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Novo Nordisk A/S (NVO)

March 04, 2013 4:00 am ET

Executives

Kasper Roseeuw Poulsen

Ronald Christie - Member of the Senior Management Board

Kezhou Zhang

Chen Jun

Ng Chin Sin

Analysts

Michael Novod - Nordea Markets, Research Division

Richard Vosser - JP Morgan Chase & Co, Research Division

Peter Verdult - Morgan Stanley, Research Division

Carsten Lønborg Madsen - Carnegie Investment Bank AB, Research Division

Jo Walton - Crédit Suisse AG, Research Division

Operator

Good day, and welcome to the Novo Nordisk's Region China Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Kasper Poulsen. Please go ahead, sir.

Kasper Roseeuw Poulsen

Welcome to this conference call focusing on Novo Nordisk's Region China. The purpose of this call is to share our perspective on the challenges and opportunities that we are facing in the region, and to leave investors and analysts with a better understanding how we strategically are managing this diverse and complex region. I'm Kasper Poulsen, Head of Investor Relations. With me, I have Senior Vice President and Head of Region China, Ron Christie; Vice President of Clinical, Medical and Regulatory, Kezhou Zhang; Vice President of Marketing, Chen Jun; and Vice President of Finance, Legal and IT, Chin Sin. Present is also Lars Borup Jacobsen from Investor Relations. We will start with a presentation, as outlined on Slide 2. The Q&A session will begin in about 1 hour.

Please turn to Slide 3. As always, we need to advise you that in this call, will contain forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For further information on the risk factors, please see the slide prepared for this presentation. Please note that this conference call is being webcast live and a replay will be made available on Novo Nordisk's website after the call. With that, over to you, Ron.

Ronald Christie

Thanks, Kasper. My name is Ron Christie, and welcome to this conference. It's my pleasure to tell you some general things about our business here in China. If we look at Slide 4, we can see there that China region as such covers Greater China, as it's known here, mainland China, Taiwan and Hong Kong. And I think it's important to point out that China is a very complex market with 31 individual provinces, each with its own ideas about health care and what should be provided to patients. So it's quite a complex market. The best way to think of it is like the European market. The business here in the region is predominantly diabetes business. It's 97% of our sales comes from the sale of the diabetes products, and our market share here is certainly slightly above the average in the global sphere for Novo Nordisk. We have 37% of the total diabetes care market and versus an average of 26% in a worldwide basis.

Our volume market share for insulin is running at 60% thereabouts, and it's been pretty stable for the last 5 years. So we have a very strong position in those markets, and we've been operating here for a long time, which has helped us to gain this position. Our business has grown significantly over the years, and as a consequence now, Novo Nordisk has more than 3,400 employees based in China. That's in the commercial, the R&D and the production operations. And of those 1,800 are direct sales force, sales reps, so we have a large sales force covering most of China. Our sales force is -- continues to grow, and this coming year '13, this year that we're in now, we expect to grow sales force by a further 10%.

If you turn to Slide 5, you can see that we are -- China is 1 of 5 regions in Novo Nordisk, and you can see that we are responsible for 8% of group sales and -- but we are growing very fast, and with a rate of growth in the past year of approximately 28%. So the sales in China over the past number of years has been growing at a compound annual growth rate of some 25%. And so we've seen significant growth and China has become an increasingly important contributor to Novo Nordisk. This past year 2012, we were the third largest contributor of the regions to Novo Nordisk. And as an individual country, China is currently the third -- in 2012 was the third largest individual country after the U.S.A., Japan and in China. But in 2013, because of the growth rate in China, we expect to become the second biggest individual market after the U.S.A.

If we move to Slide 6, and we look at the milestones here in China. We have a history that goes back to 1994. And from that early date, our company has invested in activities like R&D and production in China, and these activities that we've invested in and participated in, in China have helped us to establish a very strong business here over those years. First established in '94, China became an individual region in Novo Nordisk in 2011. And we've been producing devices since 1997, and we became the global supplier for our injection devices since 2007.

R&D facility, we expanded that a number of times, and most recently in 2012. We now have something like approximately 180 scientists working here in China, and they are an integral part of our worldwide R&D effort. We have our local filling plant that we completed building in 2011 and in 2012, started its first production and that's a significant investment for the company, some USD 400 million to build the plant. And I think the main thing if we look at our milestones, and Jack will talk later about this, I think it's what we've done as a company in terms of market development in helping to improve diagnosis and treatment of diabetes, which has been equally important for the establishment and growth of our company over time.

If we look at Slide 7, you can see that if we look at the future growth for the world region, you can see that China is going to play an increasingly important role for the pharmaceutical industry and, of course, for us as an individual company, but China is expected to account for about 30% of the global pharma growth up until 2016, and the annual growth in pharma spend in China is expected to be around about 18%.

The growth in China, the region here is expected to be above all other regions around the world. So China is a very important market for our company. It's currently the third largest pharma market, and expected to become the second largest market by about 2016 so it's very important for us to do a good job here and to be successful.

If we look at Slide #8, which comes back to what I just mentioned, you can see that as I said, China is currently the second largest market in 2012, expected to surpass Japan in 2016. And we'll talk later as a group about the different things that are driving this market here. Well, of course, you're aware, as most people are well-read people these days, that China as a market for any business, is becoming increasingly important. No matter what operation your company operates in, China is increasingly important so it is for pharmaceuticals. And there's a number of the dynamics that are driving that. So looking to the future, United States will remain our biggest pharma market, and the European Union is going to be -- stay pretty much an important second place, but China as an individual country, is going to grow very rapidly the next few years and surpass Japan and become the second largest market in the world.

If we look at Slide #9, and here, we talk about some of these trends that drive this growth in the Chinese market. Well, the obvious one is the first thing, of course, is you have so many people, 20% of the world's population, and with regard to those people, there's 2 aspects that are very important. One is the rapidly -- rapid rate of urbanization, which the latest figures from the government show that the urbanization rate in China is only 51%. So there's still a lot of people which will urbanize in the future, and the other aspect is aging population, China is becoming quite an aged society quickly, and that's mainly from the influence of one-child policy. So those 2 aspects combined, urbanization, we know that diabetes rates increase and the rates of chronic disease increase as people urbanize. And with aging, we get an increased incidence of chronic disease as well. So these 2 things, coupled with the government's increased investment in health care, the health care reforms are being carried out, plus the company's, individual multinational companies doing a lot of work to develop the pharmaceutical market, these things have combined very well to drive the Chinese pharmaceutical market at these very high rates.

