Novo Nordisk A/S (NVO) Q4 2011 Earnings Report, Transcript and Summary

Good day, and welcome to the Novo Nordisk Full Year 2011 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Lars Rebien Sørensen. Please go ahead, sir. Lars Sørensen: Thank you very much and welcome, ladies and gentlemen, to this conference call regarding our performance in 2011 and our outlook for 2012. I’m Lars Rebien Sørensen, the CEO of Novo Nordisk. With us, we have Chief Financial Officer, Jesper Brandgaard; Mads Krogsgaard, Chief Science Officer; present are also our Investor Relations Officers. Today's earnings release and the slides for this call are available on our web page, novonordisk.com. The conference scheduled to last as usual approximately one hour. Let’s start with the presentation as outlined on Slide #2. The Q&A session will begin in about 25 minutes. Please turn to Slide #3. As always, I need to advise you that this call will contain forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause the actual results to differ materially from expectations. For further information on the risk factors please see the earnings release and the slides prepared for this presentation. Also note, this conference is being webcast live, and a replay will be made available on Novo Nordisk website after the call. Turn to Slide #4. 2011 has been the good year for Novo Nordisk. Sales increased 11% in local currencies and the key sales drivers were Victoza and modern insulins. The solid sales performance has been realized in a challenging economic environment, where healthcare reforms impacted sales growth negatively by approximately 2 percentage points. A very significant milestone in 2011 was the filing for approval of a new ultra-long-acting insulin Degludec and DegludecPlus in major markets including Europe, United States. The regulatory review…

Thank you, Lars. Please turn to Slide 11. Let me start with an update on the regulatory process for Degludec and DegludecPlus. As mentioned by Lars, both of the ultra-long-acting insulins Degludec and DegludecPlus have over a 3-month period been submitted for regulatory review in Europe and the U.S., plus Japan in the case of Degludec. Furthermore, we've now submitted Degludec and DegludecPlus [indiscernible] for regulatory reviews in Switzerland and Canada. In the United States, the PDUFA action date has been set to July 29 this year and the regulatory process is proceeding as expected. In EU, the DAY 80 drug persistent reports have been received and the European agency process follows the expected schedule. In parallel with the ongoing dialogue with the triad market agencies, Novo Nordisk will continue to submit new product applications for both products in a number of territories during 2012. We will continuously provide updates on the regulatory progress towards approval of insulin Degludec products as part of the course of the announcements. Please turn to the next slide for other news from the clinical pipeline. As also mentioned by Lars, Novo Nordisk has now completed both 2-year Phase IIIa Degludec extension studies in subjects with type 2 and type 1 diabetes respectively. In the type 2 diabetes extension trial, around 1,000 patients were initially randomized and 3:1 try the once-daily insulin Degludec in the FlexTouch pen or glargine, both in addition to metformin plus-minus a DPP-4 inhibitor therapy. The HbA1c after 2 years was similar between the groups being maintained around 7% in both treatment arms with a pre-randomization baseline of around 8.2%. For Degludec, the fasting plasma glucose level stayed close to normal at approximately 6 mmol/l after the 2 years of study, which was statistically significantly lower than in the comparator group.…

Thank you, Mads. Please turn to the next slide. In 2011, sales increased by 9% measured in Danish kroner to DKK 66.3 billion and by 11% in local currencies compared to 2010. The underlying production economy improved by 40 basis points in 2011. The improvement is mainly due to a positive product mix impact driven by the conversion from human to modern insulins. As a consequence of the negative currency impact of 20 basis points, the reported gross margin improved by 20 basis points to 81.0 in 2011. Total non-production-related cost increased by 5% in local currencies and by 3% reported in Danish currencies. S&P cost increased by 4% primarily, reflecting increased sale promotion in the U.S and China and the sales force expansion in the U.S. in the fourth quarter of 2010. Moreover, selling and distribution costs in 2011 include cost related to the manufacturer’s fee part of the U.S. healthcare reform. R&D cost in 2011 remained at an absolute level similar to that in 2010. Whereas the cost level in 2010 reflects the execution of the Phase IIIa programs for both Degludec and DegludecPlus, the cost level in 2011 reflects the initiation of pivotal trial activities within diabetes care, obesity and haemophilia. Operating profit increased by 18% to DKK 22.4 billion. In local currency, the growth was 22%. Net financial show an expense of DKK 449 million in 2011 compared to an expense of DKK 605 million in 2010. For 2011 the foreign exchange result was an expense of DKK 322 million compared to an expense of DKK 1,341 million in 2010. The foreign exchange loss in 2011 reflect losses on foreign exchange hedging contracts primarily related to the Japanese yen due to the appreciation versus Danish kroner in 2011 compared to the exchange rate level prevailing in…

