#1H. Lundbeck A/S Ottiliavej 9 2500 Valby Denmark CVR no. 56759913 Lundbeck Annual Report 2021 Audrey Craven Migraine patient and advocate#2LUNDBECK ANNUAL REPORT 2021 = CONTENTS Contents MANAGEMENT REVIEW FINANCIAL STATEMENTS Consolidated financial statements Our Business 3 GOVERNANCE 57 51 Patient Perspective: Corporate Governance 36 Financial statements of the parent company 93 Ruled, but not ruined, by migraine 4 Sustainability and Compliance 38 Management statement 104 Risk Management 41 Independent auditor's reports 105 Board of Directors 43 2021 IN BRIEF Financial Highlights Executive Management 45 2021 Key Events Sustainability Highlights Letter to Shareholders 19 8 O 9 The Lundbeck Share 47 47 OUR BUSINESS Strategy Update 12 2021 Performance Review and 2022 Outlook 16 Our Science and Innovation Markets and Products Summary for the Group 2017-2021 2622 OTHER REPORTS Sustainability Report 2021 Remuneration Report 2021 Corporate Governance 2021 Also find our Sustainability Report, Remuneration Report and Corporate Governance Report on → Lundbeck.com 22 29 32 Front Page Audrey Craven is an Irish national and has been living with migraine most of her adult life. Read her story on page 4. Photo: Søren Svendsen, Sune Høegh, David Coleman, and Joanna Janczur. 2/111#3LUNDBECK ANNUAL REPORT 2021 = CONTENTS Our Business health, so every person can be their best. We are tirelessly dedicated to restoring brain KEY RESOURCES WHAT WE DO Development We conduct clinical studies globally on new drug candidates, and we work Diverse talent pool 5,300 highly specialized to develop safe, reliable, efficient and sustainable manufacturing processes. employees across 50+ countries Manufacturing 4 state-of-the-art production sites Research & Development Premier neuroscience pipeline and expertise Production We strive to create the best supply chain in the pharmaceutical industry through continuous improvement of reliability, quality, sustainability and cost. Products Strong CNS legacy with a strategic product portfolio registered in 100+ countries Research We work to understand the underlying disease biology and identify new targets in the brain for innovative, transformative drug candidates. Sustainable sourcing Responsibly and sustainably sourced raw materials VALUE CREATED 3/111 Increased quality of life for patients Advocacy We enter partnerships to co-create and publish evidence that fights stigma, and we advocate for systemic change. People Passionate and engaged employees Medicine Continuous supply of products 7 million patients treated daily Sustainable business Strong ESG ratings Increased disease awareness and improved access to brain health Diversity & Inclusion We create the context, culture, and systems where all Lundbeck employees can be their authentic self and perform at their best. Shareholder value Sustained profitable growth A highly rated and trusted partner among key stakeholders Ownership Solid majority foundation ownership with long-term commitment to brain health Partnerships Long-standing partnerships across the value chain Unmet patient needs • Pressured healthcare systems • Access inequality and barriers •Stigmatization of brain disease ⚫ Neglected rare diseases Business ethics Marketing & Sales We conduct scientific and promotional events to educate healthcare professionals about brain health and the safe and effective use of our products. SOCIETAL CHALLENGES • Patient safety and product quality ⚫ Corruption and unethical marketing • Increasing demand for transparency Climate change & circularity • Transition to zero emissions future • Scaling circular solutions • Environment and biodiversity under pressure People & communities • Lack of gender equality ⚫ Disrespect for human rights •Safe and inclusive working conditions 20% of revenue re-invested into R&D#4LUNDBECK ANNUAL REPORT 2021 = CONTENTS PATIENT PERSPECTIVE Ruled, but not ruined, by migraine 4/111 We are sharing the voices of people living with brain diseases, because patients are at the heart of all we do. Read Audrey's full story on → www.lundbeck.com Lying on the floor of her darkened bathroom, paralyzed by searing head pain, nausea and diarrhea, Audrey Craven of Dublin, Ireland, felt as isolated as one can feel. She wanted to be with her three young children, make dinner for her family, participate in life. But the migraine kept her on the bathroom floor, unable to move, speak or think. There, on the cool floor tiles, Audrey understood that her symptoms would eventually improve; the fatigue and brain fog she felt during the "migraine hangover" days would recede; and there would come a time when she finally felt like herself again. And then, after just a few days, the whole thing would start up again. The dread of that repeating cycle sometimes made her feel lost and alone in her migraine. "That's the killer. Because you're just coming through, you're just coming back on your feet and you know you will have to go through it again," she says. At that time, there were no online support groups and no migraine patient organizations in Ireland. Her family was sympathetic but didn't fully understand the severity of her symptoms. Her friends were supportive, but sometimes implied she could do more to power through her headache. And the medical community was often downright dismissive. Audrey longed to connect with someone who understood what she was going through. Someone who could help her see a way off the bathroom floor. "When I was in that very dark space and place, I made a little promise. If I ever got a handle on my own migraine, I'd do something about the dearth of information and support for people like me." FROM MIGRAINE PATIENT TO MIGRAINE ADVOCATE Audrey eventually received a proper diagnosis and treatment plan that helped her manage her disease more effectively. She became involved with patient support groups and went on to fulfill her promise by establishing Ireland's first migraine voluntary patient organization, the Migraine Association of Ireland (MAI). Audrey is proud of how she has helped others in the migraine community. But she knows that this is her unique story and making the transition from migraine patient to migraine advocate isn't as simple as picking yourself up and getting on with it. The understanding that there are so many people with migraine wanting, but unable, to get on with it is what fuels her. You feel so disempowered with this hidden disability that is underdiagnosed and undertreated "When you've seen doctor after doctor and when the medication isn't effective, it's impossible not to get disheartened. How do you pick yourself up? I think a lot of people can't and they can start to feel helpless," she says. "That's why if you're in a position to have a voice on behalf of those who are feeling so isolated in the darkened room, unable to advocate for themselves - never mind anyone else you do it. Sometimes in helping others you help yourself."#5LUNDBECK ANNUAL REPORT 2021 | = CONTENTS 2021 in Brief We continue to make good progress on our Expand and Invest to Grow strategy and revitalizing our pipeline. Our strategic brands continued to grow across the world. We also saw continued solid revenue growth in International Markets and Europe. Zaigham Hussain Operator, Drops Team IN THIS SECTION 06 Financial Highlights 07 2021 Key Events 08 Sustainability Highlights 09 Letter to Shareholders 5/111#6LUNDBECK ANNUAL REPORT 2021 = CONTENTS Financial Highlights REVENUE FROM STRATEGIC BRANDS DKKm RESEARCH AND DEVELOPMENT COSTS DKKm 6/111 In a challenging year, Lundbeck saw continued solid performance and strong growth from strategic brands. 9,287 9,287 8,086 7,057 3,823 4,545 3,823 3,116 T 1,248 EURm 1,476 USDm 2021 2020 2019 514 EURM 608 USDm 2021 2020 2019 In aggregate, strategic brands grew 18% in local currencies, representing 57% of total revenue, which amounted to DKK 16,299 million in 2021. Compared to 2020, the R&D costs declined 16%, while adjusted for the impairment of foliglurax of DKK 792 million in 2020, the R&D costs increased by 2%. PROFIT FROM OPERATIONS (EBIT) DKKm 2,010 2,010 1,990 3,153 270 EURM 320 USDm 2021 2020 2019 3,189 NET DEBT DKKM 4,106 3,189 6,566 429 EURM 507 USDm 2021 2020 2019 EBIT grew 1% compared to 2020, and EBIT margin reached 12,3%. This is in line with the guidance range communicated in the Annual Report 2020. Net debt has decreased from DKK 4,106 million at year-end 2020 to DKK 3,189 million at the end of 2021.#7LUNDBECK ANNUAL REPORT 2021 = CONTENTS 2021 Key Events The National Hospital in Denmark (Rigshospitalet) and Lundbeck announced a partnership to find new ways to treat brain diseases. Lundbeck announced a strategic partnership with Rgenta Therapeutics to discover therapies targeting ribonucleic acid (RNA) regulation and splicing of disease-causing genes. Because COVID-19 restrictions prevented corporate participation in the Copenhagen Pride Parade, Lundbeck held its own Pride Parade, celebrating the diversity of our workforce. Lundbeck announced the launch of a phase II study for potential new treatment of multiple system atrophy (MSA). 7/111 Lundbeck reports positive results for VyeptiⓇ from the DELIVER study in patients with migraine and prior preventive treatment failures. vyepti Lundbeck made the decision to continue the phase III clinical trial for treatment of agitation in patients with Alzheimer's-type dementia. Shipment of first Lundbeck product donations to IHP partner clinics in Lebanon, Gaza and the West Bank was completed. Lundbeck announced a collaboration with Inscopix to leverage sophisticated camera technology to map the brain on a neuronal level. Lundbeck announced the launch of a phase II study for potential migraine prevention treatment. Lundbeck's product VyeptiⓇ was approved by health authorities in Canada, the U.A.E., Kuwait, Switzerland, Singapore and Australia. Across the globe, Lundbeck colleagues recognized World Mental Health Day and recommitted to fighting stigma and raising awareness of inequalities in mental healthcare. Lundbeck announced that VyeptiⓇ is recommended for approval in the EU by the Committee for Medicinal Products for Human Use (CHMP) for the preventive treatment of migraine in adults. Lundbeck announced a detailed action plan to reduce emissions and set 15-year climate target towards achieving net-zero carbon emissions across the entire value chain. Lundbeck convened nearly 80 advocacy groups from more than 20 countries for the annual #1 Voice Summit, providing participants an opportunity to share best practices and collaborate on how to amplify the voices of people with brain disease. Supplemental New Drug Application (SNDA) approved for RexultiⓇ to treat schizophrenia in pediatric patients ages 13-17. Through an agreement with AprilBio, Lundbeck expanded its expertise in neuroimmunology, extended our neuroinflammation platform and gained rights to an innovative phase-I-ready biotherapeutic candidate. Lundbeck became a member of the Biopharma Sustainability Roundtable.#8LUNDBECK ANNUAL REPORT 2021 = CONTENTS Sustainability Highlights ACCESS TO BRAIN HEALTH 937 patients estimated to have been reached with our donation partnership in low- and middle-income countries. CHEMICAL RECYCLING 65% 65% 68% 59% 2021 2020 2019 BUSINESS ETHICS COMPLIANCE 99.7% employees completed the annual e-learning on the Code of Conduct. WOMEN IN MANAGEMENT 42% 43% 42% 42% 2021 2020 2019 CLIMATE ACTION 8/111 ▼16% reduction in scope 1 & 2 carbon emissions vs. 2019 SBTi target baseline. 26% estimated increase in scope 3 carbon emissions vs. 2019 SBTi target baseline. HEALTH & SAFETY 6.5 6.2 5.5 6.5 Frequency of lost time accidents per one million working hours. 2021 2020 2019 We outperformed the target to recover and reuse 60% of the organic compounds used in chemical production. Targets are set annually based on expected production volume and mix. The level of women in management is high with a gender split for people managers globally of 42% women and 58% men. We have seen an increase in our accident rate this year compared to previous years. Even though a smaller share of the accidents were serious, we are determined to bend this curve. Read more in our Sustainability Report#9LUNDBECK ANNUAL REPORT 2021 = CONTENTS 9/111 LETTER TO SHAREHOLDERS Our Expand and Invest to Grow strategy launched in 2019 is beginning to show tangible results. We have made good progress on expanding our early- and mid-stage pipeline, based around our expanded operating space. Our newest strategic brand, Vyepti®, continues to grow and gain momentum due to its proven efficacy for patients. We are well on our way with the strategic reorientation of our business to discover and develop transformative medications for indications in niche neurology and psychiatry treated by specialists, and rare diseases in neurology, so we can best deliver to patients and maintain a leadership position among Europe based pharmaceutical companies of our size and scope. As we continue to forge ahead with our Expand and Invest to Grow strategy, we are pleased with our progress. SHOWING GOOD GROWTH MOMENTUM We are effectively maximizing our existing brands, showing good growth momentum across all regions of the world. Our newest launch, VyeptiⓇ is increasing pace in the U.S. and was launched in the U.A.E. and Kuwait in 2021. It was also approved in Canada, Australia, Singapore, Switzerland and is currently under review in several countries around the world. We are investing behind the global launch of VyeptiⓇ as our first independent global launch. We are expanding our brands through new indications development for VyeptiⓇ in episodic cluster headache and RexultiⓇ in agitation in Alzheimer's disease to further drive growth. RexultiⓇ/RxultiⓇ was approved by the Food and Drug Administration (FDA) in the U.S. after the submission of an SNDA for the treatment of schizophrenia in pediatric patients 13 to 17 years of age. Our largest brand, BrintellixⓇ/TrintellixⓇ, continues to grow, and the most recent launch in Japan in 2019 has garnered 5.5% market share in the anti-depressant market, just two years after market entry. ENSURING HIGHER PROBABILITIES OF SUCCESS Three years ago, we set out to rebuild our pipeline and now we have a more robust mid-stage pipeline, with several compounds having moved into phase II in 2021. Multiple focused phase lb studies are guiding the future development of other promising compounds within an interesting phase I portfolio. Our journey to transform research and development (R&D) has strong momentum. Last year, we identified four biological clusters that our therapies of the future would address. We have stringently focused our R&D projects around these promising areas of central nervous system (CNS) biology and have implemented stronger derisking through experimental medicine and biomarker approaches to ensure higher probabilities of success as compounds eventually move towards the mid- and late-stage pipeline. To accelerate our advancements into neuroimmunology, we acquired a promising CD40L inhibitor from AprilBio, with a phase I study expected to start in 2022. Earlier in the year, we entered a strategic partnership with Rgenta Therapeutics to explore RNA-targeted therapies in our four biological clusters. We are also continuing our joint phase III studies with Otsuka Pharmaceutical Co., Ltd. (Otsuka) of brexpiprazole for agitation in Alzheimer's disease and for the treatment of post-traumatic stress disorder (PTSD). PREPARING FOR THE FUTURE As we execute our strategy, we will inevitably face challenges. We are navigating a decline of revenue from NortheraⓇ post- loss of exclusivity and VyeptiⓇ's pace of uptake has been impacted by the pandemic. At the same time, we have ongoing global industry changes that are putting increased pressure on pricing. We spent a good part of the year ensuring our business is best prepared for the future to address these and other challenges that may come our way. Although we have strong growth prospects for the coming 5-7 years for the great portfolio of existing brands we have today, we have taken steps to ensure our business model and ways of working are most effective. Using learnings from the pandemic and best practices in the industry, we have taken action to reorient our business to ensure it is better prepared to work using global technology platforms and to develop globally available products. We have also taken steps based on learnings from the pandemic to ensure we are ready for a more digital future when it comes to customer engagement.#10LUNDBECK ANNUAL REPORT 2021 = CONTENTS 10/111 Throughout the year, the pandemic continued to impact our ability to engage with healthcare providers and patients, particularly in the U.S., which saw varying levels in vaccine uptake across the country. Despite the pandemic impact fluctuating to varying degrees in different geographies over the course of the year, we are pleased with our results; overall the strategic brands continued to grow in local currencies and mature brands continued to perform well. We have great talent, aligned and dedicated to restoring brain health. It is our team's dedication to helping patients with brain disease that has made Lundbeck successful in the past and will ensure we are successful in the future. We want to take this opportunity to thank Lundbeck's employees for their dedication, hard work and all that they do to ensure that Lundbeck is best placed to restore brain health for decades to come. Lars Søren Rasmussen Chairman of the Board Прионе Deborah Dunsire President and CEO#11LUNDBECK ANNUAL REPORT 2021 | = CONTENTS Our Business 11111 Our goal continues to be providing innovative treatments for patients that create value for the company. Achieving our fullest potential as a mid-size, highly specialized pharmaceutical company requires that we thoughtfully concentrate our efforts where we can make the most difference for patients and in areas that provide for sustainable long-term growth. Ulla Bang Therkelsen Senior Laboratory Technician IN THIS SECTION 12 Strategy Update 16 Performance and Outlook 22 Our Science and Innovation 29 Markets and Products 32 Summary for the Group 2017-2021#12LUNDBECK ANNUAL REPORT 2021 = CONTENTS 12/111 STRATEGY UPDATE Since launching our Expand and Invest to Grow strategy in 2019, we continue to make strong progress, fueled by our purpose, to restore brain health so every person can be their best. DELIVERING ON OUR PROMISES We have taken significant strides to expand our operating space through the acquisitions of Abide and Alder in 2019, which gave us the platforms needed to expand our areas of focus in neuroscience. With the 2020 launch of VyeptiⓇ in the U.S. and the global roll-out which was initiated in 2021, we are beginning to establish a new frontier in migraine prevention and expanding our presence into protein-based therapies. Furthermore, we are continuously expanding our existing portfolio of medicines into new markets. The changes we made to how we approach R&D enables us to de-risk our internal pipeline compounds in early development. We utilize an experimental medicine approach to identify the effects of a drug in carefully selected patient populations, to find the most efficient clinical pathway powered by biomarkers and study designs and advance the most promising drug candidates into full development. The geographical expansion of VyeptiⓇ and the continuing efforts to grow and expand BrintellixⓇ/Trintellix®, RexultiⓇ/RxultiⓇ and Abilify MaintenaⓇ, along with several other life cycle management projects, are all crucial to our future. We have made choices on where to accelerate and enhance the use of digital within our operations and R&D. Also, we have taken steps to fortify our winning culture with increased agility, collaboration, diversity and inclusion. These are just a few of the many actions that are helping us deliver on the promise of our strategy to yield sustainable, long-term profitable growth. CREATING VALUE THROUGH OUR UNIQUE POSITION Our goal continues to be providing innovative treatments for patients that create value for Lundbeck. Achieving our fullest potential as a mid-size, highly specialized pharmaceutical company requires that we thoughtfully concentrate our efforts where we can make the most difference for patients. While we maximize the great medicines and brands that we already have, we simultaneously focus on growing our pipeline with treatments for brain diseases for which there are few, if any, treatment options. We operate within niche diseases affecting subpopulations of people where there is a high, unmet medical need. By focusing on niche and rare disease neurology and psychiatry indications, we can best take advantage of our size and strong relationships with specialist healthcare providers to deliver powerful solutions to challenging diseases. We currently promote medicines that, in some countries, both primary care physicians and specialists treat. We will continue to promote these excellent medicines, working with our partners to reach these larger numbers of physicians. Just as important to growing our pipeline and selling our medicines, is the manufacturing of our medicines, whether internally or via external contract manufacturing. We have strong internal capabilities within small and large molecules to support our R&D pipeline, including monoclonal antibody design, process and formulation development capabilities, as well as end-to-end internal small molecule manufacturing facilities. Our three priorities across Production, Development & Supply remain quality, reliability and cost. We have a robust track- record on all three parameters and ambitious goals to continuously improve performance with a strong focus on operational excellence and sustainable sourcing. We aim to build on what we have achieved and capitalize further on the strong fundamentals that are deeply ingrained in Lundbeck; our rich heritage of developing and producing life- changing treatments for patients, our deep scientific knowledge in psychiatry and neurology and our patient-centric mindset. We will focus on embracing new biologies and technologies, adjusting and learning as we forge ahead.#13LUNDBECK ANNUAL REPORT 2021 = CONTENTS 13/111 Maximize existing brands Enhance organizational agility and collaboration invest to grow Lundbeck Maintain focus on profitability Expand and Rebuild pipeline Expand operating space Figure 1: Lundbeck's strategic imperatives In the future, we will work with even more agility and collaboration across geographies, simplifying our processes and accelerating our ability to test and learn for faster, higher-quality decision making. This will fully leverage our diverse talent, knowledge and skillsets so that we can pursue solving some of the biggest brain disease challenges with the greatest patient reward. EXPAND AND INVEST TO GROW: OUR STRATEGIC IMPERATIVES Our strategic imperatives guide us towards reaching our objective to expand and invest to grow. Maximize existing brands Our strategic brands continue to show solid growth, both in volume and value, across all regions. At the same time, several of our mature brands have shown remarkable resiliency. Our commercial teams continue to accelerate our efforts in growing our mature and strategic brands across more geographies, thereby maximizing our existing brands to drive growth in the coming years. Our strategic brands BrintellixⓇ/TrintellixⓇ is a prescription medication used to treat major depressive disorder (MDD). The brand delivered solid growth in 2021 despite the flattening in total prescriptions of MDD medications in the U.S. during the pandemic. RexultiⓇ/RxultiⓇ is a prescription medication used as an adjunctive therapy to antidepressants for the treatment of MDD. We will continue to maximize this medication with launches in hopefully six additional markets in 2022. Abilify MaintenaⓇ is one of the most prescribed long acting injectable treatments for patients with schizophrenia. In some European countries it is the market leader. VyeptiⓇ is an infusion treatment for the prevention of migraine in adults. This is our newest strategic brand, launched in the U.S. in April 2020. We will continue to expand our geographical reach with approval in additional countries - in 2021 it was approved for use in Australia, Canada, the U.A.E., Kuwait, Switzerland and Singapore. Our mature brands Our portfolio of mature brands is large. In the U.S., NortheraⓇ, OnfiⓇ, SabrilⓇ and Xenazine® are declining after the initial loss to generics. The larger group of mature brands is remarkably resilient having high levels of trust and brand recognition in many markets around the world. And some of the products show continued growth, for example CipralexⓇ/LexaproⓇ. We continue our strong partnerships with Otsuka and Takeda Pharmaceutical Company Limited (Takeda) to engage healthcare professionals treating a broad range of psychiatric diseases, with keen commercial execution against our portfolio of strategic and mature brands. In the coming years, we will further strengthen and reinforce our field force ensuring that they have the digital tools and capabilities needed to help them to expand their networks and collaborate even better with patients and customers. We continue to ensure patients receive the full benefit of our medicines through continued clinical activities, life cycle management programs, proactive patient safety efforts, medical activities and value positioning, and also through advocacy efforts. Expand operating space We expanded our operating space through the acquisitions of Alder and Abide in 2019, which have given us the platforms needed to expand our areas of focus in neuroscience towards targeted indication groups of niche and rare neurology and psychiatry. Furthermore, we continue to invest in maximizing our strategic brand franchises BrintellixⓇ/Trintellix®, RexultiⓇ/RxultiⓇ, Abilify MaintenaⓇ and VyeptiⓇ, and we are continuously expanding our existing portfolio of medicines into new markets and additional indications.#14LUNDBECK ANNUAL REPORT 2021 = CONTENTS 14/111 1 ᏌᏁ 2 Most notably through the forthcoming global launch of VyeptiⓇ and further indications in development for VyeptiⓇ and RexultiⓇ/RxultiⓇ. We have assessed and identified the most promising biological clusters on which to focus our R&D efforts that enable us to treat our targeted indication groups. These four biology clusters are: 1. Hormonal / neuropeptide signaling: Targeting selected pathways of pain signals and stress response; 4 2. 3 Figure 2: Lundbeck's R&D focus on four biological clusters 3. 4. Circuit / neuronal biology: Targeting neurotransmission / synaptic dysfunction to restore brain circuits and reduce neurological, psychiatric, and pain symptoms; Neuroinflammation /neuroimmunology: Targeting neuronal loss due to an overactive immune system, relevant across many niche and rare neurological disorders; Protein aggregation, folding, and clearance: Targeting neurodegenerative proteinopathies involved in a range of neurodegenerative diseases, e.g. Alzheimer's and Parkinson's as well as rare diseases. Our focus in niche and rare neurology and psychiatry provides for a broad range of business development opportunities across all stages of development. We will continue to pursue external innovation through acquisitions, strategic partnerships and in- licensing. Access to technologies and novel early-stage assets will complement the four biological clusters and ensure we have the best possible starting point for developing differentiated medicines to patients with high unmet needs. Access to later- stage products will seek to leverage our existing global commercial infrastructure and provide for sustainable growth. Rebuilding the pipeline The R&D organization is transforming, adopting an agile mindset to enable the team to be more flexible when necessary. In this way, we will more effectively and efficiently rebuild our pipeline with a balance of first-in-class and best-in-class drug candidates, to enable a steady stream of breakthrough and differentiated medicines across all phases of the pipeline. We continue to orient R&D towards specialist treated disease indications that address high unmet needs in niche and rare disease neurology and psychiatry. We will use our four biological clusters in our in-house discovery research to target the high unmet needs within our expanded operating space and to deliver impactful neuroscience medicines of the future. Drawing on our experimental medicine expertise, we now detect signals and gain more objective evidence to test efficacy earlier in development - de-risking the path to the market. We complement the rebuild of our pipeline with the right blend of external innovation, mix of acquisitions, partnerships and licenses for new medicines that fit with our refined focus on niche neuroscience indications. Maintain focus on profitability Safeguarding a consistent level of profitability ensures our ability to make strategic investments in our business. We increase cost efficiency across the organization whenever we can by further leveraging the knowledge and capabilities in our Group Business Services center (GBS) in Poland. We will continue to harness the power of technology and pull digital capabilities into our ways of working to drive greater efficiency. With our current product portfolio and projects in our pipeline it is our ambition to reach an EBIT margin of more than 25% by 2024. Enhance organizational agility and collaboration We work as global function teams, building on each other's strengths and harnessing the full power of our functions and departments across borders for greater outcomes. Working cross-functionally and cross-geographically allows us full clarity and alignment in terms of prioritization and decision making and provides greater opportunity for our people through the transfer of knowledge and talent development. We work in alignment with our priorities and shared purpose, grounded in our beliefs.#15LUNDBECK ANNUAL REPORT 2021 = CONTENTS 15/111 We will continue to infuse the organization with more flexible and agile ways of working both in terms of how we work and the way we work, simplifying our processes and accelerating our ability to test and learn for faster, higher-quality decision making. By leveraging digital technologies and capabilities where it can make us faster and more effective, we can make the best use of our talent and competencies across functions that will enable the development of best or first-in-class products and get them to patients faster. Just as much as we need a global and cross functional working organization, we need a diverse and inclusive one too. We aim to enrich our decision making through diversity of thought across all that we do. Diversity comes from having inclusive teams made up of people with different perspectives and experiences - and that comes from having an organization of people with different nationalities, race, gender and sexual orientation. We have a zero-tolerance approach to harassment, racism and discrimination of any kind and clear processes for employees and stakeholders to voice their concerns and have them addressed. Equally important, we will continue to ensure sustainable business practices following leading environmental, social and corporate governance criteria. Our ability to successfully deliver on our strategy takes the entire Lundbeck team collaborating around our shared purpose of restoring brain health, so every person can be their best. OUR LONG-TERM AMBITION Over the past two years, we have made strategic choices around where we put our efforts across our entire business. With the choices we made, we have lofty ambitions for what the future should look like when we succeed. Our ambition is to be #1 in Brain Health in the eyes of the patients we tirelessly serve - so what does that mean? WHAT DOES IT MEAN TO BE #1 IN BRAIN HEALTH? We aim to be the leader in brain health, in the eyes of our patients. We know we are well on our way when: We have top quartile financial results in our peer group. By focusing on our patients and our products, top financial performance will follow. We have a premier neuroscience pipeline filled with assets that will make a difference to our patients. We have an established and focused commercial footprint around commercially attractive patient segments in niche and rare neurology and psychiatry. We are best in class in terms of how we use digital technologies to improve patient outcomes. We are a company leveraging diversity, where top talents within neuroscience aspire to work We continue to deliver sustainable growth in revenue and profitability. And finally, we are on track to be carbon neutral before 2050. Giving back to society is equally as important as financial performance. The culmination of all this together is what will make us #1 in Brain Health, serving the people who need new medicines to help them conquer brain diseases. It will take every brain being fully "in the game" to achieve it. We continue to prioritize and act, year by year to stay on track.#16LUNDBECK ANNUAL REPORT 2021 = CONTENTS 16/111 2021 PERFORMANCE REVIEW AND 2022 OUTLOOK 2021 saw continued solid growth of our strategic brands, which mitigated the impact from the loss of exclusivity on NortheraⓇ in the U.S. early in the year. We also saw continued solid revenue growth in International Markets and in Europe. We continue to make good progress on our Expand and Invest to Grow strategy and revitalizing our pipeline. Overall, revenue and EBIT reached mid-range of the financial guidance provided in February 2021 as a result of solid product sales. Revenue reached DKK 16,299 million in 2021. EBIT grew 1% compared to 2020 and reached DKK 2,010 million. EBIT margin reached 12,3%. Net profit ended at DKK 1,318 million for the year (DKK 1,581 million in 2020), a decrease of 17%. We continue to see strong growth in our strategic brands which include Abilify MaintenaⓇ (schizophrenia), BrintellixⓇ/TrintellixⓇ (depression), RexultiⓇ/RxultiⓇ (depression/schizophrenia) and our newest product, VyeptiⓇ (prevention of migraine) which was introduced in April 2020 in the U.S. In 2021, we continued the global roll-out program. We expect to launch in additional 15 markets in 2022, incl. the E.U. In aggregate, strategic brands grew 18% in local currencies reaching DKK 9,287 million in 2021 or 57% of total revenue. The newest product in the portfolio, VyeptiⓇ, continues its strong momentum since its launch in April 2020 in the U.S. and reached DKK 492 million in 2021 compared to DKK 93 million in 2020. In 2019, Lundbeck set up commercial operations in Japan in order to co-commercialize TrintellixⓇ together with Takeda. In 2021, the product continues to be very successful in Japan and holds 5.5% market share after two years of being on the market, making it one of the most successful BrintellixⓇ/TrintellixⓇ launches to date. Lundbeck's early-stage pipeline continued to strengthen with several projects entering first-in-man testing (phase I) and with two projects entering Proof of Concept (phase II) testing, Lu AF82422 and Lu AG09222. Additionally, the clinical program for VyeptiⓇ provided very positive results from the DELIVER trial. Our top priority is to provide innovative treatments that create value for patients as well as for Lundbeck. Now, with the global launch of VyeptiⓇ, we are in the process of building a migraine and specialty pain franchise and we are transforming our R&D organization to build a pipeline around high unmet medical needs, in specialist neuroscience indications. TOTAL REVENUE 2021 Growth DKKm 2021 2020 Growth in local currencies Abilify MaintenaⓇ 2,420 2,271 7% 8% BrintellixⓇ/TrintellixⓇ 3,526 3,102 14% 16% RexultiⓇ/RxultiⓇ 2,849 2,620 9% 14% VyeptiⓇ 492 93 429% 446% Strategic brands Cipralex /LexaproⓇ NortheraⓇ OnfiⓇ SabrilⓇ 9,287 8,086 2,346 2,380 15% (1%) 18% 3% 665 2,553 (74%) (72%) 505 657 642 (21%) (17%) 777 (15%) (11%) Other pharmaceuticals Other revenue 2,439 2,738 (11%) (10%) 347 Effects from hedging 53 491 5 (29%) (28%) (960%) Total revenue 16,299 17,672 (8%) (5%)#17LUNDBECK ANNUAL REPORT 2021 = CONTENTS 17/111 FINANCIAL PERFORMANCE 2021 PRODUCT PORTFOLIO Our strategic brands are Abilify Maintena (schizophrenia), BrintellixⓇ/Trintellix® (depression), RexultiⓇ/RxultiⓇ (depression/schizophrenia) and VyeptiⓇ (migraine prevention). Our product portfolio also includes AzilectⓇ (Parkinson's disease), CipralexⓇ/LexaproⓇ (depression), EbixaⓇ (Alzheimer's disease), NortheraⓇ (symptomatic neurogenic orthostatic hypotension), OnfiⓇ (Lennox-Gastaut syndrome), Sabril (epilepsy) and XenazineⓇ (chorea associated with Huntington's disease) as well as other mature products. Read more on pages 30-31. SALES PERFORMANCE Revenue reached DKK 16,299 million in 2021 compared to DKK 17,672 million in 2020. The decline in sales is mainly a consequence of generic erosion of NortheraⓇ. Excluding NortheraⓇ, sales grew by 6% in local currencies. The strategic brands (Abilify MaintenaⓇ, BrintellixⓇ/Trintellix®, RexultiⓇ/RxultiⓇ and VyeptiⓇ) grew 18% in local currencies and reached DKK 9,287 million or 57% of total revenue. EUROPE Revenue reached DKK 3,499 million in 2021 compared to DKK 3,329 million in 2020. In general, Europe sees robust underlying demand offsetting a continuous negative average price development and continued generic erosion on the mature product portfolio. The strategic brands increased by 14% in local currencies and reached DKK 2,198 million or 63% of sales. The largest markets in Europe are Spain, Italy, France, Switzerland and Greece. Europe constituted 22% of total revenue (excluding effects from hedging and Other revenue), which is a small increase from last year. Abilify MaintenaⓇ is Lundbeck's largest product in the region. Sales uptake of Abilify MaintenaⓇ is robust with revenue reaching DKK 1,175 million. Abilify MaintenaⓇ is the second most prescribed long-acting injectable treatment for patients with schizophrenia in many markets. Spain, Italy and France are the largest European markets for Abilify MaintenaⓇ. BrintellixⓇ/TrintellixⓇ revenue grew 19% in local currencies reaching DKK 998 million. BrintellixⓇ is Lundbeck's second largest product in Europe and realized solid growth across many markets. The solid growth in Europe has in some markets been dampened by a negative impact from the COVID-19 pandemic. RexultiⓇ/RxultiⓇ revenue reached DKK 25 million following a growth of 39% in local currencies. The product was recently launched in Italy, where it has a volume share of 0.6% by October 2021*, and the Czech Republic, thereby adding to growth. RexultiⓇ/RxultiⓇ is co-promoted with Otsuka in most markets. REVENUE - EUROPE Growth DKKm 2021 2020 Growth in local currencies Abilify MaintenaⓇ 1,175 1,081 9% 9% BrintellixⓇ/Trintellix® 998 837 19% 20% RexultiⓇ/RxultiⓇ Strategic brands CipralexⓇ 25 18 39% 39% 2,298 1,936 14% 14% Other pharmaceuticals Total revenue 530 771 523 (1%) (2%) 3,499 870 (11%) (11%) 3,329 5% 5% IQVIA#18LUNDBECK ANNUAL REPORT 2021 = CONTENTS IQVIA ** In 2020, NortheraⓇ was included in strategic brands and revenue from strategic brands was therefore DKK 7,845 million. 