Novo Nordisk A/S (NVO) Q3 2016 Earnings Report, Transcript and Summary

Good day, and welcome to the Q3 2016 Novo Nordisk A/S Earnings Conference Call. Today's conference is being recorded. And at time, I would like to turn the conference over to Mr. Lars Rebien Sørensen, CEO. Please go ahead, sir. Lars Rebien Sørensen: Thank you very much. Welcome to this Novo Nordisk conference call regarding our performance in the first nine months of 2016 and outlook for the full year. I'm Lars Rebien Sørensen, CEO of Novo Nordisk, with me I have Lars Fruergaard Jørgensen, Executive Vice President, Head Corporate Development, who will take over as CEO to 1 of January, 2017. With me I also have our Chief Financial Officer, Jesper Brandgaard and; and Mads Krogsgaard Thomsen, our Chief Science Officer. Also present and available for the Q&A session, Executive Vice President-Head of North American Operations, Jakob Riis. Present are also our Investor Relations officers. Today's earnings release and the slides for the call are available on our website, novonordisk.com. The conference call is scheduled to last one hour. As usual, we'll start with the presentation as outlined on slide number 2. The Q&A session will begin in about 30 minutes. Please note that this conference call is being webcast live, and a replay will be made available on our website. Turn to slide number 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 result to differ materially from expectations. For further information on the risk factors, please see the earnings release and the slides prepared for this presentation. Turn to slide number 4. Sales growth of the first nine months of 2016 was 6% in local currencies, and 4% in Danish kroner, compared to the first nine months of 2015. All regions contributed positively to the sales growth in local currencies. The U.S. continues to be the largest growth driver, accounting for 44% of growth however, both International Operations and Region China contributed double digit sales growth measured in local currencies. Sales growth was realized within both diabetes care and biopharmaceuticals, with the largest contributions coming from Victoza, Tresiba and Norditropin, the latter driven by a non-recurring Medicaid rebate adjustment in the United States in the firsts quarter of 2016. In September at the annual EASD meeting held in Munich, detailed data from the SUSTAIN six trial were presented. The data showed that semaglutide the once weekly GLP-1 significantly reduced the risk of major cardiovascular event by 26% compared to placebo. Also in September, we submitted a supplementary application to the FDA for a label updated placebo to include the data from the two phase 3b trial with 1 and 2. In October, we additionally submitted a supplementary application to the FDA and a Type II variation application to EMEA to include data from the leader cardiovascular outcomes trial in the Victoza label. In order to reflect the increasingly challenging payer environment, particularly in the United States, our R&D strategy and priorities have been updated. Going forward, we will apply an even higher innovation threshold for progressing R&D project. We will further intensify exploration of current assets in adjacent disease areas of high unmet medical need. Turning to financial. Operating profit grew 7% in local currencies when adjusting for the partial divesture of NNIT and the income related to the out licensing of assets for the inflammatory disorders both in 2015. In reported numbers, dilutive earnings per share increased 12% compared to the first nine months of 2015 when adjusting for the non-recurring items in 2015 earnings per share increased 22% to DKK11.5: The outlook for 2016 sales growth is now expected to be 5% to 6% and adjusted operating profit growth 5% to 7% both measured in local currencies. With regard to the financial outlook for 2017, the preliminary plans for 2017 indicates low single digit growth in sales and flat to low single digit growth in operating profit, both measured in local currencies. In February this year, the Board of Directors approved an update of the long-term financial targets to guide Novo Nordisk performance. However, since February, the competitive environment in the US has become significantly more challenging, and we now no longer deem it achievable to achieve the operating profit growth target of 10%. Consequently the target has been revised and we are now aiming at an average operating profit growth of 5%. In September it was announced that we plan to reduce the workforce by approximately thousand employees across the global organization, there are one of several actions currently been taken to reduce our operating costs. Finally, in September it was announced that I, Lars Rebien Sørensen, will retire from the company by the end of 2016, and then Lars Fruergaard Jørgensen will proceed as CEO as of January 1, 2017. So now over to Lars Fruergaard for an update. Lars Fruergaard Jørgensen: Thank you, Lars. Please turn to slide 5. The first nine months of 2016 the overall sales growth of 6% in local currencies was delivered from a balanced growth across the regions. The US continued to be the largest growth driver, followed by international operation in Region China, which accounted for 27% and 16% share growth in local currencies respectively. The sales in the US increased by 6% in local currencies and 5% in Danish kroner. The growth was driven by Victoza for which the sales increased by 14% in local currencies aided by a high underlying growth of the total GLP-1 market. Overall, the sales growth in the US was positively impacted by approximately 1.5 percentage point from non-recurring rebate adjustment in the Medicaid patient segment in the third quarter of 2016. I'll revert to the modest third quarter sales growth in US. Within International Operations, sales