If we look at Slide #10, and we talk about here about health care reform. The Chinese government has over the last number of years increased its investments in health care. And the health care, of course, just to point out, is the combination of central funding, provincial funding and individual funding. But health care, as a percentage of GDP in China, has grown significantly to a level now of around about 5% of GDP. Now I think the interesting thing there is to note that if you look at that stage of development of China, one would normally expect to see a rate of around about 7% or slightly more than 7% of GDP spent on health. So again, the fact is China has a way to go, this will help drive the business in the future, as the government invests more and more money. The Healthcare Reforms have meant that the government invested additional funds, this is USD 180 billion additional funds over a 3 year period, and addition to that, the government has in effect rolled out health care coverage in one form or another to most of the population. We haven't seen the official figure yet, but recently, the Minister of Health, just prior to this national meeting, announced that they're covering 98%. So it seems like the health care coverage is extended to virtually everybody in China now. And of course, the government wants to provide better health care, so it's extending its essential drug list, and by the end of this year, we expect to see an expanded EDL available for people throughout China. So the government's doing a lot in terms of investment and support for health care here in China.

If we look at Slide #11, which talks about the status of Healthcare Reforms, there are 5 actual areas of the reform focus. And I've mentioned already the spend to the medical insurance coverage and the establishment of the National Essential Drug List. But 3 of the other aspects, which are very important, is the improved medical infrastructure. It's quite amazing to see how many hospitals have been built in China over recent years, something on the order of 1 -- just under 1,000 hospitals have been built in China. And these hospitals, I can assure you, are large hospitals by any definition and with many beds, and by western standards, these are very large hospitals. So a lot of infrastructure is being put in place, public health service programs have been put in place and specific diseases have been targeted by the government, and are of great interest to them. For the last 5 or 6 years, diabetes has always been mentioned as one of the focus diseases in China, and the reason for that is very obvious, when you see the figures, which will later be mentioned by Kezhou, I think, about the incidence of diabetes and how it's increasing in China. So like the rest of the world, China faces an increasing burden of chronic disease, and in particular, diabetes is an increasing concern for the government here. The other thing that the government is doing is trying to -- trying to get involved and structure the hospital operations in this country. Hospitals traditionally have used the sale of medicines as well as services as a large source of income for them basically due to a lack of government investment. The government plans basically to gradually reduce the need for profit from the sale of medicines and services, and to have more central government funding. Of course, anything that reduces the price of medicine to the patient is good for us because then it means that more and more people can have access to our medicine. So we're very happy if they can be successful to find sufficient funds to invest in that.

So if we look at the next slide, which is Slide 12, and we come to look at the conclusion for this introduction, China, as we all, know is a high-growth region for most businesses for Novo Nordisk, it's one of our highest growth regions, and we secured a very good position here through significant local investments in commercial activities, R&D and also production. We expected that China will be the second-largest pharma market in the world by 2016. And for us, at Novo Nordisk, we're a little bit ahead of the curve. We expect to achieve that position as an individual country in 2013. Nonetheless, China is a great country to operate in. It's been very good for Novo Nordisk, but it is an extremely challenging country. It's a very large country. Many of the provinces we speak of have populations in excess of 100 million people. So I always say to people, "Don't think of China as one country. Think of it as like Europe, but just twice as big, and that's really what it's like to work here.

And so with that, I'll conclude and hand over to Kezhou Zhang, who's our Head of CMR, and he will tell you all about diabetes in China and what's happening. Kezhou?

Kezhou Zhang

Thank you, Ron. And we are now on Slide 14. So we take a look at China diabetes prevalence. So right now, the number of people with diabetes in China is estimated around 93 million, which is about 1/4 of the world total diabetes population. And this number is projected to raise to even higher in 2030, the number will come to 130 million. We also have to be aware of pre-diabetes, which regarded as how you define it, will progress to diabetes at one stage sooner or later. And this pre-diabetes prevalence rate in China is much higher, which comes to 15.5%, while diabetes rates right now is around 9.7%. So if we put this number together, it clearly shows that diabetes is a burden right now in China, and this burden will continue to grow due to the pre-diabetes number we have just seen.

So if we move to the Slide #15, one of the driving forces behind this huge diabetes patient number in China is the aging population. Because of rising living spend, better health care, and do not forget the unique China one-child policy, which already lasts for about 20 years here. So this demographic transition in the region will be more pronounced over the coming years, following the trends we have already seen at advanced countries, regions like Western Europe, North America and Japan. So just give a second for example, between 2010 and 2013, the population in China, of course, age 60 and above, were more than doubled to reach 450 million in China.

Slide #16, urbanization. Besides I just have said, this aging population is one of the forces to push diabetes population higher in China. Urbanization is the other key driving force behind this larger number. As we all know that diabetes is closely linked to the standard of living, Western lifestyle, with excess energy [ph] intake and limited physical activities, and this caused increase rate of diabetes. For example in 2000, 35% of the population live in city, while this rate raised to 48% in 10 years time, and it will reach to 60% in 2020. So aging and urbanization are 2 key driving forces behind this huge and growing number of diabetes population in China.

Slide 17. Overweight obesity -- we all know that obesity overweight are tightly linked to diabetes, and for a period, Chinese population is less bigger than Westerns, but this does not mean we have less diabetes challenge versus Westerns. For example, as the figure shows, 12% of people in China with a BMI range between 20, 25 are diabetics compared to only 3% in the U.S. for people in the same BMI range. Put into other words, Chinese diabetes is more sensitive towards weight increase, at the same time, we clearly see that there's increased prevalence rate of overweight and obesity in China with the lifestyle change, urbanization, et cetera, which I mentioned. So this certainly worsens the diabetic or diabetes situation right now in China.

So next slide, we move to Slide #18. Now we take a look at the control parts of diabetes. Figure shows only 1/3 of people, 1/3 of people living with diabetes in China are diagnosed, 1/3. And once diagnosed, most of patients are treated, but be aware that there are various forms of Chinese traditional medicine are often used as part of initial treatment. These are not very effective. And this is also a challenge for the treatment outcomes. Later, we will see that. Among all the diabetes patient in China, it is only about 11% who are considered in a good control, what we call the treating target, consequently, as a result, we do see a trend toward increased level or increased number in hospitalized diabetes treatment because of severe hypoglycemia, because of diabetes complications, and this surely associated with much high level of healthcare cost for diabetes treatment.

So let's turn to the diabetes pathophysiology, which is Slide #19. There's a difference. There's a difference between Caucasians and Asian individuals. If you look at left side of figure, for Caucasian, 35% of diabetes glucose abnormality is impaired at a fasting glucose level only. While for Asian, it is only 18%, which means post-prandial hypoglycemia is much more predominant for Chinese type 2 compared to the Caucasians. Recently, at the same stage of diabetes progress, Chinese patient has poor level of beta-cell function, has poor level of first phase insulin secretion, or what we call the first phase insulin secretion capability capacity. This all contributes to the high level of post-prandial glucose level we have seen in Chinese patient diabetic population.

