Important information and disclosures at the end of this report. www.norne.no

Re-Initiation of coverage

November 27th 2019

Share price: NOK 7.50

Target: NOK 11.00

Risk: High

Norne Securities AS is a market maker in the shares of NattoPharma

Positioned to deliver

We re-initiate coverage of NattoPharma, a Norwegian nutraceutical company,

specializing in vitamin K2. We believe that a Vitamin K2 market has a strong

growth potential, while the company itself is increasing its focus on efficiency,

profitability and investors. This should contribute towards further growth and

better fundamentals. However, we see the stock rather undervalued and issue

a Buy recommendation with a target price of NOK 11/sh using the DCF valuation

with a discount applied on top.

Important player in the Vitamin K2 market

NattoPharma is a Norwegian nutraceutical company founded in 2004 and is

known as one of the leading companies for an extensive research on vitamin K2

and its health benefits. Also, it is the only company producing both natural and

synthetic vitamin K2. NattoPharma’s market share could be estimated at ~30%,

while the overall market value in 2018 is in the range of USD 50-60m. We note

that it is still a market at its infancy, but as long as the recognition of vitamin K2

and its health benefits is increasing, the market will also rapidly expand.

Positive direction

We acknowledge a number of positive changes the company has implemented, which

strengthen our investment case. NattoPharma has improved their synthesis process,

increasing their synthetic production capacity and efficiency. This should translate

into lower CoGS for synthetic product from 2020. Also, NattoPharma advanced with

a new ingredient in the mood enhancement and energy segment, which is planned to

be launched in 2H20 after the first clinical studies are complete in early 2020.

Although we do not include those potential sales in our model, we note that if

successfully launched, the new product could contribute to a significant upside. In

addition, in 2019 NattoPharma has increased its focus on investor relations. The

company’s quarterly reports are reintroduced, management provides a more detailed

financial guiding, holds more meetings with investors and plans to switch from audio

cast to webcast in 4Q19 presentation. We view those as positive contributions to a

more transparent and reliable company’s image and believe investor focus will only

strengthen.

Kappa Bioscience transaction

It is worth mentioning the latest transaction in NattoPharma’s Vitamin K2

competitor, KappaBioscience of 59.49% shares, implying the overall value of the

company at around NOK 730m and EV/Sales multiple of ~5.0 (if we take 25% YoY

revenue growth for 2019). In comparison, NattoPharma trades with a market cap

of NOK 136m and EV/Sales multiple of 1.1 for 2019. We view this transaction as

supportive for NattoPharma’s investment case and the overall Vitamin K2 market.

Sector Health CareReuters NATTO.OLBloomberg NATTO NO

Market Cap (NOKm) 136 Net debt (NOKm) -1 EV (NOKm) 136 Net debt / equity -1%

Issued shares (m) 18

Share price

1m 3m 12mNATTO -1% -12% -10%OSEBX 1% 9% 7%

4Q19 Results February 19, 2020

Key share data

Performance

Upcoming events

Analyst Marina Tarakanova

+47 21 95 37 54

marina.tarakanova@norne.no

NattoPharma BUY

2

We issue a Buy recommendation with a TP of NOK 11/sh Our DCF-based target price is set at NOK 11.00/sh, which indicates a 47% upside to

the current share price. Valuation does not include any value from potential sales of

new ingredients and the value from its pharmaceutical spin-off Kaydence Pharma. We

also apply a 20% discount to our TP to account for relatively high risk of the company,

illiquidity of its shares and a considerably high possibility of an equity issue at the start

of 2020.

Key financial figures (NOKm)2016 2017 2018 2019E 2020E 2021E 2022E

Sales 52.5 66.6 107.2 128.7 163.1 203.8 254.8 EBITDA -6.5 -1.2 5.1 9.7 15.6 20.5 26.2 EBIT (adj) -13.3 -8.6 -2.2 1.7 7.8 12.7 18.4 Pretax profit -18.9 8.9 1.0 4.2 10.8 23.3 39.1 Net profit -18.2 9.5 1.8 4.8 11.3 23.8 39.6

EPS rep. (NOK) -1.03 0.54 0.10 0.26 0.62 1.31 2.18EPS adj. (NOK) -0.89 -0.47 0.10 0.26 0.62 1.31 2.18NIBD -19.8 -13.6 -18.7 2.6 -7.0 -28.1 -65.9

EV/Sales 2.70 2.20 1.22 1.11 0.79 0.53 0.28EV/EBITDA neg neg 24.4 14.3 8.3 5.3 2.7EV/EBIT (adj) neg neg neg 81.1 16.6 8.5 3.8P/E (adj) neg neg 81.0 28.3 12.0 5.7 3.4P/B (excl. goodwill) 2.30 1.54 1.39 1.26 1.14 0.95 0.75

ROE -20.1 % -9.5 % 1.7 % 4.6 % 10.0 % 18.1 % 24.3 %ROCE -14.9 % -7.8 % -1.7 % 1.3 % 5.7 % 8.2 % 9.9 %

Source: Norne Securities, NattoPharma

3

Company profile NattoPharma is a Norwegian nutraceutical company founded in 2004 and known

as one the leading companies in vitamin K2 research and development. It supplies

natural and synthetic vitamin K2 products with a strategy to strengthen market

access with its current technologies and at the same time to expand its current

portfolio by developing new products. The company’s competitive edge is built

around the extensive R&D studies, which, in combination with scientific

publications of other authors, strongly indicate that vitamin K2 can prevent or

even reverse top healthcare problems – cardiovascular diseases and bone

osteoporosis. The company’s vitamin K2 brand is called MenaQ7 and it is the only

company in the market offering both natural and synthetic vitamin K2. Due to

unique properties of vitamin K2 and the formulations, the company’s products

may be suitable for a wide range of applications including dietary supplements,

medical foods, functional foods, or pharmaceuticals.

Business model. NattoPharma supplies vitamin K2 concentrates, marketed under MenaQ7 brand,

and operates under business-to-business (B2B) model. The company sells its

products to both direct customers and the distribution partners, some of which

are presented in the table below and include Wiley’s, TG Montgomery, BioLab

Pharma, etc.

As evidenced by the table, the partners are spread around the world,

strengthening NattoPharma’s global presence. According to the management,

both South and North America remain the biggest markets for the company,

corresponding to 67% of total revenues in 2018. European market remains

relatively solid with around 25% of total 2018 revenues and stable growth

throughout the year, explained by the strongest competition in this region, as

company’s main global competitors are also based and operate in Europe. In the

meantime, the biggest growth is seen both in American and Asian markets. Going

forward, it is expected that in percentage terms growth in Asia will surpass the

growth in Americas, while in absolute terms American market will still remain by

far the biggest.

Country Partner Event

Norway TGM Books, Illustrations, Sampling, PR

UK Wiley's Mass Media, Retail Events, Whole Foods Market Training

Finland FinClub MLM Presentations over 500 Business Builders

Brazil Various Pharma Meeting Presentation to CV Physicians

United States Various National PR, Retail Education, Sampling, Books

China Various National Launch, Distributor Training, Media

Vietnam Smarc Doctor and Media Presentations; PRSource: NattoPharma CMD 2017

Sales by channel

Source: NattoPharma CMD 2017

Natural Health Food Retail35%

Mass Market28%

Mail Order6%

Multi-Level20%

Practitioner-CAM8%

Internet3%

Geographical revenue distribution in 2018

Source: NattoPharma

Europe25%

North and South

Americas67%

Rest of the

World8%

Global Markets and Offerings

Source: NattoPharma CMD 2017

4

Science behind vitamin K2

History Vitamin K was discovered by the Danish scientist Henrik Dam in the early 1930’s.

During experiments on chickens feed with a low-fat diet he found an unknown

substance that was necessary for the blood to coagulate. This substance was

named vitamin K, where letter “K” stands for Danish word “Koagulation”,

indicating that pro-coagulation activity was the first biological function assigned

to this substance. Several years later American professor Edward A. Doisy

determined the molecular structure of vitamin K1 and synthesized it in a

laboratory. It was discovered that vitamin K consisted of two groups of molecules

– vitamin K1 and vitamin K2. In 1943 Dam and Doisy were awarded the Nobel

Prize in Medicine for their discoveries.