grew 13% in local currencies and were unchanged in Danish kroner. Reported sales were negatively impacted by depreciation of the Argentinian pesos and the Venezuelan bolivar. Modern and new generation insulins were the largest growth drivers within International Operations accounting for 43 and 15% share of growth in local currencies respectively. Moreover, Victoza grew by 29% in local currency mainly driven by a number of countries in the Middle East and Latin America. Sales growth in Europe was 2% in local currencies and unchanged in Danish kroner. The growth was driven by the recent launched - recently launched products Tresiba, Xultophy and NovoEight. However, the growth was partly offset by a 2% decrease in modern insulin sales in local currencies mainly due to the increased competition in the basal insulin segment and a continued decline in the premix segment. In the first nine months of 2016, sales in Region China grew by 11% in local currencies and by 5% in Danish kroner. The sales growth is driven by a 20% increase in sales of modern insulin, aided by the underlying insulin market move and a delayed provincial bidding process. Sales in pacific grew 6% in local currencies and 11% in Danish kroner. The sales growth is mainly driven by a 19% increase of Victoza sales in local currencies, and reflects the continued expansion of the GLP-1 market in Japan and Canada. Sales growth in Pacific is however driven by a continued strong uptake of Tresiba in Japan with a total no risk value market share and the basal segment now is above 50%. The growth is approximately offset by a decline in overall insulin market volume in Japan and lower human insulin sales in the region. Saxenda is contributing positively and accounts for 21% share of growth in local currencies. Please turn to slide number 6. In the third quarter of 2016, the total US sales grew 2% in local currencies compared to 2015. The quarterly sales growth was driven by Tresiba, Victoza and Saxenda. Victoza sales increased by 11% in local currency, driven by a high underlying GLP-1 prescription volume growth. In the first quarter, basal insulin increased by 11% in locally currencies, driven by Tresiba. However, this was offset by a decrease in NovoLog and NovoLog mix, mainly due to lower prices, loss of contract with United Healthcare and a declining mix segment. Hemophilia sales in local currencies decreased 5% following decreased competitive - solid increased competitive pressure and higher level of ongoing clinical trials. Please turn to slide 7. In the third quarter of 2016, sales growth in Region China grew by 11% in local currencies compared to 2015. The sale growth in China is driven by modern insulin where sales of [indiscernible] increased by 38% and 28% in local currencies respectively. The growth within modern insulin is aided by overall insulin market growth of more than 8%. The outlook for 2016 sales growth in China is now expected to be high single digit. Please turn to slide 8. From a product perspective, sales growth was realized both within diabetes care and biopharmaceuticals, with the majority of growth coming from new generation insulin and Victoza. Sales of new generation insulin grew by 185% in local currencies and accounted for 36% of total sales growth. Sales of modern insulin declined by 1% in local currencies and by 4% in Danish kroner. International Operations and Region China contributed positively to modern insulin sales growth, but were offset by declining sales in the US, Europe and Pacific. The rollout of Saxenda is progressing according to plan and sales of Saxenda accounted for 16% sales growth in local currencies in the first nine months of 2016. Growth within biopharmaceuticals was primarily driven by Norditropin which grew 16% in local currencies, and accounted for 19% of total sales growth. The sales growth is primarily driven from the US, reflecting a significant positive non-recurring adjustment to rebates in the Medicaid patient segment in the first quarter of 2016, which relates to the period 2010 through 2015. In the first nine months of 2016, hemophilia sales declined by 1%, measured in local currencies, driven by lower sales of NovoSeven in the US, partly offset by the rollout of NovoEight in Europe and US. Please turn to slide nine. In the first nine months of 2016, total sales of Victoza increased by 12% in local currencies, driven by the US which accounted for 77% of total Victoza sales growth. In the US, Victoza sales increased by 14% in local currencies, which reflects a high underlines GLP-1 volume growth of more than 30%. The GLP-1 segment accounts for 11% of the total diabetes value margin in the US. Despite intensified competition in the GLP-1 segment, Victoza continues to grow its sales volume and now has margin of 51% and hence remains the market leader within the US GLP-1 segment. Please turn to slide 10. Tresiba is now launched in 47 countries and the market uptake continues to be successful in countries with the same level of reimbursement as insulin glargine U100. The basal insulin value market share for Tresiba has now increased to 40% in Japan despite a strong biosimilar uptake and price pressures from competitors. The Netherlands, Spain and Denmark continued to gain market share, and full reimbursement has been obtained. Please turn to slide 11. Tresiba has now reached 12% market share of new-to-brand prescriptions, and49% share of the total number of prescriptions in the US basal insulin segment. In the basal segment our combined new-to-brand prescriptions market share is now 31% driven by continued uptake of Tresiba. Based on the outcome of the contract negotiation for 2017, Tresiba will continue to have wide formula records around 75% access for patients in commercial channels and Medicare part D combined. With this, over to Mads for an update on R&D.