18/111 NORTH AMERICA Revenue reached DKK 8,245 million in 2021 compared to DKK 9,790 million in 2020. Sales were impacted by generic erosion of mature neurology products, especially NortheraⓇ as well as depreciation of currencies. Excluding NortheraⓇ, sales increased by 4.7% reported. The COVID-19 pandemic continues to impact business in the region and especially TrintellixⓇ since that product relies heavily on switches and new-to-brand prescriptions which are significantly less likely in telehealth visits. The strategic brands increased by 18% in local currencies and reached DKK 6,022 million or 73% of sales. North America constituted 52% of total revenue (excluding effects from hedging and Other revenue), which is a small decrease from last year. Abilify MaintenaⓇ revenue reached DKK 1,019 million, representing Lundbeck's share of total net sales. In the U.S., Abilify MaintenaⓇ has a stable volume market share of around 21% and in Canada it reached 32.7% by October 2021 representing a slight increase from January 2021*. TrintellixⓇ sales reached DKK 1,789 million in revenue for Lundbeck representing a growth in local currencies of 9%. The volume market share in the U.S. is unchanged at 0.9% by October 2021. In Canada, the volume share has increased from 1.4% of the total anti-depressant market in January to 1.7% in October 2021. The value market share of the total anti- depressant market in the U.S. has increased from 24.2% to 26.7%. In Canada, the value market share of the total anti- depressant market has increased from 7.7% in January 2021 to 10.1% in October*. Lundbeck's share of RexultiⓇ revenue reached DKK 2,725 million with a growth of 12% in local currencies. In the U.S., RexultiⓇ has a volume market share of 2.2% by October 2021 which is unchanged from January 2021*. However, the value share has increased from 14.6% to 15.5%. In Canada, the product has reached volume share of 3.1% representing a slight increase. Patient data suggest that more than 3/4 of prescriptions in the U.S. are prescribed for MDD. VyeptiⓇ was approved by the FDA on 21 February 2020 and in Canada in January 2021 for the preventive treatment of migraine in adults. The product was made available in the U.S. on 6 April 2020 and reached sales of DKK 489 million in 2021 in line with expectations. VyeptiⓇ can be obtained via selected specialty distributors and specialty pharmacies. Around 110 million insured U.S. individuals have access to VyeptiⓇ without any branded step-edits. In total, more than 235 million individuals have access to VyeptiⓇ. We expect to launch in Canada in 2022. It is still early in the launch, and the uptake has been affected by the general decline in physician-administered medicines during the pandemic. Nonetheless, we see increasing numbers of patients being treated with VyeptiⓇ, and we are encouraged by the positive feedback from clinicians and patients, who have used the product, on the positive effects and the ease of use. Based on the current momentum and the positive feedback, we expect continued strong growth for the product. NortheraⓇ sales reached DKK 665 million for the year following the launch of several generic versions in February 2021. SabrilⓇ revenue reached DKK 657 million. OnfiⓇ revenue reached DKK 505 million. REVENUE - NORTH AMERICA VyeptiⓇ Growth in local DKKm 2021 2020 Growth currencies Abilify MaintenaⓇ Trintellix® 1,019 980 4% 7% 1,789 1,682 6% 9% RexultiⓇ Strategic brands NortheraⓇ 2,725 2,537 489 6,022 5,292** 7% 12% 93 426% 443% 14% 18% 665 2,553 (74%) (72%) OnfiⓇ SabrilⓇ 505 642 (21%) (17%) 657 777 (15%) (11%) Other pharmaceuticals Total revenue 396 526 (25%) 8,245 9,790 (16%) (24%) (12%)#19LUNDBECK ANNUAL REPORT 2021 = CONTENTS IQVIA 19/111 INTERNATIONAL MARKETS Revenue from International Markets, which comprises all Lundbeck's markets outside of Europe and North America, reached DKK 4,155 million in 2021. The growth of 6% in local currencies was driven by RexultiⓇ/RxultiⓇ and BrintellixⓇ/TrintellixⓇ. The biggest markets are China, Japan, South Korea, Australia and Brazil. China and Japan constitute approximately 40% of the regional revenue. The strategic brands increased by 27% in local currencies and reached DKK 1,067 million or 26% of sales. In local currencies, all products grew compared to last year. Other pharmaceuticals declined by 5%. International Markets constituted 26% of total revenue (excluding effects from hedging and Other revenue), which is a small decrease from last year. Abilify MaintenaⓇ reached DKK 226 million in revenue representing a growth of 8% (4% in local currencies). Sales mainly derived from Australia where Abilify MaintenaⓇ shows robust sales performance. BrintellixⓇ/TrintellixⓇ reached DKK 739 million in revenue or an increase of 32% in local currencies. BrintellixⓇ/TrintellixⓇ realized solid growth across several markets including China and Japan. China, Brazil, Japan, South Korea and Mexico are the largest markets for BrintellixⓇ/TrintellixⓇ in the region. In China, BrintellixⓇ has a value share of 1.4% by October 2021*. In Japan, TrintellixⓇ is showing very strong momentum and has reached a volume market share of 5.5% by December 2021*. RexultiⓇ/RxultiⓇ reached DKK 99 million in sales and grew by 55% in local currencies. In International Markets, the product has its highest sales in Australia followed by Brazil. VyeptiⓇ received approval in the U.A.E. in December 2020 and in Kuwait in May 2021. In June 2021, The Australian Therapeutic Goods Administration (TGA) approved VyeptiⓇ for the preventive treatment of migraine in adults with a very strong label. VyeptiⓇ was introduced in the U.A.E. towards the end of September 2021. CipralexⓇ/LexaproⓇ generated revenue of DKK 1,699 million representing a growth of 4% in local currencies. Japan, China, South Korea, Brazil and Hong Kong are the largest markets for CipralexⓇ/LexaproⓇ in the region. Other pharmaceuticals generated revenue of DKK 1,389 million. AzilectⓇ is promoted by Lundbeck in some countries in Asia. AzilectⓇ generated revenue of DKK 135 million following a growth of 13%. EbixaⓇ generated revenue of DKK 397 million, which is 20% lower compared to 2020 following the inclusion of EbixaⓇ into Volume-Based Procurement (VBP) in China in the fourth quarter of 2020. REVENUE - INTERNATIONAL MARKETS DKKm Abilify MaintenaⓇ BrintellixⓇ/TrintellixⓇ RexultiⓇ/RxultiⓇ Strategic brands CipralexⓇ/LexaproⓇ Other pharmaceuticals Total revenue Growth 2021 2020 Growth in local currencies 226 210 8% 4% 739 583 27% 32% 99 65 52% 55% 1,067 858 24% 27% 1,699 1,730 (2%) 1,389 1,469 (5%) 4,155 4,057 2% 4% (4%) 6%#20LUNDBECK ANNUAL REPORT 2021 = CONTENTS 20/111 For definition of the measure "Core EBIT" and "Core EBIT margin", see page 110 Core reconciliation EXPENSES AND PROFITS In 2021, total costs declined by 9% to DKK 14,289 million compared to DKK 15,623 million last year. Adjusted for non- core costs, total costs declined by 3% to DKK 12,782 million mainly as a result of pandemic-related cost avoidance. Cost of sales declined by 12% to DKK 3,648 million in 2021 and the gross margin was 77.6% compared to 76.4% in 2020. Cost of sales was negatively impacted by the inclusion of VyeptiⓇ amortizations, but reduced royalty costs mitigated some of the effect. Sales and distribution costs were DKK 5,885 million, a decline of 1% compared to 2020 mainly because of COVID-19- related cost avoidance. Sales and distribution costs corresponded to 36.1% of revenue, compared to 33.6% last year. Administrative expenses declined 3% to DKK 933 million, corresponding to 5.7% of total revenue. Selling, general & administrative expenses (SG&A) for 2021 reached DKK 6,818 million compared to DKK 6,912 million in 2020. The SG&A ratio for the period was 41.8%, compared to 39.1% last year. R&D costs were 3,823 million for 2021 with a R&D ratio of 23.5%. Compared to 2020, the R&D costs declined 16%, while adjusted for the impairment of foliglurax of DKK 792 million in 2020, the R&D costs increased by 2%. Total operational costs (OPEX) reached DKK 10,641 million compared to DKK 11,457 million in 2020. Adjusted for the impairment of foliglurax product rights last year, OPEX consequently did not change. In 2021, Core EBIT* declined by 21% to DKK 3,517 million and the Core EBIT margin was 21.6%. Reported EBIT reached DKK 2,010 million compared to DKK 1,990 million in 2020 which was impacted by the impairment of the foliglurax product rights in 2020. The reported EBIT margin increased from 11.3% to 12.3%. TAX The effective tax rate for 2021 was 16.6% compared to 17.0% in 2020**. The tax rate is positively impacted by increased R&D deductions in Denmark, foreign-derived intangible income (FDII) benefits and recognition of tax credits in the U.S. PROFIT AND EPS Profit for 2021 reached DKK 1,318 million compared to DKK 1,581 million in 2020. The reported net profit corresponded to an EPS of DKK 6.63 versus an EPS of DKK 7.96 last year. Core EPS was DKK 12.57 for 2021, compared to a Core EPS of DKK 18.92 in 2020. CASH FLOWS Cash flows from operating activities amounted to DKK 2,272 million in 2021 compared to DKK 3,837 million in 2020. The development compared to last year primarily relates to reduced EBITDA due to NortheraⓇ loss of exclusivity, the Lonza liability settlement, negative impact from working capital due to inventory build-up and a higher cash tax payment related to intercompany transfer of product rights in 2020. Lundbeck's net cash flows from investing activities were an outflow of DKK 610 million in 2021 compared to an outflow of DKK 467 million in 2020. In 2021, the net cash outflow reached DKK 1,674 million compared to an inflow of DKK 976 million in 2020. The net cash flow is impacted by repayment of bank loans net of DKK 2,279 million. Net debt has decreased from DKK 4,106 million at year-end 2020 to DKK 3,189 million at the end of 2021. Interest bearing debt was DKK 5,468 million at the end of 2021. ** Please find Lundbeck's tax policy on https://www.lundbeck.com/content/dam/lundbeck-com/masters/global- site/pdf/Lundbeck_Tax_Policy_2022.pdf#21LUNDBECK ANNUAL REPORT 2021 = CONTENTS 21/111 DISCLIAMER Forward-looking statements are subject to risks, uncertainties and inaccurate assumptions. This may cause actual results to differ materially from expectations. Various factors may affect future results, incl. interest rates and exchange rate fluctuations, delay or failure of development projects, production problems, unexpected contract breaches or terminations, governance-mandated or market-driven price decreases for products, introduction of competing products, Lundbeck's ability to successfully market both new and existing products, exposure to product liability and other lawsuits, changes in reimbursement rules and governmental laws, and unexpected growth in expenses. DIVIDEND The Board of Directors proposes a dividend of 30% of net profit for 2021 in line with our pay-out policy of 30-60%. This corresponds to DKK 2.00 per share. The dividend pay-out is subject to approval at the Annual General Meeting on 23 March 2022. GUIDANCE 2022 Lundbeck's financial results for 2022 are expected to be driven by the continued strong growth of Abilify MaintenaⓇ, BrintellixⓇ/Trintellix®, RexultiⓇ/RxultiⓇ and VyeptiⓇ. Lundbeck's total revenue is expected to reach between DKK 16.7 billion and 17.3 billion in 2022. Core EBIT is expected to reach between DKK 3.6 billion and 4.0 billion and EBIT is expected to be in the range between DKK 2.2 billion and 2.6 billion. Lundbeck has foreign currency risks mainly in USD, CNY and CAD. The financial guidance for 2022 is based on the current hedging rates for those currencies; i.e. USD/DKK (6.34), CNY/DKK (0.96) and CAD/DKK (5.01) and includes an expected hedging loss of approximately DKK 200 million. Based on our assumptions for product and geographical mix, it is estimated that a 5% change of the USD/DKK exchange rate will impact revenue by around DKK 250 million. The financial guidance for 2022 is summarized below: FINANCIAL GUIDANCE 2022 DKK Revenue 4.0-4.4 bn FY 2021 actual 16,299 m FY 2022 guidance 16.7 17.3 bn EBITDA 3,720 m Profit from operation (EBIT) Core EBIT 2,010 m 2.2 -2.6 bn 3,517 m 3.6-4.0 bn#22LUNDBECK ANNUAL REPORT 2021 = CONTENTS 22/111 OUR SCIENCE AND INNOVATION Over the past year, we consistently demonstrated leadership in the CNS space through our unique approach to science and innovation. It's an approach rooted in our commitment to persist in a challenging space, shaped by our agile mindset and defined by our bold vision of better lives for people with brain diseases. EXECUTING THE R&D STRATEGY In 2021, Lundbeck advanced the R&D strategy established in 2020, sharpening our focus on leading-edge science, de-risking and optimizing clinical development and supporting the commercialization of truly global products. Central to the approach of rebuilding the pipeline is the utilization of an experimental medicine approach that allows us to de-risk the pipeline and advance only the most promising drug candidates into full development. We executed this throughout the year and were able to initiate two important studies: A phase II proof-of-concept study program of Lu AF82422 for treatment of Multiple System Atrophy and a phase Il proof-of-concept study of Lu AG09222 for migraine prevention. We also advanced our ambition to become a truly global developmental organization, registering and launching VyeptiⓇ in a number of markets. Also in 2021, we established several important partnerships that strengthen our developmental capabilities through external innovation. In October 2021, we entered into an agreement with the South Korean biopharmaceutical company AprilBio and gained exclusive worldwide rights to APB-A1 (now Lu AG22515), a phase-I-ready biotherapeutic for the treatment of neuroimmune diseases. Lu AG22515 is a novel and well- differentiated anti-CD40 ligand (CD40L) antibody-like drug candidate. Modulating the CD40L/CD40 interaction holds great promise for treatment of a wide range of immune-related nervous system disorders. The agreement bolsters our neuroinflammation/neuroimmunology discovery platform, strengthening the biology cluster focus of our future therapies. In August 2021, we entered a strategic research collaboration with the U.S.-based company Rgenta Therapeutics to discover small molecules targeting RNA regulation and splicing of disease-causing genes. Lundbeck gained access to technology that targets RNA pathways, and with this exciting platform we aim to pursue novel targets previously inaccessible. DEVELOPMENTAL PIPELINE We believe that what fuels innovative drug discovery is a focus on the most promising science - to be in touch with and at the leading edge of where the neuroscience field is headed in our understanding of the brain and the pathophysiology that underpins brain health. Through pursuit of novel targets within the four biological clusters upon which we are focused, we are advancing truly innovative solutions to areas of significant unmet need in brain diseases. ol ᏌᏁ HORMONAL / NEUROPEPTIDE SIGNALING Eptinezumab- development and regulatory status Eptinezumab is a monoclonal antibody (mAb) that binds to the calcitonin gene-related peptide (CGRP), a neuropeptide believed to play a key role in mediating and initiating migraine, with high specificity and potency. Eptinezumab is administered as a quarterly 30-minute intravenous (IV) infusion, providing immediate and complete bioavailability. In February 2020, VyeptiⓇ (eptinezumab) was approved by the FDA as the first FDA-approved IV treatment for the treatment of migraine in adults. The recommended dose is 100 mg every 3 months; some patients may benefit from a dose of 300 mg. Eptinezumab was subsequently approved in the U.A.E. in December 2020, Canada in January 2021, Kuwait in May 2021, Australia in June 2021, Singapore in September 2021 and Switzerland in October 2021.#23LUNDBECK ANNUAL REPORT 2021 = CONTENTS 23/111 In December 2020, the filling of eptinezumab was accepted by the European Medicines Agency (EMA) for marketing authorization application (MAA) review. In addition, eptinezumab currently is under regulatory review in Argentina, Brazil, Chile, Columbia, Indonesia, Israel, Hong Kong, Philippines, Saudi Arabia, South Africa, Taiwan, Thailand and the UK. In November 2021, we announced positive results from the phase IIIb DELIVER study assessing the efficacy and safety of VyeptiⓇ (eptinezumab) 100mg and 300mg IV infusion in patients with chronic or episodic migraine who had experienced two to four previous preventive treatment failures due to lack of efficacy or intolerable side effects. During the first half of 2021, Lundbeck initiated the SUNLIGHT and SUNRISE phase III clinical trials. These trials will support registration for migraine prevention in Asia, including China and Japan, and are progressing as planned and are expected to complete in 2022 and 2023. In December 2020, Lundbeck initiated the ALLEVIATE phase III clinical trial investigating the efficacy of eptinezumab in patients with episodic cluster headache. The trial is progressing as planned and is expected to complete in 2023. The primary outcome in the trial is change from baseline in number of weekly attacks, averaged over weeks 1-2. Lu AG09222 (former ALD 1910) Following supportive phase I target engagement data, a phase Il proof-of-concept study in migraine prevention commenced in November 2021. Lu AG09222 is a monoclonal antibody (mAb) designed to bind pituitary adenylate cyclase-activating polypeptide (PACAP), thereby effectively preventing PACAP from activating its receptors. PACAP has emerged as an important signaling molecule in the pathophysiology of migraine and represents an attractive novel target for treating migraine. Lu AG09222 may hold potential as a migraine prevention treatment and could provide another mechanism-specific therapeutic option for migraine patients and their physicians. C CIRCUITRY/NEURONAL BIOLOGY Brexpiprazole-phase III in Alzheimer's agitation In April 2021, Lundbeck and Otsuka announced the decision to continue the recruitment of patients in a third phase III clinical trial of brexpiprazole in the treatment of agitation in patients with dementia of the Alzheimer's type (NCT03548584). The decision to continue the trial is based on the results of an independent interim analysis, which support progressing the trial to the planned full enrollment of 330 patients. The study is designed to assess the safety, tolerability and efficacy of brexpiprazole in the treatment of patients with agitation in Alzheimer's dementia. The trial consists of a continuous 12-week double-blind treatment period with a 30-day follow-up. The trial population is planned to include 330 male and female patients, aged 55-90 years, with a diagnosis of probable Alzheimer's disease. The continuation of the study enables Lundbeck and Otsuka to further explore the efficacy of brexpiprazole to address the high medical need in patients suffering from agitation in Alzheimer's type dementia. Completion of the trial is expected in the first half of 2022. The primary outcome in the study is change in the Cohen- Mansfield Agitation Inventory (CMAI) Total score. The key secondary outcome measure is change in the Clinical Global Impression - Severity of Illness (CGI-S) score, as related to symptoms of agitation.#24LUNDBECK ANNUAL REPORT 2021 = CONTENTS 24/111 DECENTRALIZED CLINICAL TRIALS In 2021, we maintained our COVID crisis- management plans across our portfolio of ongoing clinical trials. The goal was to provide continuity of clinical trial supplies to patients and ensure patient visits and study assessments were conducted as planned. Patient visits continued at clinics where possible and remote visits were implemented in cases where travel restrictions were in place. In 2021, we also embarked on our first pre-planned Hybrid Decentralized trial, where patients have the choice of either visiting their trial site or selecting to have remote visits in their own home setting. The first study is the Lu AG09222 phase II proof-of-concept study in migraine prevention and we had first patient visits in November 2021. Brexpiprazole-phase III in Post-Traumatic Stress Disorder (PTSD) PTSD is a psychiatric disorder that can develop as a response to traumatic events, such as interpersonal violence, combat, life- threatening accidents or natural disasters. Core features of PTSD include a variety of symptoms, such as re-experiencing phenomena (i.e. flashbacks and nightmares), avoidance behavior, numbing (i.e. amnesia, anhedonia, withdrawal, negativism) and increased arousal (i.e. insomnia, irritability, poor concentration, hypervigilance). Psychiatric co- morbidities are common, and PTSD sufferers can also present with substance abuse, mood and other anxiety disorders, impulsive and dangerous behavior and self-harm. Lundbeck and Otsuka reported positive phase II data for the combination treatment of brexpiprazole and sertraline for the treatment of PTSD in November 2018. On basis of these data, Lundbeck and Otsuka initiated two pivotal phase III trials (NCT04124614; n=577 and NCT04174170; n=733), investigating the use of brexpiprazole in combination with sertraline in the treatment of PTSD subsequent to an End of Phase II meeting with the FDA in May 2019. The execution of those two ongoing studies is challenged by the COVID-19 pandemic, primarily impacting enrollment activities and Lundbeck and Otsuka are exploring options on how best to address these COVID-19 challenges. Brexpiprazole - SNDA for treatment of schizophrenia in adolescents In December 2021, the FDA approved Lundbeck's and Otsuka's SNDA for the treatment of schizophrenia in adolescents with RexultiⓇ (brexpiprazole). More specifically, RexultiⓇ/Rxulti® is now approved for the treatment of schizophrenia in pediatric patients 13 to 17 years of age. Currently, RexultiⓇ is approved in the U.S. for treatment of schizophrenia in adults and adjunctive treatment of major depressive disorder in adults. The submission was completed one year earlier than planned, with the hope of benefitting adolescent patients with schizophrenia who need more treatment options. The acceleration of the program was made possible by doing an extrapolation analysis using data from prior studies in adult patients, pharmacokinetic results from adult and pediatric trials, and 6-month data from the ongoing open-label, long-term trial in adolescent schizophrenia patients (Trial 331- 10-236). Aripiprazole -2-Month Injectable (LAI) formulation Dosing every second month can add important benefits in terms of convenience for patients and may increase treatment adherence as well as minimizing the risk of missing doses. It may also reduce the potential need for medication monitoring by healthcare professionals, family and caregivers. In July 2019, Lundbeck and Otsuka initiated a pivotal phase 1b study (NCT04030143) to determine the safety, tolerability and pharmacokinetics of multiple-dose administrations of aripiprazole to adult participants with schizophrenia or bipolar I disorder. The study was an open-label, multiple-dose, randomized, parallel-arm, multicenter study. In addition to the assessment of safety and tolerability, the objective was to establish the similarity of aripiprazole concentrations on the last day of the dosing interval and the exposure in the last dosing interval following the final administration of aripiprazole into the gluteal muscle site. The study showed that the new 2-Month formulation was safe and tolerable, and provided effective plasma concentrations of aripiprazole for two months. No further clinical studies are expected to be required and as a next step the regulatory agencies in the U.S. and the EU will be approached. Scale-up of manufacturing capacity is progressing at Otsuka with regulatory submission gated on completing build and validation of new manufacturing capacity at Otsuka. Lundbeck and Otsuka are planning to submit the aripiprazole 2- Month injectable formulation to the EMA for MAA review by mid- 2022. In addition, Lundbeck and Otsuka will submit the New Drug Application (NDA) for review by the FDA in mid-2022.#25LUNDBECK ANNUAL REPORT 2021 = CONTENTS 25/111 Lu AG06466 - phase lb Lu AG06466 (former ABX1431) is an inhibitor of the monoacylglycerol lipase (MAGL) and selective modulator of the endocannabinoid system. It works to reduce excessive neurotransmission and neuroinflammation that are known pathophysiological hallmarks for a range of psychiatric and neurological disorders. A phase lb study was initiated in September 2020 with the purpose to investigate the effect of Lu AG06466 after multiple doses in patients with PTSD (NCT04597450). Additional phase Ib investigational studies were initiated in fibromyalgia patients in June 2021 (NCT04974359), in multiple sclerosis spasticity in September 2021 (NCT04990219), and in focal epilepsy in September 2021 (NCT05081518). Trials across these indications will assess a variety of common and innovative biomarkers to develop tools to help guide further late-stage development and will guide decision making for future development. Lu AF28996 - phase I Lu AF28996 is a small molecule with agonistic properties towards D1 and D2 receptors. Continuous D1 and D2 dopamine receptor stimulation may play an important role in motor control of Parkinson's disease patients. A Phase 1b study was initiated in February 2020 on Lu AF28996 with the purpose to investigate the safety and tolerability as well as pharmacokinetics of Lu AF28996 in patients with Parkinson's disease (NCT04291859). NEUROINFLAMMATION / NEUROIMMUNOLOGY With the October 2021 agreement with AprilBio, Lundbeck took a significant leap forward in our neuroinflammation / neuroimmunology discovery platform. Through the agreement, we gained exclusive worldwide rights to APB-A1 (now Lu AG22515), a phase-I-ready biotherapeutic for the treatment of neuroimmune diseases. Lu AG22515 is a novel and well-differentiated anti-CD40 ligand (CD40L) antibody-like drug candidate. Modulating the CD40L/CD40 interaction holds great promise for treatment of a wide range of autoimmune-related CNS disorders. PROTEIN AGGREGATION, FOLDING AND CLEARANCE Lu AF82422 - phase II Lu AF82422 is a monoclonal antibody (mAb) targeting the pathological form of the protein alpha-synuclein that is believed to play a pivotal role in the development and progression of MSA, Parkinson's disease and other neurodegenerative disorders.#26LUNDBECK ANNUAL REPORT 2021 = CONTENTS 26/111 DIGITAL HEALTH TOOLS IN CLINICAL TRIALS In 2021, three different digital health tools were implemented in four phase lb studies of Lu AG06466 and Lu AG06479. The digital health tools include a sleep and seizure monitoring actigraphy wristband, a sleep monitoring EEG headband, and digital insoles that are placed in the patient's shoes for gait assessment. The inclusion of these tools represents Lundbeck's aim to explore the benefits of digitally obtained endpoints. The tools also allow Lundbeck to combine sensor data and novel algorithms, providing objective insights into previously undiscovered domains. By targeting pathological alpha-synuclein with an antibody that will inhibit aggregation and potentially clear pathological alpha- synuclein from the brain, the project aims to demonstrate delay of disease progression with a therapeutic effect on disease burden and function. A phase II proof-of-concept study program on Lu AF82422 commenced in November 2021 to investigate the safety and efficacy of Lu AF82422 in MSA. Orphan drug designation for MSA was granted by EMA in April 2021. Lu AF87908-phase I Lu AF87908 is a monoclonal antibody (mAb) targeting the pathological form of the hyper-phosphorylated tau protein, which is believed to play a pivotal role in the development and progression of Alzheimer's disease and other tau-driven neurodegenerative disorders (primary tauopathies). Lu AF87908 binds to a specific tau epitope (pS396-tau) which is a dominating phosphorylation site in pathological tau. A Phase I program on Lu AF87908 commenced in September 2019 to investigate the safety and tolerability as well as pharmacokinetics of a single dose of Lu AF87908, in healthy subjects and patients with Alzheimer's disease (NCT04149860). OTHER PROJECTS In July 2021, Lundbeck announced the licensing of global rights for idalopirdine to Denovo Biopharma, including all rights to develop, manufacture and commercialize idalopirdine for all indications. Denovo Biopharma aims to explore idalopirdine using its biomarker platform, applying a precision medicine approach to develop innovative therapies. Lundbeck holds the right to re-acquire idalopirdine, while the rights in China would be shared with Denovo Biopharma. Idalopirdine was previously developed by Lundbeck, in collaboration with Otsuka, for cognitive symptoms in Alzheimer's disease. The idalopirdine- project did not reach a successful outcome in a phase III trial in 2017.#27LUNDBECK ANNUAL REPORT 2021 = CONTENTS 27/111 COMMITMENT TO DIVERSITY IN CLINICAL TRIALS Lundbeck understands that brain diseases wreak havoc without bias. Whether it be genetics, age, race, sex, ethnicity, socioeconomics or access to healthcare, understanding and fully evaluating the multitude of factors that influence a person's health are key to both the development of good medicine and equitable advances in brain health. As part of our ongoing commitment to sustain a diverse clinical trial infrastructure, the Lundbeck Diversity Steering Team established the below Clinical Trial Diversity Principles and committed to tracking and monitoring progress against them. Develop & Execute a Clear Strategy to Achieve Diversity in Our Trials Globally We aim for each trial to be designed with intention to ensure participants mirror the full diversity of the patient population in the country or region AND the disease we are studying. This will require a concentrated effort to involve underrepresented populations in our marketed regions through focused patient-inclusion criteria; attention to the diversity of clinical trial sites and investigators; removal of barriers that could impede the participation of certain groups in clinical trials; and use of real-world data to inform development efforts and improve understanding of diseases and products. Collaborate with Patient Advocacy Groups Choosing to Make Diversity a Priority Lundbeck has a longstanding focus on community outreach, and we are committed to expanding partnerships with organizations that possess a like-minded focus on diversity. In collaboration with external partners, we strive to establish trust with diverse patient and caregiver populations, gain deeper insight into unmet patient needs and build awareness about open clinical trials to further enhance the diversity of our clinical trials. Implement Integrated Oversight Approach to Inform, Analyze and Act We aim to continuously inform and reform our internal thinking and processes by actively monitoring clinical trial diversity targets and utilizing real-world data to ensure we are driving inclusion of underrepresented populations in our clinical trials.