While vitamin K1 represents only one form, Vitamin K2 consists of a group of

closely related molecules synthesized by bacteria and together called as

menaquinones. At present only two forms of vitamin K2 (MK-4 and MK-7) are

commercially available and thus have been studied in trials.

All K vitamins have a similar function, but their pharmacokinetic behaviour, i.e.

tissue distribution following absorption, varies greatly. When ingested, most of

the vitamin K1 is rapidly transported to liver, where it participates in the

metabolism of the coagulation factors. Vitamin K2 is also transported to liver, but

due to its different distribution and long half-life in the circulation, it also reaches

other tissues such as bones and vasculature. In simple terms, one of the key

effects of vitamin K2 is the ability to increase the uptake of calcium from blood to

bones.

Dietary Vitamin K Vitamin K1 is the predominant form of vitamin K present in many foods. K1 is

mainly found in green vegetables, whereas K2 is synthesized by bacteria and is

primarily found in food where bacteria is part of the production process. Major

sources of K1 include spinach, cabbage, and kale, while absorption of dietary K1

is increased in presence of butter or oils. Besides leafy greens, K1 can also be

Structural forms of vitamin K1 and vitamin K2 group

Source: NattoPharma

5

Natto food

found in avocados and fruits like kiwi and grapes. In the meantime, the main

known sources of K2 are fermented food, meat, and dairy produce. Fermentation

of soy beans with Bacillus natto produces Natto - a Japanese dish with the highest

content of K2, hence the name of the company was derived. Dairy products are

the second richest source of K2 in the diet, although contain much less of Vitamin

K2 compared to the Natto food. Also, other sources of K2 include chicken meat,

egg yolks, sauerkraut, beef and salmon.

Health benefits As mentioned previously, one of the key effects of vitamin K2 is the ability to

enhance the uptake of calcium from blood to bones. As a consequence, two main

health benefits arise: strengthening of the bones (prevention of osteoporosis or

even its reversal) and prevention (or even reversal) of atherosclerosis (stiffening)

of the artery walls.

Dietary sources of vitamin K

Source: International Journal of Molecular Sciences, 2019

Functions of vitamin K2 in the body

Source: International Journal of Molecular Sciences, 2019

6

Vitamin K2 directs calcium to the

bones, and prevents it from

being deposited where it

shouldn't be, for example

arteries and organs, where it can

cause harm

Bone health

Vitamin K2 participates in the activation of osteocalcin – a protein, which

incorporates calcium into the bone matrix, thus making skeleton stronger. During

late 20s to mid-30s our bone mass reaches its peak, after which bone density

slowly diminishes. Thus, vitamin K2 helps to strengthen the bones and prevent

osteoporosis.

Cardiovascular health

Furthemore, vitamin K2 is showed to be beneficial for cardiovascular health.

Vitamin K2 activates Matrix Gla Protein (MGP), which stops or removes calcium

from depositing in the vessel walls. As well, Vitamin K has the ability to scavenge

free radicals, reduce oxidative stress, and decrease vascular calcification. On the

other hand, Vitamin K deficiency results in inadequate activation of MGP and thus

greatly impairs normal function of calcium removal process. Therefore, regular

intake of vitamin K2 helps to keep the blood vessels flexible – which as a result

decreases the risk of developing hypertension and cardiovascular or circulatory

diseases.

Those claims are supported by multiple studies of Vitamin K. One of them, the

Rotterdam Study (2004) shows that high dietary intake of Vitamin K2 – but not

vitamin K1 – has a strong protective effect on cardiovascular health. Findings from

this 10-year population-based study, which followed 4,807 initially healthy men

and women >55 years of age from start, indicate that eating foods rich in natural

Vitamin K2 (at least 32 mcg/day) results in 50% reduction of arterial calcification,

50% reduction of cardiovascular risk, and 25% reduction of all-cause mortality.

These findings were further supported in 2008 by another population-based

study of 16,000 women (Prospect-EPIC trial) followed up for eight years. The

researchers (Gast et al.) found that for every 10mcg vitamin K2 (MK-7, MK-8 and

MK-9) consumed, the risk of coronary heart disease was reduced by 9%. Clearly,

those different studies demonstrate the incredible evidence that vitamin K2 is

found to be cardio-protective.

Schematic representation of osteoporosis

Source: NattoPharma

Bone mass develpment with age

Source: VitaMK7

Mechanism of action

Source: NattoPharma

Vascular calcification

Source: NattoPharma

7

Three-year clinical study for cardiovascular and bone health

One of the most prominent clinical studies cited by NattoPharma was conducted

in the cooperation with the University of Maastricht in 2008-2011. During three

years period two combined large clinical studies were carried out to explore and

document the effects of daily intake of MenaQ7 on bone and cardiovascular

health.

The randomized, double-blind, placebo controlled trial involved 244

postmenopausal women, who were followed for three years (2008-2011). The

bone health results were published in 2013 in a journal “Osteoporosis

International“ showing that women in MenaQ7 group maintained their bone

mass and bone strength close to 100%, while the placebo group in the same

period on average lost 2-5% of their bone mass (statistically significant

difference).

Furthermore, the study results concerning the cardiovascular part of the trial

were published in 2015 in a journal “Thrombosis and Haemostasis“. While using

a marker of arterial stiffness (pulse-wave velocity [PWV]) as a surrogate for

atherosclerosis presence, the results indicate that the progress of this disease

(atherosclerosis) was not only stopped, but may have even been reversed. When

NattoPharma started the study, it was expected that the daily intake of MenaQ7

(180mcg) during a three-year period would significantly slow down the

development of arterial calcification. However, the study results were even more

impressive than was expected. It was shown that the group that took MenaQ7

had on average a reduction in PWV corresponding to around three times the

normal age-related increase in the placebo group. This implies that

atherosclerosis development has not only slowed down, but the process has

reversed.

Children health

Another area where the sufficient amount of Vitamin K-2 was proved to be very

important concerns children health. Recent research has shown that most

children are vitamin K deficient, which is likely attributable to the consumption of

more processed food, and generally less food that is naturally rich in K vitamins.

While the average dietary vitamin K intake dropped significantly over the last 50

What NattoPharma hoped and expected Actual study results

Source: NattoPharma

8

years, today’s intake is insufficient for optimal bone development, as evidenced

by a population-based Minnesota study showing an increase in forearm fractures

in children over a similar 30-year period. However, a 2008 study published in the

British Journal of Nutrition revealed that daily supplementation with 45-50 mcg

of vitamin K2 may support bone needs from early childhood through the lifespan.

Monitoring healthy children between 6 and 10 years of age taking 45-50 mcg of

vitamin K2 for two years resulted in improved vitamin K status as well as stronger,

denser bones.

Furthermore, clinical observations show that vitamin K-dependent Matrix Gla

Protein (MGP) helps inhibit arterial calcification. Certain medical cases show that

calcification may begin in childhood. Hence, early supplementation with vitamin

K2 may contribute to the development of healthy cardiovascular system.

Ongoing studies

Currently NattoPharma continues its research activities to further support its

argument of positive health benefits in those areas, although the studies are

mostly related with the next stage for putting vitamin K2 as a pharmaceutical

drug. Ongoing clinical trials are mostly concerned whether vitamin K2 works for

people who already have cardiovascular diseases. To support that claim there are

three ongoing clinical studies with the first results expected in February, 2020.

One of these studies is conducted in the Netherlands where patients who

previously have been through cardiovascular diseases were given double dosage

of MK-7 for 18 months. That group of patients, is then compared to a placebo

group to see whether cardiovascular health for patients in the target group have

improved. If that study comes out with positive results, it will be the first study

that tests K2 effect on people with cardiovascular diseases and have a positive

impact on their health.

Other considerations regarding vitamin K2

Besides, according to International Journal of Molecular Sciences there is a

growing body of evidence suggesting vitamin K2 is involved in multiple cellular

processes, and might have a protective role in other organs throughout the

human body.