Thank you. Please turn to slide 12. At the annual EASD conference in Munich last month, detailed results from the SUSTAIN six trial were presented. The data showed that semaglutide significantly reduces the risk of major adverse cardiovascular event with 26% compared to placebo added to standard to care. Specifically among the three individual major component, there was a statistically significant 39% decrease in non-fatal stroke, despite the low number of measles overall. In terms of microvascular complications, statistically significantly fewer people treated with semaglutide versus placebo had nuances or of worsening of nephropathy for more people treated with semaglutide experienced diabetic will not see complications, a phenomenon which we believe relates to fast and pronounced blood glucose reduction achieved in patients with existing retinopathy. The significant reduction in the composite endpoint to major cardiovascular event of absurd semaglutide was not expected, given the small study population in the short duration. Hence, in order to further expand on absurd cardiovascular benefit we plan to initiate a large-scale cardiovascular outcome superiority trial as soon as possible after the approval of semaglutide has been obtained. Likewise we'll consider investigating other long-term outcome benefits, such as those observed with our diabetic kidney disease. We expect to submit semaglutide to the regulatory authorities before the end of this year. Please turn to slide 13. We've updated our updated R&D strategy and priorities to reflect both increased payer demand, with actively differentiated new drugs to enable market actors and our own strongly lead product profile that are also raising the innovation bar for ourselves. As a consequence will find even higher innovation threshold when initiating a progressing research project. Going forward there will be ramifications of the new strategy both within research and development. In development, we intend to increase our focus on exploring the application of current assets, such as the long-acting GLP-1 analogue semaglutide in new adjacent areas with high unmet need. In research we will maintain our focus on diabetes new projects with distinct differentiation or even disruptive potential. Additionally, we'll focus on disease areas adjacent to diabetes, including end organs such as the liver, kidneys and cardiovascular system. As far as this would significantly strengthen our activities for accessing normal project in the above areas, as well as generally enhancing external academic collaborations and strategic alliances in the pursuit of new biologic target. One consequence of the above is the discontinuation of [indiscernible] the oral insulin project. In addition, a number of changes to the portfolio of early-stage projects will also be implemented. The current late stage development portfolio is not negatively affected by the changes, but will rather as in the case of GLP-1 we expanded into further therapeutic indication. Please turn to slide 14. During the third quarter we submitted a supplemental application to the FDA for a label update on Tresiba to include data from the blinded SWITCH 1 and 2 hyperglycaemic trials. Moreover, supplemental application had been submitted to the FDA and European Medicines Agency's to include data from the LEADER cardiovascular outcome trial into the Victoza label. Last month, we were informed by the FDA that a three-month extension was required in order to complete the review of the NDA by IDegLira, a fixed ratio combination of insulin degludec and liraglutide. The new drug application was submitted to the FDA in September of last year and with the extension of the review the action date has now moved to lead in this quarter. In early October we received a complete response letter from the FDA regarding the NDA for fast-acting insulin aspart. In the letter the FDA requested additional information related to the essay for immunogenetic and clinical pharmacology data before the review could be completed. We are now evaluating the content of the complete response letter and we'll work closely with the FDA to resolve outstanding issues. Finally, as part of the phase 3a PIONEER program for oral semaglutide, we've initiated patient recruitment in five further trials. The recruitment is currently proceeding according to plan and the remaining PIONEER trials anticipated to begin within the next few months. Please turn to slide 15. In the past six months we've had a high number of regulatory infection, including the submission of supplemental NDA for Tresiba and Victoza, within the next period we expect to announce the headline result for the group, the cardiovascular [ph] comprised with Tresiba and we then also submit a supplemental application for Tresiba regarding hypoglycaemia in the EU. As mentioned earlier, we are also planning the submission of semaglutide for the Type 2 diabetes indication to take place to regulatory authorities in the United States and EU before year end. Finally, we expect the FDA to complete its review of certify before year end. With this, over to Jesper for an update on the financials.