#28LUNDBECK ANNUAL REPORT 2021 = CONTENTS Pipeline PROJECT BIOLOGY AREA Eptinezumab (anti-CGRP mAb)1 Eptinezumab (anti-CGRP mAb) Eptinezumab (anti-CGRP mAb) Lu AG09222 (anti-PACAP mAb)³ Hormonal / neuropeptide signaling Migraine prevention Migraine prevention (Asia)² Episodic cluster headache Migraine prevention Brexpiprazole4 Brexpiprazole4 Aripiprazole 2-month injectable formulation Lu AF28996 (D1/D27 agonist) Lu AG06466 (MAGL inhibitor)³ Circuitry / neuronal biology Agitation in Alzheimer's disease PTSD5 Schizophrenia & bipolar I disorder Parkinson's disease Focal epilepsy/PTSD5/MS spasticity⁹ Lu AF82422 (anti-a-synuclein mAb) Protein aggregation, folding and clearance Synucleinopathies (MSA10) Lu AF87908 (anti-Tau mAb) Tauopathies Three phase III clinical trials, supporting registration in Asia, including China and Japan: SUNLIGHT, SUNRISE, and SUNSET trials PACAP: Pituitary adenylate cyclase activating peptide 1) CGRP: Calcitonin gene-related peptide 2) 3) 4) 5) Acts as a partial agonist at 5-HT1A and dopamine D2 receptors at similar potency, and an antagonist at 5-HT2A and noradrenaline alpha1B/2C receptors Post-traumatic stress disorder 6) Pivotal phase lb study finalized; Lundbeck and Otsuka Pharmaceutical are planning to submit the aripiprazole 2-month injectable formulation to the European Medicines Agency (EMA) for marketing authorization application (MAA) review and to submit the NDA for review by the U.S. FDA 7) Dopamine receptor D1 and D2 8) MAGL: Monoacylglycerol lipase i ("MAGlipase") 9) Spasticity in participants with Multiple Sclerosis 10) Multiple system atrophy 28/111 PHASE I PHASE II PHASE III FILING / LAUNCH#29LUNDBECK ANNUAL REPORT 2021 = CONTENTS Markets Lundbeck's products are registered in more than 100 countries and we have employees in more than 50 countries. Our largest markets are the U.S., China, Canada, Spain, Italy, Japan, France, South Korea, Australia and Brazil. NORTH AMERICA INTERNATIONAL MARKETS REVENUE (DKKm) 8,245 SHARE OF GROUP REVENUE 52% REVENUE (DKKm) 4,155 EUROPE SHARE OF GROUP REVENUE 26% REVENUE (DKKm) 3,499 SHARE OF GROUP REVENUE 22% REVENUE FROM STRATEGIC BRANDS (DKKm) 6,022 STRATEGIC BRANDS Abilify Maintena® Brintellix®/TrintellixⓇ RexultiⓇ/RxultiⓇ Vyepti REVENUE FROM STRATEGIC BRANDS (DKKm) 1,067 STRATEGIC BRANDS Abilify MaintenaⓇ Brintellix /Trintellix® RexultiⓇ/Rxulti REVENUE FROM STRATEGIC BRANDS (DKKm) 2,198 STRATEGIC BRANDS Abilify MaintenaⓇ Brintellix /Trintellix® Rexulti /Rxulti® 29/111#30LUNDBECK ANNUAL REPORT 2021 = CONTENTS Products STRATEGIC BRANDS Ability Maintena 400 mg wture de anpipel 28 ilmovicure phitur Brintellix 10mg filmovertrukne tabletter vortioxetine Indtages pennet munden 28 filmovertrukne tabletter/draslene tableter RXULTI 1mg filmovertrukne tabletter/ tabletter, filmdrasjerte brexpiprazol/brekspiprazol Oral anvender Oralik vyepti (ectinazumab jnr) injection 100 mg/ml F E Abilify Maintena® (aripiprazole once-monthly) Monthly intramuscular injection indicated for the treatment of schizophrenia. Lundbeck markets Abilify MaintenaⓇ in the U.S. in collaboration with Otsuka Pharmaceutical Co., Ltd. and in Europe and International Markets either alone or in collaboration with Otsuka Pharmaceutical Co., Ltd. First launched in the U.S. in 2013, hereafter launched in close to 40 countries. Brintellix /TrintellixⓇ (vortioxetine) Indicated for the treatment of Major Depressive Disorder (MDD). Lundbeck markets Brintellix®/Trintellix® in Europe and International Markets. In the U.S., Takeda Pharmaceutical Company Limited is our co-promotion partner. Launched in the first markets in 2014 and now available in approximately 60 countries. Rexulti /Rxulti® (brexpiprazole) Indicated for adjunctive therapy for the treatment of adults with Major Depressive Disorder (MDD) and as a treatment for adults with schizophrenia. Launched in the U.S. in 2015 in collaboration with Otsuka Pharmaceu- tical Co., Ltd. hereafter in a number of other countries. Vyepti® (eptizumab) Indicated for the preventive treatment of migraine in adults. Approved by the U.S. FDA in early 2020. In 2021, Vyepti was approved in Canada, Switzerland, the U.A.E., Kuwait, and Australia. End of 2021, VyeptiⓇ was also recommended for approval in the EU by the Committee for Medicinal Products for Human Use (CHMP). REVENUE (DKKm) 2,420 % OF TOTAL REVENUE 15% ▲7% REVENUE (DKKm) 3,526 % OF TOTAL REVENUE 22% ▲ 14% REVENUE (DKKm) 2,849 % OF TOTAL REVENUE 17% 19% REVENUE (DKKm) 492 429% % OF TOTAL REVENUE 3% 30/111#31LUNDBECK ANNUAL REPORT 2021 = CONTENTS Products MATURE BRANDS 28 filmovertrukne tabletter Cipralex 10 mg escitalopram Filmoverzuine fablecher - 90 Capsules NDC 67316-121-19 Northera (drop capsules 200 mg Pirty 16276 Onfi (clobazam) Tablets 10 mg @ THE Bus TH Sabril (vigabatrin) Tablets 500 mg CipralexⓇ/Lexapro® (escitalopram) Indicated for the treatment of depression. First launched in 2002 and today available in more than 100 countries around the world. Northera® (droxidopa) Indicated for the treatment of symptomatic neurogenic orthostatic hypotension in adult patients. NortheraⓇ is the only U.S. FDA-approved therapy for this condition. Lundbeck markets NortheraⓇ in the U.S. and launched the product in 2014. Onfi® (clobazam) Indicated as adjunctive treatment of Lennox-Gastaut syndrome for people aged two years or older. Launched in the U.S. in 2012. SabrilⓇ (vigabatrine) Indicated for the treatment of refractory complex partial seizures (rCPS) and infantile spasms (IS). Launched in the U.S. in 2009. Other pharmaceuticals Ebixa (dementia), Azilect (Parkinson's disease), Xenazine (chorea), DeanxitⓇ (depression), Cipramil® (depression and anxiety) and Cisordinol (psychosis) are among the biggest of our other mature brands. REVENUE (DKKm) 2,346 % OF TOTAL REVENUE 14% ▼1% REVENUE (DKKm) 665 % OF TOTAL REVENUE 4% ▼74% REVENUE (DKKm) 505 21% REVENUE (DKKm) 657 15% REVENUE (DKKm) 2,439 ▼11% % OF TOTAL REVENUE 3% % OF TOTAL REVENUE 4% % OF TOTAL REVENUE 15% 31/111#32LUNDBECK ANNUAL REPORT 2021 = CONTENTS SUMMARY FOR THE GROUP 2017-2021 32/111 Statement of profit or loss (DKKm) 2021 2020 20191 20181 20171 Revenue 16,299 17,672 17,036 18,117 17,234 Research and development costs 3,823 4,545 3,116 3,277 2,705 Reversal of impairment loss 3,766 Operating profit before depreciation and amortization (EBITDA) 3,720 4,783 4,823 6,436 9,190 Profit from operations (EBIT) 2,010 1,990 3,153 4,846 8,174 Net financials, expenses 429 84 127 12 131 Profit before tax 1,581 1,906 3,026 4,834 8,043 Profit for the year 1,318 1,581 2,313 3,553 5,560 Assets (DKKm) 2021 2020 20191 2018¹ 20171 Non-current assets 26,041 25,924 29,095 13,944 13,893 Inventories 2,775 2,163 2,204 1,753 1,376 Receivables 3,558 4,018 3,822 3,261 3,791 Cash, bank balances and securities² 2,279 3,924 3,012 6,635 3,677 Total assets 34,653 36,029 38,133 25,593 22,737 Equity and liabilities (DKKm) 2021 2020 20191 2018¹ 20171 Equity 18,279 16,973 16,782 16,833 15,117 Non-current liabilities 7,556 9,044 11,071 1,184 1,141 Current liabilities 8,818 10,012 10,280 7,576 6,479 Total equity and liabilities 34,653 36,029 38,133 25,593 22,737 Statement of cash flows (DKKm) Cash flows from operating activities Cash flows from investing activities 2021 2020 2019 2,272 3,837 (610) (467) Cash flows from operating and investing activities (free cash flow) Cash flows from financing activities 1,662 3,370 (3,336) 2018 2,609 5,981 4,045 (7,755) (2,907) (1,830) (5,146) (2,394) 4,548 2017 3,074 (1,607) 2,215 (2,235) Interest-bearing debt, cash, bank balances and securities, net, year-end - net cash/(net debt)² (3,189) (4,106) (6,566) 6,635 3,677 1) 2017-2019 have been restated to reflect the reversal of an impairment loss on the RexultiⓇ product rights in 2017. 2) In 2020 and 2021, securites amounted to DKK 0.#33LUNDBECK ANNUAL REPORT 2021 = CONTENTS SUMMARY FOR THE GROUP 2017-2021 CONTINUED 33/111 Key figures 2021 2020 20191 20181 20171 EBIT margin (%) 12.3 11.3 18.5 26.7 47.4 Research and development ratio (%) 23.5 25.7 18.3 18.1 15.7 Return on equity (%) 7.5 9.4 13.8 22.2 44.8 Equity ratio (%) 52.7 47.1 44.0 65.8 66.5 Invested capital (DKKm) 21,468 21,079 23,348 10,198 11,440 Net debt/EBITDA 0.9 0.9 1.4 (1.0) (0.7) Effective tax rate (%) 16.6 17.0 23.6 26.5 30.9 Purchase of intangible assets, gross (DKKm) 202 114 88 1,149 480 Purchase of property, plant and equipment, gross (DKKm) 410 364 356 300 245 Purchase of financial assets, gross (DKKm) 17 18 1,524 1,509 Average number of employees 5,488 5,717 5,475 5,060 4,980 Share data 2021 2020 20191 20181 20171 Number of shares for the calculation of EPS (millions) 198.7 198.7 198.7 198.7 197.5 Earnings per share, basic (EPS) (DKK) 6.63 7.96 11.64 17.88 28.14 Earnings per share, diluted (DEPS) (DKK) 6.63 7.96 11.64 17.87 28.10 Proposed dividend per share (DKK) 2.00 2.50 4.10 12.00 8.00 Cash flows from operating activities per share, diluted (DKK) 11.44 19.31 13.13 30.09 20.44 Net asset value per share, diluted (DKK) 92.01 85.42 84.45 84.67 76.03 Market capitalization (DKKm) 33,626 41,582 50,660 56,825 62,700 Price/Earnings, diluted (DKK) 25.47 26.25 21.86 15.97 11.21 Price/Cash flow, diluted (DKK) 14.76 10.82 19.38 9.48 15.41 Price/Net asset value, diluted (DKK) 1.84 2.44 3.01 3.37 4.14 1) 2017-2019 have been restated to reflect the reversal of an impairment loss on the RexultiⓇ product rights in 2017.#34LUNDBECK ANNUAL REPORT 2021 = CONTENTS SUMMARY FOR THE GROUP 2017-2021 CONTINUED 34/111 Definitions Interest-bearing debt Interest-bearing net cash EBIT margin² EBITDA Return on equity² Equity ratio² Invested capital Net debt Net debt/EBITDA² Earnings per share, basic (EPS)² Earnings per share, diluted (DEPS)² Cash flows from operating activities per share, diluted² Net asset value per share, diluted Market capitalization² Price/Earnings, diluted² Price/Cash flows, diluted² Price/Net asset value, diluted Debt and financial instruments (including financial leases) carrying interest Cash, bank balances and securities less interest-bearing debt Profit from operations as a percentage of revenue Profit before interest, tax, depreciation, amortization and gain on divestment of properties Net profit/(loss) for the year as a percentage of shareholders' equity (average) Shareholders' equity, year-end, as a percentage of total assets Shareholders' equity, year-end, plus net interest-bearing debt Interest bearing debt less cash, bank balances and securities Net interest-bearing debt divided by EBITDA Net profit/(loss) for the year divided by average number of shares, excl. treasury shares Net profit/(loss) for the year divided by average number of shares, excl. treasury shares, incl. warrants, fully diluted Cash flows from operating activities divided by average number of shares, excl. treasury shares, incl. warrants, fully diluted Shareholder's equity, year-end, divided by number of shares, year-end, excl. treasury shares, incl. warrants, fully diluted Total number of shares, year-end, multiplied by the official price quoted on Nasdaq Copenhagen, year-end The official price quoted on Nasdaq Copenhagen, year-end, divided by earnings per share, diluted The official price quoted on Nasdaq Copenhagen, year-end, divided by cash flows from operating activities per share, diluted The official price quoted on Nasdaq Copenhagen, year-end, divided by net asset value per share, diluted EBITDA calculation (DKKm) 2021 2020 20191 2018¹ 20171 EBIT 2,010 1,990 3,153 4,846 8,174 + Depreciation, amortization and impairment losses 1,710 2,793 1,670 1,638 1,258 - Gain on divestment of properties recognized in other operating expenses, net (48) (242) EBITDA 3,720 4,783 4,823 6,436 9,190 1) 2017-2019 have been restated to reflect the reversal of an impairment loss on the RexultiⓇ product rights in 2017. 2) Definitions according to the Danish Finance Society's Recommendations & Financial Ratios.#35LUNDBECK ANNUAL REPORT 2021 | = CONTENTS Governance Lundbeck has established a business ethics compliance structure consisting of the elements needed to ensure that we are doing the right thing. We continually improve processes and sustain a compliance culture. IN THIS SECTION 36 Corporate Governance 38 Sustainability & Compliance 41 Risk Management 43 Board of Directors 44 Executive Management 47 The Lundbeck Share 35/111 From left to right Michal Marczynski, Project Manager Sandra Kroll, Agile Transformation Lead Patrycia Talar-Gancarczyk, Process Excellence Specialist#36LUNDBECK ANNUAL REPORT 2021 = CONTENTS 36/111 CORPORATE GOVERNANCE Corporate governance concerns the way Lundbeck is managed and controlled, while creating value for both the company and its stakeholders. More information on the mandatory annual Corporate Governance report is disclosed on www.lundbeck.com* in accordance with section 107(b) in the Danish Financial Statements Act. https://www.lundbeck.com/content/dam/lundbeck-com/masters/global- site/pdf/corporate-governance/2021/corporate_governance_report.pdf Detailed description of the Board members and their competencies and qualifications can be found on https://www.lundbeck.com/global/about-us/our- leadership/board-of-directors Detailed description of the Board of Directors' work, evaluation procedure and results can be found on https://www.lundbeck.com/global/about-us/corporate- governance/board-tasks **** Lundbeck has a two-tier board structure consisting of the Board of Directors and the Executive Management. The two bodies are separated, and no person serves as a member of both. The Board of Directors has ten members, of which seven are elected at the Annual General Meeting for a one-year term and three are elected by Lundbeck's employees for a four-year term. The current members of the Board of Directors** bring deep industry knowledge and solid top management experience to Lundbeck, which are essential for the Board to perform its tasks. Lundbeck's Board of Directors is responsible for approving the corporate strategy and its implementation, setting goals for Executive Management, and for ensuring that members of Executive Management and other senior managers have the right qualifications. The Board of Directors also evaluates management performance and remuneration. Furthermore, the Board of Directors has the overall responsibility for ensuring that adequate internal and external controls are in place, and for identifying and addressing any relevant risks. These responsibilities are defined in the Danish Companies Act and stipulated in the rules of procedures for the Board of Directors. The Board of Directors regularly evaluates the Lundbeck's strategy, business, performance, financial strategies and policies, and ensures that day-to-day management is carried out in accordance with such policies. The Board of Directors analyzes Lundbeck's need for capital on an ongoing basis, including an assessment of Lundbeck's capital structure. There is no universal answer to the question of what the optimum capital structure is for a specific company because the relationship between equity and interest-bearing debt relies on the specific characteristics that apply within the particular industry in which the business operates and, by extension, the operating and financial risk. However, companies in the pharmaceutical industry are often particularly well-funded which may be explained by the extended development projects and risks associated with research activities. The Board of Directors pursues the policy that equity beyond the level which, based on a conservative estimate, would be considered sufficient to support the underlying business should be distributed to the shareholders. The distribution to our shareholders takes place through annual dividends and if appropriate share buyback programs. Our dividend policy is currently to pay out 30-60 % of the net profits as dividend to the shareholders. The Board of Directors has established a self-evaluation procedure covering, among other things, board composition, contribution and results, Board agenda and discussions, cooperation between the Board of Directors and Executive Management, committee work and structure. The 2021 Board evaluation was built on the previous evaluations performed in 2019 and 2020 where all members of the Board of Directors and Executive Management participated. It was conducted as an in-house online survey and the result showed an increase to an already high level of satisfaction with the collaboration and interaction between the Board of Directors and Executive Management. The collaboration was described as transparent, constructive, effective, and involving. The survey also included an update of the competencies on the Board. We saw an increase of competencies and knowledge relevant for the future strategic path of the company, e.g. scientific knowledge and experience, which is now at a satisfactory level. More details regarding the work performed by the Board of Directors, the evaluation procedure and results hereof can be found at www.lundbeck.com***. Also, the remuneration of Lundbeck's Executive Management and Board of Directors can be found at www.lundbeck.com****. Detailed description of the remuneration can be found on https://www.lundbeck.com/global/about-us/corporate-governance/remuneration#37LUNDBECK ANNUAL REPORT 2021 = CONTENTS DISCLOSURE REGARDING CHANGE OF CONTROL The EU Takeover Bids Directive, as partially implemented in the Danish Financial Statements Act, requires listed companies to disclose information about significant agreements that may be affected in case of a completed takeover bid, in particular in relation to disclosure of change-of-control provisions. Lundbeck discloses that the Group has a major partnership agreement in place under which an acquiring entity must divest any competing product according to an agreed process and, in the absence of such divesture, Lundbeck's partner may terminate the agreement. The Lundbeck Group may be met with demands for repayment on its debt portfolio should Lundbeckfond Invest A/S hold less than 50% of the share capital or voting rights in H. Lundbeck A/S (change of control). In the event Lundbeck is acquired or merges, certain Executive Management members may, depending on the impact on their position, be entitled to terminate employment with Lundbeck with a three (3) months' notice and receive a compensation of up to eighteen (18) months' remuneration. Given the ownership structure of Lundbeck the risks are considered remote. For information about the ownership structure of Lundbeck, see page 47-48. 37/111#38LUNDBECK ANNUAL REPORT 2021 = CONTENTS 38/111 SUSTAINABILITY AND COMPLIANCE In this section we present a short summary of aspirations, management, due diligence and targets. We publish an annual Sustainability Report at the same time as the release of the Annual Report. Here you can find detailed information and an Environmental, Social and Governance (ESG) factbook. Our mandatory annual statutory reporting on sustainability and diversity of management in accordance with section 99a, 99b, 99d and 107d in the Danish Financial Statements Act, and the EU Sustainable Finance Taxonomy is in our Sustainability Report*. Lundbeck's sustainability activities aim to mitigate risks and adverse impacts related to our business activities and contribute to solving societal challenges where we can. We remain committed to the UN Global Compact Principles and contribute to addressing seven of the Sustainable Development Goals. OUR MOST MATERIAL SUSTAINABILITY ISSUES Sustainability is an imperative to Lundbeck and an integral part of our strategy and culture. Our most material sustainability issues are reflected in the SDGs that we significantly impact. Our biggest contribution to sustainable development, is our medical treatments and the good health and wellbeing they bring to people. Closely related to this is being compliant in all aspects of patient safety and taking a strict stance on anti- corruption in our collaborations with business partners, healthcare professionals and regulators. Our other material issues include taking a leading role in climate action, environmental management in general, and promoting an ethical, safe, motivating and inclusive culture in our entire value chain. MANAGING SUSTAINABILITY Executive Management governs the sustainability strategy and reviews progress on targets and approves new initiatives in quarterly sessions. We continuously set ambitious targets, report progress on the targets and disclose a set of externally reviewed non-financial indicators across all areas of corporate sustainability and business ethics compliance. SUSTAINABILITY REVIEW OF 2021 Our activities related to the Access to Brain Health strategy gained momentum in 2021. We successfully completed the first year of our product donation partnership with International Health Partners (IHP), shipping medicine for treatment of more than 900 patients at NGO clinics in Lebanon, Gaza and the West Bank. In December, we signed a Letter of Intent with IHP covering the next three year outlining our shared aim to increase access to brain health to vulnerable people in the Middle east and Africa region. One of the 2021 target for business ethics was that all employees at work globally should complete the Annual Code of Conduct training. This was achieved with a 99.7% completion rate. We announced last year that we will have net zero emissions no later than 2050 and that we have set a new Science-Based target to reduce carbon emissions drastically over the next 15 years. We will reduce carbon emissions from production and company car fleet (scope 1 and 2) by almost two-thirds, and work with our suppliers to reduce our carbon footprint outside our premises (scope 3) by nearly a fifth. We can report significant progress on reducing scope 1 and 2 and have achieved a 16% reduction against the baseline year 2019. This is mainly due to fewer emission from company cars, as sales employees have been less on the road due to the COVID-19 pandemic. https://www.lundbeck.com/content/dam/lundbeck-com/masters/global- site/pdf/Sustainability_Report_2021.pdf#39LUNDBECK ANNUAL REPORT 2021 = CONTENTS https://www.lundbeck.com/content/dam/lundbeck-com/masters/global- site/pdf/Sustainability_Report_2021.pdf 39/111 With regards to scope 3 emissions, we estimate an increase in emissions by 28% compared to the baseline year of 2019. We currently calculate the majority of our scope 3 emissions based on fixed emission factors and spend data. As we have increased our clinical trial and other service purchasing as part of our business strategy, the calculated emissions have also increased. In 2021, a detailed action plan for scope 3 has been developed, including plans to progress actual emission data collection setting reduction targets with main suppliers. With this plan, we are confident that we will reach our 15-year reduction target. In 2021, we achieved a recycling rate of solvents used in our production of 65%. This means we exceeded the target of 60% for the year. We also exceeded our annual target of 62% for recycling of general waste, achieving 74%. Diversity & Inclusion is very important to Lundbeck and the level of women in management remains high in 2021 with a gender split for people managers globally of 42% women and 58% men. From 2022, we set ourselves a tougher target to improve the share of women in senior management and we will start reporting on this KPI going forward. All in all, 8 out of 10 the sustainability targets for 2021 are achieved or on track. More detailed information about our sustainability policies, efforts and results is available in our Sustainability Report*. In 2021, we had a frequency of lost time accident rate of 6.5%, not reaching our target of 5%. Even though a smaller share of the accidents is serious, we are determined to bend this curve.#40LUNDBECK ANNUAL REPORT 2021 = CONTENTS 40/111 BUSINESS ETHICS AND CODE OF CONDUCT https://www.lundbeck.com/global/sustainability/responsible-business-conduct ** https://www.lundbeck.com/global/compliance-hotline We pursue our business purpose guided by our Code of Conduct that forms a fundamental part of our Sustainability Strategy. The Code of Conduct conveys Lundbeck's commitments and the expectations to its employees for areas that are critical to the pharmaceutical industry. In 2021, we consolidated the global standards that assist us in upholding the Code of Conduct into a concise Compliance Program. It outlines the needed governance and continuous activities, for instance the annual assessment of risk, training, and monitoring, as well as management's review of the program's effectiveness. It builds on the trust we have in our employees and is founded on our core belief "Responsible - we act with respect and integrity in everything we do". ETHICS BROUGHT TO LIFE BY PEOPLE Our ethics are formed at the top in the Compliance Committee with Executive Management members and key compliance functions who review and maintain Lundbeck's ethical standards. The translation into operational requirements is driven by our Global Compliance Organization consisting of Headquarter compliance functions and the 17 Regional Compliance Officers who represent our global affiliates. Collectively, they help prevent misconduct, detect compliance issues and take prompt corrective and preventive action. They support Lundbeck's Senior Management who are held accountable for ethics and compliance within their organization. Every year, we invest in the development of global awareness campaigns and specific compliance training. We involve people from the global organization in the development to keep the initiatives relevant, engaging and ensure people know how to act. Our audits and monitoring efforts aim to validate the understanding of the requirements and capture suggestions for improvements of processes and controls. Specific feedback is provided to ensure local management ownership and follow-up. Lastly, our Chief Compliance Officer provides regular briefings on current developments at meetings within the Board of Directors and more detailed within the Audit Committee. STAYING ATTUNED WITH SOCIETAL EXPECTATIONS The regulatory landscape Lundbeck operates in is constantly changing. The Compliance Programs help us stay attuned with societal expectations. As a recent example, we have defined our Data Ethics Policy in response to an update in the Danish Financial Statements Act. Our Data Ethics Policy states the principles we commit to apply beyond staying compliant with current data protection regulations. It is especially relevant in the development or application of fast-moving, innovative digital technologies. The Data Ethics Policy will help us make ethical and responsible decisions on the use of data with maximal benefit and minimal harm for individuals and society. You can read more and find our Data Ethics Policy on Lundbeck.com*. OPEN DIALOGUE AND ACCESS TO RAISING CONCERNS We encourage everyone to have ongoing dialogue on compliance and ethics with their colleagues and manager. However, we realize that some questions, dilemmas or concerns might not be discussed openly. Our Compliance Hotline** is a secure line that is open for everyone to raise concerns about a potential violation of the Code of Conduct. It is a cornerstone in our Compliance Program that helps protecting Lundbeck. All reports are investigated in line with our global procedure that safeguards individuals who report concerns, participate in investigations or are suspected of misconduct. Our investigations are guided by principles that manifest Lundbeck's beliefs, including: • • Protection of good-faith reporters against retaliation • Confidentiality • Cooperation Proportionality • Communication#41LUNDBECK ANNUAL REPORT 2021 = CONTENTS 41/111 RISK MANAGEMENT Lundbeck's risk management processes ensure close monitoring, systematic risk assessment and the ability to identify, manage and report internal and external risks in a changing environment. RISK MANAGEMENT GOVERNANCE STRUCTURE Lundbeck is exposed to risks throughout the value chain, from the initial stages of developing innovative pharmaceuticals in our in-house facilities to the proven pharmaceuticals reaching the patients. Lundbeck's risk management processes are continually updated and adapted to match internal and external requirements, where risks related to trends, global economic developments, geopolitics and long-term forecasts are assessed as part of Lundbeck's long-term strategic planning. With this understanding of the wider context and an accurate and complete overview of Lundbeck's activities and resources, Executive Management has a clear basis for decision-making on our overall risk-exposure and mitigating actions. The overall responsibility of risk management lies with the Board of Directors. Oversight of compliance within the established enterprise risk management framework is delegated to the Audit Committee. RISK MANAGEMENT FRAMEWORK In Lundbeck, enterprise risk management is considered an integral part of doing business, which is reflected in the risk management process. The process starts in the decentralized teams within each Executive Management areas, which have detailed and extensive knowledge of the risks within their areas of responsibility. They systematically identify, quantify, respond to and monitor risks. They are ideally placed to mitigate our risk exposure in the first instance. Each area shares the risks with the central Risk Office on a semi-annual basis. The central Risk Office provides the risk framework and conducts interviews with management, risk contributors and risk responsible individuals. This represents an integral part in the alignment of risks reported to the Risk Office. In cooperation with each Executive Management area, the Risk Office assesses the likelihood of an event occurring and the potential impact on the Group in terms of financial loss. The key risk overview is presented to Executive Management for their assessment and approval, before it is reported to the Audit Committee and approved by the Board of Directors. The corporate risk register kept by the Risk Office provides a consolidated overview of Lundbeck's risk exposure by detailing each risk, risk category and type. The risk descriptions provide details on the event, its current status, the status of the response and the likelihood and potential impact. Our reporting process defines six risk categories: . Research and Development • Market, Commercial, and Strategy • • Supply, Quality and Product Safety IT security Legal and Compliance • Financial Lundbeck has developed a concise process covering day-to-day risk identification, monitoring, mitigation and reporting within each Executive Management area, all the way to the final reporting to Executive Management. This process enables Executive Management to control Lundbeck's risk appetite when deciding strategy and practice, and when making day-to- day decisions.#42LUNDBECK ANNUAL REPORT 2021 = CONTENTS KEY RISKS 42/111 RISK AREA RESEARCH AND DEVELOPMENT RISKS MARKET, COMMERCIAL AND STRATEGY RISKS SUPPLY, QUALITY AND PRODUCT SAFETY RISKS DESCRIPTION Exposure to delays of regulatory approval or failure in the development of new and innovative medicines. Exposure to delays is higher due to COVID-19. Increased regulatory requirements for clinical trials. Data requirements from production of non-clinical and clinical studies. Price pressure, new legislation, regulation of reimbursement and healthcare reforms in key markets, etc. Market dynamic change resulting from COVID-19. Disruption of production or supply or unpredictable demand and stock-out. Loss of licenses to manufacture or sell pharmaceuticals. Defects in product quality or safety. IT SECURITY RISKS Cyber-attacks and cyber fraud. LEGAL AND COMPLIANCE RISKS FINANCIAL RISKS System down-time. Intellectual property rights. Non-compliance with laws, industry standards, regulations and our Code of Conduct. Exposure to legal claims or investigations. Fluctuations in exchange rates incl. impact from currency devaluations. POTENTIAL CONSEQUENCES Delays or failure of new products could impact patients who cannot benefit from these products and decrease earnings for the company and its shareholders. Delay in regulatory approval may impact the patient's drug access. Issues with data integrity can lead to delays in studies and production - ultimately leading to withdrawals and failure to gain approval. Market restrictions could impact patients' access to Lundbeck products. Changes in market conditions and health care reforms could affect the pricing landscape as well as rebates and discounts. These changes could impact Lundbeck's results. Product shortage, not giving patients needed access to the pharmaceuticals they require. Disruption or compromise of IT security could affect all parts of Lundbeck's operations and product supply to patients. Data loss. Infringement of intellectual property rights could decrease earnings for shareholders. Loss, expiration or invalidation of intellectual property rights could decrease earnings for shareholders. Non-compliance with laws, industry standards, regulations, or our Code of Conduct could affect our 'license to operate' and impact our reputation and earnings for shareholders. Lundbeck's cash flow and earnings could be impacted in cases of fluctuations in key currencies. MITIGATING ACTIONS Clinical trials are run and evaluated throughout the research and development phase. Ongoing evaluation of the product pipeline, regulatory requirements and product benefit. Robust quality management system is in place to ensure consistent quality, data integrity and the compliance of clinical trials and clinical safety activities. Understanding the price development in main markets. Working with healthcare authorities around the world to document the value of our pharmaceuticals. Monitor political developments and requirements. Systems, policies and procedures are in place to ensure product supply, quality and safety. Dual sourcing strategy and high level of safety stock of key products. Robust pharmacovigilance system. IT policies and procedures are in place to safeguard processes and data. Cyber-attack testing is being performed on a regular basis. Annual testing of IT disaster recovery plan. Policies are in place to safeguard intellectual property rights. The Code of Conduct Compliance Program and global organization are pivotal in sustaining our compliance culture. Ongoing monitoring is conducted, and annual training is provided to all employees. Third parties are committed to observe our legal and ethical standards in mutually binding agreements and are subject to monitoring. Global Compliance Hotline and investigation procedure. Treasury policy. Monitoring the financial exposure and hedging a significant part of Lundbeck's currency risk up to 18 months in advance.