However, while vitamin K2 has improved outcomes in many clinical trials, the

exact mechanism of action remains to be resolved. Major health organizations,

such as WHO, European Food Safety Authority (EFSA) and Food and Drug

Administration (FDA) have established RDI for vitamin K, which unfortunately is

solely based on the dose of K1 to retain an appropriate blood clotting function.

Therefore, although many researchers have classified K1 and K2 into the same

category, these molecules can have a very different action in the body. It should

also be noted that the overall research on vitamin K2 is still in the early stage, but

the interest from researchers and the overall public attention have significantly

increased in the recent years. Thus, further global understanding about the need

of Vitamin K2 supplementation will certainly increase the number the demand for

NattoPharma’s MK-7 products.

9

Product portfolio

Currently, NattoPharma’s product portfolio include four vitamin K2 products:

three natural products and one synthetic product. The natural products are based

on fermentation and extraction of the vitamin through the fermentation process.

The most popular natural product (Natural MK-7) is based on the chickpeas and

is free from any allergens, another is soy-based (Natto MK-7), primarily targeting

China’s market, while the third product (Full Spectrum K2) is more “premium”,

broader product, containing MK-6, 7 & 9. In the meantime, the synthetic product

(Pharma Pure MK-7) is the cheapest to produce, thus implying a higher margin.

Among the natural products the Full Spectrum MK-7 has a bit higher margin.

When looking at each product’s proportion to the overall product portfolio,

synthetic product has the biggest volume share, however during the past year

synthetic product has been growing slightly slower than expected, while natural

products in percentage terms are growing unexpectedly faster. However, it

should be noted that such trend might also quickly reverse as one large client is

able to make up for all the difference.

The company is also engaged in the development of a new ingredient in the mood

enhancement and energy segment. NattoPharma is working on that project

together with two Indian partners: Inventia Healthcare and Laila Nutraceuticals,

while NattoPharma itself will act as a marketing and sales partner. The project is

underway with the ongoing clinical studies completing in early 2020 and a

commercial launch scheduled for later in 2020. Unfortunately, timing of the

launch was slightly impacted by the delay of the clinical studies. As of today, the

company expects results of the shorter study to come out in mid 1Q20, while the

results of a longer study should be available in 2Q20. The company has also

started the soft launch of the product meaning that the talks with selected

customers are in progress. Nevertheless, there is no firm date of the launch,

before the initial results of clinical studies are released. The potential volumes

and margins are also subject to uncertainty and thus are not disclosed by the

company. Therefore, until the first results are released and more information is

provided by the management, we choose not to include those potential future

sales from the new ingredient in our model, but note that those may result in a

considerable upside.

Supply side

NattoPharma‘s cost of goods sold is divided into three parts: raw material

(purchase of concentrate), dilution of the product from concentrate to a finished

good ready to ship further (B2B) and freight costs. What concerns purchase of

concentrate, the company has a partnership with Indian company Viridis,

supplying natural raw materials and a company in Poland, participating in the

synthesis method. Recently, NattoPharma was involved in the efficiency

improvement of the synthesis method. Enhancement of the process is already

finished in 4Q and positive effects of lower COGS for synthesized products are

expected to gradually come in 2020. This is an important step for the company

leading to increased competitiveness.

Product Type Description

Natural MK-7 Natural Chickpea based product, free of alergens, main product

Natto MK-7 Natural Soy-based product, mostly targeted for China market

Full Spectrum K2 Natural Premium product, containing MK- 6, 7 & 9

PharmaPure MK-7 Synthetic Large volume product, synthesized from plants

Source: NattoPharma

10

Market overview

Vitamin K2 market

The market for vitamin K2 remains very small in comparison to other segments of

the supplement market, thus there is limited visibility and no uniform reliable

source on the global market value and volumes for vitamin K2. Unfortunately, the

existing market analyses provide values with significant difference among each

other. As this is still not a transparent market, the market values and volumes are

often based on each company’s sales and estimated market shares which can

result in some deviations among the industry’s players. According to the

NattoPharma’s management, the fair estimate of global K2 market value in 2018

could be in the range of USD 50-60m, while consensus estimate for the whole

market’s annual revenue growth in 2019 would be between 20-25%. In the

meantime, NattoPharma’s revenue growth over the last 12 months amounts to

25%, and based on the management’s view its market share could be estimated

at slightly less than 30%. The company notes that market share expansion in the

future will depend on the company’s success in emerging markets or/and new

channels.

The key driving force in vitamin K2 sales growth is the rising awareness of its

provided health benefits, primarily in two areas – bone health and cardiovascular

diseases (CVD). Thus, as both CVD and bone osteoporosis are the top two

healthcare problems worldwide and present significant unmet medical needs, we

believe the interest in vitamin K2 and its positive health effects should further

increase. Besides, positive results of multiple studies associated with vitamin K2

would further support this assumption.

Competitors

Although the K2 market is still considered to be in its infancy, NattoPharma sees

an intensifying competition and notes the increased number of new small players,

however with mostly inferior quality products. In such competitive landscape

NattoPharma indicates several direct competitors:

Kappa Bioscience (Norway)

Menaquin Gold (India)

Gnosis Spa (Italy)

Vesta Ingredients (United States)

J-Oil Mills (Japan)

Sungen Pharma (China)

Global market of supplements

Looking on a broader scale, vitamin K2 has a potential exposure to a much bigger

market of dietary supplements. According to the Council for Responsible

Nutrition (CRN) consumer survey on dietary supplements held in 2018, 75% of

U.S. adults take dietary supplements. The majority status holds among both

women and men, and across income, educational levels, as well as among

different age groups. As presented in the graph below, the use of dietary

supplements in US has increased from 64% in 2008.

11

In the meantime, overall global supplement consumer sales were at around

USD 128bn in 2017, according to Nutrition Business Journal. The US continues to

be the largest supplement industry in the world, followed by Asia and Europe.

The overall market of dietary supplements is estimated to expand at a CAGR of

7.8% in the period of 2019-2025. In 2025 the global dietary supplements market

size is projected to reach USD 194.6bn, according to a report by Grand View

Research. This trend is backed by rising health concerns along with changing

lifestyles and diets. In addition, increasing healthcare costs, food innovation,

medical discoveries, and expectations regarding their higher prices boost both the

overall market growth and the product demand. Also, as reported by UN

Department of Economics and Social affairs, the population aged 60 years had

more than doubled since 1980 and is expected to double again by 2050, while

projections indicate that by 2050 there will be a higher number of older persons

aged 60+ than adolescents and youth at ages 10-24. Thus, we believe this macro

trend should largely support further growth of the supplement market, including

vitamin K2.

The most cited reasons for taking supplements vary across the age groups,

although the top incentive for most of the individuals is the goal of overall

wellness. In addition to that, fulfilment of nutrient gaps, higher energy and

stronger immune health are among other top reasons for supplement use. In the

meantime, as awareness of vitamin K2 increases, the vitamin K2 is likely to be

added more often to such popular supplements as calcium or vitamin D as can be

demonstrated by the analogy of calcium and vitamin D combination.

Growth of dietary supplement use over the last decade in US

Source: Council for Responsible Nutrition, 2019

64% 65% 66%69% 68% 68% 68% 68%

71%

76% 75%

55%

60%

65%

70%

75%

80%

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Global Supplement Consumer Sales by Region in 2017

Source: Nutrition Business Journal, 2017

Australia & New Zealand, 2% Canada, 2%

China, 16%

Eastern Europe &

Russia, 6%

Japan, 8%

Latin America, 8%Middle East

, 1%Other Asia,

12%

US, 31%

Western Europe, 13%

12

A wide range of nutrients and other ingredients is present in food supplements,

including, but not limited to, vitamins, minerals, amino acids, essential fatty acids,

fibre and various plants and herbal extracts. Among them the most widely used

is multivitamin. According to a CRN consumer survey in US, around 73% are taking

multivitamins, while 98% of supplement users take both vitamins and minerals.

As presented by the graph on the left, other most popular standalone

supplements include vitamin D, vitamin C, calcium and a complex of vitamin B.