Thank you, Mads. Please turn to slide 16. During the first nine months of 2016, sales increased by 6% in local currencies and by 4% measured in Danish kroner to DKK282.2 billion. Cost of goods sold increased by 6% in the first nine months of 2016, resulted in a reported gross margin of 85.1% compared to 85.4% in the same period last year. The gross margin was negatively impacted by ramp up cost for new manufacturing capacity and a negative impact from product mix due to lower NovoSeven sales. Sales and distribution costs increased by 4% in local currencies and by 1% in Danish kroner to DKK20.5 billion. The modest increase in cost is driven by sales force investments in selected countries and international operations and also reflect the controlled and focused level of promotional activities in the US. Research and development costs increased by 6% in local currencies and by 5% in Danish kroner to DKK10.1 billion. The increasing cost reflects higher research cost for diabetes and obesity product - project while development costs were largely unchanged. This is explained by the completion of the cardiovascular outcomes trial DEVOTE and the SWITCH, phase 3b development program both for [indiscernible] as well as the phase 3a program SUSTAIN for the once weekly GLP-1 analogue semaglutide. This is partly offset by increasing costs related to the PIONEER program for all semaglutide, but with fix cost that’s been initiated during the first nine months of 2016. Administration cost increased by 7% in local currencies and by 4% in Danish kroner. The increase is mainly related to higher employee-related costs in international operations, as well as cost related to the announced reduction of the workflow, other operating income was DKK640 million compared to DKK3.4 billion in 2015. The lower level of income reflects the non-recurring income from the partial divestment of NNIT, as well as non-recurring income related to the out licensing of assets for inflammatory disorders, both occurring in 2015. Operating profit decreased by 1% in local currencies and by 3% in Danish kroner to DKK37.2 billion. Adjusted for the non-recurring income in 2015, the growth in operating profit was 7% in local currencies and 5% reported in Danish kroner. Net financial showed a loss of DKK370 million compared with a loss of DKK5.2 billion in 2015. This development reflects a loss on foreign exchange hedging involving especially the Japanese yen, the US dollar and the Chinese yuan versus the Danish kroner. Please turn to the next slide. The foreign exchange result for the first nine months of 2016 was a loss of DKK349 million, compared with a loss of DKK5.1 billion in 2015. The development reflects a loss on foreign exchange hedging contracts involving especially the Japanese yen, the Chinese yuan and the US dollar versus the Danish kroner, compared to the prevailing exchange rate in 2015. Please turn to slide 18. For 2016, the range for sales growth has been narrowed to 5% to 6% measured in local currencies. The new range reflects been unfavorable volume development in the US market, especially within modern insulin. Reported sales growth is clearly expected to be around two percentage point lower than the local currency guidance. For 2016, operating profit growth is now expected to be 5% to 7% measured in local currencies, adjusted for the non-recurring income in 2015. The expectations for operating profit growth reflect the updated sales growth forecast, as well as severance costs in relation to the layoffs announced in September 2016. Reported operating profit growth is now expected to be around two percentage point lower in the local currency guidance. We expect it net financial items to a show a loss of around DKK600 million. The current expectations reflect losses associated with foreign exchange hedging contracts mainly related to the Japanese yen, US dollar and Chinese yuan versus the Danish kroner. The effective tax rate for 2016 is still expected to be between 20% to 22%. Likewise, for capital expenditure it’s still expected to be around DKK7 billion in 2016, which primarily reflects investments in an expansion of the manufacturing capacity for biopharmaceutical products, Additional capacity for active pharmaceutical ingredients, production within diabetes care, as well as an expansion of the diabetes care filling capacity. Depreciation, amortization and impairment losses are still expected to be around DKK3.0 billion. We still expect the free cash flow to be in the range DKK38 million to DKK41 billion. The Board of Directors has based on the solid outlook for the free cash flow generation in 2016 approved an expansion of the 2016 share repurchase program. The current program will therefore expand from DKK14 billion to now DKK15 billion. With regards to the financial outlook for 2017, we expect to provide detailed guidance on our expectations in connection with the release of the full-year financial results for 2016 on the 2nd February 2017. However, the preliminary plans for 2017 indicates low single digit growth in sales and flat to low single digit growth in operating profit, both measured in local currencies. The preliminary plans reflect expectations for continued robust performance of Tresiba, Victoza, and the portfolio of modern insulin, as well as a positive sales contribution from Saxenda and Xultophy. The sales growth is expected to be partly countered by intensifying competition and challenging market access conditions within both diabetes and biopharmaceuticals, especially in the US. Sales growth is further negatively impacted by the loss of exclusivity for products within hormone replacement therapy in the US, as well as the macroeconomic conditions in a number of markets in international operations. Please turn to slide 19. Novo Nordisk introduced four long-term financial targets in 1996 to balance short and long-term considerations, thereby ensuring a focus on shareholder value creation. The targets were subsequently revised and updated on several occasions, most recently in connection with the financial results for 2015 released in February 2016. This February 2016, the competitive environment in the US within both diabetes care and biopharmaceuticals has become more challenging, negatively impacting the price of our products, especially for insulin and human growth hormone. Consequently we no longer be made achievable to reach the exploration of operating profit growth of 10%. As a result thereof, the target has been revised and we are now aiming for an average operating profit growth of 5%. In terms of operating margin, Novo Nordisk does not operate with a specific financial targets for operating margin. Going forward, it is apparent that the changed pricing environment in the US will exert a negative price pressure on gross margin, this effect will be moderated by a gradual improvement in the other cost ratios, primarily the sales and distribution costs and the acting aspart. The target level for operating profit after tax to the net operating assets and the target level for cash to earnings are both punching. Please turn to slide 20. Lars Rebien Sørensen: Thank you, very much Jesper. We currently believe to intensify competition and pressure in United States has made it necessary for us to revise our long-term financial target and layoffs some of our valued employees. However, we are confident that our strong product pipeline of innovative products like Victoza, Tresiba and eventually semaglutide will enable us to deliver on our right growth target. We are now ready to take the Q&A. Where we kindly ask all participants to restrain themselves to two questions. Operator, we are now ready to take the first question.