And I would like to take insulin secretion as an example, that's on Slide #20. First insulin secretion, and this slide shows you the studies published in 2000 and 2004, and left of figure shows you that insulin secretion curve from Caucasian. Solid blue line is healthy people. Dark line green is type 2. Dark line blue is impaired glucose tolerance population or we can call the pre-diabetes population. So you can see that in Caucasians, type 2 of pre-diabetes, their first phase insulin secretion are not impaired if you compare to the normal people population. However, in contrast, for the Asian type 2 of pre-diabetes, here, I used Japanese data, insulin secretion is impaired, that's on the right side of figure. Because we know that first phase insulin secretion is needed to manage post-prandial hypoglycemia, that's the reason why Asian type 2 is associated with a predominant post-prandial glucose abnormality. That is also why Chinese type 2 diabetes control is more -- much more focused on post-prandial treatment.

And if we take this, we also consider the difference in terms of treatment guidelines between the Chinese and the Western diabetes society. That's on the next slide. Premixed insulin, that is with injection, providing both basal and prandial insulin. This is recommended as the first-line insulin treatment in China versus basal insulin only as a first-line insulin treatment in EU and U.S. diabetes guidelines. And we also can see that in Chinese diabetes guidelines, premixed analogues such as NovoMix 30 CRD. So 3 injections per day is recommended as a one option for intensification treatment, and this is not in the Western guideline. So overall, prandial glucose control is highlighted in Chinese type 2 guidelines and because of this, we do see that about 66% of all insulin used right now in China is premixed insulin compared to 14% in the U.S.

So let me conclude on this medical part. So conclusion is growth is -- the growth in diabetes, driven by changing demographics, there's relatively low diagnosed rates and poor control in Chinese type 2 patients. Premixed insulin is favored by pathophysiologists and also local Chinese treatment guideline. So that's my part, and I would like here to take you to over to Jack for the next part of presentation.

Chen Jun

Thank you, Kezhou. This is Jack, I'm Head of Marketing for Novo Nordisk China. Please turn to Page 24. I would like to start with a simple overview of the Chinese diabetes market. The slide to the left shows the Chinese diabetes value market by treatment class. Overall, in China, the split between oral diabetes treatment and insulin is about 50% and 50%. GLP-1 and its class is still relatively small. And looking at the growth rates, starting from 2007 to 2012, according to IMS, the annual growth rate, compounded annual growth rate in value turn is about 31%. However, this is partially driven by the currency appreciation of Chinese yen against the Danish kroner. Here shows the market growth from DKK 2 billion to just over DKK 7 billion. As you may know that IMS data covers only part of the Chinese market, roughly between 50% to 60%. So the actual underlying market size is closer to DKK 50 billion, but still even excluding the currency appreciation factor, the underlying volume growth according to IMS is still roughly 20% over the last 5 years. And of course, with the base getting bigger and bigger, in the recent couple of years, the growth rate slowed down a little bit, but it's still above 15%. And then the chart to the right shows the market share in value turn by different companies. Novo Nordisk is clearly the market leader with market share fairly stable over the last 5 years. Today, we stand at around 37%, which is quite higher compared to our global market share, which is around 26%.

Let's go to the next page, Page 25. One of Novo Nordisk's China's clear strength is our portfolio. We have a complete diabetes treatment portfolio across the diabetes treatment cascade [ph]. For the patient with early diagnosis, when a patient needs oral drop, we have NovoNorm. And then after one OAD failure, we still have Victoza, which is recently launched. When a patient needs insulin, we have the most complete insulin portfolio, including the second-generation insulin, which is the human insulin, and the third generation insulin which is modern insulin. And for each of the insulin generation, we have rapid acting, we have premixed 30 and 50, and we have the basal insulin. So compared to our competition, we have the most complete diabetes treatment portfolio. And then when we look at the product contribution for Novo Nordisk China in 2012, we can see the chart to the right, human insulin, which is a older generation insulin still represents 46% of the overall contribution. However, that segment has the slowest growth rates of only 5%. Our growth, mostly driven by modern insulin portfolio: NovoMix, NovoRapid, and Levemir. Victoza was launched only September 2011. It has only 1% of the sales contribution, but the -- in terms of the growth contribution, it has 7%. So we expect in the future, Victoza will become more and more important product. On this slide, the other diabetes products include the NovoNorm, include NovoPen, which is injection device, and NovoFine needle.

Let's go to the next page, Page 26. Let's dive into the insulin market. The slide on the left shows the overall insulin market dynamics. Over the last 5 years, you can clearly see that premixed insulin remains to be the dominant insulin segment. As of 2012, premixed insulin still has roughly 2/3 of the total market, and this whole dynamics has now changed very much even after the increasing usage of basal long-acting modern insulin, and then the device penetration in China is actually fairly high. It's now reaching close to 90% for the device penetration. For insulin, the total volume market growth, according to IMS is 22%, which is very respective -- respectful growth rate. When we look at the modern insulin penetration, right now, it stands at 40%. Compared to other major markets, this is still a very small number. It just shows, in the future, we still have a lot of room to grow in terms of converting human insulin users to modern insulin. The chart to the right of this page has -- shows the insulin modern [ph] market share by different companies. Again, our strength in the diabetes treatment, Novo Nordisk, is primarily in insulin segments. Here, we clearly have an advantage of 60% market share. In recent years, recent couple of years, we have seen some competitive pressure on our -- to our market share. We have seen our market share drop just slightly and be -- the company that have gained some market share here, we can see Sanofi with its launch of Lantus.

Now we go to the next page, Page 27. We have seen earlier that the Chinese diabetes market is primarily dominated by OAD and insulin. In fact, the increasing market in China is very, very small. It has only just about 1% of the total diabetes value market. Even though the first couple of incretin drugs, launched -- Byetta and Januvia, launched over 2 years ago, just like any new products uptake in China is very slow because of significant market access barrier. The incretin market is very small. But if we zoom into the incretin market, if we look at the chart to the left, we can clearly see that Victoza has grown very fast, even though it was launched a year after Januvia and a year after Byetta. And the chart to the right showing the shared growth across the incretin class, and right now in China, we have a 2 GLP-1 product, Byetta and Victoza, and 3 DPP-4 product. In terms of shared growth, Victoza is already #1 with 38% shared growth in the incretin market.

Now let's go to Page 28. We talked about a lot of IMS market performance data, and IMS mostly captured the bigger hospitals in the more mature markets. And some of the market segments are not well represented by the IMS data, and one of this important market segment is this so-called the county market.