[Operator Instructions] We'll take our first question today from Luisa Hector of Credit Suisse.

Could we start with the situations, the marketing situation following the termination of the Lilly, Amylin partnership, maybe just update us in the situation in the GLP market? And also on the insulin side whether, as a consequence you’re seeing increased effort from Lilly? That's the first question. And then maybe a couple of others, would you expect an FDA panel for Degludec? And just a quick check on the -- there was a non-recurring adjustment of provisions in the admin line in the fourth quarter, just a quick check on that please? Lars Sørensen: This is Lars Rebien Sørensen, the CEO. So we have a non-recurring, which Jesper will take care of at the end. We have a question for the panel, FDA potential and FDA panel of Degludec which Mads Krogsgaard will take care of. Then I'll start with the first question, which in a way were linked as I understood it. So the first comment is in relationship to the Lilly, Amylin breakup. This was not entirely surprising to us in that we saw very early on that Lilly had their own ambitions within GLP-1 area. So clearly, this has created some disruption between the two parties, which sort of caused a distraction. With the approval of BYDUREON in the United States, which is the key opportunity for such a product, we are anticipating that it’ll have a couple of effects on us. First of all, it’s our anticipation that by adding significant a sales force behind BYDUREON in the U.S., the whole GLP-1 market section is getting increased share voice in the diabetes market. Hence, it is going to support an expansion of the GLP-1 market, which is in everybody’s interest; it’s in the patients’ interest, it’s Novo Nordisk’s interest. And then when you compare the…

That is indeed the question. And at this point, I can say Luisa that we have received no information from the FDA in this regard, i.e., as to scheduling an advisory committee. That being said, obviously Nordisk is preparing as if one were to come for this sheer reason that one needs to be prepared for every single situation. So we are continuously preparing for everything and when that is said, we have a path towards the PDUFA action date on July 29, laid forward by the agency in terms of when, which kind of inspections, et cetera, et cetera are taking place, so we’re already a very busy bunch of people in regard to Degludec both busy with the FDA, Europe and even now also other countries. Lars Sørensen: And then, Jesper, on the administrative line there was a non-recurring in the fourth quarter which is…

Yes, we have increased the provision for employee-related costs like jubilees, et cetera, which was related to the lower, the permanent lower level of interest, we haven’t included discounting of those future obligations and that is increasing our provisions in the tune of DKK 50 million. And if you look at the admin cost on a full-year basis there are, let’s say, included this year in the growth cost in total those DKK 50 million and additional DKK 50 million which you could relate to one-time relocation cost at the headquarters side, which I wouldn’t expect to reoccur next year. So overall probably to the tune of DKK 100 million in non-recurring cost in 2011, 50 of them in Q4 related to employee provisions.

Thank you. We'll take our next question today from Martin Parkhøi of Danske Bank.