#43LUNDBECK ANNUAL REPORT 2021 = CONTENTS Board of Directors* 43/111 LARS SØREN RASMUSSEN Chairman • Born 1959 • Elected 2013 ■ Considered independent Lundbeck committees • Audit Committee (M) ■ Remuneration & Nomination Committee (C) Directorships Coloplast A/S (C) ⚫ Danish Industry (DI) Committee on Diversity (C) Danish Committee of Corporate Governance (C) • Life Science Council under the Danish Ministry of Industry, Business and Financial Affairs (C) Holding of shares 20,000 LENE SKOLE-SØRENSEN Deputy Chairman • Born 1959 • CEO, Lundbeck Foundation • Elected 2015 • Considered dependent Lundbeck committees • Remuneration & Nomination Committee (M) ⚫ Scientific Committee (M) Directorships •ALK-Abelló A/S (DC) •Falck A/S (DC) Ørsted A/S (DC) • Tryg A/S (M) • Tryg Forsikring A/S (M) Holding of shares 8,808 LARS ERIK HOLMQVIST • Born 1959 • Elected 2015 • Considered dependent Lundbeck committees • Audit Committee (M) Directorships • Biovica International AB (C) Lundbeck Foundation (M) •ALK-Abelló A/S (M) - Vitrolife AB (M) • Naka UK topco Ltd. (M) Holding of shares 15,000 JEREMY MAX LEVIN • Bom 1953 • CEO, Ovid Therapeutics • Elected 2017 • Considered independent • Lundbeck committees ⚫ Scientific Committee (C) Directorships • Ovid Therapeutics (C) • Opthea (C) • BIO (the Biotechnology Innovation • Organization) (M) Holding of shares None JEFFREY BERKOWITZ • Born 1966 • CEO, Real Endpoints • Elected 2018 . Considered independent Lundbeck committees • Remuneration & Nomination Committee (M) Scientific Committee (M) Directorships ⚫ PharmaTwoB (C) ⚫ Click Therapeutics (M) • Esperion Therapeutics, Inc. (M) ⚫ Zealand Pharma A/S (M) Uniphar PLC (M) Holding of shares None Per 31.12 2021 C=Chairman, DC Deputy Chairman, M = Member "For more information about the Board of Directors and their competencies, please visit https://www.lundbeck.com/global/about-us/our-leadership/board-of-directors#44LUNDBECK ANNUAL REPORT 2021 = CONTENTS Board of Directors* ILSE DOROTHEA WENZEL SANTIAGO ARROYO HENRIK SINDAL JENSEN 44/111 RIKKE KRUSE ANDREASEN LUDOVIC TRANHOLM OTTERBEIN ⚫ Born 1969 • Elected 2021 Considered independent Lundbeck committees ■ Audit Committee (C) Directorships Supervisory Board of Fresenius Medical Care AG & Co. KGaA (M) Holding of shares None • Born 1960 • Elected 2021 . Considered independent Lundbeck committees ■ Scientific Committee (M) Directorships ⚫ Marinus Pharmaceuticals (M) Holding of shares None • Born 1969 • Director, Corporate Business Development & Licensing • Elected by employees in 2018 Holding of shares None • Born 1971 • Senior Laboratory Technician • Elected by employees in 2018 Holding of shares 5 Born 1973 ⚫ Director, Research Informatics & Operations • Elected by employees in 2018 Directorships ⚫ Lundbeck Foundation (M) Holding of shares 300 Per 31 12 2021 C = Chairman, DC = Deputy Chairman, M = Member *For more information about the Board of Directors and their competencies, please visit https://www.lundbeck.com/global/about-us/our-leadership/board-of-directors#45LUNDBECK ANNUAL REPORT 2021 = CONTENTS Executive Management* DEBORAH DUNSIRE President and CEO - Born 1962 * Joined Lundbeck in 2018 Directorships * Syros Pharmaceuticals (M) • Ultragenyx Pharmaceutical Inc. (M) Holding of shares 7,739 LARS BANG Executive Vice President, Product Development & Supply • Born 1962 • Joined Lundbeck in 1988 Directorships .O.B. Holding Aps (M) Holding of shares 49,177 ANDERS GÖTZSCHE Executive Vice President, CFO Born 1967 Joined Lundbeck in 2007 Directorships ■ Obsidian Therapeutics (M) ⚫ DFDS (M) Rosborg Møbler A/S (C) Holding of shares 49,404 ELISE HAUGE *** Executive Vice President, People & Communication • Born 1967 • Joined Lundbeck in 2019 Directorships CBS Executive Fonden (M) Holding of shares 1,225 Per 31.12 2021 C=Chairman, DC Deputy Chairman, M = Member * For more information about Executive Management and their competencies, please visit https://www.lundbeck.com/global/about-us/our-leadership/executive-management Anders Götzsche steps down as CFO by the end of March 2022 *** Elise Hauge (Executive Vice President, People & Communication) and Keld Flintholm Jørgensen (Executive Vice President, Corporate Strategy & Business Development) participate in the Executive Management in their respective roles but are not members of the Executive Management as registered with the Danish Business Authority 45/111#46LUNDBECK ANNUAL REPORT 2021 = CONTENTS Executive Management* KELD FLINTHOLM JØRGENSEN ** Executive Vice President, Corporate Strategy & Business Development • Born 1971 • Joined Lundbeck in 2019 Directorships None Holding of shares None PER JOHAN LUTHMAN Executive Vice President, Research & Development • Born 1959 * Joined Lundbeck in 2019 Directorships None Holding of shares 4,439 JACOB TOLSTRUP Executive Vice President, Commercial Operations Born 1972 Joined Lundbeck in 1999 Directorships Pharmacosmos A/S (C) Holding of shares 287 Per 31.12 2021 C = Chairman, DC Deputy Chairman, M = Member * For more information about Executive Management and their competencies, please visit https://www.lundbeck.com/global/about-us/our-leadership/executive-management ** Elise Hauge (Executive Vice President, People & Communication) and Keld Flintholm Jørgensen (Executive Vice President, Corporate Strategy & Business Development) participate in the Executive Management in their respective roles but are not members of the Executive Management as registered with the Danish Business Authority 46/111#47LUNDBECK ANNUAL REPORT 2021 = CONTENTS 47/111 ** THE LUNDBECK SHARE 2021 was an eventful year for Lundbeck with solid financial results and continued progression against our Expand and Invest to Grow strategy. The Lundbeck share price began the year at DKK 208.80 (closing price end 2020), reached a year high of DKK 258.10 (16 February), recorded a year low of DKK 152.45 (14 December) and ended the year at DKK 168.85. This is a decrease of 19% for the year. In comparison, the Danish OMXC25 index increased by 17%, while the MSCI European Pharmaceutical Index increased by 20%. https://www.lundbeck.com/global/investors/the-share/analyst-coverage https://www.lundbeck.com/global/investors/reports-and-presentations TURNOVER Total trading in Lundbeck shares amounted to DKK 22.9 billion in 2021, while the average daily turnover was DKK 91.1 million, a decrease of 17% compared to 2020. A total of 117 million shares were traded in 2021, equivalent to 464,493 shares per day, a decrease of 7% compared to 2020. Lundbeck has an American Depository Receipt (ADR) Level 1 program. The ADR volume decreased slightly during 2021. At the end of 2021,208,407 ADRs were outstanding, representing 0.1% of the total shares or 0.3% of the free float. SHARE CAPITAL Lundbeck shares are listed on the Copenhagen Stock Exchange, Nasdaq Copenhagen. All shares belong to the same class and rank equally. The shares are negotiable and there are no restrictions on their transferability. Each share has a nominal value of DKK 5 and carries one vote. At the end of 2021, Lundbeck's total share capital amounted to DKK 996 million, which is equivalent to 199.2 million shares. COMPOSITION OF SHAREHOLDERS According to the Lundbeck share register, the company had approximately 66,000 shareholders at the end of 2021, representing approximately 99% of the outstanding shares. The Lundbeck Foundation (Lundbeckfond Invest A/S) is the company's largest shareholder, holding 137,351,918 shares at the end of 2021, which equals 69% of the share capital and voting rights. The Lundbeck Foundation is the only shareholder to report a holding in excess of 5% of the share capital. At the end of 2021, investors in North America held 28% of the free float compared to 32% in 2020; European (excl. Danish) investors held 27% compared to 31% in 2020; Danish investors held 17% compared to 14% in 2020; rest of the world held 2%, compared to 4% in 2020, and other investors, incl. private, held 27% compared to 19% in 2020. In order to fund our long-term share-based incentive programs, Lundbeck acquired treasury shares in 2021 at a value of DKK 34 million (DKK 29 million in 2020), corresponding to 144,000 shares (114,000 shares in 2020). At the end of 2021, Lundbeck's Board of Directors and Executive Management held a total of 156,384 Lundbeck shares compared to 137,883 Lundbeck shares by the end of 2020. The total number of shares in 2021 corresponds to 0.08% of the total shares outstanding. LUNDBECK AND THE EQUITY MARKET Through the Investor Relations (IR) function, Lundbeck aspires to provide a fair and accurate view of its activities by providing ongoing communications with prospective and existing shareholders and equity analysts. Through regular meetings and dialogue, we convey relevant information about our vision and goals, business areas and financial development. In 2021, IR activity was materially impacted by the global pandemic with lockdowns and travel restrictions. Lundbeck's Investor Relations team held more than 250 meetings, most of them based on digital platforms such as Teams and Zoom. Lundbeck has also participated/presented at 12 investor conferences, again most of which were virtual. Lundbeck is currently covered by 18 sell-side analysts, incl. the major global investment banks that regularly produce research reports on Lundbeck. A list of analysts covering Lundbeck is available on www.lundbeck.com*. After the announcement of our interim and full-year reports, members of Lundbeck's Executive Management and Investor Relations team always conduct roadshows to inform investors and analysts about the company's latest developments. Our investor presentations are available for download on www.lundbeck.com**.#48LUNDBECK ANNUAL REPORT 2021 = CONTENTS Financial calendar 2022 STOCK PERFORMANCE 2021 STOCK PERFORMANCE 2017-2021 48/111 23 March 2022 Annual General Meeting 2022 150 26 March 2022 Dividends for 2021 at the disposal 125 of shareholders 175 50 200 11 May 2022 Financial statements for the first three months of 2022 100 100 75 15 50 17 August 2022 Financial statements for the first six months of 2022 50 0 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 2017 2018 2019 2020 2021 Financial statements for the first 9 November 2022 ⚫ Lundbeck OMXC25 Index ⚫ MSCI European Pharmaceutical Index ⚫ Lundbeck OMXC25 Index nine months of 2022 • MSCI European Pharmaceutical Index COMPOSITION OF OWNERSHIP, END 2021 9.5% 0.5% 4% 8% 9% 69% COMPOSITION OF FREE FLOAT, END 2021 26% 28% 2% 17% O The Lundbeck Foundation North America ● Denmark, excl. The Lundbeck Foundation Rest of the world North America Europe, excl. Denmark Denmark Europe, excl. Denmark. Others, incl. private 27% Rest of the world. Others, incl. private#49LUNDBECK ANNUAL REPORT 2021 = CONTENTS SHARE RATIOS 49/111 2021 2020 2019 2018 2017 Earnings per share, basic (EPS) (DKK) 6.63 7.96 11.64 17.88 28.14 Earnings per share, diluted (DEPS) (DKK) 6.63 7.96 11.64 17.87 28.10 Cash flow from operating activities per share, diluted (DKK) 11.44 19.31 13.13 30.09 20.44 Net asset value per share, diluted (DKK) 92.01 85.42 84.45 84.67 76.03 Proposed dividend per share (DKK) Dividend payout ratio (%) Dividend yield (%) Share price, year-end (DKK) Share price, high (DKK) Share price, low (DKK) Price/Earnings, diluted (DKK) 2.00 2.50 4.10 12.00 8.00 30 31 35 67 29 1.2 1.2 1.6 4.2 2.5 168.85 208.80 254.4 285.4 315.0 258.10 302.4 306.9 475.9 411.8 152.45 178.15 217.2 257.0 315.0 25.47 26.25 21.86 15.97 11.21 Price/Cash flow, diluted (DKK) 14.76 10.82 19.38 9.48 15.41 Price/Net asset value, diluted (DKK) 1.84 2.44 3.01 3.37 4.14 Market capitalization, year-end (DKKm) 33,626 41,582 50,660 56,825 62,700 Annual trading, million shares 117 108.9 84.4 99.2 107.7 Average trading per trading day, thousands of shares 464.5 435.7 340.4 400.1 429.2#50LUNDBECK ANNUAL REPORT 2021 = CONTENTS SHARE FACTS Number of shares, year-end Share capital, year-end (DKK) Nominal value per share (DKK) Holding of treasury shares Free float (%) 199,148,222 995,741,110 5 502,115 31 IPO Stock exchange ISIN code Ticker ADR-program ADR trading code 18 June 1999 Nasdaq Copenhagen DK0010287234 LUN.CO (Reuters), LUN DC (Bloomberg) Sponsored level 1 program HLUYY 50/111#51LUNDBECK ANNUAL REPORT 2021 = CONTENTS 51/111 CONSOLIDATED FINANCIAL STATEMENTS CONTENTS Statement of profit or loss 52 Statement of comprehensive income Statement of financial position Statement of changes in equity Statement of cash flows NN345 52 53 NOTES 1 Basis of preparation 2 Revenue and segment information 3 Employee costs 4 Financial income and expenses 5 Income taxes 6 Intangible assets 7 Property, plant and equipment 8 Right-of-use assets and lease liabilities 9 Inventories 10 Trade receivables 56 57 58 60 60 64 67 68 68 68 54 11 Cash resources 69 55 12 Equity 70 13 Retirement benefit obligations and similar obligations 72 14 Incentive programs 15 Provisions 16 Contingent assets and contingent liabilities 17 Bank debt, bond debt and borrowings 18 Other payables 19 Financial instruments 20 Audit fees 21 Contractual obligations 22 Related parties 23 List of subsidiaries 24 Subsequent events 25 Significant accounting policies 74 76 80 89 89 00 % % 52222NO%22% 87 86 85 84 84 83 76 78 79 79#52LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS STATEMENT OF PROFIT OR LOSS 1 January 31 December Revenue Cost of sales Gross profit Sales and distribution costs Administrative expenses Research and development costs Other operating expenses, net Profit from operations (EBIT) Financial income Financial expenses Profit before tax Tax on profit for the year Profit for the year Earnings per share, basic (EPS) (DKK) Earnings per share, diluted (DEPS) (DKK) STATEMENT OF COMPREHENSIVE INCOME 1 January 31 December 52/111 2021 2020 Notes DKKm DKKm Notes 2021 DKKm 2020 DKKm 2 16,299 17,672 Profit for the year 1,318 1,581 3 3,648 4,166 12,651 13,506 Actuarial gains/losses 13 (1) (1) Tax 12 1 333 5,885 5,946 Items that will not be reclassified subsequently to profit or loss (1) 933 966 3,823 4,545 59 2,010 1,990 Exchange rate gains/losses on investments in foreign subsidiaries Exchange rate gains/losses on additions to net investments in foreign subsidiaries 960 (1,007) (157) (21) Hedging of net investments in foreign subsidiaries 19 (127) 356 4 14 277 Deferred exchange gains/losses, hedging 19 (340) 313 4 443 361 Deferred fair value of interest rate swaps 19 63 (90) 1,581 1,906 Exchange gains/losses, hedging (transferred to revenue) 19 (53) (5) Tax 12 137 (124) 5 263 325 Items that may be reclassified subsequently to profit or loss 483 (578) 1,318 1,581 12 12 22 6.63 Other comprehensive income 482 (578) 7.96 6.63 7.96 Total comprehensive income 1,800 1,003#53LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS STATEMENT OF FINANCIAL POSITION - ASSETS At 31 December STATEMENT OF FINANCIAL POSITION - EQUITY AND LIABILITIES At 31 December 53/111 Notes 2021 DKKm 2020 DKKm 2021 2020 Notes DKKm DKKm Goodwill Product rights Other rights Projects in progress Intangible assets 6 5,377 4,845 Share capital 12 996 996 666 17,097 17,632 Foreign currency translation reserve 874 134 143 90 Hedging reserve 19 (162) 95 133 171 Retained earnings 16,571 15,748 22,750 22,738 Equity 18,279 16,973 Land and buildings 7 1,179 1,219 Retirement benefit obligations 13 Plant and machinery 7 467 444 Deferred tax liabilities Other fixtures and fittings, tools and equipment 7 165 122 Provisions 15 Prepayments and assets under construction 7 612 492 Bank debt and bond debt 17 Right-of-use assets 8 484 456 Lease liabilities Property, plant and equipment 2,907 2,733 Other payables 18 35578 00 288 288 1,448 1,614 92 139 4,783 5,397 453 416 492 1,190 Non-current liabilities 7,556 9,044 Other financial assets 57 116 Retirement benefit obligations Other receivables 134 104 Provisions Deferred tax assets 5 193 233 Bank debt 357 13 1 2 15 1,405 1,672 17 2,000 Financial and other assets 384 453 Trade payables 3,914 3,740 Lease liabilities 8 86 77 Non-current assets 26,041 25,924 Income taxes payable 519 675 Inventories 9 2,775 2,163 Other payables 18 2,893 1,846 Current liabilities 8,818 10,012 Trade receivables 10 2,459 2,553 Income taxes receivable 183 217 Liabilities 16,374 19,056 Other receivables 289 868 Prepayments 627 380 Equity and liabilities 34,653 36,029 Receivables 3,558 4,018 Cash and bank balances 11 2,279 3,924 Current assets 8,612 10,105 Assets 34,653 36,029#54LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS STATEMENT OF CHANGES IN EQUITY At 31 December 2021 Equity at 1 January Profit for the year Other comprehensive income Comprehensive income Distributed dividends, gross Dividends received, treasury shares Buyback of treasury shares Incentive programs Tax on other transactions in equity Other transactions Equity at 31 December 2020 Equity at 1 January Profit for the year Other comprehensive income Comprehensive income Distributed dividends, gross Dividends received, treasury shares Capital increase through exercise of warrants Buyback of treasury shares Incentive programs Tax on other transactions in equity Other transactions Equity at 31 December 54/111 Notes Share capital DKKm Foreign currency translation reserve DKKm Hedging reserve DKKm Retained earnings DKKm Total equity DKKm 12 12 215 12 14 12 996 134 95 15,748 16,973 1,318 1,318 740 (257) (1) 482 740 (257) 1,317 1,800 (498) (498) 1 1 (34) (34) 37 37 215 14 (494) (494) 996 874 (162) 16,571 18,279 996 882 (75) 14,979 16,782 1,581 1,581 (748) 170 (578) (748) 170 1,581 1,003 (816) (816) 1 1 1 1 (29) (29) 30 30 1 1 (812) (812) 996 134 95 15,748 16,973#55LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS STATEMENT OF CASH FLOWS At 31 December 55/111 Notes 2021 DKKm 2020 2021 2020 Profit from operations (EBIT) Adjustment for non-cash items: Amortization, depreciation and impairment losses Incentive programs 2,010 DKKm 1,990 Notes DKKm DKKM Proceeds from loans and issue of bonds 17 400 3,701 Repayment of bank loans and borrowings 17 (3,123) (5,169) 1,710 37 2,793 Repayment of lease liabilities 8 (82) (83) 30 Buyback of treasury shares 12 (34) (29) Change in provisions (447) (307) Capital increase through exercise of warrants 1 Other adjustments (152) (39) Dividends paid in the financial year, net (497) (815) Change in working capital: Cash flows from financing activities (3,336) (2,394) Change in inventories (572) (265) Net cash flows for the year (1,674) 976 Change in receivables 540 (428) Change in short-term debt (273) 675 Cash and bank balances at 1 January 3,924 3,008 Cash flows from operations before financial receipts and payments 2,853 4,449 Financial receipts 68 11 Unrealized exchange gains/losses on cash and bank balances Net cash flows for the year 29 (60) (1,674) 976 Financial payments (200) (298) Cash and bank balances at 31 December 2,279 3,924 Cash flows from ordinary activities 2,721 4,162 Interest-bearing debt, cash and bank balances, net, is composed as follows: Income taxes paid (449) (325) Cash and bank balances 11 2,279 3,924 Cash flows from operating activities Purchase of intangible assets Purchase of property, plant and equipment Sale of property, plant and equipment Purchase of other financial assets Sale of other financial assets 2,272 3,837 Interest bearing debt (5,468) (8,030) 19 (202) (114) (410) (364) Interest-bearing debt, cash and bank balances, net, at 31 December - net cash/(net debt) (3,189) (4,106) 2 1 (17) 27 Cash flows from investing activities (610) (467) Cash flows from operating and investing activities (free cash flow) 1,662 3,370#56LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 56/111 1 BASIS OF PREPARATION 1.1 Reporting entity H. Lundbeck A/S (herein denominated the "Parent company" or "Company") is domiciled in Denmark. The Company's registered office is at Ottiliavej 9, 2500 Valby. These consolidated financial statements comprise the Parent company and its subsidiaries (together referred to as the "Group" or "Lundbeck"). The Group is engaged in research, development, production and sale of pharmaceuticals for the treatment of psychiatric and neurological disorders. See note 2 Revenue and segment information. 1.2 Basis of accounting The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and further requirements in the Danish Financial Statements Act. The consolidated financial statements were approved by the Board of Directors and authorized for issue on 9 February 2022. The statement of financial position is also referred to as "balance sheet". Details of the Group's accounting policies are included in note 25 Significant accounting policies and in note 1.7 New standards and amendments issued but not yet effective. 1.3 Functional and presentation currency Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ("the functional currency"). The consolidated financial statements are presented in Danish kroner (DKK), which is also the functional currency of the Parent company. All amounts have been rounded to the nearest DKK million, unless otherwise indicated. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions of estimates are recognized prospectively. Management believes that the following accounting estimates, assumptions and judgments are significant to the consolidated financial statements. Principal accounting policies Provision for discounts and rebates Income taxes and deferred income taxes Impairment of product rights Key accounting estimates, assumptions and judgments Notes Estimate of discounts and rebates in the U.S. Judgment and estimate of deferred tax assets and liabilities and provision for uncertain tax positions Estimate of the value-in-use methodology for impairment of product rights 2,15 5 6 Estimate of ongoing legal disputes, litigations and investigations 15,16 contingent Assumptions and estimates used in the calculation of the fair value related to contingent consideration from the businesses acquired in 2019 18 Provisions for legal disputes, contingent assets and liabilities Other payables consideration 1.6 Changes in significant accounting policies New and amended standards adopted by the group Effective 1 January 2021, a number of amendments to the accounting standards were implemented. None of the amendments have a material impact on the accounting policies and/or on the consolidated financial statements, consequently, no changes to the accounting policies or retrospective adjustments have been made as a result of adopting these standards and/or amendments. 1.4 Principal accounting policies The consolidated financial statements have been prepared to give a true and fair view of the Group's financial position at 31 December 2021 and financial performance for the year. The significant accounting policies are described in note 25 Significant accounting policies. Management believes that the accounting policies listed in note 1.5 Use of judgments and estimates are principal to the financial statements. 1.5 Use of judgments and estimates In preparing the consolidated financial statements, Management has made estimates and judgments that affect the application of the Group's accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.#57LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTES 1-2 57/111 1 BASIS OF PREPARATION - CONTINUED 1.7 New standards and amendments issued but not yet effective A number of new standards and amendments are effective for annual periods beginning after 1 January 2021 though not mandatory for annual reporting periods ending on 31 December 2021. Earlier application is permitted; however, the new or amended standards have not been early adopted by the Group. The amended standards are as follows: • A number of narrow-scope amendments to IFRS 3 Business Combinations, IAS 16 Property, Plant and Equipment, IAS 37 Provisions, Contingent Liabilities and Contingent Assets and some annual improvements on IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 9 Financial Instruments and IFRS 16 Leases • Classification of liabilities as current or non-current (Amendments to IAS 1 Presentation of Financial Statements) • Disclosure of Accounting Policies (Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2) • Definition of Accounting Estimate (Amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors) • Amendment to IAS 12 Income taxes - deferred tax related to assets and liabilities arising from a single transaction. The Group expects to adopt the new standards, improvements, amendments and interpretations when they become mandatory. None of the amended standards are expected to have significant impact on the accounting policies and/or on the consolidated financial statements. 1.8 European Single Electronic Format (ESEF) The Annual Report is prepared in XHTML format, and the consolidated financial statements are tagged using inline extensible Business Reporting Language (iXBRL). The iXBRL tags comply with the ESEF taxonomy, which is included in the ESEF Regulation and developed based on the IFRS taxonomy published by the IFRS Foundation. Where a financial statement line item is not defined in the ESEF taxonomy, an extension to the taxonomy has been created. Extensions are anchored to elements in the ESEF taxonomy, except for extensions which are subtotals. The Annual Report submitted to the Danish Financial Supervisory Authority consists of the XHTML document together with certain technical files, all included in a ZIP file named HLUNDBECK-2021-12-31-en.zip. 2 REVENUE AND SEGMENT INFORMATION The Group is engaged in research, development, production and sale of pharmaceuticals for the treatment of psychiatric and neurological disorders, which is the Group's single business (operating) segment. The business segment reflects the way in which Management makes decisions and assesses the business performance. The Group is organized in geographical regions. The tables below show the Group's revenue from external customers broken down by key products and geographical regions. 2021 Abilify MaintenaⓇ BrintellixⓇ/Trintellix® Cipralex /LexaproⓇ NortheraⓇ Onfi® RexultiⓇ/RxultiⓇ SabrilⓇ VyeptiⓇ Other pharmaceuticals Revenue by product Other revenue Effects from hedging Total revenue Of this amount: Royalty Down payments and milestone received Europe North America International DKKm DKKm Markets DKKM Group DKKm 1,175 1,019 226 2,420 998 1,789 739 3,526 530 117 1,699 2,346 665 665 505 505 25 2,725 99 2,849 657 657 489 492 771 279 1,389 2,439 3,499 8,245 4,155 15,899 347 53 16,299 775 13#58LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTES 2-3 2 REVENUE AND SEGMENT INFORMATION - CONTINUED 2020 Abilify MaintenaⓇ BrintellixⓇ/TrintellixⓇ CipralexⓇ/LexaproⓇ NortheraⓇ OnfiⓇ RexultiⓇ/RxultiⓇ SabrilⓇ VyeptiⓇ Other pharmaceuticals Revenue by product Other revenue Effects from hedging Total revenue Of this amount: Royalty Down payments and milestone received 3 EMPLOYEE COSTS 58/111 Europe DKKm North America International 2021 2020 Markets Group Breakdown of employee costs DKKm DKKm DKKm DKKm DKKm 1,081 980 210 2,271 Short-term employee benefits 3,996 4,249 Retirement benefits 256 244 837 1,682 583 3,102 523 Social security costs 332 353 127 1,730 2,380 2,553 2,553 Equity- and cash-settled incentive programs 41 34 642 642 18 2,537 65 777 2,620 777 Severance and other costs from restructuring activities Total 100 15 4,725 4,895 93 870 3,329 399 1,469 9,790 4,057 93 2,738 17,176 For details on payments related to share-based incentive programs, see note 14 Incentive programs. For details on provisions for severance and other costs from restructuring activities, see note 15 Provisions. Employee costs for the year are included in the following functions in the statement of profit or loss: 2021 2020 491 Employee costs DKKm DKKm 5 Cost of sales 720 703 17,672 Sales and distribution costs 2,477 2,550 Administrative expenses 588 628 752 32 Research and development costs Total 940 1,014 4,725 4,895 Information on employees 2021 2020 Average number of full-time employees in the financial year 5,488 5,717 Number of full-time employees at 31 December In Denmark In 2021, Denmark generated local revenue from external customers in the country of domicile in the amount of DKK 30 million (DKK 29 million in 2020). The U.S generated local revenue of DKK 7,456 million (DKK 8,804). The U.S. and Denmark are the only countries where sales contribute 10% or more of total revenue. In 2021, no single customer contributes 10% or more of total revenue. In 2020, one customer in the U.S. contributed to approximately DKK 1.8 billion of total revenue. In other countries Total Intangible assets and property, plant and equipment by geographic region Denmark 2021 DKKm 2020 DKKm 11,070 11,452 USA 12,778 12,487 Other countries 1,809 1,532 Total 25,657 25,471 1,751 1,728 3,597 3,900 5,348 5,628#59LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 3 EMPLOYEE COSTS - CONTINUED Remuneration of the registered Executive Management Equity- and 59/111 year to year. The CEO has a target of up to 100% and a maximum of up to 117% of the fixed annual base salary. The other registered Executive Management members have a target of up to 33.33% and a maximum of up to 50% of the fixed annual base salary. All registered Executive Management members may receive payment below target and potentially no payment in case of performance below target. cash- Total settled Salary DKKm Cash bonus Pension DKKm DKKm Other incentive benefits programs DKKm DKKm Total DKKm Tax indemni- fication¹ DKKm after tax indemni- Remuneration of key management personnel fication DKKm 2021 Short-term employee benefits Deborah Dunsire', President and CEO Lars Bang, Executive Vice President, 9.9 8.0 0.2 4.2 22.3 34.3 56.6 Retirement benefits Other social security costs Product Development & Supply 4.1 1.3 1.1 0.2 2.3 9.0 9.0 Equity- and cash-settled incentive programs Anders Götzsche, Executive Vice President, CFO Total 2021 DKKm 2020 DKKM 104 96 10 11 1 1 12 11 127 119 5.1 1.6 1.3 0.2 0.5 8.7 8.7 Per Johan Luthman, Executive Vice President, Research & Development 4.0 1.3 1.1 0.2 1.8 8.4 8.4 Jacob Tolstrup, Executive Vice President, Commercial Operations Total Key management personnel are defined as persons who report directly to the registered Executive Management. 4.0 1.3 1.0 0.2 2.2 8.7 8.7 27.1 13.5 4.5 1.0 11.0 57.1 34.3 91.4 Remuneration of the Board of Directors 2020 Deborah Dunsire¹, President and CEO Lars Bang, Executive Vice President, 9.6 9.1 0.4 3.9 23.0 2.7 25.7 Product Development & Supply 4.0 1.8 1.1 0.2 2.2 9.3 9.3 Anders Götzsche, Executive Vice President, CFO 5.0 24 2.4 1.3 0.2 2.3 11.2 11.2 Per Johan Luthman, Executive Vice President, Research & Development 3.8 1.7 1.0 0.2 1.1 7.8 7.8 Jacob Tolstrup, Executive Vice President, Commercial Operations Total 3.9 1.7 1.0 0.2 1.9 8.7 8.7 26.3 16.7 4.4 1.2 11.4 60.0 2.7 62.7 1) According to the employment agreement with Deborah Dunsire, Lundbeck is entitled to pay the difference in taxation on investment return from personal assets between the U.S. and Denmark. Each of the registered Executive Management members participates in a short-term incentive program that provides an annual cash bonus based on the achievement of predetermined targets for the preceding financial year. The short-term incentive payment levels will be determined by the Board of Directors from The total remuneration of the Board of Directors for 2021 amounted to DKK 8.5 million (DKK 7.5 million in 2020). The amount includes fees for participation in the Audit Committee of DKK 0.7 million (DKK 0.7 million in 2020), the Remuneration Committee of DKK 0.7 million (DKK 0.7 million in 2020), the Scientific Committee of DKK 0.9 million (DKK 0.7 million in 2020) and travel allowances of DKK 1.1 million (DKK 0.8 million in 2020) for board members with permanent residence outside of Europe. The remuneration for 2021 is consistent with the remuneration approved at the Annual General Meeting held on 23 March 2021. The members of the Board of Directors held a total of 44,113 Lundbeck shares at 31 December 2021 (47,313 shares in 2020). The total remuneration of the chairman of the Board of Directors amounted to DKK 1.7 million (DKK 1.7 million in 2020). The total remuneration of the deputy chairman of the Board of Directors amounted to DKK 1.2 million (DKK 1.2 million in 2020). These amounts include fees for participation in Board committees.#60LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTES 4-5 4 FINANCIAL INCOME AND EXPENSES 5 INCOME TAXES Tax on profit for the year 60/111 2021 2020 2021 2020 DKKm DKKm DKKm DKKm Interest income from financial assets measured at amortized costs 7 6 Current tax 342 735 Gain on other financial assets, measured at fair value through profit or loss, incl. dividends Fair value adjustment of contingent consideration 7 92 Prior-year adjustments, current tax (51) 1 102 Prior-year adjustments, deferred tax 36 (41) Exchange gains 76 Change in deferred tax for the year (200) (284) Other financial income 1 Financial income 14 277 Change in deferred tax as a result of changed income tax rates Total tax for the year (1) 36 126 447 Interest expenses from financial liabilities measured at amortized costs 146 173 Tax for the year is composed of: Interest expenses relating to lease liabilities 7 8 Tax on profit for the year Loss on other financial assets, measured at fair value through profit or loss, incl. dividends Fair value adjustment of contingent consideration 65 12 Tax on other comprehensive income 133 99 Tax on other transactions in equity Exchange losses 31 Total tax for the year 263 325 (137) 123 (1) 126 447 Other financial expenses 61 69 Financial expenses Net financials, expenses 443 361 429 84 For a specification of tax on comprehensive income, see note 12 Equity. Uncertain tax positions The Group operates in a multinational tax environment. Complying with tax rules can be complex as the interpretation of legislation and case law may not always be clear or may change over time. In addition, transfer pricing disputes with tax authorities may occur. Management's judgments are applied to assess the possible effect of exposures and the possible outcome of disputes or interpretational uncertainties. Uncertain tax positions comprise of a liability of DKK 497 million and an asset of DKK 66 million (a liability of DKK 484 million and an asset DKK 78 million in 2020). Management believes that the accrual is adequate. However, the actual obligation may differ from the accrual made and depends on the outcome of litigations and settlements with the relevant tax authorities.#61LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 5 INCOME TAXES - CONTINUED Explanation of the Group's effective tax rate DKKm % 2021 Profit before tax Calculated tax, 22% 2020 1,581 Profit before tax 348 22.0 Calculated tax, 22% Tax effect of: Tax effect of: Differences in the income tax rates of foreign subsidiaries from the Danish corporate income tax rate 33 2.1 Differences in the income tax rates of foreign subsidiaries from the Danish corporate income tax rate Non-deductible expenses/non-taxable income and other permanent differences 72 4.6 Non-deductible expenses/non-taxable income and other permanent differences Research and development incentives (76) (4.8) Research and development incentives Foreign-derived intangible income benefit (32) (2.0) Foreign-derived intangible income benefit Non-deductible amortization of product rights 16 1.0 Non-deductible writedown on intangible assets Change in valuation of net tax assets Change in deferred tax as a result of changed income tax rates Prior-year tax adjustments etc., total effect on operations Effective tax/tax rate for the year (82) (5.2) Non-deductible amortization of product rights (1) (0.1) Change in valuation of net tax assets (15) (1.0) Change in deferred tax as a result of changed income tax rates 263 16.6 Prior-year tax adjustments etc., total effect on operations Effective tax/tax rate for the year 61/111 DKKm % 1,906 419 22.0 20 1.0 59 3.1 (69) (3.6) (26) (1.4) 111 5.8 101 5.3 (286) (15.0) 36 1.9 (40) (2.1) 325 17.0#62LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 5 INCOME TAXES - CONTINUED Deferred tax balances Temporary differences between assets and liabilities as stated in the consolidated financial statements and in the tax base Balance at 1 January DKKm Effect of foreign exchange differences DKKm Adjustment of deferred tax at beginning of year DKKm Additions through acquisitions DKKm 2021 Intangible assets Property, plant and equipment Inventories Provisions Other items¹ Tax loss carryforwards etc. Total temporary differences Deferred (tax assets)/tax liabilities Research and development incentives Deferred (tax assets)/tax liabilities 2020 Intangible assets Property, plant and equipment Inventories Provisions Other items¹ Tax loss carryforwards etc. Total temporary differences Deferred (tax assets)/tax liabilities Research and development incentives Deferred (tax assets)/tax liabilities 1) Movements during the year include DKK 0 million (DKK -1 million in 2020) recognized in equity. 62/111 Movements during the year DKKm Balance at 31 December DKKm 12,836 744 71 (652) 12,999 728 8 (78) 122 780 (75) (2) (54) (131) (1,411) (75) 20 (273) 133 (1,606) (545) (22) (47) 39 (59) (634) (5,828) (190) 211 (31) (5,838) 5,705 463 177 (234) (541) 5,570 1,385 88 88 36 (49) (118) 1,342 (4) (83) (87) 1,381 88 36 (49) (201) 1,255 15,708 (981) 5 (1,896) 12,836 753 (15) 6 (16) 728 597 (15) (582) (178) 103 (75) (1,645) 102 49 (164) 247 (1,411) (546) 36 (8) (27) (545) (7,191) 380 366 164 453 (5,828) 7,676 (493) (164) (178) (1,136) 5,705 1,831 (119) (41) (38) (248) 1,385 (4) (4) 1,827 (119) (41) (38) (248) 1,381#63LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 5 INCOME TAXES - CONTINUED Deferred (tax assets)/tax liabilities Intangible assets Property, plant and equipment Inventories Provisions Other items Tax loss carryforwards etc. Research and development incentives Deferred (tax assets)/tax liabilities Offset within legal tax entities and jurisdictions Total net deferred (tax assets)/tax liabilities 63/111 2021 2021 2021 2020 2020 2020 Deferred tax assets Deferred tax liabilities Deferred tax Net assets Deferred tax liabilities Net DKKm DKKm DKKm DKKm DKKm DKKm (107) 3,175 3,068 (105) 3,156 3,051 (5) 187 182 (8) 179 171 (96) 53 (43) (94) 68 (26) (384) (384) (339) (339) (202) 39 (163) (195) 53 (142) (1,318) (1,318) (1,330) (1,330) (87) (87) (2,199) 3,454 1,255 (4) (2,075) (4) 3,456 1,381 2,006 (2,006) (193) 1,448 1,255 1,842 (233) (1,842) 1,614 1,381 Management estimates future income according to budgets, forecasts, business plans and initiatives scheduled for the coming years, which supports the recognition of deferred tax assets. When forecasting the utilization of tax assets, the Group applies the same assumptions as for impairment testing. See note 6 Intangible assets. Accordingly, at 31 December 2021, all deferred tax assets relating to tax losses carried forward in Denmark from 2015, 2016, 2018 and 2021 were capitalized in the amount of DKK 884 million (DKK 777 million in 2020). U.S. tax losses and tax credits stemming from acquisitions have been recognized at an amount of DKK 521 million (DKK 553 million in 2020) equalling the expected utilization within a foreseeable future, whereas an amount of DKK 56 million (DKK 132 million in 2020) has not been recognized in the balance sheet. Unrecognized deferred tax assets Unrecognized deferred tax assets at 1 January Additions through acquisitions Prior-year adjustments Additions Recognized Unrecognized deferred tax assets at 31 December 2021 2020 DKKm DKKm 184 507 (37) 8 1 (90) (287) 102 184 Unrecognized deferred tax assets primarily relate to net operating losses and tax credits not expected to be utilized within a foreseeable future.#64LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 6 INTANGIBLE ASSETS 64/111 Total Product Intangible assets 2021 Cost at 1 January Goodwill DKKm rights¹ Other rights² Projects in intangible progress² assets DKKm DKKm DKKm DKKm Intangible assets Product Other Projects in Total intangible Goodwill rights' rights² progress² assets DKKm DKKm DKKm DKKM DKKm 2020 4,845 30,253 1,731 171 37,000 Cost at 1 January Effect of foreign exchange differences 347 1,209 9 1 1,566 Effect of foreign exchange differences Transfers 110 (121) (11) Transfers Additions 102 18 82 202 Additions 5,278 31,610 1,826 134 38,848 (409) (1,357) (12) (1) (1,779) 55 (55) 21 93 114 Additions through acquisitions, change in opening balance 185 185 Additions through acquisitions, change in opening balance (24) (24) Disposals (90) (29) (119) Disposals (159) (159) Cost at 31 December 5,377 31,474 1,839 133 38,823 Cost at 31 December 4,845 30,253 1,731 171 37,000 Amortization and impairment losses at 1 January Effect of foreign exchange differences 12,621 572 1,641 14,262 Amortization and impairment losses at 1 January 10,878 1,712 3 12,593 8 580 Effect of foreign exchange differences (597) (10) (607) Amortization 1,274 68 1,342 Transfers 3 (3) Disposals (90) (21) (111) Amortization 1,548 63 1,611 Amortization and impairment losses at 31 December 14,377 1,696 16,073 Impairment losses 792 792 Carrying amount at 31 December 5,377 17,097 143 133 22,750 Disposals (127) (127) Amortization and impairment losses at 31 December Carrying amount at 31 December 12,621 1,641 14,262 4,845 17,632 90 171 22,738 1) In 2021, product rights not yet commercialized amounted to DKK 5,992 million (DKK 5,890 million in 2020). 