Due to aging population, age-linked diseases such as CVD and osteoporosis are

predicted to increase as well. For example, according to International

Osteoporosis Foundation, cases of osteoporosis are projected to increase from

27.5million in 2010 to 33.9 million in 2025. Given that and also that few of the

common cited reasons for taking dietary supplements include bone and heart

health, we believe that awareness for vitamin’s K2 positive health benefits in

those areas should increase, thus the demand for vitamin K2 is likely to rise as

well.

Intellectual property rights

Due to novelty of the science and the applications of vitamin K2, a regulatory

approval and patents are a crucial part of securing NattoPharma’s success. As a

result of long-term partnership with VitaK, NattoPharma has been able to acquire

a number of patents at attractive terms. The patent portfolio gives NattoPharma

an advantage with respect to marketing claims compared to other vitamin K2

companies as well as cost and quality leadership on the synthetic vitamin K2. The

company continues to develop this patent portfolio, with new and expanding

claims regarding the benefits of vitamin K, and especially vitamin K2.

In connection with the spin-off of Kaydence Pharma in December 2017, the

granted and pending patents were transferred from NattoPharma to Kaydence

Pharma with the exclusive rights to use all the patents and the related technology

in the supplement business through a license agreement. NattoPharma is also

granted exclusive access to all the research and development taking place in

Kaydence Pharma during the license period.

The intellectual property portfolio covers methods promoting cardiovascular

health, metabolic health and other indications pending by administering

nutritional products containing vitamin K and K2, the menaquinones.

Common reasons for taking dietary supplements in the US

Source: Council for Responsible Nutrition, 2019 (sample of 1504 individuals)

Overall wellness, 49%

Fill nutrient gaps, 33%

Bone health , 31%

Heart health , 29%

Healthy aging, 28%

Joint health, 23%

55+ years

Overall welness, 47%

Energy, 33%

Fill nutrient gaps, 32%

Immune health, 31%

Hair, skin, nails, 23%

Digestive health, 21%

35-54 years

Overall wellness, 42%

Energy, 37%

Hair, skin, nails, 28%

Immune health, 25%

Fill nutrient gaps, 22%

Weight control, 21%

18-34 years

Multivitamin is the most popular supplement in the US

Source: Council for Responsible Nutrition, 2019

73%

37%

32%

26%

24%

Multivitamin

Vitamin D

Vitamin C

Calcium

Vitamin B/B Complex

13

Kaydence Pharma

Back in 2017 Kaydence Pharma was spun-off from NattoPharma with the main

purpose to separate two distinct business paths – nutraceutical and

pharmaceutical. Kaydence Pharma is now an independent, privately-owned,

company registered in Norway and operating in both Oslo, Norway and New

Brunswick, New Jersey, USA. Kaydence Pharma is mainly focused on the

development of menaquinone-7 as a pharmaceutical product for vascular and

other tissue calcification-related diseases. It holds patents for clinical applications

of the family of menaquinones and for its proprietary process technology for the

production of MQ-7.

Kaydence Pharma has a dedicated pharmaceutical path which includes

pharmaceutical clinical trials, building intellectual property, managing multi-year

regulatory processes and working on partnerships with pharmaceutical players.

According to the company’s webpage the target indication areas range from

narrowly defined segments to patient groups in millions. Accordingly, the range

of potential revenues is estimated between USD 500 million and USD 3 billion,

where the higher end of this range is therapies for diseases affecting 5+ million

patients. Currently, the company has already finished the preclinical stage

development and would start the phase I of clinical trials, when it has secured

financing in place. When the phase I clinical trials will start, the results might

become available within a year after it starts. Nevertheless, the success rate is

usually very low – according to the study of MIT Sloan School of Management

only 14% of all drugs in clinical trials eventually get approvals from the FDA.

Success rates vary slightly among the disease group, particularly in cardiovascular

area success rate is around 18%, according to DiMasi 2001.

NattoPharma owns 46% of the company Kaydence and has the exclusive rights to

use all the patents and the related technology together with an access to all the

research and development taking place in Kaydence Pharma during the period of

the licence agreement.

Depending on the results of clinical trials and market approvals potential value

might be huge, although there is also a significant financial risk involved.

Kaydence Pharma search for capital is an on-going process, therefore the

NattoPharma‘s value of the investment and loan receivable it holds is highly

dependent on future capital injections in Kaydence Pharma. The investment in

Kaydence Pharma is booked using equity method and might be subject to an

impairment test in conjunction with the annual financial closing at the end of the

year, and unless there is a positive development in the funding activity of the

company it is likely that a full or partial write down of the asset will be required.

In case of the partial impairment, the company would assess the value present in

Kaydence Pharma, while in a more unlike case of a full impairment the accounting

impact would be equal to the net exposure (as of 3Q19 it is at 33.9m), whereas

the consolidated accounts would have to be written down by an amount of loan

and accrued interest and by a deferred gain. Also, at the beginning of October, to

ease Kaydence Pharma‘s search for capital, NattoPharma granted a 24-month

waiver in relation to all claims against Kaydence Pharma under the ongoing loan

agreements, including accrued and future interest.

Therefore, we currently do not assign any value for the Kaydence Pharma in our

valuation model due to the current need for capital, its early stage of the clinical

trials and significant uncertainty involved as clinical trials, especially at their start,

have extremely high attrition rates.

14

Financial statement analysis

Revenue growth and margins

In 2018 NattoPharma reported 53% YoY higher operating revenues, a gross

margin of 41%, EBITDA margin of 5.0% and also for the first time the company

achieved a positive net profit for the full year. For 2019 YTD, EBITDA margin

stands at 5.8%, gross margin is at 42%, while annual adjusted EBITDA is expected

by the company to come at around NOK 10m. The company last reported on

November 13th with relatively strong 3Q19 results: YTD revenue growth of 25%

and EBITDA margin of 10.1% for the quarter. Going forward, for 2019-2022 we

foresee an average yearly revenue growth of ~25-27%, while annual EBITDA

margin is expected to improve to 10.0% for 2020-2022.

COGS and OPEX

The biggest part of the company’s cost structure (~56%) is attributed to COGS,

which include purchase of raw material, dilution and freight. Also, as the company

has invested throughout the whole year on synthesis process improvement, we

expect COGS from synthetic product to come gradually down in 2020, which as a

result should increase gross margins on synthetic products.

Other substantial part of ~44% of total costs contributes to OPEX. Looking at the

historic development of OPEX to sales ratio, the company has managed to

increase its efficiency while in the longer term OPEX/sales ratio is expected at

~31%.

Revenue and gross margin development; 2016-2023E EBITDA and EBITDA margin development; 2016-2022E

Source: NattoPharma; Norne Securities Source: NattoPharma; Norne Securities

44%47%

41% 42% 43% 42% 42%

0%

10%

20%

30%

40%

50%

0

50

100

150

200

250

300

2016 2017 2018 2019E 2020E 2021E 2022E

NO

Km

Sales Gross margin

-12%

-2%

5%8%

10% 10% 10%

-15%

-5%

5%

15%

25%

35%

-10

-5

0

5

10

15

20

25

30

2016 2017 2018 2019E 2020E 2021E 2022E

NO

Km

EBITDA EBITDA margin

Cost structure; 2019E OPEX/Sales, %

Source: NattoPharma; Norne Securities Source: NattoPharma; Norne Securities

Wages

25%

Other costs

13%

Depreciation

6%

COGS

56%

57%

49%

41%37%

34% 32% 32%

0%

10%

20%

30%

40%

50%

60%

70%

2016 2017 2018 2019E 2020E 2021E 2022E

15

Liquidity

Looking at the previous quarters’ reports we see that the company’s liquidity has

deteriorated. The primary reason is related to working capital management:

suppliers delay in 2Q and inventory build-up. Following 2Q19, in 3Q19 cash

balance slightly improved, primarily due to positive bottom line and increased

account payables, on the other hand due to increased accounts payable quick

ratio deteriorated. For 4Q20 NattoPharma is likely to finance its working capital

needs sufficiently. The company acknowledges its need for liquidity, but is not

desperate to get funding on any terms. We acknowledge the possibility for

additional financing in the near term, possibly in 1H20, but for now we choose to

keep our model without any capital injection.

