Risk factors

Novozymes is exposed to a wide range of risk factors. We strive to identify and mitigate risks that could affect our financial, environmental or social performance as early as possible.

This section describes a number of critical risks identified in our value chain along with the measures that Novozymes is taking to reduce them. The risks described are the major risks presented to the Board of Directors, but selected information has been omitted for commercial or competitive reasons.

Some of the risks described include opportunities that are actively being pursued.

A color-coded symbol next to each risk indicates Novozymes’ assessment of the level of risk after mitigating activities:

High risk and high impact 
Low risk and high impact, or high risk and low impact
Low risk and low impact

Financial risks are not included below, but presented in Note 34 to the consolidated financial statements.

Supply and supplier risks

Energy consumption and prices

Novozymes' production requires relatively large amounts of energy, and fluctuations in energy prices will therefore affect the cost of goods sold. The risk of a negative impact from rising energy prices is managed by continuously optimizing the production process, for example by using gene technology, and by partially hedging energy prices for a future period. In the long term, this risk is often offset by the positive impact on sales when energy prices go up, as it becomes more profitable for our customers to replace oil-based ingredients with enzymes and to use energy-saving enzymes in their production.

To further reduce this risk, Novozymes has set a target to improve energy efficiency per kilo of product by 50% in 2015 compared with the 2005 level.

Raw material consumption and prices

A significant proportion of Novozymes’ raw materials is derived from agricultural produce, and fluctuations in prices for these commodities will therefore affect the cost of goods sold. Novozymes seeks to reduce the risk of a negative impact on costs by optimizing the production process, for example by using gene technology, and by ensuring the greatest possible flexibility in the use of raw materials. Raw materials are in many cases purchased on 12-month contracts, mitigating sudden price spikes.

Supply chain management

Novozymes attaches importance to integrating sustainability and risk management into the selection and evaluation of key suppliers, as choosing the wrong suppliers can lead to a risk of damage to Novozymes' reputation. Therefore, an advanced supplier performance management system is used, where sustainability is a parameter and evaluated alongside commercial and quality parameters. Instead of relying only on supplier self-evaluations, the supplier evaluation process is supplemented with media research, dialogue and the critical insight of Novozymes’ purchasers. The system helps rank and compare suppliers according to risk and opportunity and provides an overview of the global supplier pool. The system is also designed to help the purchasing function identify the suppliers who typically pose the biggest risks. Suppliers with critical issues are subject to further questions, action plans or an audit.

To further reduce energy price-related risk, Novozymes has set a target to improve energy efficiency per kilo of product by 50% in 2015 compared with the 2005 level.

Innovation risks

Innovation 

Novozymes strives to maintain its position as market leader by continually launching new and improved high-quality solutions that meet customers’ needs. Our projected sales are not dependent on single large product launches, as we constantly have several new products in the pipeline. However, an inability to deliver innovation could increase the risk of a negative impact on Novozymes’ sales growth targets. This places high demands on our research and development function, requiring it to sustain a full and flowing pipeline. Novozymes allocates 13-14% of sales to research and development to ensure sufficient resources for future innovation.

Patent strategy

Our technology is the basis of our business, and we pursue an active patent strategy by protecting new discoveries as early as possible. This prevents new products, processes, etc., from being copied. With 7,000 patents granted or pending, Novozymes has an extensive patent portfolio that it actively safeguards to prevent and stop infringement by competitors. At the same time, competitors' activities are constantly monitored to ensure that Novozymes' innovation does not infringe any existing patents, whereby resources and costs for product development can be saved through early intervention.

In 2012, we worked continuously on securing patent rights in China, as we have seen an increasing risk in enforcing intellectual property rights in the Chinese legal system.

Novozymes allocates 13-14% of sales to research and development to ensure sufficient resources for future innovation.

Market risks

Biofuels 

Unlike most other industries in which Novozymes operates, the transportation fuel industry is politically regulated, and sales to this industry are closely linked to regulatory developments. In the U.S., our major market for biofuels, changes in blend limits and/or the Renewable Fuel Standard will have a significant impact on our sales to the industry.

The biofuel industry in the U.S. was founded on a political initiative to use domestic agricultural resources to improve energy security, reduce carbon emissions and support rural economic development. The same three drivers apply globally, but political support varies due to its dependence on regional and geopolitical developments.

Sales to this industry may also be affected by the ongoing debate on whether the use of agricultural resources for energy production is sustainable.

Novozymes works actively across regions in close collaboration with industry partners, key opinion leaders, NGOs and intergovernmental organizations to promote a balanced public debate and ensure that policy is scientifically based, all with a view to long-term sustainable development.

Customer concentration 

Sales to our five largest customers make up approximately 28% of total sales. Thus, a relatively small number of customers account for a high proportion of Novozymes’ revenue, which means that the company is affected by developments in these customers’ markets. To reduce the risk of fluctuations in sales, we focus on delivering a strong innovation pipeline to support our customers’ market development. Novozymes also works closely with major customers to build long-term relationships by means of joint development projects and joint production planning, for example.

In the U.S., our major market for biofuels, changes in blend limits and/or the Renewable Fuel Standard will have a significant impact on our sales to the industry.

Other risks

Reputation

Novozymes’ reputation is an important factor throughout the business, from interaction and partnerships with customers to relations with authorities to recruitment of new employees. Novozymes aims to maintain a good reputation by means of openness and transparency in both internal and external communications. Work is also carried out on an ongoing basis to mitigate the risk associated with situations that could damage Novozymes’ reputation. Relevant legislation must be complied with at all times, and Novozymes is committed to ensuring high standards in everything we do and to conducting our business operations in a responsible way. For example, we continually train our employees in our business integrity principles.

Positively impacting our surrounding environment is important to Novozymes. Therefore, we endeavor to do business in such a way that our environmental impact is part of the solution to current environmental challenges. Our targets of achieving significant reductions in CO2 emissions and water and energy consumption demonstrate our commitment to this ambition.

Data & IT security 

The continuous development of IT technology and use of IT tools impose an increasing risk of data theft by external parties. In 2012, Novozymes upgraded its IT security setup and implemented training programs to educate employees on potential threats and the best way to safeguard confidential information.

Global organization and taxes 

Novozymes operates in many markets via sales companies and distributors, while production takes place in a small number of countries. This leads to transactions between Group companies. Novozymes follows the OECD principles in setting internal transfer prices for these transactions, but this is a complicated area and entails a tax risk, partly because the area is subject to political judgment in each individual country. Novozymes regularly enters into dialogue with the tax authorities to reduce this risk, and we have entered into advance pricing agreements with the tax authorities in the countries where internal transactions are most significant, such as the U.S. and China. For Novozymes, such agreements create predictability in relation to taxation and reduce the risk of Novozymes becoming part of the ongoing transfer pricing debate around the world. A major part of internal transactions in the Group is covered by advance pricing agreements.

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