Recently, we've seen a report from Boston Consulting Group showing the market performance of this county market using 2010 market share data. And of this county market, which is more representative of the rural part of China, the market -- the key players are all local companies. And the chart here shows the top 20 companies in this county market, 19 of these top 20 are local manufacturers, and Novo Nordisk is the only multinational company in this top 20 list. And the -- but one thing unique about this county market is its high growth rate. In fact, for 2012, the county market has the highest growth rates across all the market segments, and our presence in this county market, strong presence, is a very encouraging sign that we have secured our position in this faster-growing market segment.

Now let's go to Page #29. Novo Nordisk, our sales force is organized in 9 sales regions with more or less similar market or business contribution. One thing you probably see on this slide is, some of the sales regions on the eastern seaboard are very small, when you look at the geographic coverage, and the one to the west has a huge area. It just shows the heterogeneity of the Chinese market. One extreme example is, for example, in the city of the Beijing, we have over 150 sales reps, and for the province of Tibet, we have only 1. And it just shows in China, there's a huge diversity across different provinces.

To further illustrate this inequality, we go to Page #30. On Page #30, the chart to the left shows the average personal income by province. And we can see that the richest city/providence in here is Shanghai, has about 5x the average personal income compared to the province of Xizang, which is another name for Tibet. In fact, the same goes for the personal health care expenditure, there's a huge difference across different provinces of China. And given these differences, our commercial approach has to be different, and we have to adapt to the unique market characteristics of different market segments.

Let's go to Page 31, and here, we show you how we internally define the Chinese markets. We segment the Chinese market into 3 subsegments. The first segment is basically we call the key city, and we only consider the center part of the key city in this Segment 1. Some of the example include Shanghai, include Chengdu, include Nanyang, Hunan province. If we put all this key city -- the center part of the key city together, they represent about 15% of the Chinese population. However, their business contribution to Novo Nordisk is over 50%. And the unique characteristics of this key city, the Segment 1, is the competitive level is very high, all the companies have a strong presence in this market segment. And the market is relatively mature; they have a slower growth rate. Our market approach is to maintain our strong position in this particular segment.

For Segment 2, they represent about 260 prefecture cities, and again, we only put the center part of the city in this Segment 2. They have about the same, 15% of the Chinese population. And some of the example include Jingdezhen in Jiangxi province, including Changzhi in Shanxi province. And our objective is to strengthening our leading position.

Then there is Segment 3, which is a county market. Each county is a part of the prefecture city or the key city, but we take them out, so they represent -- there are 2,000 counties, and they -- collectively, they have about 70% of the Chinese population. And this market has a very fast growth rate compared to the Segment 1 and Segment 2, and on average, is about twice as fast in terms of the growth. And our approach is to educate the doctors here and educate the patients so that the doctor can improve their capacity to diagnose patients and to treat patients.

If we go to Page 32, and here just shows some of the examples what we do in this different market segment. For example in Segment 1, we -- our focus is on the new product launches and also product upgrade initiatives. For example, to move patients from human insulin to modern insulin. And we also have a number of high-level academic meetings in this first segment. And for Segment 2, our key initiatives including training of the health care professionals, including patient education, and we have some of the innovative programs such as meeting the expert, by which we invite the top national KOLs, key opinion leaders, to these smaller cities to hear their clinical experience. And for Segment 3, as mentioned earlier, the key focus is to build up the capacity for the doctor to be able to diagnose and treat diabetes patients. And there, we use a lot of the e-marketing, digital tools to educate the doctors in the rural areas.

Overall, in 2012, our educational activities covered about 135,000 health care professionals in terms of the interactions. And then we covered more than 100,000 patients, again, in terms of interactions.

Let's go to Page 33. One thing I want to emphasize is Novo Nordisk China's emphasis on education. Because diabetes is a chronic bases, we spend a lot of efforts -- actually our promotional effort in educating physicians and educating patients. And here, it just shows a large basket of educational activities and the tools we have down in China, including some of these leadership forum, including NovoCare activities and so on and so forth.

So in conclusion, I would like to go to Page 34. Overall, Novo Nordisk China holds a very strong position in a rapid growing diabetes care market in China. We are, by far, the largest diabetes company in this market. And our key strength in -- is, we have a broad diabetes product portfolio which is very advantageous, especially when we grow into these smaller cities and rural markets, and we basically have the right product for each of the market segments. And finally, I want to emphasize is the complexity of the Chinese diabetes market require us to develop and tailor different approaches to the local needs.

So with that, I would like to turn over to Chin Sin.

Ng Chin Sin

Thank you, Jack. In the next session, I'd like to present to you a simplified framework on how we actually effectively get the products into the hands of the patients. On Slide #36, you'll see 5 key points that I put together. I'll start with the national level regulatory approval, which will highlight 2 different pathways that we can get the product approved. On the second point, I would like to highlight the work that we need to do at a provincial level, one province at a time, including both pricing and bidding listings. Going further to the third point is to show that beside what we do at a national level and a provincial level, we also need, to a good extent, to go from one hospital to another to get our product listed into their formulary. And on point 4 it's a very important component to the whole value chain of the way we see it because we have to ensure that the patients are able to pay all rather [indiscernible] paying on behalf of the patients. That brings us to the last point, which is also very important because then we need to get a group of partners to physically deliver the product into the hand of the patients.

Going to the next slide, Slide #37. In terms of the national regulatory approval, SFDA has 2 pathways to allow the biologics to be approved. If I go to the bottom of the slide, which shows China classic pathway, it is basically the routine application process we can go through to get our product approved. And you can note that for that process, we can only start after either we have an approval in the EU or in the U.S. by FDA. That will mean that for any product coming to China market, there'll be a delay of 4 to 5 years. The alternative pathway that SFDA also allow is also called the China MRCT pathway. With that, a company can actually approach SFDA to submit application information given that quite a long list of requirements, and however, as we highlighted, there's no clear answer and to say there is one that is able to fulfill all these requirements, the product will get automatically approved. So far, if I take the example of biologic product approval via the MRCT pathway, we have seen only 1 success, which is our Victoza.

Going to the next slide on Slide #38, when we go to a provincial level, on the slide, on the left of the slide, you'll see the SFDA approval as a starting dot. And in the province, typically after the SFDA approval, will take 3 to 6 months in order to work to get the product's pricing to be approved by the provincial government. And this we have to go province by province. That's why the timeline also be impacted by how a province will have this approval. And sometimes, it will take even longer than this time.

Assuming we have the pricing approved after a 6-month period, then we also have to go through a provincial bidding process, and this is a lengthy process that can last between 12 to 13 months, or even longer is what we have experienced. And the bidding criteria will also require the key opinion to give the opinion -- or sorry, the key opinion leaders to give their opinions on the product and also an assessment of the quality. And more and more, we are seeing price becoming a key factor in the province deciding on how they are going to approve the product. And I think I need to highlight that once we get a price approval in the province, it doesn't mean that actually we can sell the product, but that will restrict the sale of the product only in the pharmacy. It's only after a bidding listing is done in the province, then only we can start to list our product into the hospital formulary.

