaries amounted to DKK 0 thousand (2018: DKK 0 thousand). The Board of Directors proposes that the parent company’s 2019 net result of DKK -570.2 million (2018: net result of DKK 498.5 million) be carried forward to next year by transfer to retained loss. Note 18 – Adjustments for non-cash items Note 21 – Significant events after the balance sheet date Please refer to note 30 in the consolidated financial statements. Note 22 – Approval of the annual report Please refer to note 31 in the consolidated financial statements. DKK thousand Depreciation Warrant compensation expenses Income tax receipt Income tax expense Financial income Financial expenses Exchange rate adjustments Total adjustments Note 19 – Change in working capital DKK thousand Increase/decrease in receivables Increase/decrease in payables Adjustment for non-cash investing activities Adjustment for cash outflow for investment in Beta Bionics Change in working capital 2019 Restated 2018 13,682 13,796 -5,497 0 -9,227 3,137 -7,916 7,975 4,508 17,400 0 43,722 0 1,389 -8,514 58,505 2019 2018 -29,616 20,029 -7,932 22,803 5,284 -5,745 16,995 0 0 11,250 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 100 100 Par Fin – Alternative performance measures Alternative performance measures for the Group (non-audited) Net operating expenses Net operating expenses consist of research, development and administrative expenses less government grants and research funding (which are included in other operating income). Net operating expenses is used to show the total cost level, excluding costs related to revenue, i.e. royalty expenses. This is used to show the cost level that needs to be covered by revenues minus royalty expenses in order to show an operating profit. The table below shows a reconcil- iation of net operating expenses for the years ended 2019, 2018 and 2017: DKK thousand Research and development expenses Administrative expenses Government grants and research funding Net operating expenses 2019 Restated 2018 Restated 2017 561,423 67,881 -444 628,860 438,219 43,543 -630 481,132 323,949 47,443 -607 370,785 Free cash flow Free cash flow is calculated as the sum of cash flows from operating activities less purchase of property, plant and equipment. A positive free cash flow shows that the Group is able to finance its activities and that external financing or capital raises is thus not necessary for the Group’s operating activities. Therefore, Executive Management believes that this non-IFRS liquidity measure provides useful information to investors in addition to the most directly comparable IFRS financial measure “Net cash flow from operating activities.” The table below shows a rec- onciliation of free cash flow for 2019, 2018 and 2017: DKK thousand 2019 Restated 2018 Restated 2017 Cash (outflow)/inflow from operating activities Less purchase of property, plant and equipment Free cash flow -409,455 -21,036 -430,491 -461,420 -4,038 -465,458 -278,746 -7,226 -285,972 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019 Statement – Management 101101 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, 2019. parent company’s operations and cash flows for the financial year January 1 – December 31, 2019. The consolidated financial statements and parent company financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by 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, 2019, and of the results of the Group’s and the In our opinion, the Management’s review 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 principal risks and uncertainties to which the Group and the parent company are exposed. We recommend that the Annual Report be approved at the Annual General Meeting. Søborg, March 12, 2020 Executive Management Emmanuel Dulac President and Chief Executive Officer Matthew Douglas Dallas Senior Vice President and Chief Financial Officer Adam Sinding Steensberg Executive Vice President, Research & Development, and Chief Medical Officer Board of Directors Alf Gunnar Martin Nicklasson Chairman Kirsten Aarup Drejer Vice Chairman Jeffrey Berkowitz Board member Bernadette Connaughton Board member Leonard Kruimer Board member Alain Munoz Board member Michael John Owen Board member Hanne Heidenheim Bak Board member Employee elected Jens Peter Stenvang Board member Employee elected Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019102 102 Statement – Independent auditor Independent auditor’s report To the shareholders of Zealand Pharma A/S Opinion We have audited the consolidated financial state- ments and the parent financial statements of Zealand Pharma A/S for the financial year January 1 – De- cember 31, 2019 which comprise the income state- ment, statement of comprehensive income, state- ment of financial position, statement of changes in equity, statement of cash flows and notes, including a summary of significant accounting policies, for the Group as well as for the