2) Other rights and projects in progress include items such as the IT system SAP. The amounts include directly attributable internal expenses. In 2021, Lundbeck adjusted the goodwill related to the acquisition of Alder BioPharmaceuticals (subsequently renamed to Lundbeck Seattle BioPharmaceuticals, Inc.) due to the identification of accounting errors in the purchase price allocation in prior years related to the fair value of a future milestone payment to a third party of Alder BioPharmaceuticals of DKK 273 million (see note 18 Other payables) and an unrecognized prepayment of DKK 39 million. The 2021 changes to the purchase price allocation are (a) a net increase in goodwill of DKK 185 million, (b) an increase in other payables of DKK 273 million, (c) an increase in prepayments of DKK 39 million, and (d) a net decrease in deferred tax liabilities of DKK 49 million. Due to immateriality, the accounting errors are recognized in 2021 and not as an adjustment to prior years. In 2020, Lundbeck changed the initial purchase price allocation relating to the acquisition of Alder BioPharmaceuticals (subsequently renamed to Lundbeck Seattle BioPharmaceuticals, Inc.) due to prepayments to a supplier expensed prior to the acquisition date and due to a reassessment of the inventory valuation. This resulted in a decrease in goodwill of DKK 24 million, comprising of an increase in prepayments of DKK 164 million and a decrease in inventories, net of tax, of DKK 140 million.#65LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 65/111 6 INTANGIBLE ASSETS - CONTINUED Description of material product rights Vyepti® Tthe eptinezumab product rights (VyeptiⓇ), which is an investigational monoclonal antibody (mAb) for migraine prevention targeting the calcitonin gene-related peptide (CGRP) was acquired in 2019. The value of the product rights was DKK 13,421 million at the time of acquisition. The carrying amount of DKK 12,107 million, net of amortization, at 31 December 2021 (DKK 12,076 million in 2020) was affected by developments in the USD/DKK exchange rate. RexultiⓇ RexultiⓇ is a prescription medication used as an adjunctive therapy to antidepressants for the treatment of MDD and as a treatment for adults with schizophrenia in certain markets. RexultiⓇ is co-marketed in a partnership collaboration with Otsuka Pharmaceuticals Co., Ltd. The total carrying amount of the RexultiⓇ product rights amounted to DKK 2,497 million, net of amortization, at 31 December 2021 (DKK 2,823 million in 2020). Portfolio of compounds including the product rights to ABX-1431 A portfolio of compounds, including the product rights to ABX-1431; a first-in-class, small-molecule inhibitor of monoacylglycerol lipase (MGLL) currently being investigated in clinical trials for the treatment of neurological disorders, and various compounds in the pre-clinical phase, was acquired in 2019. The value of the portfolio of compounds recognized as product rights was DKK 1,853 million at the time of acquisition. During 2020, the Parent company H. Lundbeck A/S acquired all intellectual property rights from Lundbeck La Jolla Research Center, Inc. The carrying amount at 31 December 2021 was DKK 1,871 million (DKK 1,871 million in 2020). Amortization and impairment losses Amortization and impairment losses for the year are included in the following functions in the statement of profit or loss: Amortization and impairment losses Cost of sales Sales and distribution costs Administrative expenses Research and development costs Total 2021 DKKm 2020 DKKm 1,305 1,584 8 33 5 18 32 800 2,435 1,350 In March 2020, it was announced that the phase lla study (AMBLED) of its novel selective positive allosteric modulator of the glutamate 4 receptor (mGlu4 PAM), foliglurax, for the treatment of Parkinson's disease did not meet the primary study endpoint. Consequently, Lundbeck recognized an impairment loss of DKK 792 million relating to the foliglurax product rights. The impairment loss was included in research and development costs in 2020. Impairment testing Goodwill The Group is considered a single cash-generating unit (CGU) as this is how Management makes decisions and assesses business performance. All subsidiaries are considered fully integrated into the Group as no entity has significant independent or separately identifiable inflow of cash. Most cash inflows are based on the output from research and development activities performed by headquarters on behalf of the entire Group. Accordingly, an impairment test is annually performed based on Lundbeck having one single CGU. Product rights In addition to the impairment test for goodwill (based on the CGU), the Group performs impairment tests of product rights not yet commercialized and for product rights available for use, in case an indication of impairment is identified. Methodology Goodwill In the impairment test of the CGU, based on the fair value less cost of disposal, the market price of Lundbeck is compared with its carrying amount. Product rights In the impairment tests of product rights, based on value-in-use, the discounted expected future cash flows for the specific asset tested are compared with the carrying amount of the intangible asset. The expected future cash flows are based on a forecast period, which is the period used by Management for decision making, with due consideration of patent expiry. The assumptions used in the impairment test are based on benchmarked external data and historical trends. The key parameters in the calculation of the value-in-use are revenue, earnings, working capital, discount rate and the preconditions for the cash flow period.#66LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 66/111 6 INTANGIBLE ASSETS - CONTINUED Significant assumptions and estimates are applied to the discounted expected future cash flows from the product right. The four category elements in the table below are taken into consideration when determining the key parameters for the value-in-use calculation. Financial elements Prices Rebates Quantities Patient population Market shares Competition Fill rates Prescription rates Lundbeck costs (including promotion costs) Market elements Healthcare reforms Price reforms Market access Pharma restrictions Launch success Product positioning Competing pharmaceuticals Generics on the market 2021 testing outcome The impairment tests performed in 2021 did not result in the recognition of any impairment loss. 2020 testing outcome The impairment tests performed in 2020 did not result in the recognition of any impairment loss other than the impairment loss on the foliglurax product rights recognized in March 2020. Impact of possible changes in key assumptions If the budgeted revenue had been 5% lower than Management's estimates, the head room would continue to be positive. If the discount rate after tax applied to cash flows had been 1% higher, the head room would continue to be positive. The sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. The method and types of assumptions used in preparing the sensitivity analyses did not change compared to the prior period. The potential changes in key assumptions are considered within historic variations experienced by the Group and thus considered reasonably possible. R&D elements R&D spend Collaborations Pipeline success rate Product labelling Liaison with regulatory bodies Other elements Supply chain effectiveness Strength and abilities of partners The assumptions are based on past experience, external source of information and industry-relevant observations for each product right. The calculation of the value-in-use for product right is based on a discount rate after tax of 6.2% (7.3% in 2020).#67LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 7 PROPERTY, PLANT AND EQUIPMENT 67/111 Land and buildings¹ Property, plant and equipment 2021 DKKm DKKm Plant and machinery Other fixtures and fittings, tools and equipment Prepayments and assets under construction DKKm DKKm Total property, plant and equipment DKKm Property, plant and equipment Land and buildings¹ DKKm Plant and machinery DKKm Other fixtures and fittings, tools and equipment Prepayments and assets under construction DKKm DKKm Total property, plant and equipment DKKm 2020 Cost at 1 January 3,495 2,002 833 492 6,822 Cost at 1 January 3,381 1,906 853 419 6,559 Effect of foreign exchange differences 2 11 (1) 12 Effect of foreign exchange differences (1) (6) (16) (2) (25) Transfers 61 86 53 (189) 11 Transfers 91 68 21 (180) Additions 10 41 49 310 410 Additions 29 46 34 255 364 Disposals (29) (81) (102) (212) Disposals (5) (12) (59) (76) Cost at 31 December 3,537 2,050 844 612 7,043 Cost at 31 December 3,495 2,002 833 492 6,822 Depreciation and impairment losses at 1 January 2,176 1,468 717 4,361 Depreciation and impairment losses at 1 January 2,276 1,558 711 4,545 Effect of foreign exchange differences 1 9 10 Effect of foreign exchange differences (1) (5) (7) (13) Depreciation 109 100 49 258 Depreciation 104 100 45 249 Impairment losses 3 3 Impairment losses 1 7 8 Disposals (27) (79) (90) (196) Disposals (4) (12) (44) (60) Depreciation and impairment losses at Depreciation and impairment losses at 31 December 31 December 2,358 1,583 679 4,620 2,276 1,558 711 4,545 Carrying amount at 31 December 1,179 467 165 612 2,423 Carrying amount at 31 December 1,219 444 122 492 2,277 1) No land and buildings were mortgaged at 31 December 2021 and at 31 December 2020. Depreciation and impairment losses Depreciation and impairment losses for the year are included in the following functions in the statement of profit or loss: Depreciation and impairment losses Cost of sales Sales and distribution costs Administrative expenses Research and development costs Total 2021 2020 DKKm DKKm 159 152 34 26 21 31 63 64 277 273#68LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTES 8-10 8 RIGHT-OF-USE ASSETS AND LEASE LIABILITIES 68/111 The maturity analysis of lease liabilities is provided in the table "Classification of and contractual maturity dates for financial assets and financial liabilities" in note 19 Financial instruments. Amounts recognized in profit or loss Expenses relating to short-term leases, not capitalized Depreciation of right-of-use assets, land and buildings Interest expenses relating to lease liabilities Total 2021 DKKm 2020 DKKm 2 2 9 INVENTORIES 83 85 7 8 92 95 Raw materials and consumables Work in progress 2021 2020 Land and buildings Cost at 1 January DKKm DKKm Finished goods and goods for resale Total 2021 2020 DKKm DKKm 207 206 1,534 1,155 1,034 802 2,775 2,163 596 545 Effect of foreign exchange differences 14 (20) Additions 45 34 Disposals during the year (11) (19) Adjustments to right-of-use assets during the year 61 56 Cost at 31 December 705 596 Inventories recognized as cost of sales amounted to DKK 2,337 million (DKK 2,618 million in 2020). Inventories of DKK 1,071 million at 31 December 2021 are expected to be recovered after more than 12 months (DKK 722 million in 2020). Depreciation and impairment losses at 1 January Effect of foreign exchange differences Depreciation Depreciation and impairment on disposals Depreciation and impairment losses at 31 December Carrying amount at 31 December Development in lease liabilities 2021 Lease liabilities Total lease liabilities 140 69 6 (6) 10 TRADE RECEIVABLES 83 85 (8) (8) 221 140 Trade receivables 484 456 Writedowns Trade receivables, net Balance at Non-cash 1 January Cash outflow flow DKKm DKKm DKKm Balance at 31 December DKKM Credit risks 493 (82) 128 493 (82) 128 539 539 2020 Lease liabilities 516 (83) 60 493 Total lease liabilities 516 (83) 60 493 The total cash outflow from recognized lease agreements amounted to DKK 89 million (DKK 91 million in 2020) and includes repayment of lease liabilities and interest. 2021 2020 DKKm DKKm 2,484 2,579 (25) (26) 2,459 2,553 Lundbeck's products are sold primarily to distributors of pharmaceuticals, pharmacies and hospitals. The payment conditions for the customers, including credit periods and any payment of interest in case of non- payment, vary, but are always based on industry practice in the relevant market. As a result of special trading conditions in specific markets, the credit period may be up to approximately 200 days and for one customer 360 days. The weighted average credit period is approximately 50 days.#69LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTES 10-11 69/111 10 TRADE RECEIVABLES - CONTINUED In April 2020, Lundbeck purchased a “key buyer" credit insurance covering around 100 of the largest customers of the Group. The credit insurance was bought to protect against insolvency, protracted default and political risk as a result of uncertainties created by the pandemic. The credit insurance was not renewed in 2021 due to assessment that the pandemic did not materially increase the credit risk. Changes to the Group's customer portfolio are limited. When collaboration is established with a new customer, credit assessment is done either by Lundbeck or an external credit rating agency. At the time of revenue recognition, Lundbeck assesses the full lifetime expected credit losses. In addition, undue and due receivables are analyzed in an ongoing process. Based on the credit assessment, receivables analysis, historical and industry experience, it is estimated whether the receivables are recoverable or writedowns are needed. Historically, losses on debtors have been insignificant. Fluctuations in foreign exchange rates, including the impact from currency devaluations, represent an inherent risk as Lundbeck also operates in volatile economies. Lundbeck monitors and takes action to mitigate risks associated with receivables. Market risks The pharmaceutical market is characterized by the aim of authorities to reduce or cap healthcare costs in general. Market changes such as price reductions and ever-earlier launch of generics may have a considerable impact on the earnings potential of pharmaceuticals. 11 CASH RESOURCES Cash and bank balances 2021 2020 DKKm DKKm 2,279 3,924 Liquidity risk and capital structure The credit risk on cash and bank balances and derivatives (forward exchange contracts, currency options and interest rate swaps) is limited as Lundbeck only deals with banks with a solid credit rating. The counterparty risk towards banks with a short-term credit rating lower than A-1 (Standard & Poor's) is kept to a minimum, only allowing balances necessary for operating needs within the immediate future. To further limit the risk of loss, internal limits have been defined for the credit exposure accepted towards the banks with whom Lundbeck collaborates. Credit lines are part of the Treasury Policy. The Treasury Policy covers financial resources, foreign currency exposure, interest rate risk, securities, loan and bond portfolios as well as capitalization of subsidiaries. The Treasury Policy is presented to the Audit Committee annually for subsequent approval by the Board of Directors. In addition, the Board of Directors approves the framework for selecting financial collaboration partners and the credit lines and types of transactions allowed. Pursuant to its Treasury Policy, Lundbeck must ensure that a minimum of DKK 1.0 billion is held in cash or cash equivalents. If this amount is not available in cash, fixed-term deposits or bonds, Lundbeck will enter into committed credit facilities with its banking partners. In 2019, Lundbeck entered into two loan agreements with its strategic banks; a revolving credit facility (RCF) of EUR 1.5 billion and a term loan of DKK 2 billion. The term loan was repaid in February 2021, following a year of strong cash flow generation. The RCF expires in 2025 and has an option, at the lenders' discretion, to extend the maturity for up to one additional year. The flexible structure of the RCF enables Lundbeck to repay the debt in full at short notice, normally not more than three months, and still maintain the facility until expiration of the credit commitment. The RCF is subject to covenants, and no breaches were encountered during the year. At 31 December 2021, Lundbeck had unutilized committed credit facilities of DKK 10.1 billion. In addition, Lundbeck has a number of uncommitted credit facilities to cover its day-to-day operations. At 31 December 2021 and 31 December 2020, these credit facilities were unutilized.#70LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTES 11-12 70/111 11 CASH RESOURCES - CONTINUED In October 2020, Lundbeck issued a seven-year eurobond in the amount of EUR 500 million with a fixed coupon of 0.875%. The bond was issued under Lundbeck's euro medium-term note (EMTN) program of EUR 2 billion. In addition, Lundbeck has a number of uncommitted credit facilities to cover the day-to-day operations. At 31 December 2021 and 31 December 2020, these credit facilities were unutilized. When managing the capital structure, Lundbeck's main objective is to support the Expand and invest to grow strategy; use capital resources for required research and development and for investments to realize the strategy; and to generate long-term attractive return for the shareholders. Lundbeck also wishes to be a strong financial counterparty to debt providers and other stakeholders by maintaining the investment grade credit rating (BBB-). To maintain or adjust the capital structure, Lundbeck may adjust dividends paid to shareholders, return capital to shareholders, issue new shares, sell assets to reduce debt or increase debt. To minimize the refinancing risk, Lundbeck strives to have diversified funding, both in terms of duration and source. Lundbeck defines capital as total equity and net interest-bearing debt (see notes 17 Bank debt, bond debt and borrowings and 8 Right-of-use assets and lease liabilities) and after deducting cash resources. At 31 December 2021, total equity amounted to DKK 18,279 million compared with DKK 16,973 million at 31 December 2020. Net interest-bearing debt amounted to DKK 3,189 million at 31 December 2021 compared with DKK 4,106 million at 31 December 2020. 12 EQUITY Share capital The share capital of DKK 996 million at 31 December 2021 is divided into 199,148,222 shares at a nominal value of DKK 5 each. Share capital At 1 January Capital increase through exercise of warrants At 31 December Issued shares At 1 January Capital increase through exercise of warrants At 31 December Treasury shares 2021 2020 DKKm DKKm 996 996 996 996 2021 Number 2020 Number 199,148,222 199,148,222 199,136,725 11,497 199,148,222 Shares of Nominal DKK 5 nom. value Proportion of share capital Number DKKM % Cost DKKm Treasury shares 2021 Shareholding at 1 January 449,896 2 0.23 135 Share buyback 144,000 1 0.07 34 Shares used for funding incentive programmes Shareholding at 31 December (91,781) (0.05) (31) 502,115 3 0.25 138 2020 Shareholding at 1 January 435,019 2 0.22 135 Share buyback 114,000 1 0.06 Shares used for funding incentive programmes (99,123) (1) (0.05) Shareholding at 31 December 449,896 2 0.23 135 $མསྐྱེ་ (29)#71LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 12 EQUITY - CONTINUED The Parent company has only one class of shares, and all shares rank equally. The shares are negotiable instruments with no restrictions on their transferability. In 2021, the Parent company acquired treasury shares at a value of DKK 34 million (DKK 29 million in 2020), corresponding to 144,000 shares (114,000 shares in 2020). The shares were acquired to fund Lundbeck's long-term share-based incentive programs. A total of 91,781 shares were used for this purpose in 2021 (99,123 shares in 2020). The Board of Directors is authorized to issue new shares and raise the share capital of the Parent company as set out in article 4 of the Parent company's Articles of Association. The share capital is in compliance with the capital requirements of the Danish Companies Act and the rules of Nasdaq Copenhagen. Distribution of profit The Board of Directors is proposing distribution of dividends for 2021 of 30% (31% in 2020) of the net profit for the year allocated to the shareholders, equivalent to DKK 2.00 per share (DKK 2.50 per share in 2020) or DKK 398 million (DKK 498 million in 2020), inclusive of dividends on treasury shares. Total dividends are based on the current share capital. Earnings per share Profit for the year (DKKm) Average number of shares ('000 shares) 2021 1,318 2020 1,581 199,148 Average number of treasury shares ('000 shares) (487) 199,146 (416) Average number of shares, excl. treasury shares ('000 shares) 198,661 198,730 Average number of warrants, fully diluted ('000 warrants) Average number of shares, fully diluted ('000 shares) 198,661 198,733 Earnings per share, basic (EPS) (DKK) 6.63 7.96 6.63 7.96 Tax on other comprehensive income 2021 Other comprehensive income recognized under foreign currency translation reserve in the statement of changes in equity Exchange rate gains/losses on investments in foreign subsidiaries Exchange rate gains/losses on additions to net investments in foreign subsidiaries Hedging of net investments in foreign subsidiaries Total Other comprehensive income recognized under hedging reserve in the statement of changes in equity Deferred exchange gains/losses, hedging Deferred fair value of interest rate swaps Exchange gains/losses, hedging (transferred to revenue) Total Other comprehensive income recognized under retained earnings in the statement of changes in equity Actuarial gains/losses Total Recognized in other comprehensive income Earnings per share, diluted (DEPS) (DKK) At 31 December 2021, no warrants were outstanding. 71/111 Before tax DKKm Tax DKKm After tax DKKm 960 960 (157) 36 (121) (127) 28 (99) 676 64 740 (340) 63 75 (53) (330) ༞ཙུས༩ (14) 12 73 (265) 49 (41) (257) (1) (1) (1) 345 137 482#72LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTES 12-13 72/111 12 EQUITY - CONTINUED Before tax DKKm Tax DKKm After tax DKKm 2020 Other comprehensive income recognized under foreign currency translation reserve in the statement of changes in equity Exchange rate gains/losses on investments in foreign subsidiaries Exchange rate gains/losses on additions to net investments in foreign subsidiaries (1,007) (1,007) (21) 3 Hedging of net investments in foreign subsidiaries 356 (79) (18) 277 Total (672) (76) (748) Other comprehensive income recognized under hedging reserve in the statement of changes in equity Deferred exchange gains/losses, hedging 313 (69) 244 13 RETIREMENT BENEFIT OBLIGATIONS AND SIMILAR OBLIGATIONS Defined contribution plans The major defined contribution plans cover employees in Australia, Canada, Denmark, Finland, South Korea, Sweden, the UK and the U.S. The cost of defined contribution plans, representing contributions to the plans, amounted to DKK 246 million in 2021 (DKK 234 million in 2020). Defined benefit plans The Group has defined benefit plans in a few countries. The most important plans comprise current and former employees in Germany and the UK. The defined benefit plan in Germany is unfunded and administered by Lundbeck Germany. The defined benefit plan in the UK is funded and constituted under a trust, whose assets are legally separated from the Group. Both plans entitle the employees to an annual pension on retirement based on the service and salary level until retirement. Deferred fair value of interest rate swaps (90) 20 (70) Exchange gains/losses, hedging (transferred to revenue) (5) 1 (4) Total 218 (48) Retirement benefit obligations and similar obligations 170 Present value of defined benefit plans Other comprehensive income recognized under retained earnings in the statement of changes in equity Fair value of plan assets Defined benefit plans at 31 December Actuarial gains/losses Total (1) (1) 1 Other obligations of a retirement benefit nature 1 Retirement benefit obligations and similar obligations at 31 December 2021 DKKm 2020 DKKm 539 530 (285) (275) 254 255 35 35 289 290 Recognized in other comprehensive income (455) (123) (578) Retirement benefit obligations and similar obligations break down as follows: Non-current obligations 288 288 Exchange rate gains/losses on investments in foreign subsidiaries, a gain of DKK 960 million (a loss of DKK 1,007 million in 2020), and exchange rate gains/losses on additions to net investments in foreign subsidiaries, a loss of DKK 157 million (DKK 21 million in 2020), are primarily driven by developments in USD/DKK and GBP/DKK exchange rates. Current obligations 1 2 Retirement benefit obligations and similar obligations at 31 December 289 290#73LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 73/111 13 RETIREMENT BENEFIT OBLIGATIONS AND SIMILAR OBLIGATIONS - CONTINUED The amounts recognized in the balance sheet and the movements in the net defined benefit obligation over the year are as follows. Actuarial assumptions 2021 2020 The following were the key actuarial assumptions at the reporting date. 2021 2020 Change in present value of defined benefit plans Present value of defined benefit plans at 1 January DKKm DKKm 530 537 Key assumptions for the most significant plans % % Discount rate 1.00-1.80 Inflation rate Pay rate increase Pension increase Age-weighted employee resignation rate Expected return on plan assets Assumptions regarding future mortality are set based on actuarial advice in accordance with published statistics and experience in each country. 2.10-3.30 0-2.50 2.10-5.00 0-8 1.80 0.70-1.70 1.75-2.85 Effect of foreign exchange differences Pension expenses 20 (16) 7 7 Interest expenses relating to the obligations 7 7 0.00-2.50 Experience adjustments (7) 4 1.75-5.00 Adjustments relating to financial assumptions 4 9 0-8 Adjustments relating to demographic assumptions (3) 1.70 Benefits paid (20) (19) Employee contributions 1 1 Present value of defined benefit plans at 31 December 539 530 Sensitivity analysis The most significant assumptions used in the calculation of the obligation for defined benefit plans are discount rate and inflation rate. An increase in the discount rate of 0.25 of a percentage point would result in a decrease in the obligation of approximately DKK 21 million, before tax (DKK 22 million in 2020) and vice versa. An increase in the inflation rate of 0.25 of a percentage point would result in an increase in the obligation of approximately DKK 8 million, before tax (DKK 8 million in 2020) and vice versa. The sensitivity analysis indicates how a change in the individual assumptions would change the obligation. However, the assumptions will most likely be correlated and consequently result in a different obligation. Change in fair value of plan assets Fair value of plan assets at 1 January Effect of foreign exchange differences Interest income on plan assets Experience adjustments Administration fees Contributions Benefits paid Employee contributions Fair value of plan assets at 31 December Fair value of plan assets Shares Bonds Property Insurance contracts Other assets Total 2021 DKKm 2020 DKKm 61 56 40 38 16 17 152 147 16 17 285 275 Shares, bonds, property and other assets are measured at fair value based on quoted prices in an active market. Insurance contracts are not based on quoted prices in an active market. 2021 2020 DKKm DKKM 275 275 18 (13) 5 5 (7) 12 (1) (1) 8 7 (14) (11) 1 1 285 275#74LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTES 13-14 74/111 13 RETIREMENT BENEFIT OBLIGATIONS AND SIMILAR OBLIGATIONS - CONTINUED Net expense recognized in profit or loss Pension expenses Administration fees Total Finance costs Amount recognized in other comprehensive income Actuarial (gains)/losses Realized return on plan assets 2021 DKKm 2020 DKKm 7 7 2 2 1 1 10 10 2021 DKKm 1 2021 DKKm 2020 DKKm 1 2020 DKKm (2) 17 The benefit under unfunded defined benefit plans is paid directly by the Group. In some countries, the future contribution to funded defined benefit plans depends on the development in salaries, administrative fees and regular premiums, and in other countries on the surplus/deficit according to local requirements. The weighted average duration of the obligation is 15 years (15 years in 2020). The expected contribution to defined benefit plans for 2022 is DKK 12 million (DKK 14 million for 2021). Other obligations of a retirement benefit nature In 2021, an obligation of DKK 35 million (DKK 35 million in 2020) was recognized to cover other obligations of a retirement benefit nature, which primarily include post-employment benefits in a number of subsidiaries. These benefit payments are conditional upon specified requirements being met. 14 INCENTIVE PROGRAMS In order to attract, retain and motivate key employees and align their interests with those of its shareholders, Lundbeck has established a number of long-term incentive programs. Lundbeck uses equity- and cash- settled programs. Equity-settled programs In 2021, equity-settled incentive programs consisted of restricted share units (RSUs). In February 2021 (February 2020), Lundbeck established an RSU programme for Lundbeck's registered Executive Management and key employees, as part of Lundbeck's recurring long-term incentive programme. Four of the members of the registered Executive Management (four members for the 2020 program) and 135 key employees employed with H. Lundbeck A/S or a Lundbeck subsidiary were granted RSUs (131 key employees for the 2020 program). The participants were selected on the basis of job level. All the RSUs vest three years after grant (for the 2020 program will vest three years after grant). Vesting is subject to the Board of Directors' decision on vesting, to Lundbeck achieving certain strategic and financial targets specified by the Board of Directors and to continuing employment with the Group during the vesting period. The fair value of the RSUS has been calculated on the basis of a share price of DKK 250.97 (DKK 274.56 for the 2020 program) reduced by an expected dividend yield of 2.00% p.a. The fair value at the time of the grant was DKK 236.21 per RSU (DKK 258.41 for the 2020 program). The RSUs granted to the registered Executive Management and key employees in 2017 vested in 2021. The RSUS granted to the registered Executive Management and key employees in 2016 vested in 2020. RSU programs Number of persons included in the program Total number of RSUs granted 2021 139 2020 2019 160,273 135 139,119 139 127,899 2018 133 107,321 2017 127 131,516 Number of RSUs granted to the registered Executive Management Vesting date Fair value at the date of grant, DKK 34,781 01.02.24 236.21 29,923 01.02.23 258.41 28,128 01.02.22 269.71 24,783 01.02.22 291.03 47,911 01.02.21 268.65 At 31 December 2021, no warrants were outstanding (no warrants in 2020). No new warrant programs were granted in 2021. In 2020, all remaining warrants granted (from the 2012 program) were exercised or expired and the weighted average share price of the warrants exercised during 2020 was DKK 284.52.#75LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 75/111 14 INCENTIVE PROGRAMS - CONTINUED Granted Warrant programs Number of persons included in the program in 2012 102 Total number of warrants granted 692,003 vesting date. The fair value at the time of the initial grant was DKK 250.97 per RCU (DKK 258.41 for the 2020 program). The RCUS granted in 2017 vested in 2021, after which the program was settled. The RCUs granted in 2016 vested in 2020, after which the program was settled. Number of warrants granted to the registered Executive Management Fair value, liability and expense recognized in the statement of profit or loss Vesting date Exercise period begins Exercise period ends Exercise price, DKK Fair value at the date of grant, DKK 31.03.15 01.04.15 31.03.20 113.00 24.11 Warrants 2020 1 January Registered Executive Management Executives Number Number Other Number Total Number Average exercise price DKK Exercised Expired 31 December 3,458 (3,458) 23,527 (8,039) (15,488) 26,985 (11,497) (15,488) 113.00 113.00 113.00 The RSUs granted are recognized in profit or loss for 2021 at an expense corresponding to the fair value at the time of grant for the part of the vesting period that concerns 2021. The total expense recognized in respect of equity-settled programs amounted to DKK 37 million (DKK 30 million in 2020). At 31 December 2021, the fair value of the remaining equity-settled programs was DKK 91 million (DKK 89 million in 2020). The RCUS granted are recognized in the income statement at an expense corresponding to the value adjustment for the year based on the performance of the Lundbeck share. The total expense recognized in respect of cash-settled programs amounted to DKK 4 million (DKK 4 million in 2020) and covers all cash- settled programs in force in 2021. At 31 December 2021, the total liability in respect of cash-settled programs was DKK 11 million (DKK 7 million in 2020) and covers all cash-settled programs. The total expense recognized in profit or loss for all incentive programs amounted to DKK 41 million in 2021 (DKK 34 million in 2020). Cash-settled programs In 2021, the cash-settled programs consisted of restricted cash units (RCUs). The cash-settled programs cannot be converted into shares because the value of the programs is distributed as a cash amount. In February 2021 (February 2020), Lundbeck established an RCU programme for the Chief Executive Officer (CEO) and a few key employees in the US subsidiaries. The terms and conditions are similar to those applying to the RSU programme granted to the registered Executive Management and key employees of the Parent company and its non-U.S. subsidiaries in February the same year. The RCUS granted to the CEO, a total of 33,621 (30,012 for the 2020 program), and the RCUS granted to the key employees, a total of 1,505 (1,526 for the 2020 program), will vest three years after grant (for the 2020 program will vest three years after grant). Vesting is subject to the Board of Directors' decision on vesting, to Lundbeck achieving certain strategic and financial targets specified by the Board of Directors and to continuing employment with the Group during the vesting period. The size of the amount depends on the value of the Lundbeck share on the#76LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTES 15-16 15 PROVISIONS 2021 Discounts and rebates Product returns DKKm DKKm Other provisions DKKm Total DKKm 76/111 Other provisions Of other provisions at 31 December 2021, DKK 253 million (DKK 161 million in 2020) relates to restructuring programs. This amount includes the restructuring costs announced during 2021 of around DKK 200 million, which was recognized in sales and distribution costs in October 2021. In addition, other provisions comprise liabilities relating to items such as legal disputes. Provisions at 1 January 1,002 179 630 1,811 Effect of foreign exchange differences 76 10 21 107 Provisions charged 1,790 101 407 2,298 Provisions used (1,945) (205) Unused provisions reversed (498) (71) (2,648) (71) Provisions at 31 December 923 85 489 1,497 Provisions break down as follows: Non-current provisions Current provisions Provisions at 31 December 38 54 923 47 435 1,405 923 85 489 1,497 92 22 Discounts and rebates The most significant sales deductions are in the U.S. and comprise discounts and rebates given in connection with sales under the U.S. Federal and State Government Healthcare programs, primarily Medicaid. Management's estimate of discounts and rebates is based on a calculation which includes a combination of historical product/population utilization mix, price increases, program/market growth and state-specific information. Further, the calculation of rebates involves legal interpretation of relevant regulations and is subject to changes in interpretive guidance from governmental authorities. The obligations for discounts and rebates are incurred at the time the sale is recorded; however, the actual rebate related to a specific sale may be invoiced by the authorities six to nine months later. In addition to this billing time lag, there is no statute of limitations for states to submit rebate claims; thus, rebate adjustments in any particular period may relate to sales from a prior period. Moreover, when a product loses exclusivity, shifts in payer mix may cause Medicaid claims/estimates to be more volatile. Product returns The Group has product return obligations normal for the industry. Management does not expect any major losses from these obligations apart from the amount already recognized. 