If I take one dot further to the right, having our pricing approved in the province and also having the bidding listed, it doesn't mean that our product can stay on forever in the listing in the province. Every now and then, we'll also see that the province will reopen or renew the bidding, and with that, we also have to actively participate in the renew bidding. And over the past few years, we have seen that the renewal of the bidding, as being as a mechanism also to reduce the price of drug.

Having said that, I move on to the next slide, Slide #39. Assuming I have cleared both the national regulatory approval and also the provincial approval, we come to hospital listings. On the right -- sorry, on the left of the chart, I show you a long list of number that highlights for different grades of hospitals in China -- that's a huge number for each of the grades. The lower down the table will signify the smaller hospitals, and there, you'll even see a bigger number. And on the right part of the table where I put some peak, it will highlight how we can have the hospital formulary being listed with our product. If I fit -- sorry, if I file with these 3 hospitals, you'll see that the bigger the hospital, that, you'll have special requirements where the hospitals typically require individual listing, meaning you'll need to have the rights into [ph] the hospital, work with them to get the product listed. The smaller the hospital, if I say, the good ones, some of them, they will follow the listing of a bigger hospital, assuming they are in the same grouping, and that will make the work slightly easier. And going down, there, you'll see urban community service centers typically will have a good listing. However, now we also see that coming to some of the township hospitals and [indiscernible] hospitals that Jack has presented, many of them will require individual listing.

On the overall, this is what I'm trying to highlight in this slide is that there's a lot of work and resources required for the sales rep, for our other department colleagues to actually work together to get the product eventually listed into the hospital.

In the next slide, Slide #40, I will come to the economy part of the China health care system. On the left of the slide is the Urban Employee or Urban Resident BMI system, UEBMI. Currently, this system -- this insurance scheme actually covers more than 90% of urban employees or residents, and this week, encompassing 400 over million [ph] people. And actually, this insurance scheme that we have, most of the Novo Nordisk product being listed and being reimbursed at this moment. On the top [ph]2 slides, I will come into more details on this particular insurance scheme.

[indiscernible] moving on to the next insurance scheme, which is in the middle, is the National Rural Cooperative Health Care system, NRC. And under this scheme, currently, it covers more than 800 million rural residents. However, the reimbursement level remains rather low, and it only covers the EDL drugs, meaning the essential drug list products. There's some fine things on the bottom, if I take the year 2012, basically, the government is targeting on a per resident basis, the premium for the NRC is only up to RMB 300 per patient per year. And for all that, we know that, that's basically a very minimum level of coverage. And that premium is used to pay for not only drug, but also inpatient treatment, surprises like an accident, so it's not a very high level of premium that we are talking about.

On the right, which is the Private Medical Insurance, and this segment that keep developing, we see profit development, however, we do not see a big part of the payment or reimbursement coming from this initial scheme yet.

Going to the next slide, Slide #43. In order to get the products reimbursed, basically a patient will have to look at which province he or she comes from, which -- sorry, I have to come to Slide 41. I just come to the wrong page. On Slide 41, I would like to introduce to you the -- in more details the 2 insurance schemes. The one UEBMI. If you look at this National Reimbursement Drug List, at the national level, we have in total 1,164 Western drugs listed; we have the TCN of 1,032. But when you look at the secondary provincial listing requirements, you can see that a province can actually add or minus up to 15% of this number of drugs being already listed into the National Reimbursement Drug List. And the criteria that a province will typically look at will be the medical needs for sure, and the second big factor is actually whether a province, at its economic development stage can afford to pay for the reimbursement of this drug.

Coming to the next one, at the bottom, the NRC, the Essential Drug List, you can see that the initial list at a national level is only having 307 products. However, while the list is being reviewed and adjusted by the province, some provinces have added 62 drugs to the Essential Drug List, and some have even added more than double the number, meaning 381 drugs, to the list. So I think, again, that shows that the province actually has some authority, has some power in deciding on what drug they want to list. And in effect, they also signify that for us, a pharma company, we have to work with also different levels of key stakeholders in different provinces.

On Slide 42, coming to the funding of health care in China. And if I go first to the green dots, over the period, over 10 years, you can see that the health care spend for inhabitants actually increased from USD 47 to USD 221, approximately over 7 times [ph] of increase. And most significantly, if you look at the percentage of the -- our forecast payment of co-pay by the patient, it has been coming down along the years. What we really see is that over the past years, all the development of the agency, all the efforts by the government actually has a positive impact on making sure that, of course, on a gradual basis, the residents or the citizens are having to pay lesser. And at this moment, we actually see a continuing trend in that direction. And we hope, therefore, that it will signify a continued growth of the pharma industry here.

Coming to Slide 43, combining all these factors, there you can see that how much a patient is getting reimbursed will have a play of all these factors coming together, meaning, in which province that the patient is, under what insurance scheme that a patient is covered and what drugs all the patients use and whether he's been treated or he or she has been treated in outpatient or inpatient setup. And it's complex, but basically, that's how it works. Tedious. Complex.

I have added another slide, which is Slide #44. This will highlight the differences in the different provinces and cities that we have the product reimbursed. If I take Beijing for part, and many of you would know Beijing, then you can see that only human insulin is 100% reimbursed in Beijing, whereas for modern insulin and even for NovoNorm, we have a co-pay structure. And then the reimbursement level is actually higher in a city like Nanjing and Tianjin for both human insulin and also for modern insulin. And for Hefei, another city which is classified basically at the same level, I mean, the classification is by the Chinese government, at Nanjing, then the reimbursement level is always coming with a co-pay, and for modern insulin, the patient will actually have a co-pay of approximately 40%.

On the far right-hand side of the table, I highlight a few capping number. If I take Beijing, it will be very different how much the patient can get reimbursed, depending on whether the patient is being treated outpatient or inpatient, and if I see the differences in the cap. The numbers are in DKK. And taking the other 2 cities, then you can see that in Nanjing, the outpatient reimbursement is at a rather low level of only 5,300. And bear in mind, this number will encompass all health care cost for the patient, not only limited to drugs.

And one up, what happens if a patient comes to the cap of this reimbursement capping? The answer is basically, then the patient will have to pay 100% of the excess out of pocket.

On Slide #45, I'd like to highlight a very important component of the value chain. We show hardy work with the distributors to get the products into the hand of the patients. First in terms of the different levels of the distributors, it's purely internal classification. However, these are rather big numbers. And we actually contract or engage all these distributors. And that shows also the complexity of the distribution, having to move the products from one distributor to another via different tiers of distribution. But what we believe is our strength is that over the past years, since Novo Nordisk [indiscernible] established in 1994, we have been working with [indiscernible] of distributors, many of them have been added all along the year, but we do see a core group of distributors working very closely with us. And over this period of time, we have really worked very closely in setting up a cold chain distribution, which in the past is nonexistent in China, but we have partnered then to manage setting up the structure. And as far as today, we can see that we have been growing with them to distribute our products into the new markets, as what Jack has mentioned. And also, the distributors play a very important part in ensuring that our fields get paid.