Thank you. [Operator Instructions] We will now take our first question from Richard Vosser from JPMorgan. Please go ahead. Your line is open.

Hi. Thanks for taking my question. Question on the future great targets, the long-term targets, so could you give us an idea of the future pricing environment factored into that long-term guidance, both for the basal insulin for price environment [ph] and the GLP-1s a as well please. I think overall you highlighted previously zero price growth in the US or I believe was the assumption, what are the sort of assumptions now? And then, and the second question, could give us an idea I suppose, you know, what's got worse in relation to 2017 relative to the position that you outlined at the second quarter '16, I think most of the expectations were sort of mid-single digit growth to that point. So just some idea of what's changed on that dimension as well? Thanks very much.

Thank you, Richard. Jesper Brandgaard, to comment on the long-term financial target, pricing environment assumption both in basal and human growth hormone and GLP-1? Lars Rebien Sørensen: Yes. Thank you, Richard. According to actual Q2 we noted that we saw a negative pricing impact and our US business low to mid-single digit. When we look through the actual impact as we have all plans and all is completed for '17, we think that we are now will be at about 5% negative pricing impact and that has been included in the update of long-term financial target, giving an approximately 2.5% negative impact on sales from this pricing thing. You are also absolutely correctly referring to that we - at the outset of the update of the long-term financial targets we're assuming on a global basis a neutral impact on prices. Looking ahead, it’s apparent that when we look to 2017 in the vicinity of 2.5% negative impact on prices would be apparent for that year and it’s also apparent from the discussion we've had with peers in the US, that we will continue to see a negative pricing pressure also in subsequent years. Although the prime impact of the basal insulin segment probably have been realized in 2017. So a continued negative pricing pressure occurring, especially for the modern insulin, but also with ending to Tresiba and the premium that we are able to obtain on Tresiba in the US. Furthermore, we should also continue to expect a challenging pricing situation and intensifying competition within human growth hormone. We will refrain from giving specific product therapy guidelines by either geography or by individual products, but I think this high level indicates pretty well what we have assumed for the long-term financial target. In terms of the comment in Q2, I just highlight that we in Q2 didn't provide any guidance on the growth levels for 2017, we just have made sure that the as both CVS and ESI had just announced their formulary positions on basal insulin - the total formulary for 2017 that we provided insight of change expectation for pricing in the US at that point in time. We didn't provide any guidance as to the growth level in 2017. That we provide them now in connection with Q3 is completely in line with the practice that we've had for more than a decade of providing a glimpse of where the growth is going to be for the subsequent year in connection with Q3, we have that historically to ensure that our investors are not suffering from excessive volatility in the share price because of uncertainty about the future operating level, and that's what we also have done this year, so this is completely in line with our practice. Lars Fruergaard Jørgensen: Yes, and so - this is Lars Fruergaard, then you could say that in connection with that exercise of starting to see the operational plan for 2017, we obviously also took a look at the subsequent years and that led to the adjustment of the long-term financial target. Thanks for the question. Next question please?

We will now take our next question from Michael Lutucan [ph] from UBS. Please go ahead. Your line is open.

Thank you. It’s Michael Liston from UBS. Just going back to the long-term targets, could you just help me - could help me understand the 10% versus to 5%, are we, do I think about this as a halving of your expectations as you were looking at it before, or is the slight change in wording in the paragraph where you now talk about an average 5% growth rate, as opposed to target 10%, does that make it an apples-to-oranges comparison and I shouldn’t think about it is as a halving of your long-term growth aspiration? Thank you. Lars Fruergaard Jørgensen: Thank very much that astute question and observation. I think your observation is correct that we receive for the long-term financial target at the 10% was an exploration and we - at the time when we announced it we noted that there was a specific challenges for 2017, that was primarily in relation to the generic competition arising from Vagifem product in the US. We have now ensured that it’s completely transparent. What the objective is for the operating profit growth, it is the average for the period 2016, until we achieve our long-term financial target, which we typically pursue over a 4 to 5 year horizon. So we think we make it even more clear exactly what is meant and I would say in large-scale, it is a halving of the ambition level, but we are making even more clear how we are going to make for this. Lars Rebien Sørensen: Thank you. Next question please?

Thank you. We will now take our next question from Sachin Jain from Merrill Lynch. Please go ahead. Your line is open.