Martin Parkhøi. I will stick to the 2 question rule. Firstly with respect to China, Lars, you are quoted on some news flash as stating that one of the reasons for the growth, low growth in China is also to some increased competition from local manufacturers. If local manufacturers are aspiring to be a big competitor, how do you draw a parallel to the risk that you’re seeing for biosimilar in all other regions because you've always stressed that you were still holding on in China, despite a lot of local producers? And then the second question with respect to Victoza, I guess that in the guidance you have given to the market, you at least have been wrong since it’s now already a clear blockbuster in 2011. We’re seeing more than DKK 500 million in quarter-on-quarter growth in, from Q3 to Q4. So it's a no-brainer that if that will continue then it will explode also in 2012. Can you give us some kind of guidance on why we should expect quarter-on-quarter growth at that because this has just increased from Q2 to Q3 and then Q3 to Q4? Lars Sørensen: Thank you, very much Martin and thanks for reminding us, keeping us on it. With regards to China what I've mentioned is that we have seen some market share erosion in human insulins. I would say most is probably Eli Lilly product, but I do believe we’ve also lost some to some of the local manufacturers. Price levels are getting very low, they can only compete in the local markets. So and they have to have some revenues. So I don't see that necessarily translating into a big risk on the international scene. I don't believe these companies have significant capacity wherewithal to compete at us globally. But…

But just a little follow-up on that because as you’ve seen in the, from the second to the third quarter you almost saw an increase of DKK 300 million. Then in the -- from the third to the fourth quarter you saw almost DKK 550 million increase. If I just add DKK 250 million to each quarter in 2011 then it will be a double blockbuster -- or sorry in '12 of course then it will be a double blockbuster already in '12, is that realistic? Lars Sørensen: I don't believe that. But we are not giving guidance as you know, Martin, on individual products. I think we hope that you are right. But I don’t think it's realistic. Let's move on to the next question.

And our next question comes from Richard Vosser of JPMorgan.

Two please. Just on the U.S. insulin market share, just from the script trends it appears you started off the year with a couple of percentage points share gain for the modern insulin, some local mix, completely different picture to the beginning of 2011. Is this just the Caremark contract? Could you talk us through the dynamics involved in taking the share there? And then the second question is just on Degludec. And just in light of the extension data, which looks good and reiterates the hypoglycaemia benefit for the product but, also in light of the austerity conditions that we see across Europe at least, could you share your comment and thinking in terms of the ability to achieve premium pricing for the product, where you're thinking about it, in terms of that? Lars Sørensen: Yes, certainly. Well, yes, you’re pointing exactly to some of the – a couple of very interesting issues that dynamics you see in the market. If we take the, and I think we mentioned this last year, when Lilly became extraordinarily aggressive in the pricing, that we were not seeing a long-term future in the human insulin market. But then on the other hand, of course, we don't want to surrender all the patients to our competitors. So that meant that we actually did sharpen our pen so to speak and became more competitive. And you saw a result of this with the Caremark contract, and yes it is correct, that we have seen a pickup of our 2 main modern insulins, Levemir and NovoLog in the U.S. in the beginning of the year as opposed to the drop that we saw in the beginning of 2011. So there’s also different conditions on the Caremark contract and the contract we lost, because the Caremark…

Yes, just on the capture rate for new scripts in North America, and EMEA also for NovoLog B, some impact in recent months from the shortage that we've seen in the market from glulisine. It's a little bit uncertain how big effect it can have and it seems that, that situation has now more normalized, but I think there is an element in the pickup in our nprx, which may be related to a shortage that we’ve truly seen in the market. Lars Sørensen: And Mads, you just had comment on hypos and Degludec.

Yes, it's just a notion that of course our health economists that have worked on this ever since Phase II, they are walking down 3 roads to make sure that we create the best possible platform, and of course they are as you correctly mentioned, Richard, really supported by the data. So on safety it’s about the value of reducing hypoglycaemia, as we've discussed often before. On efficacy, it's about the potential for in a real-life situation actually improving glucodynamic measures, because of the enhanced safety, which we’re not able to do in a Phase III treat to target trial. But you can come back to the agencies at later points with the real-world evidence. And then finally because of the both flexibility and also because of the consistency of the molecule that’s also something about the cost of glucose drips and so on. So overall, what Lars alluded to as the modest premium is something that is fully justifiable from a health economic perspective, but of course there are these regional differences as described by Lars. Lars Sørensen: Yes. And you have probably read the recent article in New England Journal of Medicine where they have investigated medicines that cause hospitalization due to side effects, and insulin is actually the second-most commonly causing hospitalization due to hypoglycaemia, which is of course a side effect or an unwanted [ph] effect from the insulin. So it is indeed not a trivial problem. And if Kåre Schultz had been here today, he would have likened the occurrence of severe hypos even though they are relatively rare in type 2 diabetics to the situation of airbags in cars, I would imagine that, it is a very small proportion of the airbags that have been installed in cars around the world that are ever used for this intention. But they are there because when the event occurs, it can be traumatic and it can be damaging. And so I think it's the same notion that we like it in a way to [indiscernible] hypos; these are not trivial. These render the patients unable to fend for themselves, if it's during the night. It can have serious cerebral effects, if it happens to in day, it can cause accidents and other unpleasant things. So we think we’ve got a good case for building off there. Thank you. Next question please?