In conclusion, coming to Slide #46. While there's a very lengthy regulatory approval process that we have seen and also the reimbursement or listing process requires a lot of resources, we believe that we are handling it fairly. And the next point about the reimbursement system, although it's very complex, but the good thing is we do see expanding public coverage, meaning, an expanding of reimbursement and reducing out of pocket ratio. And in Novo Nordisk, we believe that to be successful, what we require is to really make sure that we do well in each of the set throughout this whole value chain.

And with this, I would like to hand over to Ron. Thank you.

Ronald Christie

Yes, thank you, Chin Sin. Just to summarize what we've been discussing. I think the Chinese market is and remains and will remain the most exciting market for the pharmaceutical industry and also for Novo Nordisk.

To date, we've been extremely successful in establishing our business here. We have high market share. And we have a full range of products, which enables us to take many opportunities in the market here.

We expect to see solid performance in terms of sales going forward, with sales growing around about 15% for the mid-term. And if we look to the long-term performance, I'm very sure that the demographic trends that we've spoken about in terms of urbanization, aging, the increased investment from the government will continue to make this a very exciting market for us here in Novo Nordisk.

It's a complex market, but we've been in it for a long time, and we have a very established organization, a large organization, which is able to visualize the opportunities that exist here in China.

And with that, I'll hand it back to Kasper. Thank you.

Kasper Roseeuw Poulsen

Thank you, Ron. We are now moving to the Q&A part. Here, I would kindly ask all participants to focus their questions on our Chinese business and to restrain themselves to 2 questions each. Operator, we are ready to take the first question.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Michael Novod from Nordea.

Michael Novod - Nordea Markets, Research Division

It's Michael Novod from Nordea Markets in Copenhagen. First of all, a question on Victoza, could you elaborate a bit more on when you actually see the, say, the major take off of Victoza, when that is expected, and also of course related, to when do you expect Victoza to get better status in terms of reimbursement which you also went through in the presentation? And then secondly, maybe you could update us on your plans for registration and clinical trials for Tresiba in China? And also in that -- relation to that question, to how do you see the, say, the guidelines develop for basal insulin in China, where we have seen a major move towards basals in other market, do you expect that also to happen in China?

Kasper Roseeuw Poulsen

Thank you, Michael. So I think for the first question on Victoza expectations for takeoff and reimbursement, I will ask Jack to answer that. And then afterwards, I would ask Kezhou to answer with regards to our expectation for both future treatment guidelines in China, as well as the outlook for Tresiba in terms of trials and approval process. Jack?

Chen Jun

Right. Yes, this is Jack, and to answer your question about Victoza, overall, if we benchmark the launch performance of any of this diabetes product in China, Victoza has performed extremely well. However, given that the significant market access barrier in China for any new product, the absolute value is still fairly small and the number of market access hurdles we are facing, including reimbursements, including provincial bidding and including individual hospital listing. So that's why, as Chin Sin alluded, the average market entry process takes 4 or 5 years. And we are now into the second full year of Victoza launch. So to address your question, when do we expect the reimbursement status will change for Victoza, again, that question is somewhat dependent upon the government review -- reviewing process. In general, Chinese government start to look at the reimbursement for new product every few years. Last time, the review process took place in 2009, and the implementation of that new reimbursement list started somewhat in 2010 and 2011, depending on which province we are talking about. And when do we expect the next round of reimbursement window will open? That is still up in the air because that depends on when the government starts to do this. So this -- to answer your question, I think, we cannot really answer exactly when we -- do we expect the reimbursement will happen.

Kasper Roseeuw Poulsen

And Kezhou, on the Tresiba timelines and treatment guidelines with regard to basal insulin?

Kezhou Zhang

For the Tresiba, we are about to initiate Phase III study in China in a couple of months. That's our planned timeline. And for DegludecPlus, that start right now, we are about applying the permission to run a clinical trial in China. So it is the -- it will take several years to get this product approval. My estimation is around, traditionally, 3 or 5 years from now. So that's the ballpark of time I can estimate. And your question related to basal, premixed has a very deep root in Chinese diabetes treatment, as I illustrated. And for the basal , we do see that it's safety, it's convenience, once daily injection is getting more and more attractive and also, acceptance from our Chinese insulin prescribers. And to compensate the prandial control, which is a limit from basal insulin-only treatment, we do see that in Chinese clinical practice, doctor add OADs, sulfonylurea [ph] on top of basal insulin to compensate the prandial control. So my theory is, basal insulin use will gradually or slowly pick up but for a very, very long period. I think premixed is still widely used in a quite larger population and at the same time, basal insulin will be adopted gradually more for our doctors. It takes a long period. I think premixed still will be used most often in China.

Kasper Roseeuw Poulsen

Operator, we'll take the next question.

Operator

Yes. We have now one question from Richard Vosser from JPMorgan.

Richard Vosser - JP Morgan Chase & Co, Research Division

It's Richard Vosser from JPMorgan. Just a question on pricing and price cuts. I think Lantus and possibly, Levemir, had a price cut at the beginning of this year to go into '13 of around 10%. Just wondering how you think of the price of Lantus, which is very much more expensive than human insulin our mixed insulin, and how that price cut could affect shares going to the basal insulins going forward in the medium term? Whether you think price is a big barrier to the uptake of basals? And just following up on the question around Tresiba and the timelines, is there anything in terms of you asking permission for Ryzodeg trials to start? Is there anything that you foresee in the difference of opinion between say, the U.S. and Europe, over the new treatment of Tresiba that could mean that they may not want to allow you to start trials? Is there anything you foresee there or is it just Danish approval that's important?

Kasper Roseeuw Poulsen

Thank you, Richard. So for the first question on the pricing point for basal insulins and whether, a, that constitutes a barrier for wider use of basal insulin, and secondly, whether the recent price cuts will improve market access. I'll ask Ron to answer that. And then secondly, on the differences of opinion with regard to Tresiba in Europe and the U.S., I'll ask Kezhou to elaborate on what potential implication that may have here in China.