Parent. The consolidated financial statements and the parent financial state- ments are prepared in accordance with International Financial Reporting Standards as adopted by the EU and additional requirements of the Danish Financial Statements Act. Basis for opinion We conducted our audit in accordance with Interna- tional Standards on Auditing (ISAs) and the additional requirements applicable in Denmark. Our responsi- bilities under those standards and requirements are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements and the parent financial statements section of this auditor’s report. We are independent of the Group in accordance with the International Ethics Standards Board of Accountants' Code of Ethics for Professional Accountants (IESBA Code) and the additional require- ments applicable in Denmark, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evi- dence we have obtained is sufficient and appropriate to provide a basis for our opinion. In our opinion, the consolidated financial statements and the parent financial statements give a true and fair view of the Group’s and the Parent’s financial position at December 31, 2019, and of the results of their operations and cash flows for the financial year January 1 – December 31, 2019 in accordance with International Financial Reporting Standards as adopted by the EU and additional requirements of the Danish Financial Statements Act. Our opinion is consistent with our audit book com- ments issued to the Audit Committee and the Board of Directors. To the best of our knowledge and belief, we have not provided any prohibited non-audit services as referred to in Article 5(1) of Regulation (EU) No 537/2014. We were first appointed auditors of Zealand Pharma A/S on April 29, 2014 for the financial year 2014. We have been reappointed annually by decision of the general meeting for a total contiguous engagement period of six years up to and including the financial year 2019. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019Key audit matters Key audit matters are those matters that, in our pro- fessional judgement, were of most significance in our audit of the consolidated financial statements and the parent financial statements for the financial year January 1 – December 31, 2019. These matters were addressed in the context of our audit of the consol- idated financial statements and the parent financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Collaboration Agreement with Alexion Pharmaceuticals, Inc. On March 20, 2019 Zealand Pharma A/S entered into a Collaboration Agreement with Alexion Phar- maceuticals, Inc. (“Alexion”). Under the terms of the agreement, Alexion and Zealand Pharma A/S entered into an exclusive collaboration for the discovery and development of subcutaneously delivered peptide therapies directed to up to four complement path- way targets. Zealand Pharma A/S leads the joint discovery and research efforts through the preclinical stage and Alexion leads development efforts begin- ning with Investigational New Drug filing and Phase 1 studies. The agreement provides Alexion with exclu- sive worldwide licenses and commercial rights to the peptide therapies developed in the collaboration. Zealand Pharma A/S received a non-refundable up- front fee of USD 25 million for the first target and Alexion made a concurrent USD 15 million equity investment in Zealand Pharma A/S at a premium to the market price. For the lead target, the agreement provides the potential for development-related milestones of up to USD 115 million, as well as up to USD 495 million in sales-related milestones and the potential for high single- to low double-digit royalty payments. Management has allocated the non-refundable up- front fee to the combined license and research and development services and is recognized as revenue along with provision of the research and develop- ment services under the lead program. Expenses incurred to provide the services are recognized when incurred. Further, the premium over the market share price on the Zealand Pharma A/S shares subscribed by Alexion, DKK 12.7 million, is attributed to the agreement as further consideration and consequent- ly also recognized over the period over which the research and development services are provided. In total for the year ended December 31, 2019, Alexion has paid USD 40 million (DKK 262.9 million) that has affected equity by DKK 85.6 million from the equity investment excluding the additional premi- um and deferred revenue by DKK 177.3 million. Of this DKK 177.3 million of initially deferred revenue at the time of the transaction in March 2019, DKK 37.4 million of Revenue has been recognized for the year ended December 31, 2019, and DKK 139.9 million remains recorded in Deferred Revenue as of Decem- ber 31, 2019. 