And our next question today comes from Carsten Madsen of Carnegie Bank.

Yes, thank you very much. Just 2 questions here to start off with. One for, first one for Mads, on your long-acting Victoza or Semaglutide, and why you are now starting the Phase I trial with the LA Victoza. Does this mean that you are closer to making a decision about which one of these moleculars you’ll work on going forward? And also in that relation, will you skip Phase II and go directly into Phase III, when you have complete Phase I trials? Second question is for Jesper on CapEx, you guide for DKK 3.5 billion for CapEx for 2012. That is actually the same level as you have been spending for last 3 years despite the fact that your franchise has expanded significantly. When will you ever need to spend more money on CapEx? Thank you. Lars Sørensen: I know that Jesper will be delighted to talk about this, but why don't we start with Mads.

Right. As regards new molecule, namely Semaglutide, first of all we’ll be announcing the long-awaited Phase II data at conferences this year. That being said, of course, we’ve also kind of shaped up the molecule in preparation of this decision as to whether this one goes into Phase III or the Liraglutide depot formulation receives further development. Semaglutide will be ready for entering Phase III with a highly competitive profile, whereas Liraglutide depot, we simply don't know yet. And that's the whole dilemma, that we’re getting to new clinical data later in this first half of the year, and then they will enable management come summertime to make a decision of which one to enter into final development. Can we skip Phase II for the Lira depot? In principal, yes, as we’ve see other depot preparations such as BYDUREON. But BYDRUEON actually did do one Phase II trial, so it is an open-ended question. And I think I'd like to wait until summertime and you'll get very insightful on exactly what we are doing with which of these molecules. But it's a nice position to be in, so happy selection process. Lars Sørensen: Thank you. And then Jesper, CapEx?

Yes, we've guided to the level of DKK 3.5 billion. And I think the guidance I would give for the range 2012 to ‘14 would be an investment level in the ballpark of 5% of sales. I think we will spend resources and invest in facilities enable us to roll out a new device that you will see us use with Degludec, DegludecPlus. And longer term replacing the placement device and there will be investment going in that direction. You've seen that included, expanding our facilities in Denmark and U.S. in the first wave. But of course, as we’re selling more than $300 million of FlexPen per year a significant investment is longer term involved in this area, so that would be a key area of investment. And then also longer term, if there’s one thing that can make a change to the level of bulk production facilities we need for API production, that would be the success that Mads would be able to demonstrate for the portfolio of all protein projects we have under development both in terms of GLP-1s and also the insulin projects. However it’s still early stage, so I think it will probably beyond ‘14 for those significant investments to materialize if we are successful in that area. So I think you are comfortable in using a 5% guidance for 2012 to ‘14, that will probably suffice for now.

And our next question comes from Vincent Ollivier of BNP Paribas.