Ronald Christie

Yes, okay. In essence, it's an interesting question. Regarding the price of the barrier to basal, and I'll come back to that. But regarding the price cut first, there was a general price cut which was due, that was -- the government has gradually gone through all the therapeutic categories and reduced prices, and so, it was the turn of modern insulins and human insulins are being reviewed recently. What we have now is a situation where the price of human insulin is uniform across all parties in China, but for modern insulin, we have individual pricing per product to a company. And whilst in general, the price cuts have been of the order of 10%, the impact to individual companies is much less than that because it's already bidding prices have reduced prices somewhat a little bit below the stated maximum pricing, retail pricing in the market. So we have already seen some degradation of price. So the price cut is taking things down towards reality as they are now. So there's just a little bit of impact, but not a lot. Regarding the basal price, is price of basal insulin a barrier in -- let's forget about the price cut in general, it is of course

[Audio Gap]

it's a simple treatment, but it may not be the best treatment for individual patients. Secondly, the modern insulin basals are relatively much more expensive than mixed modern insulins in this country, effect of about 2.5x, so it is the barrier. And of course, for good treatment for diabetes with basal insulin, you also need to either add an oral or you have to add a further injection of fast-acting insulin. And most patients would rather have 2 injections a day of premixed and 4 injections of other insulins. So that's another barrier. But I certainly think price is a barrier to the use of basal insulin. But will it change the dynamics in there are not at all because the government has reduced the prices or reviewed prices on an individual basis. So in effect each company advances, so Lantus, Detemir and the local generic producer of glargine had each been cut pretty much the same amount in terms of percentage. So the relative position of the companies has not changed, and it has not changed against premixed insulins. So I don’t think it'll have any impact on the dynamics of the different sectors of the insulins that are used here.

Kasper Roseeuw Poulsen

Kezhou, can I ask you to talk about the next...

Kezhou Zhang

Yes, the question again with the Tresiba. In the very short term, we do not expect this FDA situation will impact on the initiation of our Tresiba Phase III. So I do not expect that the -- we will expect that the trial will initiate on time. And your other question is about the home country approval. Yes. Usually that SFDA, China FDA, rely on the home country approval as a precondition for the NDA, new drug application. So the new drug application in China only can be submitted when the home country approval is granted. So you're right. But the fact is, SFDA is putting increasing attention on looking into the details from other regulatory agencies, for example U.S. and Japan. So that's a fact. They looked abroad data available from U.S. and Japan as well. And because our Tresiba development project is at very early stage, we haven't even started the trial yet. And our health authority, SFDA, probably would take them 1 or 2 years time from now to look into our clinical study data, we can calculate this timeline. So at such early stage, we really cannot comment on FDA impact, whether it's positive, negative or no effect on the China regulatory situation. But what we do is we work hard to follow-up, communicate with the China authority to get their opinion, to get their comments if they're available.

Kasper Roseeuw Poulsen

Thank you. Operator, we will take the next question.

Operator

Our next question comes

[Audio Gap]

Peter Verdult - Morgan Stanley, Research Division

[indiscernible] Morgan Stanley. Just a few questions. Ron, just on your 15% midterm growth aspiration for China, just crudely, when you think about volume, price and mix, can you give us a sense how that sort of gets you to 15%? And then you've given some numbers already, but can you just remind us, when we think about the absolute or average cost of human insulin in China versus modern insulins, could you give us some numbers around that? Secondly, for Jack, I just want to get a better understanding from -- about the impact from local players. I mean, big opportunity, clearly, but I wanted to understand better what measures the Chinese government are making to promote the domestic insulin producers. I think the current system is -- in major hospitals is having 2 or 3 suppliers for insulins so that a company like Novo or Sanofi will always get one of them. Is that still the case or are you seeing any changes in the landscape there? And then, Kasper, if I may, just a quick third question. Just you've talked about the market axis hurdles for getting reimbursement for Victoza going forward and how long that might take. Can you just remind us what the patent situation is for the modern insulins Victoza and Tresiba in China?

Kasper Roseeuw Poulsen

Thank you. Peter, that was quite a number of questions. I hope I caught all the questions. I think, Ron, we'll start by asking you to elaborate a little bit on the composition of future growth. What will -- what is expected to be volume, what is expected to be market share and what is expected to be price. And then in connection with that, elaborate a little bit on the differences of human and modern insulin prices in China.

Ronald Christie

I think in terms of, if we look to our growth for the future, there's a number of -- the underlying growth is volume growth, because the market is expanding on an annual basis. So that's a significant portion of the growth. Coupled to that, we have a significant movement in upgrade from human insulin to modern insulins. And this has been going on for many years. KOLs, doctors here will tell you that they'd much prefer modern insulins, patients get better results. So that's a trend that we'll see continuing going into the future. So those 2 things combined will enable us to see an increasing growth, maintenance of that growth going forward. The other thing that we -- for us, products like Victoza, which is in its second year launch, is very new. And as Jack was explaining, it takes many years to get to full level of reimbursement around the country. So new products are also a strong growth driver for us going forward. So I think there are a number of things driving our business here in China. And the primary one will be volumetric growth in markets getting bigger. Second driver is the modern insulin's increasing penetration. And the third thing is the influence of new products like Victoza. So those things are going to drive our business going forward. If we talk about pricing of human insulins versus modern insulins, if you look at -- human insulin is uniformly priced now in China across all companies. Of course, you can bid at different price levels, but the maximum price is set by the government, it's uniform for all companies. If we compare that to modern insulins for rapid acting insulin and mixed insulins, then the price difference is approximately around about 25% higher. If we look at basal insulins, they are significantly higher, more than double the price of human insulin, something like 3x over -- not quite 3, 2.5x the price. So there's a significant difference between basal insulins and human insulin and there is a difference between modern insulin and human insulin. So what we find is that in terms of reimbursement levels, different parts of the countries have different reimbursement levels. So you find some cities, if you are on human insulin, you can get pretty much complete reimbursement. If you get modern insulin, you would normally have to make a contribution yourself. But most patients seem to be willing to do that because they get a much improved outcome because of that.

Kasper Roseeuw Poulsen

Thank you, Ron. And Jack, could I ask you to elaborate on what initiatives, if any, you see the government take to promote local players?

Chen Jun

Yes, thanks for the question. I think this is probably more significant in the human insulin area because human insulin will have a number of local competitors. One recent development we have seen is the government have unified the price for all human insulin. That means that Novo Nordisk's human insulin is priced at the same level as the local [indiscernible] insulin or any other local producers in human insulin. So that is actually quite a bit of a change because in the past, there is about 20%, 25%, 30% price gap between these producers. And actually, the main difference we've seen is when it comes to provincial bidding. Because provincial bidding is a prerequisite for a lot of hospitals to purchase a product. And of course, each province, when it comes the provincial bidding, they have their own policy or their own rules. And some of the -- we've seen some -- in some of the provinces, they have given companies, if they have a national scientific award, they give additional credit when it comes to bidding. And the [indiscernible], they're one of the local companies actually have the national science award for their human insulin, and of course, the foreign companies don't have the Chinese national award. So in that way, we've seen the [indiscernible], or the local company get somewhat of a preferential treatment. But of course, overall, this kind of change has a very minimal impact to the market because the commercial success is not just reliant on the pricing, and a lot of that is dependent upon the company's reputation, the service the company can provide, and overall, the kind of educational activities the company has. So I would say, overall, we have seen small changes in the market environment. Because of this, as you've mentioned, maybe there is some kind of a movement towards promoting the local biotechnology industry.