16 CONTINGENT ASSETS AND CONTINGENT LIABILITIES Pending legal proceedings Lundbeck is involved in a number of legal proceedings, including patent disputes, the most significant of which are described below. The outcome of these proceedings is not expected to have a material impact on the financial position or cash flows beyond the amount already provided for in the financial statements, or it is too uncertain to make a reliable provision. Such proceedings will, however, develop over time, and new proceedings may occur which could have a material impact on the financial position and/or cash flows. In June 2013, Lundbeck received the European Commission's decision that agreements concluded with four generic competitors concerning citalopram violated competition law. The decision included fining Lundbeck EUR 93.8 million (approximately DKK 700 million). Lundbeck paid and expensed the fine in the third quarter of 2013. In March 2021, the European Court of Justice rejected Lundbeck's final appeal of the European Commission's decision. So-called "follow-on claims" for reimbursement of alleged losses, resulting from alleged violation of competition law, often arise when decisions and fines issued by the European Commission are upheld by the European Court of Justice. Health authorities in the UK and an umbrella organization of Dutch health insurance companies have taken formal protective steps against Lundbeck with the principal purpose of preventing potential claims from being time-barred under the applicable statutes of limitation. In September 2021, the UK proceedings were transferred from the High Court to the Competition Appeal Tribunal at the request of the parties. Lundbeck expects that the UK health authorities will now pursue their alleged claims. Further, in late October 2021, Lundbeck received a writ of summons from a German health care company claiming compensation for an alleged loss of profit plus interest payments, allegedly resulting from Lundbeck's conclusion of agreements with two of the four generic competitors, which were comprised by the EU Court of Justice ruling. Lundbeck is preparing its defence and it may take several years before a final conclusion is reached by the German courts. Lundbeck disagrees with the claims and will defend itself against the claims.#77LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 77/111 16 CONTINGENT ASSETS AND CONTINGENT LIABILITIES - CONTINUED In Canada, Lundbeck is involved in three product liability class-action lawsuits relating to Cipralex®/CelexaⓇ (two cases alleging various CelexaⓇ-induced birth defects and one case against several SSRI manufacturers (incl. Lundbeck) alleging that SSRI (CelexaⓇ/LexaproⓇ) induces autism birth defect, three relating to Abilify MaintenaⓇ (alleging i.a. failure to warn about compulsive behaviour side effects) and one relating to RexultiⓇ (also alleging i.a. failure to warn about compulsive behaviour side effects). The cases are in the preliminary stages and as such there is significant uncertainty as to how these lawsuits will be resolved. Lundbeck strongly disagrees with the claims raised. In 2018, Lundbeck entered into settlements with three of four generic companies involved in an Australian federal court case, in which Lundbeck was pursuing patent infringement and damages claims over the sale of escitalopram products in Australia. Lundbeck received AUD 51.7 million (DKK 242 million) in 2018. In Lundbeck's case against the last of the four generic companies, Sandoz Pty Ltd, the Federal Court found that Sandoz Pty Ltd had infringed Lundbeck's escitalopram patent between 2009 and 2012 and awarded Lundbeck AUD 26.3 million in damages. Sandoz' appeal of the decision was heard in May 2019 and the Full Federal Court has in August 2020 allowed Sandoz' appeal and decided that Sandoz is not liable for damages. Lundbeck's application for special leave to appeal the decision to the High Court was granted in February 2021, and the appeal was heard on 8 October 2021. A decision is expected within 3 - 6 months from the hearing. If Lundbeck's appeal is successful, the case will go back to the Federal Court for recalculation and Lundbeck's appeal of the Australian Patent Office's decision to grant Sandoz a license will be restarted. Together with Takeda, Lundbeck instituted patent infringement proceedings against 16 generic companies in response to their filing of Abbreviated New Drug Applications ("ANDAS") with the U.S. FDA seeking to obtain marketing approval for generic versions of TrintellixⓇ in the U.S. Two opponents have since withdrawn and Lundbeck has settled with eight opponents. As communicated by Lundbeck in company release no. 706 dated 1 October 2021, the cases against the six remaining opponents (the "ANDA Filers") has been decided by the U.S. District Court for the District of Delaware (the 'Court'). The Court found that Lundbeck's patent protecting the active ingredient in TrintellixⓇ, vortioxetine (U.S. Patent No. 7,144,884) is valid. The active ingredient patent expires on 17 June 2026, with an expected six-month paediatric exclusivity period extending to 17 December 2026. Assuming the ruling is confirmed at appeal, final approval will not be granted to the relevant ANDA Filers until after expiration of the active ingredient patent, including any extension or additional periods of exclusivity. A total of seven other patents asserted at trial were found by the Court to be valid or their validity was not challenged during the trial. The Court decided that none of the seven other patents were infringed by the relevant ANDA Filers, except that Lupin was found to infringe a patent covering Lundbeck's process for manufacturing vortioxetine. Unless and until the Court's ruling is reversed on appeal, the patents found not infringed by a particular ANDA Filer will not prevent that ANDA Filer from receiving final approval. For details on each of the patents comprised by the case, please see the company release no. 706. The Court's decision has been appealed by Lundbeck to the U.S. Court of Appeals for the Federal Circuit. Lupin has appealed with respect to the process patent and the ANDA Filers have cross appealed with respect to the validity of two of the seven other patents. Together with Otsuka Pharmaceutical, Lundbeck has instituted patent infringement proceedings against several generic companies that have applied for marketing authorization for generic versions of RexultiⓇ in the U.S. Lundbeck has strong confidence in the RexultiⓇ patents. The U.S. FDA cannot grant marketing authorization in the U.S. to the generic companies before the patents expire, unless the generic companies receive decisions in their favour. Trial is scheduled to begin on 25 July 2022. The compound patent, including patent term extensions, will expire in the U.S. on 23 June 2029. A patent for the specific formulation used will expire 12 September 2032. Lundbeck received a Civil Investigative Demand ("CID") from the U.S. Department of Justice ("DOJ") in March 2020. The CID seeks information regarding the sales, marketing, and promotion of Trintellix. Lundbeck is cooperating with the DOJ. In the U.S., Lundbeck is involved in three product liability lawsuits relating to LexaproⓇ (alleging LexaproⓇ induces birth defects). The cases are in the preliminary stages. Lexapro was marketed by Forest Labs. in the U.S. Lundbeck will vigorously defend against the claims raised. Joint taxation H. Lundbeck A/S and Danish subsidiaries are part of a Danish joint taxation scheme with Lundbeckfonden (Lundbeckfond Invest A/S including subsidiaries of Lundbeckfond Invest A/S), according to which the Company has partly a joint and several liability and partly a secondary liability with respect to corporate income taxes etc. for the jointly-taxed companies. In addition, H. Lundbeck A/S has partly a joint and several liability and partly a secondary liability with respect to any obligations to withhold tax on interest, royalties and dividends for these companies. However, in both cases the secondary liability is capped at an amount equal to the share of the capital of the Company directly or indirectly owned by the ultimate parent company. The total tax obligation under the joint taxation scheme is shown in the financial statements of Lundbeckfond Invest A/S.#78LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 78/111 17 BANK DEBT, BOND DEBT AND BORROWINGS 2021 2020 Bank debt and bond debt maturing within below periods from the balance sheet date DKKm DKKm Within one year 2,000 The USD funding has been swapped into fixed interest rates by interest rate swaps. The nominal amounts of the interest rate swaps follow the expected repayment profile of the USD debt until they expire in 2023. The total outstanding amount of the interest rate swaps as of 31 December 2021 was USD 305 million, and the average interest rate was 1.56% for the fixed legs and 0.12% for the floating legs. Between three and four years 1,083 1,698 After more than five years 3,700 3,699 The eurobond is issued with a fixed coupon until October 2027. Bank debt and bond debt at 31 December 4,783 7,397 Amortized cost is calculated as the proceeds received less instalments paid, plus or minus amortization of capital gains or losses Bank debt and bond debt break down as follows: Non-current bank debt and bond debt Current bank debt and bond debt Bank debt and bond debt at 31 December 4,783 5,397 Development in bank debt, bond debt and borrowings 2,000 Balance at 4,783 7,397 1 January Cash inflow Cash outflow Non-cash flow Balance at 31 December Development in bank debt, bond debt and borrowings DKKm DKKm DKKm DKKm DKKm For maturity analysis of loans, see note 19 Financial instruments. 2021 Bank loans 3,698 400 (3,123) 108 1,083 Weighted Issued bonds 3,699 1 3,700 average Total bank debt and bond debt 7,397 400 (3,123) 109 4,783 Currency Expiry of commitment Fixed/ floating effective interest rate Amortized Nominal Fair cost value value DKKm DKKm DKKm 2020 2021 Bank loans 9,062 (5,169) (195) 3,698 Bank loan USD Issued bonds EUR Jun 2025 Oct 2027 Floating Fixed 0.93 1,083 1,083 1,083 Issued bonds 3,701 (2) 3,699 0.88 3,700 3,718 3,755 Total bank debt and bond debt 9,062 3,701 (5,169) (197) 7,397 Total 4,783 4,801 4,838 2020 Bank loan DKK Oct 2021 Floating 0.80 2,000 2,000 2,000 Bank loan USD Jun 2024 Floating 1.11 1,698 1,698 1,698 Issued bonds EUR Oct 2027 Fixed 0.88 3,699 3,720 3,781 Total 7,397 7,418 7,479 The DKK 2 billion bank loan was fully repaid in February 2021.#79LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTES 18-19 18 OTHER PAYABLES 79/111 Contingent consideration is recognized at fair value. The calculation of the fair value is based on the discounted cash flow method (DCF method) which comprises significant assumptions and estimates. Key inputs are expected timing of payment (using a specific discount rate) and probability of success. Contingent consideration Other payables Non-current payables Contingent consideration Other payables Current payables Contingent consideration recognized through acquisitions 2021 DKKm 2020 DKKm 386 1,108 106 82 492 1,190 1,237 1,656 2,893 1,846 1,846 As part of the acquisition of Alder BioPharmaceuticals, Inc. (subsequently renamed Lundbeck Seattle BioPharmaceuticals, Inc.), Lundbeck is required to pay a contingent value right (CVR) of USD 2.00 per share upon European approval of eptinezumab. The CVR has a value of up to USD 233 million (USD 236 million in 2020). At 31 December 2021, the fair value of the CVR amounted to DKK 1,237 million (DKK 1,059 million in 2020). The CVR was recognized as a contingent consideration at fair value at the acquisition date. Key inputs to the fair value of the CVR are the promise to pay a fixed price per share acquired, probability of success weighted by the possible outcomes and Lundbeck's WACC (weighted average cost of capital). As part of the acquisition of Alder BioPharmaceuticals, Inc. (subsequently renamed Lundbeck Seattle BioPharmaceuticals, Inc.), Lundbeck is required to pay a sales milestone dependent on predefined milestones being reached. The fair value of contingent consideration is calculated as the discounted cash outflows (DCF method) from future milestone payments, taking probability of success into consideration. The probability of success of 83.2% used for the calculations of the fair value of the CVR and the sales target milestone is based on the BIO/MedTracker 2016 publication. As part of the acquisition of Abide Therapeutics, Inc., Inc. (subsequently renamed Lundbeck La Jolla Research Center, Inc.), Lundbeck is required to pay up to USD 100 million in sales milestones (USD 150 million in 2020) dependent on predefined milestones being reached. At 31 December 2021, the fair value of the contingent consideration amounted to DKK 60 million (DKK 49 million in 2020). 19 FINANCIAL INSTRUMENTS Foreign currency risks Foreign currency management is handled centrally by the Parent company. Currency management focuses on risk mitigation and is carried out in conformity with the Group's Treasury Policy, as approved by the Board of Directors. Foreign currency risks managed by derivatives and loans in 2021 comprise cash flow risk in several currencies and USD translation risk emanating from net investments in foreign subsidiaries. The Parent company hedges a part of the Group's anticipated revenue in selected currencies for a period of 12-18 months using forward exchange contracts and currency options. Hedging is performed on a rolling basis each month. The forward exchange contracts and currency options are classified as hedging instruments when meeting the accounting criteria for hedge accounting according to IFRS 9 Financial Instruments. Unhedged cash flows are sold spot. Changes in the fair value of all instruments meeting the criteria for hedge accounting are recognized in the statement of comprehensive income as they arise, together with the forward points and option premiums. At maturity of the hedge contracts, the final effect is transferred from other comprehensive income and recognized in the profit or loss or balance sheet together with the hedged item. Forward exchange contracts and currency options that do not meet the hedge accounting criteria are classified as trading contracts, and changes in the fair value are recognized under financial income or financial expenses as they arise. Cash flow timing and changes to the forecasted amounts are the main sources for evaluating the risk of hedge ineffectiveness. When concluding a hedge transaction, and each time presenting the financial statements thereafter, it is assessed whether the hedged exposure and the hedging instrument are still financially correlated. If the hedged cash flows are no longer expected to be realised, the accumulated value change is transferred to financial income or financial expenses. Lundbeck did not have any hedge ineffectiveness in 2021 or 2020.#80LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 19 19 FINANCIAL INSTRUMENTS - CONTINUED 80/111 Contract amount according to hedge accounting Forward exchange contracts Fair value at year-end recognized in the statement of comprehen- sive income/ other receivables Fair value at year-end recognized in the statement of comprehen- sive income/ other payables Realized exchange gains/losses for the year recognized in the statement of profit or loss/ statement of financial position Average hedge prices of existing forward exchange contracts Contract amount according to hedge Maturity accounting Fair value at year-end recognized in the statement of comprehen- sive income/ other receivables Fair value at year-end recognized in the statement of comprehen- sive income/ other payables Realized exchange gains/losses for the year recognized in the statement of profit or loss/ statement of financial position Average hedge price range of existing option contracts¹ Maturity (against DKK) DKKm DKKm DKKm DKKm DKK Currency option contracts (against DKK) DKKm DKKm DKKm DKKm DKK 2021 2021 CAD (sell position) 393 (12) (23) CNY (sell position) 505 (33) (28) JPY (sell position) 252 (1) 14 USD (sell position) 3,030 1 (109) 116 499.04 95.53 5.69 631.25 Oct. 2022 AUD (sell position) 82 1 Oct. 2022 CAD (sell position) 137 22 462.18-498.24 (2) Nov. 2022 JPY (sell position) 43 498.99 536.51 5.49 -6.01 Nov. 2022 Dec. 2022 Oct. 2022 Nov. 2022 USD (sell position) 571 1 Other currencies 1,136 15 (27) (26) Dec. 2022 2 (15) (19) 634.07 670.85 Nov. 2022 Total 16 (182) 53 1) Lundbeck's option structures all consist of a purchased put option and a sold call option, which protects against downside movements in currency and limits the upside. The hedge price range is shown net of premium. 2020 CAD (sell position) 383 2 (1) 7 CNY (sell position) 458 3 (5) JPY (sell position) 294 8 5 USD (sell position) 3,337 225 (55) 475.46 91.71 6.04 648.01 Other currencies 1,172 14 (41) 48 Dec. 2021 Oct. 2021 Oct. 2021 Oct. 2021 Dec. 2021 Net foreign exchange contracts, trading Total 252 (47) 5 There were no outstanding forward exchange contracts relating to trading at 31 December 2021 and no material impact from trading contracts was recognized in financial income or financial expenses in 2021. Hedges of net investment Lundbeck has hedged part of the translation risk emanating from its net investments in foreign subsidiaries in the U.S. by taking out bank debt in USD. Thereby, Lundbeck decreases the negative impact that a weaker USD would have on the value of its U.S. assets, as a decrease in the value of the debt portfolio will offset part of this impact. Lundbeck designates the USD bank debt as hedge of net investment, and the exchange rate adjustments are recognized in other comprehensive income. The hedges of net investment are considered to be effective as long as the carrying amount of the net assets in the foreign operation is (at least) equal to the notional amount on the hedging instrument. For more information about the net investment hedges, see note 17 Bank debt, bond debt and borrowings.#81LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 19 81/111 19 FINANCIAL INSTRUMENTS - CONTINUED Estimated impact from financial instruments on profit for the year and equity from a 5% increase in year-end exchange rates of the major currencies CAD DKKm CNY DKKm USD DKKm 2021 Profit for the year Equity 2020 Profit for the year Equity 3 3 9 (23) (32) (235) 4 (2) (78) (18) (25) (330) The shown sensitivities only comprise impact from Lundbeck's financial instruments and reflect a relative change of the exchange rates at 31 December 2021 and 2020. The sensitivity analysis includes derivatives, bank loans, trade receivable, trade payables, intercompany lending and borrowing as those are the financial instruments where the Group has the most currency exposure. The profit impact comprises financial instruments that remained open at the balance sheet date and which have an impact on profit in the current financial year. It includes foreign exchange differences relating to intra- group balances that are not eliminated in the consolidated financial statements. The calculation of the estimated impact is based on the functional currency of the entities where the financial instruments are located. The profit impact is limited as the largest liabilities are exchange rate adjusted in other comprehensive income, being part of Lundbeck's hedging structure. The equity impact includes financial instruments that remained open at the balance sheet date and which are exchange rate adjusted in other comprehensive income. The equity effect in 2021 and 2020 primarily consists of exchange rate adjustments on bank loans in USD (for 2020 also including cross-currency swaps) that are designated as hedges of net investment and foreign exchange differences on outstanding cash flow hedging contracts. Due to Denmark's long-standing fixed exchange rate policy against the euro and the expected continuation of this policy, the foreign currency risk for euro is considered immaterial, and euro is therefore not included in the table above. Interest rate risks Lundbeck ensures that the interest rate risk is managed according to the Treasury Policy. Interest rate risk relates mainly to outstanding interest-bearing debt with floating interest rates. Interest rate risk management is handled centrally by the Parent company. Through the Group's Treasury Policy, the Board of Directors has approved the limits for borrowing and investment. Loans secured by property must be approved by the Board of Directors. Only a limited part of the total loan portfolio is allowed to have floating interest rates, and to hedge the interest rate risk on loans, the Board of Directors has approved the use of Interest Rate Swaps (IRS), Caps, Floors and Forward Rate Agreements (FRAs). Lundbeck's exposure to interest rate risk is low, as the EUR 500 million bond has a fixed coupon and the USD funding has been swapped into fixed interest through interest rate swaps. For more information about interest rate swaps, see note 17 Bank debt, bond debt and borrowings. An interest rate change on bank debt and bond debt, including interest rate swaps, of +/- 1 percentage point would decrease/increase profit for the year before tax by DKK 2 million (DKK 15 million in 2020) and increase/decrease equity by DKK 19 million at 31 December 2021 (DKK 56 million in 2020). The below table includes undiscounted cash flows, including interest payments, and assumes that the liabilities will be repaid at their contractual maturity dates. See note 18 Other payables for details on the obligations relating to contingent consideration and note 17 Bank debt, bond debt and borrowings for details on the bank debt and bond debt.#82LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 19 19 FINANCIAL INSTRUMENTS - CONTINUED 82/111 Classification of and contractual maturity dates for financial assets and financial liabilities Effective Between interest Within 1 year 2021 DKKm 1 and 5 years DKKm After 5 years Total rates DKKM DKKm % 2020 Between Within 1 year DKKm 1 and 5 years DKKm After 5 years Total Effective interest rates DKKm DKKm % Financial assets Financial assets Derivatives to hedge future cash flows - FX 19 19 ° 0 Derivatives to hedge future cash flows - FX 252 252 Derivatives to hedge future cash flows - interest 5 4 9 0-2 Derivatives to hedge future cash flows - interest 15 22 Derivatives to hedge net investments 0-2 Derivatives to hedge net investments 209 209 - NY 0-2 0-2 Financial assets measured at FVTOCI¹ 24 4 28 Financial assets measured at FVTOCI¹ 476 7 483 Other financial assets 57 57 0 Other financial assets 116 116 0 Other financial assets measured at FVTPL² 57 57 Other financial assets measured at FVTPL² 116 116 Receivables³ 2,707 134 2,841 0 Receivables³ 2,941 104 3,045 0 Cash and bank balances 2,279 2,279 (1)-10 Cash and bank balances 3,924 3,924 (1)-10 Financial assets measured at amortized cost 4,986 134 5,120 Financial assets measured at amortized cost 6,865 104 6,969 Total financial assets 5,010 138 57 5,205 Total financial assets 7,341 111 116 7,568 Financial liabilities Financial liabilities Derivatives to hedge future cash flows - FX Derivatives to hedge future cash flows - interest 202 24 9 Financial liabilities measured at FVTOCI¹ 226 9 202 33 235 0 Derivatives to hedge future cash flows - FX 47 47 0 0-2 Derivatives to hedge future cash flows - interest 46 58 104 0-2 Financial liabilities measured at FVTOCI¹ 93 58 151 Contingent consideration 1,237 33 353 1,623 Contingent consideration4 1,087 21 1,108 Other financial liabilities measured at FVTPL2 1,237 33 353 1,623 Other financial liabilities measured at FVTPL² 1,087 21 1,108 Bank and bond debt 45 1,260 3,751 5,056 0-2 Bank and bond debt 2,063 1,865 3,786 7,714 0-2 Lease liabilities 86 266 187 539 1-8 Lease liabilities 77 229 187 493 1-8 Trade and other payables 5,320 101 5,421 0 Trade and other payables 5,896 82 5,978 0 Financial liabilities measured at amortized cost 5,451 1,627 3,938 11,016 Financial liabilities measured at amortized cost 8,036 2,176 3,973 14,185 Total financial liabilities 6,914 1,669 4,291 12,874 Total financial liabilities 8,129 3,321 3,994 15,444 1) Fair value through other comprehensive income. 2) Fair value through profit or loss. 3) Including other receivables recognized in non-current assets. 4) See note 18 Other payables.#83LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTES 19-20 19 FINANCIAL INSTRUMENTS - CONTINUED Financial assets and financial liabilities measured or disclosed at fair value 2021 Financial assets Other financial assets¹ Derivatives¹ Total Level 1 Level 2 Level 3 DKKm DKKm DKKm 22 22 35 41 22 41 35 83/111 amounts to a net loss of DKK 133 million and is the result of changes in the time value of the contingent value rights and of the sales milestones dependent on predefined milestones being reached. Total contingent consideration amounted to DKK 1,623 million at 31 December 2021 (DKK 1,108 million at 31 December 2020). Besides the fair value adjustment and the adjustment of the sales milestone (see note 18 Other payables), the only change in contingent consideration is exchange rate adjustments of DKK 109 million. The carrying amount of other receivables, trade receivables, prepayments, bank debt, other debt, trade payables and other payables is believed to be equal to or close to fair value. Financial liabilities Contingent consideration' Derivatives1 Bank debt² Bond debt² Total 1,623 20 AUDIT FEES 243 1,083 3,755 3,755 1,326 1,623 Statutory audit Assurance engagements other than audit 2020 Tax advisory Financial assets Other services Other financial assets¹ 81 35 Fee to PricewaterhouseCoopers Derivatives¹ 697 Total 81 697 35 Financial liabilities Contingent consideration¹ Derivatives¹ Bank debt² Bond debt² Total 1) Measured at fair value. 2) Disclosed at fair value.. 1,108 365 3,698 3,781 3,781 4,063 1,108 The fair value of securities is based on publicly quoted prices of the invested assets. The fair value of derivatives is calculated by applying recognized measurement techniques, whereby assumptions are based on the market conditions prevailing at the balance sheet date. The fair value of contingent consideration is calculated as the discounted cash outflows (DCF method) from future milestone payments, taking probability of success into consideration. The fair value adjustment of contingent consideration 2021 2020 DKKm 9 DKKm 10 1 2 4 4 1 16 15 The fee for non-audit services provided to the Group by PricewaterhouseCoopers Statsautoriseret Revisionspartnerselskab, Denmark, amounted to DKK 3 million (DKK 4 million in 2020) and consisted of people service project, other assurance services and other accounting and tax advisory services. Certain subsidiaries of the Group are not subject to audit by PricewaterhouseCoopers.#84LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTES 21-22 84/111 21 CONTRACTUAL OBLIGATIONS Research and development milestones and collaborations The Group has entered into a number of agreements relating to research and development as well as other collaborations. According to the agreements, Lundbeck is committed to pay certain milestones. At 31 December 2021, potential future milestone payments covering the coming ten-year period totalled up to DKK 1,031 million (DKK 300 million in 2020). Sales milestones Lundbeck is committed to pay certain commercial sales milestones. The amounts depend on future sales. Other purchase obligations The Group has undertaken purchase obligations relating to property, plant and equipment in the amount of DKK 68 million (DKK 126 million in 2020). 22 RELATED PARTIES Lundbeck's related parties • The Parent company's principal shareholder, Lundbeckfonden (Lundbeckfond Invest A/S), Scherfigsvej 7, 2100 Copenhagen, Denmark. • Companies in which Lundbeckfonden exercises controlling influence, including ALK-Abelló A/S and Falck A/S. • Members of the Parent company's registered Executive Management and Board of Directors as well as close relatives of these persons. . Companies in which members of the Parent company's registered Executive Management and Board of Directors as well as close relatives of these persons exercise controlling influence. Transactions and balances with Lundbeckfonden There have been the following transactions and balances with Lundbeckfonden: • Payment of dividends of DKK 343 million in 2021 (DKK 563 million in 2020). Payment of provisional tax of DKK 28 million in 2021 (DKK 101 million in 2020) for the Parent company and Danish subsidiaries. • Refund of residual tax of DKK 131 million in 2021 (DKK 64 million in 2020) for the Parent company and Danish subsidiaries. • Interest income of DKK 1 million in 2021 (expense of DKK 1 million in 2020). Lundbeckfonden exercises controlling influence on H. Lundbeck A/S. Transactions and balances with the ALK group There have been no transactions or balances with the ALK group. Transactions and balances with the Falck group There have been no material transactions or balances with the Falck group. Transactions and balances with the registered Executive Management and the Board of Directors In addition to the transactions with members of the registered Executive Management and the Board of Directors outlined in notes 3 Employee costs and 14 Incentive programs, the Parent company has paid dividends on shares held by members of the registered Executive Management and the Board of Directors in H. Lundbeck A/S. At 31 December 2021 and 31 December 2020, there were no balances with the registered Executive Management and the Board of Directors. Transactions and balances with other related parties Other than the above, there have been no material transactions or balances with other related parties.#85LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 23 23 LIST OF SUBSIDIARIES The list below shows the subsidiaries in the Group. 85/111 Share of voting rights and ownership Share of voting rights and ownership Purpose % Purpose % Lundbeck Argentina S.A., Argentina Sales and distribution 100 UAB Lundbeck Lietuva, Lithuania Sale services 100 Lundbeck Australia Pty Ltd, Australia, including Sales and distribution 100 Lundbeck Malaysia SDN. BHD., Malaysia Sales and distribution 100 - CNS Pharma Pty Ltd, Australia Sales and distribution 100 Lundbeck México, SA de CV, Mexico Sales and distribution 100 Lundbeck Austria GmbH, Austria Lundbeck S.A., Belgium Lundbeck Brasil Ltda., Brazil Lundbeck Canada Inc., Canada Lundbeck Chile Farmacéutica Ltda., Chile Lundbeck (Beijing) Pharmaceuticals Consulting Co., Ltd., China Lundbeck Colombia S.A.S., Colombia Lundbeck Croatia d.o.o., Croatia Lundbeck Czech Republic s.r.o., Czech Republic Lundbeck Export A/S, Denmark Lundbeck Pharma A/S, Denmark Lundbeck Eesti A/S, Estonia OY H. Lundbeck AB, Finland Lundbeck SAS, France Sales and distribution 100 Lundbeck B.V., The Netherlands Sales and distribution 100 Sales and distribution 100 Prexton Therapeutics B.V., The Netherlands, including Other 100 Sales and distribution 100 - Prexton Therapeutics S.A., Switzerland Other 100 Sales and distribution 100 Lundbeck New Zealand Limited, New Zealand Other 100 Sales and distribution 100 H. Lundbeck AS, Norway Sales and distribution 100 Sale services 100 Lundbeck Pakistan (Private) Limited, Pakistan Sales and distribution 100 Sales and distribution 100 Lundbeck America Central S.A., Panama Sales and distribution 100 Sale services 100 Lundbeck Peru S.A.C., Peru Sales and distribution 100 Sales and distribution 100 Lundbeck Philippines Inc., Philippines Sales and distribution 100 Lundbeck Business Service Centre Sp.z.o.o., Poland Sales and distribution Other 100 100 Sales and distribution 100 Lundbeck Poland Sp.z.o.o., Poland Sales and distribution 100 Sales and distribution 100 Sales and distribution 100 Lundbeck Portugal - Produtos Farmacêuticos Unipessoal Lda, Portugal Sales and distribution 100 Sales and distribution 100 Lundbeck Romania SRL, Romania Sales and distribution 100 Sofipharm SA, France, including Other 100 Lundbeck RUS LLC, Russian Federation Sale services 100 - Laboratoire Elaiapharm SA, France Production 100 Lundbeck Singapore PTE. LTD., Singapore Sales and distribution 100 Lundbeck GmbH, Germany Sales and distribution 100 Lundbeck Slovensko s.r.o., Slovakia Sales and distribution 100 Lundbeck Hellas S.A., Greece Sales and distribution 100 Lundbeck Pharma d.o.o., Slovenia Sales and distribution 100 Lundbeck HK Limited, Hong Kong Sales and distribution 100 Lundbeck South Africa (Pty) Limited, South Africa, including Sales and distribution 100 Lundbeck Hungária KFT, Hungary Sales and distribution 100 - H. Lundbeck (Proprietary) Limited, South Africa Other 100 Lundbeck India Private Limited, India Sales and distribution 100 Lundbeck España S.A., Spain Sales and distribution 100 Lundbeck (Ireland) Ltd., Ireland Sales and distribution 100 H. Lundbeck AB, Sweden Sales and distribution 100 Lundbeck Israel Ltd., Israel Sales and distribution 100 Lundbeck (Schweiz) AG, Switzerland Sales and distribution 100 Lundbeck Italia S.p.A., Italy Sales and distribution 100 Lundbeck İlaç Ticaret Limited Şirketi, Turkey Sales and distribution 100 Lundbeck Pharmaceuticals, Italy S.p.A., Italy, including Production 100 Lundbeck Group Ltd. (Holding), UK, including Other 100 - Archid S.A., Luxembourg Sales and distribution 100 - Lundbeck Limited, UK Sales and distribution 100 Lundbeck Japan K.K., Japan Sale services 100 - Lundbeck Pharmaceuticals Ltd., UK Other 100 Lundbeck Korea Co., Ltd., Republic of Korea Sales and distribution 100 - Lifehealth Limited, UK Other 100 SIA Lundbeck Latvia, Latvia Sale services 100 - Lundbeck UK LLP, UK1 Other 100#86LUNDBECK ANNUAL REPORT 2021 = CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTES 23-24 86/111 23 LIST OF SUBSIDIARIES - CONTINUED Share of voting rights and ownership Lundbeck USA Holding LLC, USA, including - Lundbeck LLC, USA, including - Lundbeck NA Ltd., USA Purpose Other % 100 Sales and distribution 100 - Chelsea Therapeutics International, Ltd., USA, including Other 100 24 SUBSEQUENT EVENTS In January 2022, Lundbeck announced that the European Commission has granted marketing authorization for VyeptiⓇ in the European Union (EU) for the prophylactic treatment of migraine in adults who have at least four migraine days per month. The approval follows the positive opinion on 11 November 2021 from the European Medicines Agency's (EMA) Committee for Medicinal Products for Human Use (CHMP). The marketing authorization is valid in all EU Member States, Iceland, Norway, and Liechtenstein. Other 100 - Lundbeck Pharmaceuticals LLC, USA Other 100 - Lundbeck Research USA, Inc., USA - Lundbeck La Jolla Research Center, Inc., USA, including - Abide Therapeutics (UK) Limited, UK - Lundbeck Seattle BioPharmaceuticals, Inc., USA, including - Alder Biopharmaceuticals Pty., Ltd., Australia Other 100 The approval will result in an increase in the fair value of the contingent consideration payable of approximately DKK 300 million, which will be expensed as financial items in 2022. Research and development 100 Other 100 Research and development 100 - Alder Biopharmaceuticals Limited, Ireland - Alderbio Holdings LLC ("ANEV"), USA Other Other 100 100 Other 100 Sales and distribution 100 Lundbeck de Venezuela, C.A., Venezuela 1) Lundbeck UK LLP is owned by Lundbeck Group Ltd. (Holding), Lundbeck Limited and Lifehealth Limited, all of which have H. Lundbeck A/S as their direct or ultimate parent company.