Company’s guiding

NATTO reiterated its financial guidance in 3Q19 report and expects annual growth

between 20% and 30% for 2019, while overall gross margin is targeted between

40-45%. Besides, for the first time the company provided its guiding for annual

adjusted EBITDA of around NOK 10million, whereas we estimate adj. EBITDA at

NOK 9.3m for 2019. For 2020 NattoPharma has not yet provided any guiding.

Liquidity position

Source: NattoPharma; Norne Securities

1.32

0.98

0.73

0.98

-0.80

-0.30

0.20

0.70

1.20

1.70

0

2

4

6

8

10

12

14

16

1Q19 2Q19 3Q19 4Q19E

NO

Km

Cash balance (LHS) Quick ratio (RHS)

16

Valuation and recommendation

In estimating the fair value of the company, we used DCF method without the

potential from the Kaydence Pharma and introduction of products with new

ingredients. Our forecasted free cash flows were discounted at a rate of 12.0%

(WACC; see DCF table). Thus, calculated fair equity value is NOK 240m or

NOK 13.20/sh. To account for relatively high risk of the company (more on risks

can be found on page 18.), shares‘ illiquidity and considerably high possibility of

an equity issue in 1H20 we choose to apply a 20% discount to the calculated

equity value. Therefore, we set the target price at NOK 11.00/share, which is

equivalent to around 47% upside to the current share price and we re-initiate a

coverage of NattoPharma with a Buy recommendation.

Due to company‘s specific and narrow business area it is relatively hard to assign

appropriate peers for the company, therefore we decide to include some peers

specializing in nutritional food products, supplements or niche medical areas.

In NattoPharma‘s case, for 2019E we see an adj. P/E of 28.3, while adj P/E of 12.0

and 5.7 is expected for 2020-2021 respectively. Compared to the peer group‘s

median P/E of 28.4 and 24.6 for 2020-2021, NattoPharma‘s P/E multiples do not

look very demanding, especially given an expected strong revenue growth going

forward. At the same time, EV/Sales and EV/EBITDA multiples are also trading

deeply discounted to peers median level, implying a relatively high upside

potential for NATTO stock.

However, we understand that due to relatively high risk of the company and

stock‘s illiquidity, compared to that of the peer group, a relative valuation may

not be a very accurate representation of the company‘s true value, but is rather

used to cross-check our DCF valuation.

Peers Country Industry Subgroup

Mimi's Rock Corp Canada Medical -Drugs

Prothena Corp PLC Ireland Medical -Biomedica l/Gene

MedicaNatumin AB Sweden Medical -Drugs

BioGaia AB Sweden Vitamins&Nutri tion Prod

Chr Hansen Holding A/S Denmark Food-Misc/Divers i fied

J-Oi l Mi l l s Inc Japan Food-Misc/Divers i fied

Novozymes A/S Denmark Chemicals -Specia l ty

DCF model

NOKm 4Q 2019E 2020E 2021E 2022E 2023E 2024-2030E

Revenues 37 163 204 255 306 2,964.7

EBIT 2.5 7.8 12.7 18.4 24.6 252.8

Tax on EBIT 0.1 0.5 0.5 0.5 0.5 -58.1

NOPLAT (+) 2.6 8.3 13.2 18.9 25.1 194.7

Depreciation & amortization (+) 2.0 7.8 7.8 7.8 7.2 14.0

Capital expenditure (-) -0.9 -4.1 -5.1 -5.4 -6.1 -44.5

Change in working capital (- or +) -7.6 -5.5 -5.4 -4.3 -3.5 -1.6

Free Cash Flow to the Firm -3.9 6.5 10.6 17.1 22.8 162.6

NPV of FCFF -3.8 5.7 8.2 11.8 14.1 59.5

WACC calculation Valuation, NOKm Assumptions

Debt ratio 0.0% Net debt -0.6 L.t. growth 2.5%

Cost of debt (after tax) na Minority interest 0.0 Tax rate 23%

Proceeds from options

Risk free rate 3.0% NPV cash flow # shares, m 18.180

Beta 1.5 4Q 2019E - 2030E 95.4

Market risk premium 6.0% 2031E - 143.9 Options, m 0.300

Cost of equity 12.0% Total NPV cash flow 239.3 Price, NOK

WACC 12.0% Equity value 239.9 NOKm 0.0

Value per share, NOK 13.20

17

Kappa Bioscience transaction

As mentioned before, Kappa Bioscience is one of the most prominent

NattoPharma’s competitors in the vitamin K2 market.

Associated with KappaBioscience, an interesting transaction took place at the end

of October. Kistefos, the main shareholder of Kappa Bioscience has sold all of its

53.49% of shares of the company. This transaction resulted in a booked profit of

~NOK 340m, suggesting the value of its stake at around ~NOK 390m. Therefore,

the overall implied value of Kappa Bioscience could stand at around NOK 730m.

If we apply a YoY revenue growth of ~25% for Kappa Bioscience revenues in 2018,

we would get an approximate EV/Sales multiple of ~5.0 – a way higher valuation

compared to EV/Sales multiple for NattoPharma which is currently expected at

1.1. However, we should also account for Kappa Bioscience better operational

performance. The company has delivered higher gross margin of 55% and an

EBITDA margin of 20% for 2018, which are above those delivered by NattoPharma

in 2018 (gross margin at 41% and EBITDA margin at 5%). Nevertheless, this

transaction is viewed as positive for the overall K2 market, underlines currently

undemanding valuation of NattoPharma and further supports our investment

case.

Peer comparisonUSDm Source EV*

2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

NattoPharma Norne 15.0 14.3 8.3 5.3 1.1 0.8 0.5 28.3 12.0 5.7 15

NattoPharma ASA Consensus** 14.9 9.3 6.7 1.2 1.0 0.7 25.0 15.0 9.4

Peers

Mimi's Rock Corp Consensus** 25 5.1 3.2 2.4 na na na na 4.8 3.2 18

Prothena Corp PLC Consensus** 115 na na na na na na na na na 481

MedicaNatumin AB Consensus** 20 6.4 5.8 5.5 1.0 1.0 0.9 11.8 9.4 9.4 18

BioGaia AB Consensus** 652 25.3 20.3 17.6 8.1 7.0 6.2 35.5 28.4 24.6 645

Chr Hansen Holding A/S Consensus** 10,890 24.0 22.8 21.0 8.5 8.1 7.5 35.9 33.8 31.0 10,083

J-Oil Mills Inc Consensus** 856 na na na na na na na na na 669

Novozymes A/S Consensus** 14,618 19.4 19.2 18.1 6.9 6.6 6.3 30.5 29.5 27.0 11,495

Median 19.4 19.2 17.6 7.5 6.8 6.3 33.0 28.4 24.6

Discount/premium to peers -26.1% -56.8% -70.0% -85.3% -88.4% -91.5% -14.1% -57.6% -76.7%

* Calculated by applying the last reported Balance Sheet and last Market Capitalization

** Bloomberg

EV/Sales*Market Cap

EV/EBITDA* Adj. P/E*

18

Recommendation, valuation, risk and sources

Recommendation and target price

Recommendation history for NattoPharma during the previous 12 months:

Date Recommendation Target price (NOK)

27/11/2019 BUY 11.00

Valuation

To arrive at our share price target we have used a discounted result from DCF-

based valuation. The potential from the new ingredient products and upside from

the Kaydence Pharma is not included.

Risks

The main risks to our target price and recommendation on NattoPharma are the

following:

Immature vitamin K2 market increases the uncertainty over estimates

Health properties of vitamin K2 are still not widely known and any

unexpected negative effects could hurt sales

The company is in a strong growth phase with limited visibility and

significant deviations to our estimates present a risk to our target price

NattoPharma may need additional equity or debt financing in the future,

thus the company is dependent on its access to capital markets. In case

of equity financing, if the amount/issue price are different than the ones

in our model, this can dilute the shareholders’ value

Failure to protect IP rights might eliminate the competitive edge

MK-7 synthesis is key for profitable growth of NattoPharma. Failure to

scale up the production or any production problems will have a negative

effect on our estimates and target price

Increased competition from new entrants might put pressure on margins

Departure of key management people

NattoPharma is engaged in the business-to-business operations. Thus,

results are dependent on the success of customers’ products. Failure of

these products could have a negative impact on our estimates

Exchange rate risk, especially the weakness of USD and EUR, could have a negative effect on estimates and a target price

Sources The sources used in the preparation of this report were: NattoPharma,

Bloomberg, Oslo Børs VPS Arena, Refinitiv Eikon, Infront, International Journal of

Molecular Sciences, Council for Responsible Nutrition, Nutrition Business Journal,

Grand View Research, MIT Sloan School of Management.