103103 Refer to notes 1, 2 and 23 in the consolidated finan- cial statements. We have identified this transaction as a key audit matter as there is significant accounting judgement taken by Management regarding the initial account- ing for this transaction and as this is a significant transaction that is out of the scope of the normal business undertaken by Zealand Pharma A/S. How the matter was addressed in the audit Based on our risk assessment procedures focused on the Group’s business process and internal controls for significant unusual transactions during the year, we tested the appropriateness of the recognition and disclosures related to the transaction. We read the Collaboration Agreement as well as Management’s accounting memo and discussed it with Manage- ment and evaluated the related accounting treatment including disclosures. We obtained Management’s calculation of the accounting impact of the transac- tion and evaluated the validity of the calculation by testing the accuracy and completeness of the inputs to such calculation. Statement on the Management review Management is responsible for the Management review. Our opinion on the consolidated financial statements and the parent financial statements does not cover the Management review, and we do not express any form of assurance conclusion thereon. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019104 104 In connection with our audit of the consolidated financial statements and the parent financial state- ments, our responsibility is to read the Management review and, in doing so, consider whether the Man- agement review is materially inconsistent with the consolidated financial statements and the parent fi- nancial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. Moreover, it is our responsibility to consider whether the Management review provides the information required under the Danish Financial Statements Act. Based on the work we have performed, we conclude that the Management review is in accordance with the consolidated financial statements and the parent financial statements and has been prepared in ac- cordance with the requirements of the Danish Finan- cial Statements Act. We did not identify any material misstatement of the Management review. Management's responsibilities for the consolidated financial statements and the parent financial statements Management is responsible for the preparation of consolidated financial statements and parent fi- nancial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the EU and additional re- quirements of the Danish Financial Statements Act, and for such internal control as Management deter- mines is necessary to enable the preparation of con- solidated financial statements and parent financial statements that are free from material misstatement, whether due to fraud or error. the economic decisions of users taken on the basis of these consolidated financial statements and these parent financial statements. In preparing the consolidated financial statements and the parent financial statements, Management is responsible for assessing the Group’s and the Parent’s ability to continue as a going concern, for disclosing, as applicable, matters related to going concern, and for using the going concern basis of accounting in preparing the consolidated financial statements and the parent financial statements unless Management either intends to liquidate the Group or the Entity or to cease operations, or has no realistic alternative but to do so. Auditor's responsibilities for the audit of the consolidated financial statements and the parent financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements and the parent financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and the additional requirements applicable in Denmark will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggre- gate, they could reasonably be expected to influence As part of an audit conducted in accordance with ISAs and the additional requirements applicable in Denmark, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstate- ment of the consolidated financial statements and the parent financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrep- resentations, or the override of internal control. • Obtain an understanding of internal control rele- vant to the audit in order to design audit proce- dures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s and the Parent’s internal control. • Evaluate the appropriateness of accounting pol- icies used and the reasonableness of accounting estimates and related disclosures made by Man- agement. Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019• Conclude on the appropriateness of Management’s use of the going concern basis of accounting in preparing the consolidated financial statements and the parent financial statements, and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's and the Parent’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidat- ed financial statements and the parent financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or condi- tions may cause the Group and the Entity to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements and the parent financial statements, including the disclosures in the notes, and whether the consoli- dated financial statements and the parent financial statements represent the underlying transactions and events in a manner that gives a true and fair view. • Obtain sufficient appropriate audit evidence re- garding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with govern- ance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in in- ternal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consol- idated financial statements and the parent financial Other 105105 statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation pre- cludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our re- port because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Copenhagen, March 12, 2020 Deloitte Statsautoriseret Revisionspartnerselskab Business Registration No 33 96 35 56 Sumit Sudan State-Authorized Public Accountant MNE no mne33716 Kåre Valtersdorf State-Authorized Public Accountant MNE no mne34490 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019106 106 Other – COVER Other information Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019Other – Sources - Company info Sources Transforming Peptides 1 J. Lau and M. Dunn, Therapeutic peptides: Historical perspectives, current devel- opment trends, and future directions. Bioorganic & Medicinal Chemistry, version 26, issue 10, 1 June 2018, p. 2700-2707 Pipeline Overview 1 Partnered with Boehringer Ingelheim. Zealand eligible for EUR 366m in outstand- ing milestones 2 3 Partnered with Boehringer Ingelheim. Zealand eligible for EUR 283m in outstand- ing milestones Partnered with Aexion Pharmaceuticals. Zealand eligible for USD 610m in out- standing milestones 4 Acquired with Encycle Therapeutics Severe hypoglycemia ¹ Kalra 2013, UK Hypoglycemia Study Group 2 American Diabetes Association, diabetes.org 3 cdc.gov and diabetes.org and www.diabetesselfmanagement.com/diabetes- resources/tools-tech/insulin-pumps 4 National Diabetes Statistics Report. CDC. 2014 5 Company announcement No. 23/2018, Zealand Pharma achieves primary and key secondary endpoints in pivotal Phase 3 trial with dasiglucagon for severe hypoglycemia Company announcement No. 15/2019, Zealand Pharma achieves primary and key secondary endpoints in second pivotal Phase 3 trial with dasiglucagon for severe hypoglycemia Company announcement No. 35/2019, Zealand Pharma achieves primary and key secondary endpoints in pediatric Phase 3 trial with dasiglucagon for severe hypoglycemia 6 7 107107 Company information Zealand Pharma A/S Sydmarken 11 2860 Søborg Denmark CVR no.: 20 04 50 78 Tel: +45 88 77 36 00 Fax: +45 88 77 38 98 Zealand Pharma U.S., Inc. 434 W 33rd Street PH Floor New York, NY 10001 info@zealandpharma.com www.zealandpharma.com Established April 1, 1997 Registered office Gladsaxe Auditors Deloitte Statsautoriseret Revisionspartnerselskab CVR no.: 33 96 35 56 Congenital hyperinsulinism 1 https://www.orpha.net/consor/cgi-bin/ (not including transient cases due to perinatal stress or diabetic mother) 2 Congenital Hyperinsulinism International. Available at: http://congenitalhi.org 3 Thornton PS et al., J Pediatr. 2015;167(2):238-45 4 Meissner T et al., Long-term follow-up of 114 patients with congenital hyper- insulinism. Eur J Endocrinol 2003;149:43-510 5 Yorifuji et al. Pediatrics International 2014;56:467 6 Eljamel et al. Orphanet Journal of Rare Diseases 2018;13:123 Automated diabetes management ¹ ADA Section 8 2017: p71A 2 ADA Section 6 2017: p60C; p61A 3 Nicole C. Foster, et al, and for the T1D Exchange Clinic Network. Diabetes Technology & Therapeutics. Feb 2019. Short bowel syndrome ¹ Pironi L et al. Clin Nutr 2016;352:247–307 2 Jeppesen P. Expert Opinion Orphan Drugs 2013;1:515–25 3 Bielawska B. Nutrients 2017;9:466–60 4 Transparency Market Research; Short Bowel Syndrome Market, 2017 5 Torres C. Current Paediatr 2006;16:291–7; Bielawska B. Nutrients 2017;9:466–79; Pironi L et al. Clin Nutr 2016;352:247–307; Hofstetter S et al. Curr Med Res Opin 2013;29:495–504 Obesity/Type 2 diabetes ¹ Company announcement No. 29/2019, September 3, 2019 2 Skarbaliene, J., Pagler, T., Eickelmann, P., and Just, R. Anti-obesity effects of the novel long-acting amylin analogue ZP4982 in high-fat diet fed rats. Poster, the American Diabetes Association’s (ADA) 76th Scientific Sessions, New Orleans, 2016 Zealand Pharma ∞ Annual Report 2019Zealand Pharma ∞ Annual Report 2019Zealand Pharma A/S Sydmarken 11 DK-2860 Søborg Denmark Tel: +45 88 77 36 00 Fax: +45 88 77 38 98 CVR no.: 20 04 50 78 www.zealandpharma.com P h o t o s : J e s p e r W e s t l e y D e s i g n a n d p r o d u c t i o n : N o t e d

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