The first one is on the FVIII, can you please explain us again, what is the differentiation for this drug versus the existing and well-established competitors, in order for you to grab material market share medium term and long term? And also I have 2 questions with regards to margins. First R&D in 2012, is it fair to expect stabilization around DKK 9.6 billion in absolute terms? And regarding the gross margin is it also possible to assume an improvement of the same magnitude as what we still over ’10 to '11? Lars Sørensen: I’ll start with the first then Mads can pitch in and Jesper can take some of the questions on the margins. FVIII is a biosimilar FVIII basically, to the leading VIII product in the market, FVIII. The trial that we have conducted has demonstrated a very, very stable process and no antibody reactions on the trial participants even though it’s the largest trial that’s been conducted both in adults and in children. So it’s an effective and very safe and so far no antibody eliciting FVIII. See we’ve developed this, because we want to develop a long-acting FVIII and this is the backbone on which we’ll be doing a long-acting FVIII. And so our ideal situation is that we will have this product as a biosimilar FVIII and an improved FVIII in terms of the long-acting FVIII, which will give us a wonderful situation when going to market where we can, especially in emerging markets where there are in a way as you always know 2 segments. There is one segment, which can afford high-end product such as a potential new long-acting VIII and then there are price-sensitive segments, which are public health segments, where a biosimilar of FVIII might be well suited. So that’s the whole idea. Of course, the proof of the pudding in the eating and whether we can differentiate the long-acting FVIII, and Mads can perhaps say a few things about this before we go to the margins.

Yes, Lars, and I think you covered it nicely, so I’ll just very briefly, it is indeed a B domain [indiscernible], so of course, it’s a different molecule from the others in the industry, but essentially it is a biosimilar approach in terms of having [indiscernible]. Now many people are asking me, "Why didn’t you see a single inhibitor patient, even though you had 150 in the trial?" And the short answer is, we cannot know, and nobody knows, which episode [ph] or which protein structure or which contaminant or which immunological phenomena in the individual boys or men that precipitates inhibitors, nobody knows the underlying mechanisms in that regard. All we can relate to is the fact that we have neither in kids or boys, nor in adults, seen any inhibitors at this point. So if you combine a very nice efficacy, very nice effi profile with a formulation into a very decent device that we will take the opportunity to also wrap it into, then I think we are in a situation to grab market share, as Lars alluded to. Of course there are also different markets and more and more tenders going on even in the western markets nowadays. And of course [indiscernible] now will have a very nice offering in that regard and also serving as a backbone for an ATP [ph]. So I think it’s a good position Lars Sørensen: And Jesper, then on R&D and other improvement to productivity?

Yes, thank God Mads didn’t take the long version. In terms of the gross margin, we have guided to this year, we believe we can make an improvement in our gross margin between 50 basis points to 100 basis points where we last year have realized 40-basis-point improvement. We've had a expected bigger impact from healthcare reform last year. And we also see a value in the rollout of the Victoza that will have a recurring effect on our gross margins. So 50 basis points to 100 basis points in local currency improvement and on top of that it’s our anticipation with the current currencies that you probably should anticipate some 40-basis-point currency impact in the positive direction. So 2012 at present looks like it will be quite positive on the development in gross margin. In terms of the other cost ratio, we are expecting a selling and distribution ratio in the same ballpark as where we were in 2011. So let’s say around 29%. And the actual amount is going to be very dependent on the precise approval of Degludec, especially in the U.S. In terms of R&D ratio between 14% to 15% to sales, which of course will then imply that we will see a significant growth in absolute terms compared to last year. So I saw the stable absolute level of R&D investment in 2011 as a normal situation. Known orders are continuing to expand our R&D activities and we also expect to do that. We have initiated a portfolio of clinical trials in the second half of 2011 and those costs will impact us on a full-year basis in 2012. So R&D ratio, 14% to 15%. In terms of admin ratio we are moving towards the 4.5 percentage point to sales in admin ratio. So admin should continue to grow significantly less than the top line. So that would be some guidance on the individual cost ratios.

And our next question comes from Mark Dainty of Citi.

Just one quick one, probably for Mads on the FVIII. Just wondering what the -- what’s required between having the data in hands now and filing in the second half? That seems to be a reasonably lengthy timeframe. Are you waiting for anything else or is that just a little bit of caution? Lars Sørensen: We are very happy that you asked this question in this call. Because we wonder ourselves, so Mads, maybe you can elaborate on this?

Well, first of all the latest data, the pediatric data, it just came in very, very recently indeed. So I don't think it's that profound [ph], but at the same time we are also of course cognizant of the fact that if there were an intellectual property out there we'd make sure that we never infringe on any. So it's a question of both technicalities and all other things put together and that gives us the submission in the second half and we’ll be more specific about it later on in the year.