Hi. Sachin Jain, Bank of America. Couple of things, first just a clarification comment, on the pricing comment to the first question, it’s clear that pricing it seems gone from flat to decline. And I wondered if you could also comment on the mix component of your prior guidance at the double-digit diabetes, I think it was 2% to 3%, where are you know in the mix benefit. And I guess, roughly relative broader question within the prior target, I think you alluded sort of 8% to 10% top line growth, where does that fit overall now. Secondly, related just to clarify commentary on mid-term margins and I think, the commentary before was obviously no target, but that sort of flattish outlook, what should we think about now, I think you reference gross margin pressure offset by S&D, does that imply declining margins because you touch on them level on R&D spend within the given the new structure? Thank you. Lars Rebien Sørensen: Thank you very much Sachin. Jesper, you are in demand today.

Thank you. In terms of the pricing outlook, you correctly understood that we were anticipating a negative pricing environment also in subsequently year and being in the range of probably a 2% to 3% when we get beyond the 2017 year. In terms of the mix effect, I don't see a significant change in the mixed development of our business, yes, we are continuing to see where we operate in the form towards Tresiba in the market around the world. We continue to see a significant value opportunity for the GLP-1 constituting an ever higher proportion of the overall turnover and that’s hopefully is going to be improved also, as we get semaglutide to market. So the overall mix effect would still hold true for business. In terms our operating margin and we stated in connection with the full year that we expected the operating margin to stay largely unchanged compared to the level achieved in 2015 and the level in 2015 is to adjust for the non-recurring factors that we've been discussing all along, in NNIT and the divestment of the inflammatory asset, then we did note in the company announcement that it was at about the level of 43.6% in operating margin. And we are currently operating at a slightly higher level, but it's also clear that the pricing pressure, especially for 2017 will serve a negative pressure on it. We do expect that we are able to compensate some of that and I would assume that the prime compensation will come from the biggest cost ratio, which of course apparently is the selling and distribution cost, and then I would also anticipate that we will continue to improve our admin ratio, but with the prime contribution from selling and distribution. In here embed was also that I didn't say any significant changes to the R&D ratio, which is currently at the 13% level and we wouldn't anticipate any major contribution there. There that not ruling out, that there are individual years, depending on the level of especially clinical activities would be variations depending on what the opportunities are with the late stage portfolio. So broadly assumptions of a relative unchanged level of investment to sale, to R&D. Lars Rebien Sørensen: Thank you very much. Next question please.

We will now take our next question from Peter Bodez [ph] from Citi. Please go ahead. Your line is open.

Thanks. David from Citi. Two questions. Jesper, sorry again to go back to long-term financial target, just to be about clear here, could you just give a little more detail on the balance between the reimbursement pressures you are seeing across the US diabetes portfolio versus potentially reduced expectations for the commercial potential of Tresiba, Xultophy and CS [ph] given recent developments and competitor actions. I just want to know if they are both coming into play in terms of these long-term growth target or changes or one is overriding the other. And then secondly, for Mads, I mean, the reliance on the GLP-1 growth story at Novo increases, particularly with Semi, so could you just discuss what efforts you're making posts staying fix data regarding better understanding the rest, not the signal as well as the device strategy that you intend to pursue there? Thanks very much. Lars Rebien Sørensen: Thank you very much Peter. Jesper, a few comments on what we see other than pricing pressure in terms of Tresiba, Xultophy and CS, I mean, is the fact that we have had a deferral of approval of some of the new generation drug in other areas in basal.

First, in respect to Tresiba, the expectation of Tresiba remain exactly as they are, I think we are well on track to deliver on the objective of delivering a 5% value market share at the end of the first year in full commercial operation and we continue high hopes for our Tresiba franchise in the US and that will be the prime driver of growth, it was a third of the growth in the first nine months and we will continue to invest in that and no changes in our expectations of Tresiba. It is a fantastic product that makes a difference for people diabetes As for Xultophy the three month delay in approval doesn't make a significant difference. I think that this will further focus us on Tresiba in the near-term horizon and then subsequently focus moving towards Xultophy for [indiscernible] is along been seen as a product opportunity to basically and ensure that we safeguard our fast acting insulin patients in the US but not has been assumed as a major driver of value upgrade. And so no significant changes there and it also note that the competing products will materialize in the fast acting segment somewhat later. So no significant changes in those assumption. If there is one assumption that I should highlight that has also been taken into consideration in the update of the growth year, it is that the impact we have seen on our NovoSeven franchise has materialized earlier in the form of a number of Novo patient - high number NovoSeven patient being enrolled in competitive clinical trials and the impact on our business has emerged faster than what we anticipated and that has been factored into the updated target. Lars Rebien Sørensen: Thank you very much Jesper. And then GLP-1 growth all becomes relatively more important and Mads, any comments to the issue of retinopathy in any comments you want to share with the audience the competitors about our device strategy?