19

Financial statements & Estimates

Profit & Loss (NOKm) 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E

Operating revenues 25.6 31.7 52.5 66.6 107.2 128.7 163.1 203.8 254.8

Operating expenses -26.1 -29.6 -30.0 -32.8 -44.2 -47.4 -55.3 -65.5 -80.8

EBITDA -18.5 -20.0 -6.5 -1.2 5.1 9.7 15.6 20.5 26.2

Depreciation & Amortisation -5.5 -5.8 -6.9 -7.4 -7.3 -8.0 -7.8 -7.8 -7.8

EBIT (adj) -24.0 -25.8 -13.3 -8.6 -2.2 1.7 7.8 12.7 18.4

Non-recurring items - -11.2 -2.7 26.3 - - - - -

EBIT -24.0 -37.0 -16.0 17.8 -2.2 1.7 7.8 12.7 18.4

Net interest & other financial effects 2.1 4.8 -2.8 -8.9 3.3 2.5 3.0 10.6 20.7

Pre-tax profit -21.9 -32.2 -18.9 8.9 1.0 4.2 10.8 23.3 39.1

Minority interests - - - - - - - - -

Taxes 0.5 0.7 0.7 0.6 0.7 0.6 0.5 0.5 0.5

Profit after tax -21.4 -31.6 -18.2 9.5 1.8 4.8 11.3 23.8 39.6

EPS rep. (NOK) -1.58 -1.84 -1.03 0.54 0.10 0.26 0.62 1.31 2.18

EPS adj. (NOK) -1.58 -1.20 -0.89 -0.47 0.10 0.26 0.62 1.31 2.18

Margins

Operating margin -94% -81% -25% -13% -2% 1% 5% 6% 7%

ROE -31% -27% -20% -10% 2% 5% 10% 18% 24%

ROCE -29% -29% -15% -8% -2% 1% 6% 8% 10%

Tax rate nm 2% 4% -7% -68% -14% -5% -2% -1%

Growth rates (YoY)

Operating revenues 53% 24% 66% 27% 61% 20% 27% 25% 25%

EBIT (adj) nm nm nm nm nm nm 355% 63% 45%

EPS (adj) nm nm nm nm nm 174% 135% 110% 66%

Cash flow (NOKm) 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E

Pre-tax profit -21.9 -32.2 -18.9 22.3 1.0 4.2 10.8 23.3 39.1

Depreciation and amortisation 5.5 5.8 6.9 7.4 7.3 8.0 7.8 7.8 7.8

Net financial items - - 0.7 - - - - - -

Other Non-cash adjustments -7.2 6.9 1.8 -36.3 -4.9 1.5 - - -

Paid taxes - - - - - 0.1 0.5 0.5 0.5

Change in working capital -1.4 -5.2 4.4 -7.1 3.0 -19.7 -5.5 -5.4 -4.3

Operating cash flow (OCF) -25.0 -24.7 -5.1 -13.7 6.5 -5.9 13.6 26.2 43.2

Capital expenditures -0.8 -3.6 -1.5 -0.9 -3.7 -10.8 -4.1 -5.1 -5.4

Other investments & asset transactions - - - - - - - - -

Free Cash Flow (FCF) -25.8 -28.4 -6.6 -14.6 2.8 -16.7 9.6 21.1 37.8

Net loan proceeds - -4.4 - - - 1.3 - - -

Dividend paid - - - - - - - - -

Share issues 17.4 45.2 1.1 6.9 1.9 - - - -

Other incl. FX effects -0.4 -0.8 0.6 1.4 0.3 0.4 - - -

Change in cash -8.8 11.7 -4.9 -6.3 5.1 -15.0 9.6 21.1 37.8

20

Balance sheet (NOKm) 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E

Goodwill 6.8 7.3 6.9 7.4 7.5 7.5 7.5 7.5 7.5

Deferred tax asset - - - - - - - - -

Licences, property, plant & equipment 49.7 49.8 41.8 38.5 35.2 38.6 34.9 32.2 29.7

Other intangible assets - - 0.1 57.7 40.3 48.0 48.0 48.0 48.0

Non-current Assets 56.5 57.1 48.8 103.6 83.0 94.1 90.4 87.7 85.2

Inventory 5.1 6.3 3.8 13.0 11.6 28.8 29.9 38.0 47.5

Receivables 11.2 9.6 14.4 19.5 21.9 23.4 26.7 34.7 36.9

Other current assets 2.9 11.0 8.0 7.6 12.2 9.2 9.2 9.2 9.2

Cash and cash equivalents 13.1 24.8 19.8 13.6 18.7 3.7 13.2 34.4 72.2

Current Assets 32.3 51.7 46.0 53.6 64.4 65.1 79.1 116.4 165.8

Total assets 88.8 108.7 94.8 157.2 147.3 159.2 169.4 204.0 251.0

Shareholders equity 75.7 92.8 76.2 111.0 109.8 115.6 126.9 150.7 190.3

Non-controlling interests - - - - - - - - -

Total equity 75.7 92.8 76.2 111.0 109.8 115.6 126.9 150.7 190.3

Deferred tax liability 6.1 5.7 4.7 4.4 3.7 3.1 3.1 3.1 3.1

Long-term interest bearing debt - - - - - - - - -

Other long-term liabilities 0.0 - - 22.0 12.0 13.0 13.0 13.0 13.0

Non-current liabilities 6.1 5.7 4.7 26.4 15.7 16.1 16.1 16.1 16.1

Current interest bearing debt - - - - - 6.3 6.3 6.3 6.3

Trade payables 5.4 3.5 10.2 14.5 18.6 17.6 16.5 27.3 34.7

Other current liabilities 1.5 6.7 3.6 5.3 3.3 3.7 3.7 3.7 3.7

Current liabilities 6.9 10.2 13.8 19.8 21.9 27.5 26.5 37.2 44.6

Total liabilities 13.0 15.9 18.5 46.2 37.6 43.7 42.6 53.3 60.7

Total liabilities and equity 88.8 108.7 94.8 157.2 147.3 159.2 169.4 204.0 251.0

Working capital 12.2 16.7 12.4 20.3 23.9 40.2 45.7 51.0 55.3

Net IB debt -13.1 -24.8 -19.8 -13.6 -18.7 2.6 -7.0 -28.1 -65.9

Capital employed 81.8 98.5 81.0 137.4 125.5 131.7 143.0 166.8 206.4

Net IB debt / equity -17% -27% -26% -12% -17% 2% -5% -19% -35%

Equity / total assets 85% 85% 80% 71% 74% 73% 75% 74% 76%

21

Share data 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E

Shares outstanding, year end (mill.) 13.569 17.140 17.570 17.570 18.180 18.180 18.180 18.180 18.180