And our next question comes from Mark Purcell of Barclays.

One question on GLP-1’s, one on insulins and Lantus. In terms GLP-1s, can you help us understand what proportion of global value share could the ex-U.S. become in the future, just trying to understand some of the dynamics between the sort of 1.2 and 1.8 mix split? How BYDUREON is doing outside the U.S in markets it’s launched? It wasn’t in your chart, it was just the Victoza, exenatide comparison? And how successful you think these volume caps could be, so first question ex-U.S. GLP-1 and how large this could be as a proportion of the market in Victoza? And then the second question, you just mentioned that there are going to be some countries going forward that are a little bit more price sensitive when it comes to their insulin choice. And I just wondered if you could hazard a guess in terms of what proportion of the market you believe could stomach a 10%, 20%, 30% premium for Degludec over Levemir and what proportion of the market would be much more attracted to biosimilar glargine formulations from [indiscernible] and Lilly I guess which should be entering the market in 2015? Lars Sørensen: This is Lars Rebien here. In terms of overseas GLP-1 market, whether we can use the model that we described from our developed markets of a 10% value, I think it’s a stretch because the nature of these markets are that there is a large public sector which is very, very low price and in fact generic, and then generic insulins are also used in those markets. So I find it a stretch to see in the next 5 to 7 years that markets like China, markets like India, markets outside of the developed markets will arrive at 10% of the total value of the diabetes…

And Mark, in terms of the distribution of usage of the GLP-1 outside the U.S. it's our assessment that in the reimburse markets you're looking at something like 90% of the patients using the 1.2 microgram version of the product, so that's the most predominant form used. Also the general weight in some of the IO markets is lower. So you probably should anticipate the lower dose version used and then bear in mind that the improved version in Japan is an 0.9 per microgram, so that’s some guidance on the amount of drug used. Lars Sørensen: Yes and then we think the final question. Okay, go ahead, go ahead?

Sorry, guys. And in terms of cap, how do you think that’s going to work out, because obviously, it’s pretty difficult to get anything paid for here in the U.K. But as a proportion of the diabetes market with the kind of the gradient you’re showing on Slide 10, you’re getting close to 9%, talk [ph] to one of the proportion of value of the diabetes market in U.K. and France is already at 10%. So I’m just wondering when and if these caps are actually going to come in, how effective they’re going to be? Because in some of these markets Europe, you’re already hitting your kind of long-term target, as it were. Lars Sørensen: Yes, but I do think the whole issue for us is that we get the product into the marketplace, and we get an ability to present the clinical benefits from the product. So yes, I do think it’s going to be difficult for the authorities to make those caps effective, because the medical profession and the patient associations, they really see these as a very, very beneficial treatments that effectively deals with their diabetes in a very low risk way and then they have all the other virtues of weight lowering, blood pressure lowering. So it is going to be difficult, but it’s going to be temporary measures that will be put in place in many markets.

And you could see, Mark, that the 10% and ambition level we gave for GLP-1 out of the total diabetes care segment was given on a global base. If you think that’s a realistic level, we’ve seen individual markets reaching above that. And I think the key deciding factor here is really how long time can we make patients stay in good control on a product like Victoza, and if the stay time can go beyond 2 or 3 years, of course then the number of patients on the product will gradually grow. We have seen a steady growth in the number of patient on Victoza, and we estimate currently that we have more than 0.5 million patients on Victoza. And long as we continue to see a steady increase in that, I don’t think -- I think it’s going to be hard for healthcare regulators to take patients off a drug that keeps them in good control with limited hassle for the physician and limited risk of hypoglycaemia. Lars Sørensen: So ladies and gentlemen, unfortunately I was soliciting the last question, but we've already run over time and we have an investor call in the city that have to run off to. We thank you all for participating this afternoon. Thank you for your interest in Novo Nordisk. And we will be continuing to come back, hopefully with good results.

Thanks.

That concludes our conference call for today. Ladies and gentlemen, thank you for your participation. You may disconnect your line.