Okay. Well, first of all, as regards the retinopathy findings, to be aware that in this SUSTAIN 1, 2, 3, 4 and 5 there were neither familiarity or by any means measures any imbalances, only in SUSTAIN where we included patients with pre-existing retinopathy, but not in a way that where there was a lot of baseline fundus photography and things like that which you would normally do, so it was more measured as adverse events reporting. There what we've done is looked at the imbalance that we are seeing and then we have performed what is the quite well-known growth in the field of statistics and in neuro psychology and so on and we've done a so-called mediation analysis and the mediation analysis is one that so dependent from independent variable. And what it shows is when you do it in the three-dimensional network looking at baseline A1C and decremented A1C over time you over time you can actually explain that in those people according to this analysis, who at the base and had a high A1C and hence a every precipitous drop of 2 plus percent AIC units over three to four months. Those predisposed individuals as we have also seen it studies like ECCT and others that can precipitate a competition to the retinopathy. When you take this mediation and adjust for those finding which is base line A1C and degree of A1C in the beginning of the study then there is absolutely no difference. But these are things that we will be discussing with agencies and obviously since it is an observation we have done we do intend to be able to follow up on that also in the post-marketing environment. But what we are seeing neither non-clinically normally think - mechanistically is anything to suggest that there must be any different from any other GLP-1 agonist on any parameter, apart from the fact that does more than the others do with metabolic parameters bodyweight and so on. And that may will be underlying deeper in the package insert as we had for the insulin and mention of the fact that if people have active retinopathy want to you to obviously not go very aggressively to the titration as you would also consider not doing for an insulin. But these are things that I think we are in a good shape to discuss.

And device Mads?

Device wise, we will obviously over time have a kind of dedicated specific cement device what will have from the beginning is using more of the existing device platform technology, disposable devices that are engineered in such a way that you can dial the relevant cement doses to point. 25, 0.5 and one but we will be more elaborative, at this point we can provide you a update on the device strategy as we get closer. Lars Rebien Sørensen: Thank you very much. Next question please.

Thank you. We'll now take our next question from Ronny Gal from Bernstein. Please go ahead. Your line is open.

Good morning. And thank you for taking my questions. I got two, so first you know, the logic of a declining pricing of insulin is well affected and I guess my concern is more under GLP-1 market, there are few options in that market, are you seeing any trend among peers into going to a single award, preferred award situation. The GLP-1 and essentially is assumption of single or glyph one build into your long-term financial projection? Second, I think Jesper mentioned that you probably should have seen the worse of the pressure on the base insulin market this year, am I understanding the part D market have not yet switched to a single award model and that could happen in 2018 given the timing of a plans coming in. Is this already a discounts into that or already visible in 2017 or should we see another point of pressure with the part D plan are introduced in 2018? Lars Rebien Sørensen: Thank you. Ronny, this is Lars Rebien here. And no we have not seen any move towards single source contract and exclusively on the GLP-1 market and that we had not anticipated in the timeframe that we are looking that this will happen. And with regards to basal pricing, it is correct that Jesper mentioned that in our modeling - of the impact is likely to have been seen in '17, but some impact going forward, and we're going to specify that between the commercial and part d plans, but some further negative impact going forward, it’s all been factored in.

Thank you very much. Lars Rebien Sørensen: Thanks. Next question please.

Thank you. We'll now take our next question from Michael Novod from Nordea. Please go ahead. Your line is open.

It’s Michael from Nordea. Again to the updated long-term growth target of 5%, so you said on media that you might see growth coming back in '19 and to get to an average of 5%, we discussed is also earlier regarding the 10% which then became, was a point estimate, now it’s an average. Can you just maybe elaborate a bit more on how you see the space between years, sort 5% in '18 how do you see coming back in '18 or should it more be a '19, '20 thing. And then the last thing is on human growth hormone, are you able to talk about how us see the human growth hormone say, annual sales developed after 2016, so are we due to see a decline in sales or actually just low single digit sales? Lars Rebien Sørensen: Thank you very much. Jesper, I think there must be a misunderstanding here, that Michael has picked up that we have indicated that that would be continuous growth of our business in 2018, could you please comment on how you arrive at the average 5%, over the entire period.

Its apparent that we've given the guidance now for 2017, we haven’t provided a detail guidance for 2018, but it’s also apparent from the long-term financial target and looking at average that we need to see in j2018 our operating profit into the 5% level in order for us to meet the average and that is certainly also our expectation. That advantage we will have in 2018, is that we get beyond the 12 month effect from the Vagifem passing the competition in the US and hence we should be able to deliver a 5% growth level in '18. That is built into assumptions, but what this specific amount is going to be, we will have to get properly prepared for third quarter 2017, before we make more detailed comment on that. But the growth level will be in that vicinity. Lars Rebien Sørensen: Thank you, Jesper. And then regarding growth hormone, you should remember here, that we had a very significant ones off pricing effect in 2016 on growth hormone, but that we will be seeing weak volume development in United States as a result of loss of an advanced formulary with CVS where we have elected not to participate and that formula actually gained traction and coverage in the US. But then on the other hand, we are seeing a relatively strong volume growth. However, a different pricing point outside the US in particular in emerging markets, especially in the Middle East and Northern Africa region. So short-term declining growth hormone business, longer term, it would be depending on the weight between the US growth hormone business and the growth of our international growth hormone business. Thanks next question please?