Share price, year end (NOK) 9.95 7.95 9.09 9.10 8.10 7.50 7.50 7.50 7.50

Market cap (NOKm) 135.0 136.3 159.7 159.9 142.3 136.4 136.4 136.4 136.4

Enterprise value (NOKm) 121.9 111.5 139.9 146.3 123.7 139.0 129.4 108.2 70.4

EPS rep. (NOK) -1.58 -1.84 -1.03 0.54 0.10 0.26 0.62 1.31 2.18

EPS adj. (NOK) -1.58 -1.20 -0.89 -0.47 0.10 0.26 0.62 1.31 2.18

DPS. (NOK) - - - - - - - - -

Valuation 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E

EV/Sales 4.8 3.5 2.7 2.2 1.2 1.1 0.8 0.5 0.3

EV/EBITDA neg neg neg neg 24.4 14.3 8.3 5.3 2.7

EV/EBIT (adj) neg neg neg neg neg 81.1 16.6 8.5 3.8

P/E (adj) neg neg neg neg 81.0 28.3 12.0 5.7 3.4

P/B (excl. goodwill) 2.0 1.6 2.3 1.5 1.4 1.3 1.1 1.0 0.7

Growth (YoY) 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E

Revenues 53% 24% 66% 27% 61% 20% 27% 25% 25%

EBITDA nm nm nm nm nm 91% 61% 32% 28%

EBIT (adj) nm nm nm nm nm nm 355% 63% 45%

Pre-tax profit (rep) nm nm nm nm -88% 301% 157% 115% 68%

Net profit (rep) nm nm nm nm -82% 174% 135% 110% 66%

EPS (rep) nm nm nm nm -82% 174% 135% 110% 66%

EPS (adj) nm nm nm nm nm 174% 135% 110% 66%

Margins 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E

Gross margin 29 % 30 % 44 % 47 % 41 % 42 % 43 % 42 % 42 %

EBITDA -72 % -63 % -12 % -2 % 5 % 8 % 10 % 10 % 10 %

EBIT (adj) -94 % -81 % -25 % -13 % -2 % 1 % 5 % 6 % 7 %

Pre-tax profit -85 % -102 % -36 % 13 % 1 % 3 % 7 % 11 % 15 %

Net profit -84 % -100 % -35 % 14 % 2 % 4 % 7 % 12 % 16 %

Profitability 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E

ROE -30.8 % -26.6 % -20.1 % -9.5 % 1.7 % 4.6 % 10.0 % 18.1 % 24.3 %

ROCE -29.1 % -28.6 % -14.9 % -7.8 % -1.7 % 1.3 % 5.7 % 8.2 % 9.9 %

Dividend yield 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 %

22

Appendix 1: Management team

Kjetil Ramsøy– CEO/CFO:

Kjetil Ramsøy joined NattoPharma as CFO in 2016. A Certified Public Accountant,

he has served in several senior financial positions within the power supply

industry, as well as the oil service industry. Having worked in both Scandinavia

and the United States, he brings experience from both global and publicly listed

companies to NattoPharma.

Hogne Vik, MD, PhD, MBA– Chief Medical Officer: Dr. Hogne Vik has an MBA and a unique international industrial experience and

background from Nycomed/Nycomed Amersham, Pronova BioPharma and Aker

Biomarine. As a physician and professor, he has published over 80 international

scientific papers, including ones addressing allergy and dietary supplements. He

has held management and product development responsibilities in international

companies for both dietary supplements and pharmaceuticals. He was

responsible for documentation of known Omega-3 products, and participated in

developing vitamin K2 supplements.

Peter Stahl- Chief Operations Officer: Peter Stahl oversees company operations with experience from multiple

industries including aerospace, healthcare, fabrication, distribution, and even

hospitality. A problem solver by nature, he has tackled operations improvements

at companies as large as Boeing and Baxter, down to startups. Very much a hands-

on type, he believes there is always a solution and it’s often a simple one.

Dan Rosenbaum- CEO of Kaydence Pharma: Dan Rosenbaum steers the ship with is extensive experience in strategy

development and implementation, general management, finance, and business

development. A senior leader with global, multi-cultural background and

experience, he has a successful track record of driving operational excellence and

building motivated, high-performance organizations.

Martin Lycke- Vice President Finance: A Certified Public Accountant, Martin Lycke is responsible for NattoPharma’s

overall financial reporting and accounting. With extensive experience from both

practice and industry, most recently as CFO for a Scandinavian FMCG business, he

offers the company a strong combination of technical and commercial expertise.

23

Chris Speed- Senior VP of Global Sales & Marketing: A nutritional scientist and dietician, Chris Speed was a central member of

NattoPharma’s 2015 media outreach campaign, and provides an unparalleled

understanding of the nutrition market as the leader of NattoPharma’s Sales &

Marketing Teams.

William Sommer- VP Global Development & Regulatory: Leading NattoPharma’s R&D Solutions Division, William Sommer has more than

20 years experience working on product and application development and

manufacturing in regulated specialty chemical industries.

Eric Anderson- Senior VP, Global Marketing & Business Development: Eric Anderson brings more than 20 years of experience in the natural products

industry to NattoPharma’s Global Sales & Marketing team, having played a

leading role launching some of the most successful natural ingredients to the

marketplace.

Rudi De Man- VP Sales & Business Development: Rudi De Man’s international sales experience and an extensive knowledge of the

Food Ingredients and Pharmaceutical & Nutraceutical business makes him an

effective leader of NattoPharma’s sales efforts through European and Asian

markets.

24

Appendix 2: Board of Directors

Frode Marc Bohan– Chairman of the Board:

Mr. Bohan started his career within the industry in 1991 and founded the original

NattoPharma Ltd (later NattoPharma ASA) in 2004, where he has been a significant

shareholder from the incorporation. After two decades-long track record of founding

and establishing prosperous companies, Mr. Bohan serves now as the Executive

Chairman of NattoPharma. Mr. Bohan has studied marketing and computer science

and based on the experience from building the MenaQ7 brand, he founded NoLabel

and NutriCon, which are the world leading nutraceutical and pharmaceutical

communications companies. Moreover, Mr. Bohan is a substantial Shareholder of

Eqology ASA, and the chairman of the Board of directors at ImmunoPharma AS.

Sjur Thorsheim– Board Member:

Sjur Thorsheim holds a law degree from the University of Oslo. For the last 20 years

he has been a professional investor, investing in non-listed companies within

industries such as aerospace, real estate, advertising, and security. Thorsheim has also

invested in industries within commodities and biotec, and has been a significant

shareholder in NattoPharma for many years. Recently he has increased his ownership

in NattoPharma and today is one of the biggest shareholders in the company.

Katarzyna Maresz– Board member:

A master’s graduate at the Jagiellonian University, Pharmacy Faculty (specialization:

Medical Analytics, 1998). Holds a PhD in Biological Sciences at the Medical Faculty of

the Jagiellonian University (2002). Held her practice at the Laboratory of Cellular and

Molecular Immunology, Blood Research Institute, in Milwaukee, WI, USA (2003-

2006). She is a post-doctoral fellow within the Marie-Curie Programme at the

Department of Microbiology. Currently she is a scientific staff member at the

Department of Biochemistry, Biophysics and Biotechnology at the Jagiellonian

University as a part of a research project financed by the European Union.

Annette Elmqvist– Board member:

Annette Elmqvist, Pharmacist from Uppsala University. Started her career at the

Medical Product agency and over 20 years within former Pharmacia as Qualified

person/Production manager, Director of Operation at SBL vaccine and CEO at Unitech

Biopharma. Current position is VP Quality Assurance at Scandinavian Biopharma AB.

The broad experience within pharmaceutical industry especially within quality and

production processes give her the mission to support companies to develop new

products.

Stefan Hallden– Board member:

Mr. Halldén is today working chairman of Life Science Sweden AB, a long time

shareholder in NattoPharma and a valuable contributor to the development of the

company. The last year he also held the position as a member of the Election

Committee. Halldén has a long track record from international finance.

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Appendix 3: Shareholders

As can be seen from the table below, 81% of all NattoPharma’s shares are owned

by Top 30 shareholders, while only five of them exceed the 5% mark. The biggest

shareholder is Svenska Handelsbanken which is a nominee for Life Science

Sweden with 12.9% of the company’s ownership. The second biggest shareholder

is PRO AS, fully owned by Sjur Thorsheim, member of the Board of Directors in

NattoPharma. The third biggest shareholder TG Montgomery AS with 9.5% of

shares.

During the past few weeks, Life Science Sweden has been selling small part of its

shareholding which as explained by the company it is due to Life Science Sweden

need for liquidity and Life Science Sweden still strongly believes in Nattopharma’s

positive development.