#87LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 25 87/111 25 SIGNIFICANT ACCOUNTING POLICIES The Group has consistently applied the following accounting policies to all periods presented in these consolidated financial statements, unless otherwise mentioned (see note 1.7 New standards and amendments issued but not yet effective). Basis of consolidation The consolidated financial statements comprise the Parent company H. Lundbeck A/S and entities controlled by the Parent company. Translation of foreign currency On initial recognition, transactions denominated in foreign currencies are translated at standard rates which approximate the exchange rates at the transaction date. Exchange differences arising between the exchange rates at the transaction date and the exchange rates at the date of payment are recognized in profit or loss under financial income or financial expenses. Receivables, payables and other monetary items denominated in foreign currencies that have not been settled at the balance sheet date are translated at the exchange rates at the balance sheet date. The differences between the exchange rates at the balance sheet date and the rates at the time of recognition or settlement are recognized in profit or loss under financial income or financial expenses. On recognition of foreign subsidiaries having a functional currency different from that used by the Parent company, items in the profit or loss are translated at monthly average exchange rates, and non-monetary and monetary balance sheet items are translated at the exchange rates at the balance sheet date. Exchange differences arising when translating the profit or loss and the balance sheet of foreign subsidiaries are recognized in other comprehensive income. Exchange gains/losses on translation of receivables from and payables to subsidiaries that are considered part of the Parent company's overall net investment in subsidiaries are recognized in other comprehensive income. Exchange gains/losses on that part of the bank debt in foreign currency which is used for hedging of the net investments in subsidiaries and which provides an effective hedging of the exchange gains/losses of the net investments are recognized in other comprehensive income Statement of cash flows The consolidated statement of cash flows is presented in accordance with the indirect method and shows the composition of cash flows, divided into operating, investing and financing activities, and cash and bank balances at the beginning and end of the year. Cash comprises cash and bank balances. Cash flows denominated in foreign currencies, including cash flows in foreign subsidiaries, are translated at the average exchange rates for the year as they approximate the actual exchange rates at the date of payment. Cash and bank balances at year-end are translated at the exchange rates at the balance sheet date, and the effect of exchange gains/losses on cash and bank balances is shown as a separate line item in the statement of cash flows. Financial instruments Forward exchange contracts and other derivatives are initially recognized in the balance sheet at fair value on the contract date and subsequently remeasured at fair value at the balance sheet date. The fair value of derivatives is determined by applying recognized measurement techniques, whereby assumptions are based on the market conditions prevailing at the balance sheet date. Positive and negative fair values are included in other receivables and other payables, respectively. Changes in the fair value of derivatives classified as hedging instruments and meeting the criteria for hedge accounting are recognized in other comprehensive income. On recognition of hedged items, income and expenses relating to such hedging transactions are transferred from other comprehensive income and recognized in the same line item as the hedged item. Changes in the fair value of derivatives not qualifying for hedge accounting are recognized in the statement of profit or loss under financial income or financial expenses as they arise. Securities, equity investments recognized in other financial assets, derivatives and contingent consideration measured at fair value are classified according to the fair value hierarchy as belonging to levels 1-3 depending on the valuation method applied.#88LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 25 88/111 25 SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Statement of profit or loss Revenue Revenue comprises invoiced sales less expected return of goods for the year, discounts, rebates and revenue-based taxes. Revenue is recognized when the goods are delivered at the agreed destination (point in time), meaning that control of products has transferred to the buyer and it is probable that the Group will collect the consideration to which it is entitled for transferring the products. Revenue is measured at the amount of consideration to which the Group expects to be entitled to in exchange for transferring the products. Revenue is recognized net of sales deductions, including product returns as well as discounts, rebates and revenue based taxes. Moreover, revenue includes licensing income and royalties from out-licensed products, non-refundable down payments and milestone payments relating to research and development collaborations, and income from collaborations on commercialization of products. Sales-based licensing and royalty income from out-licensed products are recognized in profit or loss under revenue, when the Group provides access to its product rights as it exists throughout the license period. As the performance obligations are satisfied over time, revenue is also recognized over time. When the Group provides a customer the right to use the product rights as it exists at the point in time at which the license is granted, revenue is recognized at a point in time when control is transferred to the licensee and the license period begins when the customer's rights to the intellectual property is transferred. Non-refundable down payments and milestone payments received relating to research collaborations are recognized in profit or loss under revenue. Cost of sales Cost of sales comprises cost of goods sold, which includes the cost of raw materials, transportation costs, consumables and goods for resale, direct labour and indirect costs of production, including operating costs, and amortization/depreciation and impairment losses relating to product rights and manufacturing facilities. Sales and distribution costs Sales and distribution costs comprise costs incurred for the sale and distribution of the Group's products sold during the year. This includes costs incurred for sales campaigns, training and administration of the sales force and for direct distribution, marketing and promotion. Also included are salaries and other costs for the sales, distribution and marketing functions, amortization/depreciation and impairment losses and other indirect costs. Administrative expenses Administrative expenses comprise expenses incurred for the management and administration of the Group, i.e. salaries and other expenses relating to e.g. management, HR, IT and finance functions as well as amortization/depreciation and impairment losses and other indirect costs. Research and development costs Research and development costs comprise costs incurred for the Group's research and development functions, i.e. employee costs, amortization/depreciation and impairment losses and other indirect costs as well as costs relating to research and development collaborations. Research costs are always recognized in profit or loss as they are incurred. Due to a very long development period and the significant uncertainties inherent in the development of new products, development costs are expensed as incurred in line with industry practice. Consequently, the development costs do not qualify for capitalization as intangible assets until marketing approval by a regulatory authority is obtained or considered highly probable. Other operating expenses Other operating expenses comprise other income and expenses relating to operating activities of a secondary nature to the Group. Other operating expenses include integration and transaction costs relating to material acquisitions, income and expenses relating to legal settlements and material gains and losses on the sale or retirement of items of property, plant and equipment. Financial income and financial expenses Financial income and financial expenses include interest income and expenses, net gain or loss on securities and other financial assets, including dividends, fair value adjustment of contingent consideration, fair value adjustment of other financial liabilities, foreign currency gains or losses and other financial income and expenses. Interest income or expense is recognized using the effective interest method.#89LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 25 89/111 25 SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Income tax The Parent company and Danish subsidiaries are jointly taxed with the principal shareholder, Lundbeckfonden (Lundbeckfond Invest A/S), and its Danish subsidiaries. The current Danish corporate income tax liability is allocated among the companies of the tax pool in proportion to their taxable income (full allocation subject to reimbursement in respect of tax losses). Tax for the year, which consists of the year's current tax and the change in deferred tax, is recognized in the statement of profit or loss as regards the amount that can be attributed to the net profit or loss for the year, in other comprehensive income as regards the amount that can be attributed to items in other comprehensive income, and in equity as regards the amount that can be attributed to items in equity. The effect of foreign exchange differences on deferred tax is recognized in the statement of financial position as part of the movements in deferred tax. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Group operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and considers whether it is probable that a tax authority will accept an uncertain tax treatment. The Group measures its tax balances based on either the most likely amount or the expected value, depending on which method provides a better prediction of the resolution of the uncertainty. Current tax for the year is calculated based on the income tax rates and rules applicable at the reporting date. Current tax payables and receivables, including contributions payable and receivable under the Danish joint taxation scheme, are recognized in the balance sheet, computed as tax calculated on the taxable income for the year adjusted for provisional tax paid. Deferred tax is recognized on all temporary differences between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not recognized on temporary differences arising either on initial recognition of goodwill or from a transaction that is not a business combination, if the temporary difference ascertained at the time of the initial recognition affects neither the financial result nor the taxable income. The tax value of the assets is calculated based on the planned use of the individual assets. Deferred tax is measured on the basis of the income tax rates and tax rules in force in the respective countries at the balance sheet date. Changes in deferred tax resulting from changed income tax rates or tax rules are recognized in profit or loss. Deferred tax assets, including the tax value of tax loss carryforwards, are recognized in the balance sheet at the value at which the assets are expected to be realized, either through an offset against deferred tax liabilities or as net tax assets to be offset against future positive taxable income. Changes in deferred tax concerning expenses for share-based payments are generally recognized in profit or loss. However, if the amount of the tax deduction exceeds the related cumulative expense, it indicates that the tax deduction relates not only to an operating expense, but also to an equity item. In such a case, the excess of the associated current or deferred tax is recognized directly in equity. Deferred tax in respect of recaptured losses previously deducted in foreign subsidiaries is recognized on the basis of a specific assessment of each individual subsidiary. Balances on interest deductibility limitations calculated according to the provisions of the Danish Corporation Tax Act are allocated between the jointly-taxed companies according to a joint taxation agreement and are allocated between the companies that are subject to deductibility limitation in proportion to their share of the total limitation. Deferred tax liabilities in respect of these balances are recognized in the balance sheet, whereas deferred tax assets are recognized only if the criteria for recognition of deferred tax assets are met. Statement of financial position Intangible assets Goodwill On initial recognition, goodwill is measured and recognized as the excess of the cost over the fair value of the acquired assets, liabilities and contingent liabilities. Development projects Development costs are recognized in profit or loss as they are incurred unless the conditions for capitalization have been met. Development costs are capitalized only if the development projects are clearly defined and identifiable and where the technical rate of utilization of the project, the availability of adequate resources and a potential future market or development opportunity can be demonstrated. Furthermore, such costs are capitalized only where the intention is to manufacture, market or use the project, when the cost can be measured reliably and when it is probable that the future earnings can cover production, sales and distribution costs, administrative expenses and development costs. After completion of the development work, development costs are amortized over the estimated useful life. The maximum amortization period for development projects protected by intellectual property rights is consistent with the remaining patent protection period of the rights concerned. Ongoing development projects are tested for impairment at least annually or when there is indication of impairment.#90LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 25 90/111 25 SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Product rights and other intangible assets Acquired intellectual property rights in the form of product rights, patents, licences, customer relationships and software are measured at cost less accumulated amortization and impairment losses. The cost of software comprises the cost of planning, labor and costs directly attributable to the project. Product rights are amortized over the economic lives of the underlying products, which in all material aspects follow the patent terms, which are currently between five and fifteen years. Other rights are amortized over the period of agreement. Amortization commences when the asset is ready to be brought into use. Amortization is recognized in profit or loss under cost of sales and research and development costs, respectively. Borrowing costs to finance the manufacture of intangible assets are recognized in the cost price, if such borrowing costs relate to the production period. Other borrowing costs are expensed. Gains and losses on the disposal of development projects, patents and licences are measured as the difference between the selling price less cost to sell and the carrying amount at the time of sale. In general, amortization methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. Property, plant and equipment Property, plant and equipment is measured at cost less accumulated depreciation and impairment losses. Land is not depreciated. Cost includes the costs of purchase and expenses directly attributable to the purchase until the asset is ready for use. The cost of self-constructed assets includes costs directly attributable to the construction of the asset. Borrowing costs to finance the construction of property, plant and equipment are recognized in the cost price, if such borrowing costs relate to the production period. Other borrowing costs are expensed. Property, plant and equipment is depreciated on a straight-line basis over the estimated useful lives of the assets: Buildings • Installations • Plant and machinery . Other fixtures and fittings, tools and equipment Leasehold improvements, max. 30 years 10 years 3-10 years 3-10 years 10 years Depreciation methods, useful lives and residual values are reassessed annually and adjusted if appropriate. Costs incurred that increase the recoverable amount of an asset are added to the value of the asset as an improvement and are depreciated over the estimated useful life of the improvement. Gains or losses on the sale or retirement of items of property, plant and equipment are calculated as the difference between the carrying amount and the selling price less cost to sell or discontinuance costs. Gains and losses are recognized in profit or loss; normally in a separate line item or, if considered immaterial to the understanding of the consolidated financial statements, in the same line item as the associated depreciation. Right-of-use assets are initially measured at cost, which comprises the initial amount of the liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives. Subsequently, the right-of-use asset is depreciated using the straight-line method from the commencement date to the end of the lease term. Depreciation is recognized in profit or loss. Right-of-use assets are presented as part of property, plant and equipment. Impairment Intangible assets with indefinite useful lives, intangible assets not yet available for use and goodwill acquired in a business combination are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they may be impaired. The annual impairment test is performed irrespective of whether there is any indication of impairment. Intangible assets and property, plant and equipment in use with finite useful lives are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.#91LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 25 91/111 25 SIGNIFICANT ACCOUNTING POLICIES - CONTINUED An impairment loss is recognized for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs of disposal and value-in-use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating unit). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period. Impairment losses are reversed only if the assumptions and estimates underlying the impairment calculation have changed. Indications of impairment or reversal of impairment include the following: ⚫ Research and development results for a product • • • • Changes in expected cash flows due to lower sales expectations • Changes in technology Changes in assumptions about future use Changes in market and legal risks Changes in cost structure Other financial assets Equity investments that are not investments in associates are classified as other financial assets. On initial recognition, equity investments are measured at fair value. Subsequently, they are measured at fair value at the balance sheet date, and changes to the fair value are recognized under financial income or financial expenses or in other comprehensive income according to an individual decision for each equity investment. Inventories Raw materials, packaging and goods for resale are measured at the latest known cost at the balance sheet date, which is equivalent to cost computed according to the FIFO method. Work in progress and finished goods manufactured by Lundbeck are measured at cost, i.e. the cost of raw materials, consumables, direct labor and indirect costs of production. Indirect costs of production include materials, labor, maintenance of and depreciation on machines, factory buildings and equipment used in the manufacturing process as well as the cost of factory administration and management. Indirect costs of production are allocated based on the normal capacity of the production plant. Inventories are written down to net realizable value if it is lower than the cost price. The net realizable value of inventories is calculated as the selling price less costs of completion and costs incurred to execute the sale. The net realizable value is determined having regard to marketability, obsolescence and expected selling price developments. Receivables Current receivables comprise trade receivables and other receivables arising in the Group's normal course of business. Other receivables recognized in financial assets are financial assets with fixed or determinable cash flows that are not quoted in an active market and are not derivative financial instruments. On initial recognition, receivables are measured at fair value and subsequently at amortized cost, which usually corresponds to the nominal value less writedowns to counter the risk of losses. Writedowns are calculated using the 'full lifetime expected credit losses' method, whereby the likelihood of non-fulfilment throughout the lifetime of the financial instrument is taken into consideration. A provision account is used for this purpose. Securities On initial recognition, securities (including the bond portfolio), which are included in the Group's documented investment strategy for excess liquidity and recognized under current assets, are measured at fair value. Subsequently, the securities are measured at fair value at the balance sheet date. The fair value is based on officially quoted prices of the invested assets. Both realized and unrealized gains and losses are recognized in profit or loss under financial income or financial expenses. Equity Dividends Proposed dividends are recognized as a liability at the time of adoption of the dividend resolution at the Annual General Meeting (the time of declaration). Dividends expected to be paid in respect of the year are included in the line item Profit for the year in the statement of changes in equity. Treasury shares Acquisition and sale of treasury shares as well as dividends are recognized directly in equity under retained earnings. Share-based payments Share-based incentive programs in which shares are granted to employees and in which employees may opt to buy shares in the Parent company (equity-settled programs) are measured at the equity instruments' fair value at the date of grant and recognized under employee costs as and when the employees obtain the right to receive/buy the shares. The offsetting item is recognized directly in equity under retained earnings.#92LUNDBECK ANNUAL REPORT 2021 E CONTENTS CONSOLIDATED FINANCIAL STATEMENTS NOTE 25 92/111 25 SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Share price-based incentive programs in which employees have the difference between the agreed price and the actual share price settled in cash (cash-settled programs) are measured at fair value at the date of grant and recognized under employee costs as and when the employees obtain the right to such difference settlement. The cash-settled programs are subsequently remeasured on each balance sheet date and upon final settlement, and any changes in the fair value of the programs are recognized under employee costs. The offsetting item is recognized under liabilities until the time of the final settlement. Retirement benefit obligations and similar obligations Defined contribution plans Payments to defined contribution plans are recognized in profit or loss at the due date, and any contributions payable are recognized in the balance sheet under current liabilities. Defined benefit plans The present value of the Group's liabilities relating to future pension payments under defined benefit plans is measured on an actuarial basis once a year on the basis of the pensionable period of employment up to the time of the actuarial valuation. The calculation of present value is based on assumptions of future developments of salary, interest, inflation, mortality and disability rates and other factors. Present value is computed exclusively for the benefits to which the employees have earned entitlement through their employment with Lundbeck. Pension expenses, finance costs and administration fees are recognized in profit or loss under employee costs. Actuarial gains and losses are recognized in other comprehensive income as they are calculated and cannot subsequently be recycled through profit or loss. The present value of the defined benefit plan liability is recognized less the fair value of the plan assets, and any net obligation is recognized in the balance sheet under non-current liabilities. Any net asset is recognized in the balance sheet as a financial asset, taking into consideration, where relevant, the provisions of IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. Provisions Provisions mainly consist of provisions for discounts and rebates, product returns, pending lawsuits and restructuring. A provision is a liability of uncertain timing or amount. Unsettled discounts and rebates are recognized as provisions, when the timing or amount is uncertain. Where absolute amounts are known, the discounts and rebates are recognized as trade payables. Return obligations imposed on the Group are recognized as provisions in the balance sheet. Amounts relating to pending lawsuits are recognized when the outflow is probable and the amount is measured as the best estimate of the costs required to settle the liabilities at the balance sheet date. In connection with restructurings in the Group, provisions are made only for liabilities set out in a specific restructuring plan on the basis of which the parties affected can reasonably expect that the Group will carry out the restructuring, either by starting to implement the plan or announcing its main components. Debt Bank debt and bond debt are recognized at the time of raising of the loan/issuing of the bonds at the fair value of the proceeds received less transaction costs paid. In subsequent periods, the financial liabilities are measured at amortized cost, which is equivalent to the capitalized value when the effective rate of interest is used. The difference between the proceeds and the nominal value is recognized in profit or loss under financial income or financial expenses over the loan period. Other payables Other payables include contingent consideration, payables to shareholders, debt to public authorities, etc. Contingent consideration is recognized as part of the business combination and is recognized at fair value considering the passage of time and changes in the applied probability of success. The fair value is assessed at each reporting date and the effect of any adjustments relating to the timing of payment and the probability of success is recognized under financial income or financial expenses. Payables to shareholders and other debts are measured at amortized cost. Lease liabilities Lease liabilities are recognized at the present value of future payments in accordance with the lease agreements and include the present value of future payments relating to reasonably certain extensions. Interest on the lease liabilities is calculated using Lundbeck's incremental borrowing rate and recognized under financial income or financial expenses. The lease liabilities are reduced by any instalments paid to the lessor. Lundbeck uses the same incremental borrowing rate for lease agreements with similar characteristics. Changes to lease agreements after initial recognition are accounted for either as a modification to an existing agreement, a separate agreement or a partial disposal depending on the nature of the change. Changes will result in changes to both the lease liability and the right-of-use asset.#93LUNDBECK ANNUAL REPORT 2021 = CONTENTS FINANCIAL STATEMENTS OF THE PARENT COMPANY CONTENTS Statement of profit or loss 94 20 95 NOTES 1 Revenue 2 Employee costs 3 Investments in subsidiaries 4 Financial income and expenses 5 Income taxes 6 Distribution of profit 7 Intangible assets 8 Property, plant and equipment Statement of financial position Statement of changes in equity 96 9 Right-of-use assets and lease liabilities 10 Inventories 11 Provisions 12 Contingent assets and contingent liabilities 13 Bank debt and bond debt 14 Payables to subsidiaries 15 Financial instruments 16 Audit fees 17 Contractual obligations 18 Related parties 19 Subsequent events 20 Significant accounting policies 93/111 97 97 97 98 98 98 99 99 100 100 100 101 102 102 102 102 102 102 103 103#94LUNDBECK ANNUAL REPORT 2021 = CONTENTS FINANCIAL STATEMENTS OF THE PARENT COMPANY STATEMENT OF PROFIT OR LOSS 1 January 31 December Revenue Cost of sales Gross profit Sales and distribution costs Administrative expenses Research and development costs Other operating expenses, net Profit from operations (EBIT) Income from investments in subsidiaries Financial income Financial expenses Profit before tax Tax on profit for the year Profit for the year 2021 2020 Notes DKKm DKKM 1 11,298 10,733 2 2,732 2,532 8,566 8,201 222 3,247 3,110 634 648 3,600 5,027 8 1,085 (592) 344 56 223 757 256 743 617 273 947 635 127 (80) 820 715 94/111#95LUNDBECK ANNUAL REPORT 2021 = CONTENTS FINANCIAL STATEMENTS OF THE PARENT COMPANY STATEMENT OF FINANCIAL POSITION - ASSETS At 31 December STATEMENT OF FINANCIAL POSITION - EQUITY AND LIABILITIES At 31 December 95/111 Notes 2021 DKKm 2020 DKKm 2021 2020 Notes DKKm DKKm Product rights Other rights Projects in progress Intangible assets Land and buildings Plant and machinery Other fixtures and fittings, tools and equipment Prepayments and assets under construction Right-of-use assets Property, plant and equipment Investments in subsidiaries Receivables from subsidiaries Other investments Other receivables Financial assets 7 9,357 9,850 Share capital 996 996 7 122 68 Proposed dividends 398 498 7 104 132 Hedging reserve (81) 176 9,583 10,050 Retained earnings 12,567 12,144 ∞ ∞ ∞ 88 Equity 13,880 13,814 8 993 1,040 8 180 197 Deferred tax liabilities 8 50 25 Bank debt and bond debt 425 295 Lease liabilities 9 188 194 Payables to subsidiaries 14 5321 239 137 4,783 5,397 9 174 182 1,836 1,751 Other payables 9,066 20 6,226 20 3 10,539 10,534 5,839 4,819 Non-current liabilities Provisions 14,282 11,962 11 240 132 56 4 114 Bank debt 2,000 4 Trade payables 2,062 2,092 16,438 15,471 Lease liabilities 9 14 13 Payables to subsidiaries 2,786 3,791 Non-current assets 27,857 27,272 Other payables 698 878 Inventories 10 1,848 1,303 Current liabilities 5,800 8,906 Trade receivables Receivables from subsidiaries 709 2,006 587 Liabilities 20,082 20,868 1,388 Equity and liabilities 33,962 34,682 Joint taxation contribution 48 130 Other receivables 115 747 Prepayments 116 84 Receivables 2,994 2,936 Cash and bank balances 1,263 3,171 Current assets 6,105 7,410 Assets 33,962 34,682#96LUNDBECK ANNUAL REPORT 2021 = CONTENTS FINANCIAL STATEMENTS OF THE PARENT COMPANY STATEMENT OF CHANGES IN EQUITY At 31 December Equity at 1 January Profit for the year Notes Share capital DKKm Proposed dividends DKKm Hedging reserve DKKm Retained earnings Equity DKKm DKKm 996 498 176 12,144 13,814 6 398 (498) 422 820 (498) 1 1 Distributed dividends, gross Dividends received, treasury shares Deferred exchange gains/losses, hedging Deferred fair value of interest rate swaps Exchange gains/losses, hedging (transferred to revenue) Buyback of treasury shares Incentive programs Tax on transactions in equity 5 Equity at 31 December See note 12 Equity in the consolidated financial statements. (340) 63 63 53 (53) (340) 63 63 34 34 (34) 34 73 ི་ཚ° (53) (34) 73 996 398 (81) 12,567 13,880 96/111#97LUNDBECK ANNUAL REPORT 2021 = CONTENTS FINANCIAL STATEMENTS OF THE PARENT COMPANY NOTES 1-3 97/111 1 REVENUE Information on employees Revenue by region 2021 DKKM 2020 Average number of full-time employees in the financial year DKKm Europe 3,761 3,636 Number of full-time employees at 31 December 2021 2020 1,721 1,738 1,732 1,709 North America 4,994 4,806 International markets 2,338 2,187 Remuneration of the Registered Executive Management Total 11,093 10,629 See notes 3 Employee costs and 14 Incentive programs in the consolidated financial statements. Other revenue Effects from hedging Total revenue 152 99 Remuneration of the Board of Directors 53 5 11,298 10,733 See note 3 Employee costs in the consolidated financial statements. Incentive programs See note 14 Incentive programs in the consolidated financial statements. 2 EMPLOYEE COSTS Breakdown of employee costs Short-term employee benefits Retirement benefits Social security costs Equity- and cash-settled incentive programs Severance and other costs from restructuring activities Total 2021 DKKm 2020 DKKm 3 INVESTMENTS IN SUBSIDIARIES 1,396 1,456 125 126 20 27 Cost at 1 January 34 29 100 2 Capital contributions to subsidiaries Cost at 31 December 1,675 1,640 2021 DKKm 10,738 5 10,743 Employee costs for the year are included in the following functions in the statement of profit or loss: Impairment at 1 January Impairment at 31 December 2021 2020 Carrying amount at 31 December 204 204 10,539 Employee costs DKKm DKKm Cost of sales 428 414 Sales and distribution costs 177 105 Administrative expenses Research and development costs Total 347 391 723 730 In 2021, income from investments in subsidiaries relates to dividends amounting to DKK 223 million. In 2020, income from investments in subsidiaries related to dividends received, proceeds from liquidation of subsidiaries and impairment losses recognized related to investments in subsidiaries amounting to DKK 757 million. 1,675 1,640 See note 23 List of subsidiaries in the consolidated financial statements for an overview of subsidiaries.#98LUNDBECK ANNUAL REPORT 2021 = CONTENTS FINANCIAL STATEMENTS OF THE PARENT COMPANY NOTES 4-6 4 FINANCIAL INCOME AND EXPENSES Deferred tax balances 98/111 Financial income Financial expenses Net financials, expenses/(income) 2021 2020 DKKm DKKm Temporary differences between assets and liabilities as stated in the financial statements and in the tax base 256 743 617 273 Intangible assets 361 (470) Property, plant and equipment In 2021, out of total financial income and expenses, DKK 246 million (DKK 233 million in 2020) and DKK 49 million (DKK 56 million in 2020), respectively, are related to intra-group interest income and expenses. Financial income and financial expenses are impacted by a net exchange loss of DKK 163 million relating to translation of receivables from and payables to subsidiaries that are considered part of the overall investment in subsidiaries. Further, financial income and financial expenses are impacted by a loss of DKK 127 million relating to the translation of external loans used for hedging net investments in foreign operations in the U.S. Inventories Other items Tax loss carryforwards etc. Total temporary differences Deferred (tax assets)/tax liabilities 1 January DKKm Balance at Adjustment of deferred tax at beginning of year DKKm Movements during the year Balance at 31 December DKKM DKKm 3,715 68 1,025 4,808 471 (68) 28 431 350 13 363 (381) (119) (500) (3,532) 210 (695) (4,017) 623 210 252 1,085 137 47 55 239 The major assumptions relating to the recognition and measurement of tax assets are described in note 5 Income taxes in the consolidated financial statements. 5 INCOME TAXES Tax on profit for the year Current tax, joint taxation contribution Prior-year adjustments, current tax Prior-year adjustments, deferred tax Change in deferred tax for the year Total tax for the year 2021 2020 DKKM DKKm Movements in deferred tax 137 178 Balance at 1 January 2021 DKKm 2020 DKKm Movements related to transactions recognized in profit or loss Balance at 31 December 102 (41) 239 137 3 12 (51) (2) g|ཆར་ (49) 6 DISTRIBUTION OF PROFIT (31) Tax for the year is composed of: Proposed distribution of profit for the year Tax on profit for the year 127 (80) Proposed dividends for the year Tax on transactions in equity (73) 49 Transferred to/from distributable reserves Total tax for the year 54 (31) Total profit for the year Proposed dividend per share (DKK) See note 12 Equity in the consolidated financial statements for details on treasury shares. 