Investments

Investments – a roller coaster year

The main objectives of our investments are to ensure continued financial capability to support LEO Pharma’s long-term continuation and strategic development, as well as provide funds for the LEO Foundation’s philanthropic activities. In line with these objectives, we strive to generate the best possible returns while retaining a sensible, well-balanced risk profile.

The financial markets were on a roller coaster ride in 2020. After a very strong start to the year with global equity returns boosted by a stronger US dollar, markets turned around completely following the global outbreak of COVID-19. In less than a month, global equities were down more than 30%, and credit spreads widened to levels not seen since the financial crisis of 2008-09. COVID-19 continued to be the key theme for the remainder of the year. Huge financial and fiscal support across the world stabilized markets, and a slow recovery started. Risk appetite increased in Q4, following the US presidential election and signs that COVID-19 vaccines would soon be available.

2020 was by no standards a normal year. Yet looking at the LEO Foundation’s financial investments in isolation, it would be tempting to characterize 2020 as a normal year, in which most asset classes, despite uncertainty and surprises, delivered returns at year-end in line with long-term return targets.

Strong return despite roller coaster impact

LEO Holding’s financial portfolio generated a return of DKK 968 million or 6.5%, with all the main asset classes – equities, credit (including currency hedging), government and mortgage bonds, and alternatives – contributing positively.

Equities contributed almost DKK 800 million and achieved an asset class return of 11.4%. However, returns for individual mandates were between -6% and +45%, highlighting the importance of diversification. Credit contributed DKK 40 million, while the government and mortgage bond portfolio returned 1.6% – a strong return given the negative yields on government bonds. Alternatives generated a return of 4.8% (DKK 100 million), driven by strong hedge fund returns, and negatively impacted by private equity funds being in the early stages of their investment period.

Increased allocation to illiquid alternatives – and a new Tax Code of Conduct

In 2020, LEO Holding continued to execute its long-term strategy of increased allocation to illiquid alternatives. This included commitments to – and investments in – distressed credit, private equity, and real assets. The exposure to real assets increased by almost DKK 600 million, Asset allocation of the investment portfolio at 31.12.2020

Equities 51.9%

Credit 24.5%

Alternatives 14.2%

Government and mortgage bonds 9.4%

split between real estate and infrastructure. In addition, one investment-grade mandate was terminated and replaced by a mandate on emerging markets debt corporate bonds.

The portfolio continues to comprise both actively managed investments and passive index exposure, with a slight increase in passive exposure due to significant gains on equities in 2020. Major transactions on existing mandates in 2020 included a temporary increase in emerging markets debt hard currency, an increase in allocation to fixed-income hedge funds, adjustments of the equity weighting using equity index futures, and reductions in fixed-income exposure to cover grant and operating payouts of a total of DKK 358 million.

As of January 1, 2021, the LEO Foundation is a signatory to the Tax Code of Conduct established by four major pension funds, and now adopted by 12 pension funds and six major foundations in Denmark. The Tax Code of Conduct outlines principles and recommendations promoting responsible tax behavior in relation to unlisted investments. Investment strategy 2021

In 2021, we will continue the development from prior years, with further refinements being made to the portfolio by selectively adding more alternative components to enhance returns and portfolio diversification. The level of risk in the portfolio is expected to be kept at the same level as in 2020. The financial portfolio’s risk and liquidity will continue to ensure that the LEO Foundation is able to support LEO Pharma.

Investment portfolio

Assets Market value (DKK million) Return (%)

31.12.2020 31.12.2019 31.12.2018 2020 2019 2018

Government and mortgage bonds 1,499 2,596 3,521 Equities Credit 8,225 7,453 7,210 3,885 3,914 4,968

Alternatives 2,252 1,263 1,057

Total 15,861 15,226 16,756 1.6 1.7 0.7

11.4 0.3 4.8 26.1 9.8 7.9

(7.8) (1.0) (3.2) 6.9 14.9 (3.1)