Top 30 Shareholders - updated 25/11/2019

Investor # of shares % of total Country Comment

SVENSKA HANDELSBANKEN AB 2,336,732 12.9% Sweden Nominee for Life Science Sweden AB

PRO AS 1,966,310 10.8% Norway Sjur Thorsheim - board member

TG MONTGOMERY AS 1,735,122 9.5% Norway One of NATTO clients

AVANZA BANK AB 1,508,534 8.3% Sweden

BOHAN & CO AS 1,098,455 6.0% Norway Frode Marc Bohan and Kim Øien

NOVEL NUTRITION NETWORK SP. Z O.O. 673,927 3.7% Cyprus A supplier of synthetic vitamin K2 to NattoPharma

EUROCLEAR BANK S.A./N.V. 560,000 3.1% Belgium

ENG AS 554,508 3.1% Norway A company controlled by Hogne Vik

UBS SWITZERLAND AG 490,455 2.7% Switzerland

BJERKENES HOLDING JAN FREDRIK 435,032 2.4% Norway

RATUSINSKA PATRYCJA KAROLINA 350,000 1.9% Poland

CINCO INVEST AS 290,476 1.6% Norway Kjetil Ramsøy - CEO

NIELSEN TRYGVE 268,850 1.5% Norway

NORDNET BANK AB 240,008 1.3% Sweden

NICOLINE INVEST AS 200,000 1.1% Norway Kim Øien - CEO of TG Montgomery

NXT CAPITAL LTD 200,000 1.1% Cyprus

TSAMBIKO HOLDING AS 190,476 1.0% Norway

SIX SIS AG 182,586 1.0% Switzerland

VRENNE STEIN OLE 179,000 1.0% Norway

ØYEN ERIK 164,470 0.9% Norway

NORDNET LIVSFORSIKRING AS 156,525 0.9% Norway

PERSHING LLC 126,000 0.7% United States

CITIBANK, N.A. 114,355 0.6% Ireland

MARÅS EINAR 110,000 0.6% Norway

3LP NORGE AS 105,000 0.6% Norway

TORSETNES RUNE 100,000 0.6% Norway

VELAND KÅRE 100,000 0.6% Norway

JOHNSEN HARALD MORTEN 97,662 0.5% Norway

LØTVEIT KURT MAGNE 91,230 0.5% Norway

MARKIEWICZ JAN MARIAN 90,000 0.5% Norway

Top 30 shareholders 14,715,713 80.9%

Other 3,464,220 19.1%

Total 18,179,933

*Oslo Børs VPS Arena

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DISCLOSURES AND DISCLAIMER

STANDARDS AND SUPERVISORY AUTHORITY This report has been prepared by Norne Securities AS, which is supervised by The Financial Supervisory Authority of Norway (Finanstilsynet). Industry standards issued by The Norwegian Securities Dealers Association (Verdipapirforetakenes Forbund) (www.vpff.no) have been used in preparing this report.

DISCLAIMER This report is provided for information purposes only. It should not be used or considered as an offer to sell or a solicitation of an offer to buy any securities. This report is prepared for general circulation and general information only. It does not take into account the specific investment objectives, investment knowledge and experience and financial situation of any recipient. Investors seeking to buy or sell any securities discussed or recommended in this report, should seek independent financial advice relating thereto and make his/her own appraisal of the tax or other financial merits of the investment. Any opinions expressed are subject to change without prior notice. This report is based on information from various sources believed to be reliable. Although all reasonable care has been taken to ensure that the information herein is not misleading, Norne Securities AS makes no guarantee, representation or warranty, expressed or implied as to its accuracy, adequacy or completeness. Neither Norne Securities AS, its employees, nor any other person connected with it, accepts any liability whatsoever for any direct, indirect or incidental, special or consequential loss of any kind arising out of the use or reliance on the information in this report.

This report is intended for use only by those persons to whom it is made available by Norne Securities AS. This report may not be distributed, quoted from or reproduced, in full or in part, in any manner without written approval by Norne Securities AS.

RECOMMENDATION STRUCTURE Norne Securities’ general recommendations – Buy, Hold and Sell – are based on the expected absolute return on the financial instrument within the next 12 months, which equals to an upside to the target price, in combination with a risk profile. The target price represents the price level which the analyst expects the financial instrument to trade at within the coming 12 months. The table below shows the ranges of returns under different risk levels, based on which the recommendation is being determined:

Total return next 12 months (upside to target price)

Risk Buy Hold Sell

Low > 10% 2% - 10% < 2%

Medium > 15% 3% - 15% < 3%

High > 25% 5% - 25% < 5%

Our risk assessments range from “high risk” to “medium risk” and “low risk” and are based on a subjective assessment of the following factors: 1) volatility in the share price, 2) liquidity in the share, 3) strength of the balance sheet, 4) absolute earnings level and trend and 5) estimate risk.

Share prices used in the report are as of market close on the last trading day if the report is being published before the stock market opening, or market price within 15 min. before the publication if the report is published during the trading hours of the Oslo Stock Exchange.

TARGET PRICE AND UPDATES Target prices may be based on one or several valuation methods, for instance, the discounted cash flow (DCF) analysis or applying “fair” pricing multiple(s) based on historical valuation or peer pricing level. Target price may not necessarily equal to the “fair value” of the financial instrument – certain discount or premium is possible due to various reasons, depending on the analyst’s view of what the price may be within the 12 months period. Norne Securities AS plans to update the recommendation based on the following events: the target price is achieved; new accounting figures are released; any significant news on the company or its industry is announced.

DISCLOSURE OF INTERESTS Norne Securities AS may at any time perform investment banking or other services or solicit investment banking or other mandates from the company or companies covered in this report. Norne Securities AS may hold positions in securities covered in this report due to its own-account trading that is part of its investment services operations, such as market making. Norne Securities AS has appointed and may at any time appoint tied agents to provide investment services on behalf of Norne Securities AS. Tied agents are listed in the public registry of the Norwegian Financial Supervisory Authority, and an updated overview of appointed tied agents of Norne Securities AS can be found on https://www.norne.no/compliance/.

PREVENTING CONFLICTS OF INTEREST Norne Securities AS has arrangements in place with the aim of preventing conflicts of interest. As part of these arrangements, Norne Securities AS has established information barriers between different parts of the company to restrict and control the exchange of sensitive information. No direct link exists between remuneration of the Norne Securities AS analysts and investment banking services provided by Norne Securities AS, but analysts may receive a bonus under the firm’s general bonus scheme. Under our internal regulations, which have been prepared in accordance with applicable legislation and relevant industry standards, our analysts are not permitted to purchase new securities in the companies they cover.

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POTENTIAL CONFLICTS OF INTEREST Norne Securities AS is a market maker in the shares of NattoPharma. This report has been presented to the issuer before dissemination for a check of factual information. Amendments of factual infor-mation have been made following this.

Share holdings of Norne employees in NattoPharma ASA:

Responsible analyst(s) 0

All Norne analysts 0

All Norne employees 0

Norne Securities AS 0

The overview of share holdings is updated continuously. A list of total share holdings of the Norne Securities’ employees and the date of last overview can be found on https://www.norne.no/compliance/. Shareholdings that Norne Securities AS owns as a result of own-account trading that is part of its investment services operations (such as market making) are not included in the table above.

Distribution of Norne Securities’ recommendations during three months up till September 30, 2019:

Buy Hold Sell

Total recommendations 46 34 8

% of total 52% 39% 8%

Corporate clients* 27 10 1

% of corporate clients* 71% 26% 3%

* Includes publicly disclosed not immaterial investment banking services or issues of financial instruments where Norne Securities AS has been lead manager or co-lead manager, and market making clients during the 12 months prior to the overview date.

CAUTIONARY NOTE REGARDING RISK An investment in the company involves risk, and several factors could cause the actual results, performance or achievements of the company to be materially different from future results, performance or achievements that may be expressed or implied by statements and information in this presentation. Including, among others, risk or uncertainties associated with the company’s business segments, development, growth management, financing, market acceptance and relations with customer, and more generally, general economic and business conditions, changes in domestic and foreign laws and regulations, taxes, changes in competition and pricing environment, fluctuations in currency exchange rates and interest rates and other factors. Should one or more of these risks or uncertainties materialise, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this document. Past performance is not a guide to future performance. Investing in securities may result in a loss of all or part of the investment.

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