2021 2020 DKKm DKKm 398 498 422 217 820 715 2.00 2.50#99LUNDBECK ANNUAL REPORT 2021 = CONTENTS FINANCIAL STATEMENTS OF THE PARENT COMPANY NOTES 7-8 7 INTANGIBLE ASSETS 8 PROPERTY, PLANT AND EQUIPMENT 99/111 Product Other Projects in rights¹ rights² progress² Total intangible assets Intangible assets Cost at 1 January DKKm DKKm DKKm DKKm 16,441 1,659 132 18,232 Property, plant and equipment DKKm Land and buildings DKKm Plant and machinery Other fixtures and fittings, tools and equipment Prepayments and assets under Total property, construction plant and equipment DKKm DKKm DKKm Transfers Additions Disposals Cost at 31 December 99 (99) Cost at 1 January 3,176 1,135 531 295 5,137 102 16 71 189 Transfers 41 22 36 (99) (89) (25) (114) Additions 6 10 3 229 248 16,454 1,749 104 18,307 Disposals (28) (80) (63) (171) Cost at 31 December 3,195 1,087 507 425 5,214 Amortization and impairment losses at 1 January 6,591 1,591 8,182 Amortization Disposals Amortization and impairment losses at 31 December Carrying amount at 31 December 594 57 651 Depreciation and impairment losses at (88) (21) (109) 1 January 2,136 938 506 3,580 7,097 9,357 1,627 122 8,724 Depreciation 93 44 14 151 104 9,583 Impairment losses 3 3 Disposals (27) (78) (63) (168) 1) At 31 December 2021, product rights not yet commercialized amounted to DKK 6,341 million (DKK 6,239 million in 2020). 2) Other rights and projects in progress primarily include items such as the IT system SAP. The amounts include directly attributable internal expenses. Depreciation and impairment losses at 31 December 2,202 907 457 3,566 Carrying amount at 31 December 993 180 50 425 1,648 For details on material product rights and impairment testing, see note 6 Intangible assets in the consolidated financial statements. Pledged assets No land and buildings were mortgaged at 31 December 2021. No other assets have been pledged.#100LUNDBECK ANNUAL REPORT 2021 = CONTENTS FINANCIAL STATEMENTS OF THE PARENT COMPANY NOTES 9-11 9 RIGHT-OF-USE ASSETS AND LEASE LIABILITIES Amounts recognized in profit or loss Expense relating to short-term leases, not capitalized Depreciation of right-of-use assets, land and buildings Total 11 PROVISIONS 2021 DKKM 2020 DKKm 2 1 Provisions at 1 January 13 13 Provisions charged 15 14 Provisions used 2021 2020 Land and buildings DKKm DKKm Cost at 1 January 220 216 Adjustment to right-of-use assets during the year 7 4 Cost at 31 December 227 220 Depreciation and impairment losses at 1 January Depreciation 26 13 13 13 Depreciation and impairment losses at 31 December 39 26 Carrying amount at 31 December 188 194 Maturity analysis of lease liabilities Within 1 year Between 1 year and 5 years After 5 years Lease liabilities at 31 December 10 INVENTORIES 2021 2020 DKKm DKKm 14 13 54 52 120 130 188 195 2021 2020 DKKm DKKm Raw materials and consumables 162 143 Work in progress 1,342 868 Finished goods and goods for resale 344 292 Total 1,848 1,303 Unused provisions reversed Provisions at 31 December 100/111 2021 DKKm 132 284 (125) (51) 240 The Parent company has entered into agreements with individual subsidiaries, under which the Parent company will cover expected losses and obligations concerning the restructuring programs. The provisions in the Parent company therefore cover such losses and obligations. At 31 December 2021, provisions of DKK 240 million (DKK 132 million in 2020) related to restructuring programs.#101LUNDBECK ANNUAL REPORT 2021 = CONTENTS FINANCIAL STATEMENTS OF THE PARENT COMPANY NOTE 12 101/111 12 CONTINGENT ASSETS AND CONTINGENT LIABILITIES Pending legal proceedings H. Lundbeck A/S (the "Company") is involved in a number of legal proceedings, including patent disputes, the most significant of which are described below. The outcome of these proceedings is not expected to have a material impact on the financial position or cash flows beyond the amount already provided for in the financial statements, or it is too uncertain to make a reliable provision. Such proceedings will, however, develop over time, and new proceedings may occur which could have a material impact on the financial position and/or cash flows. In June 2013, the Company received the European Commission's decision that agreements concluded with four generic competitors concerning citalopram violated competition law. The decision included fining the Company EUR 93.8 million (approximately DKK 700 million). The Company paid and expensed the fine in the third quarter of 2013. In March 2021, the European Court of Justice rejected the Company's final appeal of the European Commission's decision. So-called "follow-on claims" for reimbursement of alleged losses, resulting from alleged violation of competition law, often arise when decisions and fines issued by the European Commission are upheld by the European Court of Justice. Health authorities in the UK and an umbrella organization of Dutch health insurance companies have taken formal protective steps against the Company with the principal purpose of preventing potential claims from being time-barred under the applicable statutes of limitation. In September 2021, the UK proceedings were transferred from the High Court to the Competition Appeal Tribunal at the request of the parties. The Company expects that the UK health authorities will now pursue their alleged claims. Further, in late October 2021, the Company received a writ of summons from a German health care company claiming compensation for an alleged loss of profit plus interest payments, allegedly resulting from the Company's conclusion of agreements with two of the four generic competitors, which were comprised by the EU Court of Justice ruling. The Company is preparing its defense and it may take several years before a final conclusion is reached by the German courts. The Company disagrees with the claims and will defend itself against the claims. In Canada, the Company is involved in three product liability class-action lawsuits relating to CipralexⓇ/CelexaⓇ (two cases alleging various CelexaⓇ-induced birth defects and one case against several SSRI manufacturers (incl. the Company) alleging that SSRI (CelexaⓇ/LexaproⓇ) induces autism birth defect, three relating to Abilify MaintenaⓇ (alleging i.a. failure to warn about compulsive behaviour side effects) and one relating to RexultiⓇ (also alleging i.a. failure to warn about compulsive behaviour side effects). The cases are in the preliminary stages and as such there is significant uncertainty as to how these lawsuits will be resolved. The Company strongly disagrees with the claims raised. In 2018, the Company entered into settlements with three of four generic companies involved in an Australian federal court case, in which the Company was pursuing patent infringement and damages claims over the sale of escitalopram products in Australia. The Company received AUD 51.7 million (DKK 242 million) in 2018. In the Company's case against the last of the four generic companies, Sandoz Pty Ltd, the Federal Court found that Sandoz Pty Ltd had infringed the Company's escitalopram patent between 2009 and 2012 and awarded the Company AUD 26.3 million in damages. Sandoz' appeal of the decision was heard in May 2019 and the Full Federal Court has in August 2020 allowed Sandoz' appeal and decided that Sandoz is not liable for damages. The Company's application for special leave to appeal the decision to the High Court was granted in February 2021, and the appeal was heard on 8 October 2021. A decision is expected within 3 - 6 months from the hearing. If the Company's appeal is successful, the case will go back to the Federal Court for recalculation and the Company's appeal of the Australian Patent Office's decision to grant Sandoz a license will be restarted. Together with Takeda, the Company instituted patent infringement proceedings against 16 generic companies in response to their filing of Abbreviated New Drug Applications ("ANDAS") with the U.S. FDA seeking to obtain marketing approval for generic versions of Trintellix in the U.S. Two opponents have since withdrawn and the Company has settled with eight opponents. As communicated by the Company in company release no. 706 dated 1 October 2021, the cases against the six remaining opponents (the "ANDA Filers") has been decided by the U.S. District Court for the District of Delaware (the 'Court'). The Court found that the Company's patent protecting the active ingredient in TrintellixⓇ, vortioxetine (U.S. Patent No. 7,144,884) is valid. The active ingredient patent expires on 17 June 2026, with an expected six-month paediatric exclusivity period extending to 17 December 2026. Assuming the ruling is confirmed at appeal, final approval will not be granted to the relevant ANDA Filers until after expiration of the active ingredient patent, including any extension or additional periods of exclusivity. A total of seven other patents asserted at trial were found by the Court to be valid or their validity was not challenged during the trial. The Court decided that none of the seven other patents were infringed by the relevant ANDA Filers, except that Lupin was found to infringe a patent covering the Company's process for manufacturing vortioxetine. Unless and until the Court's ruling is reversed on appeal, the patents found not infringed by a particular ANDA Filer will not prevent that ANDA Filer from receiving final approval. For details on each of the patents comprised by the case, please see the company release no. 706. The Court's decision has been appealed by the Company to the U.S. Court of Appeals for the Federal Circuit. Lupin has appealed with respect to the process patent and the ANDA Filers have cross appealed with respect to the validity of two of the seven other patents. Together with Otsuka Pharmaceutical, the Company has instituted patent infringement proceedings against several generic companies that have applied for marketing authorization for generic versions of RexultiⓇ in the U.S. The Company has strong confidence in the RexultiⓇ patents. The U.S. FDA cannot grant marketing authorization in the U.S. to the generic companies before the patents expire, unless the generic companies receive decisions in their favour. Trial is scheduled to begin on 25 July 2022. The compound patent, including patent term extensions, will expire in the U.S. on 23 June 2029. A patent for the specific formulation used will expire 12 September 2032.#102LUNDBECK ANNUAL REPORT 2021 = CONTENTS FINANCIAL STATEMENTS OF THE PARENT COMPANY NOTES 12-18 12 CONTINGENT ASSETS AND CONTINGENT LIABILITIES - CONTINUED 16 AUDIT FEES 102/111 Joint taxation The Parent company is part of a Danish joint taxation scheme with Lundbeckfonden (Lundbeckfond Invest A/S including subsidiaries), according to which the Company has partly a joint and several liability and partly a secondary liability with respect to corporate income taxes, etc. for the jointly-taxed companies. In addition, the Parent company has partly a joint and several liability and partly a secondary liability with respect to any obligations to withhold tax on interest, royalties and dividends for these companies. However, in both cases the secondary liability is capped at an amount equal to the share of the capital of the company directly or indirectly owned by the ultimate parent company. The total tax obligation under the joint taxation scheme is shown in the financial statements of Lundbeckfond Invest A/S. Letters of intent The Parent company has entered into agreements to cover operating losses in certain subsidiaries. As collateral for bank guarantees, the Parent company has issued letter of intent to the banks in the amount of DKK 7 million (DKK 6 million in 2020) on behalf of subsidiaries. 13 BANK DEBT AND BOND DEBT Bank debt and bond debt falling due after more than five years from the balance sheet date amounted to DKK 3,700 million at 31 December 2021 (DKK 3,699 million in 2020). 14 PAYABLES TO SUBSIDIARIES Payables to subsidiaries falling due after more than five years from the balance sheet date amounted to DKK 9,066 million at 31 December 2021 (DKK 6,226 million in 2020). 15 FINANCIAL INSTRUMENTS Foreign currency management is handled by the Parent company. See note 19 Financial instruments in the consolidated financial statements. The fair value of derivatives at year-end is disclosed in note 19 Financial instruments in the consolidated financial statements. The fair value adjustment recognized in equity is disclosed in the statement of changes in equity in the financial statements of the Parent company. All fair value adjustments are initially recognized in equity. Statutory audit Assurance engagements other than audit Tax advisory Other services Fee to PricewaterhouseCoopers 17 CONTRACTUAL OBLIGATIONS Research and development milestones and collaborations 2021 DKKm 2020 DKKm 3 4 1 2 3 3 1 9 8 The Parent company has entered into a number of agreements relating to research and development as well as other collaborations. According to the agreements, the Company is committed to pay certain milestones. At 31 December 2021, potential future milestone payments covering the coming ten-year period totalled up to DKK 1,031 million (DKK 300 million in 2020). Sales milestones The Company is committed to pay certain commercial sales milestones. The amount depends on future sales. Other purchase obligations The Company has undertaken purchase obligations relating to property, plant and equipment in the amount of DKK 48 million (DKK 82 million in 2020). 18 RELATED PARTIES For information on related parties exercising controlling influence on the Parent company, see note 22 Related parties in the consolidated financial statements. The Parent company is included in the consolidated financial statements of Lundbeckfonden.#103LUNDBECK ANNUAL REPORT 2021 = CONTENTS FINANCIAL STATEMENTS OF THE PARENT COMPANY NOTES 18-20 103/111 18 RELATED PARTIES - CONTINUED The Parent company had transactions with subsidiaries during 2021. The Parent company's share of ownership of all subsidiaries is 100%. The Parent company did not enter into any transactions with other related parties that were not on an arm's length basis. 19 SUBSEQUENT EVENTS See note 24 Subsequent events in the consolidated financial statements. 20 SIGNIFICANT ACCOUNTING POLICIES The financial statements of the Parent company H. Lundbeck A/S have been prepared in accordance with the Danish Financial Statements Act applying to enterprises in reporting class D. The financial statements are presented in Danish kroner (DKK). All amounts have been rounded to the nearest DKK million, unless otherwise indicated. The accounting policies for the financial statements of the Parent company remain unchaged from the previous financial year. Differences relative to the accounting policies for the consolidated financial statements The Parent company's accounting policies for recognition and measurement are consistent with the accounting policies for the consolidated financial statements with the exceptions stated below. For a description of the accounting policies of the Group, please refer to the consolidated financial statements. Statement of profit or loss Income from investments in subsidiaries Income from investments in subsidiaries includes dividends from subsidiaries, which are recognized in the Parent company's statement of profit or loss when the Parent company's right to receive such dividends has been approved. Further, income from investments in subsidiaries includes proceeds from liquidation of subsidiaries and any impairment losses or reversals of impairment losses on investments in subsidiaries. Exchange gains/losses Exchange gains/losses on translation of receivables from and payables to subsidiaries that are considered part of the overall investment in subsidiaries are recognized in profit or loss under financial income or financial expenses. Exchange gains/losses on that part of the bank debt in foreign currency which is used for hedging of the net investments in subsidiaries and which provides an effective hedging of the exchange gains/losses of the net investments are recognized in profit or loss under financial income or financial expenses. Statement of financial position Investments in subsidiaries Investments in subsidiaries are measured at cost in the Parent company's financial statements. Where the recoverable amount of the investments is lower than cost, the investments are written down to this lower value. In addition, cost is written down to the extent that dividends distributed exceed the accumulated earnings in the subsidiary since the acquisition date. Other financial assets On initial recognition, investments are measured at cost, corresponding to fair value plus directly attributable costs. Subsequently, they are measured at fair value at the balance sheet date. Any fair value adjustments on equity investments recognized in other comprehensive income in the consolidated financial statements are recognized under financial income or financial expenses in the Parent company's statement of profit or loss. Statement of changes in equity Pursuant to the Danish Financial Statements Act, entries recognized in the statement of comprehensive income in the consolidated financial statements are recognized directly in the statement of changes in equity in the Parent company's financial statements, except for entries concerning exchange gains/losses on translation of receivables from and payables to subsidiaries, entries providing an effective hedge against foreign exchange gains/losses on the net investment and entries concerning other financial assets. Statement of cash flows In accordance with the exemption clause in section 86(4) of the Danish Financial Statements Act, no separate statement of cash flows has been prepared for the Parent company as it is included in the consolidated statement of cash flows.#104LUNDBECK ANNUAL REPORT 2021 = CONTENTS 104/111 MANAGEMENT STATEMENT The Board of Directors and the registered Executive Management have today considered and adopted the Annual Report of H. Lundbeck A/S for the financial year 1 January - 31 December 2021. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU and further requirements in the Danish Financial Statements Act, and the Parent company financial statements have been prepared in accordance with the Danish Financial Statements Act. Management review has been prepared in accordance with the Danish Financial Statements Act. In our opinion, the consolidated financial statements and the Parent company financial statements give a true and fair view of the financial position at 31 December 2021 of the Group and the Parent company and of the results of the Group and Parent company operations and consolidated cash flows for the financial year 1 January - 31 December 2021. In our opinion, Management review includes a true and fair account of the development in the operations and financial circumstances of the Group and the Parent company, of the results for the year and of the financial position of the Group and the Parent company as well as a description of the most significant risks and elements of uncertainty facing the Group and the Parent Company. We recommend that the Annual Report be adopted at the Annual General Meeting. In our opinion, the Annual Report of H. Lundbeck A/S for the financial year 1 January to 31 December 2021 identified as HLUNDBECK-2021- 12-31-en.zip is prepared, in all material respects, in compliance with the ESEF Regulation. We recommend that the Annual Report be approved at the Annual General Meeting. Copenhagen, 9 February 2022 REGISTERED EXECUTIVE MANAGEMENT Примаме Deborah Dunsire President and CEO Lars Bang Executive Vice President, Product, Development & Supply Anders не Anders Götzsche Executive Vice President, CFO Per Johan Luthman Executive Vice President, Research & Development Jacob Tolstrup Executive Vice President, Commercial Operations BOARD OF DIRECTORS Lars Søren Rasmussen Chairman of the Board Jeeny Levin Jeremy Max Levin heve Hole Lene Skole-Sørensen Deputy Chairman Соегл Ilse Dorothea Wenzel کا Santiago Arroyo Rikke K Andreasen Rikke Kruse Andreasen Employee representative by Beka Berkowitz Lars Erik Holmqvist Hemik Sindal Jusu Luioric T Otterbein Henrik Sindal Jensen Employee representative Ludovic Tranholm Otterbein Employee representative#105LUNDBECK ANNUAL REPORT 2021 = CONTENTS 105/111 INDEPENDENT AUDITOR'S REPORTS To the shareholders of H. Lundbeck A/S Report on the audit of the financial statements Our opinion In our opinion, the consolidated financial statements (pages 51-92) give a true and fair view of the group's financial position at 31 December 2021 and of the results of the group's operations and cash flows for the financial year 1 January to 31 December 2021 in accordance with International Financial Reporting Standards as adopted by the EU and further requirements in the Danish Financial Statements Act. Moreover, in our opinion, the Parent company financial statements (pages 93-103) give a true and fair view of the Parent company's financial position at 31 December 2021 and of the results of the Parent company's operations for the financial year 1 January to 31 December 2021 in accordance with the Danish Financial Statements Act. Our opinion is consistent with our Auditor's Long-form Report to the Audit Committee and the Board of Directors. What we have audited The consolidated financial statements of H. Lundbeck A/S for the financial year 1 January to 31 December 2021 comprise the consolidated statement of profit or loss and statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of changes in equity, the consolidated statement of cash flows and the notes, including summary of significant accounting policies. The Parent company financial statements of H. Lundbeck A/S for the financial year 1 January to 31 December 2021 comprise the statement of profit or loss, the statement of financial position, the statement of changes in equity, and the notes, including summary of significant accounting policies. Collectively referred to as the "financial statements". Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs) and the additional requirements applicable in Denmark. Our responsibilities under those standards and requirements are further described in the Auditor's responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the International Ethics Standards Board for Accountants' International Code of Ethics for Professional Accountants (IESBA Code) and the additional ethical requirements applicable in Denmark. We have also fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. To the best of our knowledge and belief, prohibited non-audit services referred to in Article 5(1) of Regulation (EU) No 537/2014 were not provided. Appointment We were first appointed auditors of H. Lundbeck A/S on 24 March 2020 for the financial year 2020. We have been reappointed annually by shareholder resolution for a total period of uninterrupted engagement of 2 years, including the financial year 2021. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements for 2021. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.#106LUNDBECK ANNUAL REPORT 2021 = CONTENTS 106/111 INDEPENDENT AUDITOR'S REPORTS CONTINUED Key audit matter Sales deductions in the U.S. As of 31 December 2021, Management has recognized a provision for discounts and rebates of DKK 923 million (2020: DKK 1,002 million). The Group provides rebates and discounts to customers in the U.S. that fall under certain government mandated reimbursement arrangements, of which the most significant is Medicaid. These arrangements result in deductions to gross sales in arriving at net revenue. The period passing between the sales to distributors and payment of the related rebates under the U.S. Federal and State Government Healthcare programs may be several months and require the unsettled amounts to be recognized as a provision. We focused on these arrangements because they are complex and require significant estimation by Management in establishing an appropriate provision for the unsettled amounts. This includes estimation of sales volumes subject to the rebates, estimation of applicable rebate percentages, and estimation of the lag time described above. We refer to note 1.5, 15 and 25 in the consolidated financial statements. Impairment of product rights As of 31 December 2021, the Group has product rights of DKK 17,097 million (2020: DKK 17,632). Product rights are tested when there is an indication of impairment, and product rights not yet commercialized are tested annually for impairment. The recoverability of the carrying value of product rights is contingent on future cash flows and/or the outcome of research and development activities. The determination of the recoverable amounts includes significant estimates, which are highly sensitive and depend upon key assumptions, including the probability of technical and regulatory success, amount and timing of projected future cash flows, patent expiry, and discount rate assumptions. Changes in these assumptions could have an impact on the recoverable amount of product rights. We focused on this area as the amounts involved are material and there is a risk that the product rights will be impaired if the key assumptions deviate negatively from the expectations. We refer to note 1.5, 6 and 25 in the consolidated financial statements. How our audit addressed the key audit matter We evaluated and tested relevant controls related to the provision for rebates and discounts in the U.S., including applicable IT systems and Management's monitoring controls. We obtained Management's calculations under the reimbursement arrangements and evaluated the accuracy of the calculations made. Further, we assessed and tested key data inputs and significant assumptions and recalculated the rebate percentages. We obtained and assessed the Group's estimate of the period from sale to payment of rebates, and rebate percentages applied, and inquired Management about their estimation process. We considered the Group's historical provisions by comparing the actual rebate with the rebate percentage estimate used by Management to recognize the provision, including performing a retrospective review of the prior period provision compared to subsequent payments to evaluate the accuracy of Management's estimate and to identify any potential management bias. We evaluated the presentation and disclosures of sales deductions in the U.S. in the consolidated financial statements. We evaluated the design and tested the operating effectiveness of the Group's controls for assessing impairment indicators and the recoverability of the carrying value of product rights. For product rights with impairment indicators and product rights not yet commercialized, we among others: • Tested Management's process for determining the recoverable amount; • Evaluated the appropriateness of the methodology used in the impairment tests; • Evaluated Management's assumptions used in the impairment tests, including the probability of technical and regulatory success, amount and timing of projected future cash flows, and impact of the expiry of patents; • Tested the underlying data used in the impairment tests, including reconciliation of the cash flows to Management approved Long Term Plan and forecasts; and • Included our in-house valuation experts to assess the valuation techniques used and to assist with the evaluation of certain key assumptions, including the discount rates applied. Moreover, we evaluated the disclosures of impairment testing in the consolidated financial statements.#107LUNDBECK ANNUAL REPORT 2021 = CONTENTS 107/111 INDEPENDENT AUDITOR'S REPORTS CONTINUED Statement on Management review Management is responsible for Management review (pages 3-50 and pages 110-111, respectively). Our opinion on the financial statements does not cover Management review, and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read Management review and, in doing so, consider whether Management review is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. Moreover, we considered whether Management review includes the disclosures required by the Danish Financial Statements Act. Based on the work we have performed, in our view, Management review is in accordance with the consolidated financial statements and the Parent company financial statements and has been prepared in accordance with the requirements of the Danish Financial Statements Act. We did not identify any material misstatement in Management review. Management's responsibilities for the financial statements Management is responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the EU and further requirements in the Danish Financial Statements Act and for the preparation of Parent company financial statements that give a true and fair view in accordance with the Danish Financial Statements Act, and for such internal control as Management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, Management is responsible for assessing the Group's and the Parent company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless Management either intends to liquidate the Group or the Parent company or to cease operations, or has no realistic alternative but to do SO. Auditor's responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the 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 aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs and the additional requirements applicable in Denmark, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the 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, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures 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 company's internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management. • • Conclude on the appropriateness of Management's use of the going concern basis of accounting 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 company'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 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#108LUNDBECK ANNUAL REPORT 2021 = CONTENTS 108/111 INDEPENDENT AUDITOR'S REPORTS CONTINUED or conditions may cause the Group or the Parent company to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that gives a true and fair view. • Obtain sufficient appropriate audit evidence regarding 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 governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal 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, actions taken to eliminate threats or safeguards applied. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial 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 precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on compliance with the ESEF Regulation As part of our audit of the financial statements we performed procedures to express an opinion on whether the Annual Report of H. Lundbeck A/S for the financial year 1 January to 31 December 2021 with the filename HLUNDBECK-2021-12-31-en.zip is prepared, in all material respects, in compliance with the Commission Delegated Regulation (EU) 2019/815 on the European Single Electronic Format (ESEF Regulation) which includes requirements related to the preparation of the annual report in XHTML format and iXBRL tagging of the consolidated financial statements. Management is responsible for preparing an annual report that complies with the ESEF Regulation. This responsibility includes: • The preparing of the annual report in XHTML format; • The selection and application of appropriate iXBRL tags, including extensions to the ESEF taxonomy and the anchoring thereof to elements in the taxonomy, for all financial information required to be tagged using judgment where necessary; . Ensuring consistency between iXBRL tagged data and the consolidated financial statements presented in human-readable format; and For such internal control as Management determines necessary to enable the preparation of an annual report that is compliant with the ESEF Regulation.#109LUNDBECK ANNUAL REPORT 2021 = CONTENTS INDEPENDENT AUDITOR'S REPORTS CONTINUED Our responsibility is to obtain reasonable assurance on whether the annual report is prepared, in all material respects, in compliance with the ESEF Regulation based on the evidence we have obtained, and to issue a report that includes our opinion. The nature, timing and extent of procedures selected depend on the auditor's judgment, including the assessment of the risks of material departures from the requirements set out in the ESEF Regulation, whether due to fraud or error. The procedures include: • Testing whether the annual report is prepared in XHTML format; • Obtaining an understanding of the company's iXBRL tagging process and of internal control over the tagging process; • Evaluating the completeness of the iXBRL tagging of the consolidated financial statements; • Evaluating the appropriateness of the company's use of iXBRL elements selected from the ESEF taxonomy and the creation of extension elements where no suitable element in the ESEF taxonomy has been identified; • Evaluating the use of anchoring of extension elements to elements in the ESEF taxonomy; and • Reconciling the iXBRL tagged data with the audited consolidated financial statements. In our opinion, the Annual Report of H. Lundbeck A/S for the financial year 1 January to 31 December 2021 with the file name HLUNDBECK- 2021-12-31-en.zip is prepared, in all material respects, in compliance with the ESEF Regulation. Hellerup, 9 February 2022 PricewaterhouseCoopers Statsautoriseret Revisionspartnerselskab CVR No 3377 1231 Lars Baungaard State Authorized Public Accountant mne23331 John of Torben Jensen State Authorized Public Accountant mne18651 109/111#110LUNDBECK ANNUAL REPORT 2021 = CONTENTS CORE RECONCILIATION Part of Management review 110/111 Acquisition valuation DKKm Major restructuring DKKm and integration costs DKKm Legal fees and Divestments/ settlements DKKm sales milestones DKKm Core result DKKm Amortization rights Reported of product result DKKm DKKm Impairment and inventory 16,299 Cost of sales 3,648 (1,274) Gross profit 12,651 1,274 (37) 37 Sales and distribution costs 5,885 (162) Administrative expenses 933 (31) Research and development costs 3,823 (3) 16,299 2,337 13,962 5,723 902 3,820 Other operating expenses, net Profit from operations (EBIT) 2,010 1,274 233 3,517 Net financials, expenses Profit before tax Tax on profit for the year Profit for the year 429 429 1,581 1,274 233 3,088 263 276 51 590 1,318 998 182 2,498 Earnings per share, basic (EPS) (DKK) 6.63 5.02 0.92 12.57 As a general rule, Lundbeck adjusts for amortization of product rights and for each non-recurring item that Management deems exceptional and which accumulates or is expected to accumulate to an amount exceeding a DKK 100 million threshold. Lundbeck's core reporting is a non- IFRS performance measurement. Lundbeck's core results, including core operating income (core EBIT) and core EPS, exclude: Amortization of product rights Impairment of intangible assets and property, plant and equipment as well as inventory valuation adjustment Major restructuring costs Acquisition and integration costs, including: • Accounting adjustments relating to the consolidation of material acquisitions and disposals of associates, products and businesses ⚫ Costs associated with the integration of newly acquired companies • Retention costs • Transaction costs Legal fees and settlements, including: ⚫ Legal costs (external), charges (net of insurance recoveries) and expenses relating to settlement of litigations, government investigations and other disputes • Income from settlement of litigations and other disputes Core results 1 January 31 December 2021 Revenue#111LUNDBECK ANNUAL REPORT 2021 = CONTENTS 111/111 CORE RECONCILIATION Part of Management review CONTINUED Amortization Reported of product result rights Core results DKKm DKKM Acquisition Impairment and inventory valuation DKKm Major restructuring DKKm and integration costs DKKm Legal fees and Divestments/ settlements DKKm sales milestones DKKm Core result DKKm 1 January 31 December 2020 Divestments/milestones, including: • Income/expenses from discontinued operations • Gains/losses on divestments of assets • Received or expensed upfront sales and development milestones The adjusted core result is taxed at the underlying corporate tax rate. Gross profit Sales and distribution costs Administrative expenses Research and development costs Other operating expenses, net Profit from operations (EBIT) Revenue 17,672 17,672 Cost of sales 4,166 13,506 (1,548) 1,548 (47) 2,571 47 15,101 5,946 5,946 966 966 4,545 (792) 3,753 59 (59) 1,990 1,548 839 59 4,436 Net financials, expenses 84 84 Profit before tax 1,906 1,548 839 59 4,352 Tax on profit for the year 325 244 11 14 594 Profit for the year 1,581 1,304 828 45 3,758 Earnings per share, basic (EPS) (DKK) 7.96 6.56 4.17 0.23 18.92#112H. Lundbeck A/S Ottiliavej 9 2500 Valby Denmark Corporate Communication & Public Affairs Tel. +45 36 30 13 11 [email protected] www.lundbeck.com CVR number 56759913