Thank you. We will now take our next question from [indiscernible] from Credit Suisse. Please go ahead. Your line is open.

Hi. Thanks for taking my questions. Just going back to the GLP, can you discuss the competitive environment you're seeing them in Europe, Victoza sales are down this quarter and what's impact from the loss of Germany being? Second question is one of the key areas that you speak about is obesity, the Saxenda growth that seems to have slowed in the US, can you give us some color surrounding the formally access and coverage for this product? Thanks very much. Lars Rebien Sørensen: Thank you very much. Yes, the European GLP-1 market is slightly more pressured than the situation is in United States. We have a lot of business in Germany, but however, we had not seen growth of our business in Germany and this is due to very strong performance of a competing product in the German market and then we all influenced in Europe on pricing, there been some pricing adjustment. So our GLP-1 business in Europe is about flat slightly - slightly positive, where as its growing significantly as we've already indicated 14% in the US and its growing double-digits in international operations and in Japan, With regard to Saxenda we have seen the exit of competitors in this market in the US which is a leading us as the main player in the US, but maybe I should further question to the former head of marketing, but now President of our US operations to answer what the t specifics are in the US on Saxenda.

Yes. I'll start with Saxenda we're very pleased with the development of Saxenda globally and as well in the US. There is an element of seasonality in the data, so we typically see a stronger market development earlier in the year that slows off the in the latter part of the year. That is, that is also impacting and Lars said, we are increasingly alone in developing this market, but it is developing a at a satisfactory rate we just need to build it you could say patient-by-patient [indiscernible].So I would say yes, maybe little slowing but it’s a seasonality we've seen before. So all in all, a good development. Lars Rebien Sørensen: Thank you very much both gentlemen. Next question please?

Thank you. We'll now take our next question from Keyur Parekh from Goldman Sachs. Please go ahead. Your line is open.

Good afternoon. Up to big picture questions, please. First, your commentary today and increasingly to the course of the year, it seems to suggest an operating environment for Novo Nordisk that is materially different than the last decade has bought. Do you think the company is currently structured to survive and climb in this new operating business environment, do you have the right mindset and the right people in place to execute on growth in a market environment that is likely to be very different. That's question number one. And question number two, would be, given your commentary on lack of willingness to pay for innovation or at least marginal innovation in the diabetes market, is it fair why is 13% or 14% of revenue still the right money to spend on R&D?. Thank you. Lars Rebien Sørensen: Thank you very much. Could you elaborate in here. I think in order to also have some accountability on the comments about the long-term picture that I - referring to first question that you have, the incoming CEO as to whether or not he sees that - and its obviously everyone that there is a change in the operating environment which has led us to change the short term growth. But how we will be able to operate in such an environment, perhaps Lars should share his perspective of vision what you should be expecting [indiscernible] in the coming period. Lars Fruergaard Jørgensen: Thank you, Lars. So when we across the world, I think we have to acknowledge that the detention operating environment is primarily in the US and we see continued strong performance and actually a rebound of our Chinese business and also very strong performance of our Japanese business and actively growing Europe more than we have done in recent years and continued strong momentum in Idaho. So we need to focus in on the US and to be honest, I think we also have acknowledge that we are not fully satisfied with our US operations, if you see how the quarters have developed during 2016, we have seen a decline in our quarterly performance, and of course, it’s a significant change environment for our US organization where the company environment will know from mid to low market share, increasing market share and then adding price increase on top of that, to now we have - we like to taking out the pricing element and now we have to drive volume in the market. And that’s also the background for the changes we done to the organization where our base is now hitting up the US and we have proven that he can do what he is now hitting to do in US and in other markets to apply constant that with the changes we do and also significant restructuring in our US, that will get a grip on this. Obviously this is something that would take a b it of time, but we have the right portfolio to play with and we believe we can do it. Lars Rebien Sørensen: Thank you very much, Lars. In addition to that I think you can say that we have been - we have been used to operating in such environment for years in Europe and we are starting to see growth in Europe. We still haven’t resolved the Germany issue, but I think that’s the situation we share with many of our colleagues, same thing Japan, Japan coming around to growth. So it is not prone to us, it is a specific issue. As Lars said, it is of course and obvious question effect itself, if it’s difficult to get reimbursement for marginal innovation, we cut the R&D budget. So with that ladies and gentlemen, we'd like to thank you for your interest in Novo Nordisk. I would like to personally thank you for this numerous quarterly announcement that I've had the opportunity to sharing with you. This was the 63, it has been great fun and there we have had a lot of good interaction, I am going to be missing all of you, but I will be checking out as of this call. So I wish you all a very good luck and thanks for our relationship during the years. Thanks.

Thank you. Ladies and gentlemen, that will conclude today' conference call. And you many now all disconnect.