Kasper Roseeuw Poulsen

Thank you, Jack. And Chin Sin, could you remind Peter of the patent situation in Japan and when we expect the patent to be in China [ph] -- I'm sorry, in China. [indiscernible]

Ng Chin Sin

For our modern insulin, aspart, and our mixed, the molecular patent actually expired in the year of 2006, whereas for Levemir, you'll expire in year 2014. And for Victoza, 2024.

Kasper Roseeuw Poulsen

Thank you. And operator, we are now ready to take the next question. And everybody, please constrain yourself to 2 questions to allow as many people as possible to ask questions.

Operator

We have now one question from Carsten Madsen from Carnegie Bank.

Carsten Lønborg Madsen - Carnegie Investment Bank AB, Research Division

I'll try to restrain -- I hope it's not 2 questions on average because then I guess I have fewer questions left here. But let me just ask about Victoza. When you look at this, the fact that it is, more or less, the only product that has been approved according to the classic pathway and also, according to the timelines as expected. Does this say anything about how the local authorities view the need for this new type of treatment? That's the first question. And then secondly, if you look at your market share in the country markets, it looks strong of course. Is this the least profitable segment to be in due to, I guess, more human insulin being used et cetera, et cetera?

Kasper Roseeuw Poulsen

Okay. Kezhou, if you could elaborate, I think Carson meant the MCRT regulatory process with the multinational trial and how we expect that to be used going forward. And then subsequently, Jack, if you could comment on the more rural markets and the aftereffect.

Kezhou Zhang

All right. MRCT stands for [indiscernible] so China is joining other countries to run a global study. And basically, if we are using the Chinese part of the data from this global study for local registry in purpose, this is how we define its regulatory pathway. Chemical drugs, small moleculars, like in diabetes OAD. There is actually a long history using they are using this MRCT pathway to get approval. Okay, so it's relatively easier for chemical drugs like OAD, to use this regulatory pathway going forward for the approval. In biological, yes. The Chinese health authority indeed puts a lot of attention -- put a lot of attention on biological because biological includes a lot of drugs for example for vaccine, so they have concerns. That's why the control level, the degree of the control on biological development is stricter compared to chemical. Victoza, yes, it is first biological product approved by MRCT pathway. The reason is also because we are the first -- one of the first ones to take this approach, but I expect more and more biological product will take this approach eventually when they get on the approval checked. In terms of product health authority looking into it., when take the MRCT pathway, health authority, of course, looking in very much into safety. Is the drug safe to be allowed to doing Chinese patients. And the second, as you said, is true, unmet medical needs is something they will think about it, if that type of drug currently address unmet medical needs in China. And the third part is we do see a trend of more and more multinational companies is applying MRCT pathways. So we see a lot of applications, including biological product application, they are going forward -- they are going through these MRCT pathways. So in the long run, I think more and more biological product will be successful by using MRCT to get the final regulatory approval.

Kasper Roseeuw Poulsen

Thank you, Kezhou. And Jack, if you could elaborate on the outlook and our commercial position in the more rural parts of China?

Chen Jun

Yes, for the lower-tiered markets, it's actually very fast-growing compared to the traditional city markets. And your question comes to whether the value of this market is relatively lower. I think to answer this question, we have to look at the 2 angles. One is the product profile. What product is more suitable for the lower tier markets? Overall, the expensive product, like a Victoza, right now, because it's launched recently, we haven't really penetrated into the lower tier markets. But however, when we look at the modern insulin and human insulin, in fact, we have seen, actually, also a strong uptake for our modern insulin in this lower tier market because of the price difference between, for example, novo mix and human insulin, is not a big difference. We're talking about 30% premium. And if it's reimbursed, the out-of-pocket payment is fairly reasonable. And the second aspect we should look at is the business model. Because of the rural areas, the doctors are widely spread. So the traditional business model may not be very effective. So we -- in this area, we actually have a lot of innovative approaches, including the increasing usage of digital educational tools. So that we can -- we still figure out a good way to achieve good business results. And the one thing just, I want to emphasize is there are lot of people in the rural markets and still, there are a lot of higher income people in the rural market as well.

Kasper Roseeuw Poulsen

Thank you, and operator, we will take one last question.

Operator

Our last question comes from Jo Walton from Credit Suisse.

Jo Walton - Crédit Suisse AG, Research Division

One final question, more about personnel and the challenges of growing. You already have a large number of sales people in China. You say that you're going to add another 10% more. Do they come from other pharma companies so that you have a very high staff turnover; they work for you for a year, they work for somebody else for a year, and they move on? Or do you manage to get them and train them? So if you could just tell us a little bit about the challenges of running such a large organization, what your staff turnover is? And sort of how costs for personnel have changed over the years? There seems to be a lot of competition for highly qualified staff and how you tackle compliance issues. Just the personnel side please.

Kasper Roseeuw Poulsen

Thank you, Jo, and Ron, could I ask you to talk about your experiences here with staff expansion and employee turnover as well as to what extent you are experiencing spiraling salary costs?

Ronald Christie

Yes. Of course, it's a very interesting question when you're running a large organization. I think the first thing is -- I would say is that we don't have a problem to find general staff like sales representatives. That is not a problem for us. There's a very large number of graduates in China who are looking for work. In fact, this might sound strange, but there is unemployment amongst university graduates and it's not as easy as it was for them to gain positions before. As a company, as a philosophy, we don't necessarily like to poach sales reps all the time from other companies because you just add to this constant churn of staff, and there is a churn of people in China. And our turnover staff, is traditionally, it's always been in the order of 5% less than the industry. And that, the industry has run from about 20% to 22% turnover for the last few number of years. So we typically run in the region of 15% to 17%, which is a significant number. So that creates its own problems for us because it is a dynamic market, there are many opportunities, and staff who have a position here who can normally, would move to a management position somewhere else. And so if we find a lot of companies trying to poach us, we don't think it's such a wise thing to do, to necessary poach approach people from other companies. We'd much rather take a broader range of people into our company because that enables us to actually train them up and to get them to think the way that we want them to think. You mentioned compliance, and it's very important for us that we get people in and we train them to work the way that Novo Nordisk wants them to work. So I think poaching from other people is a bit of a -- it doesn't necessarily get the right results for us. We'd rather take slightly younger people, maybe people from other industries, others walks of life, and to train them to our way of working. I think in terms of salary cost, I wouldn't describe it as the -- salaries are increasing faster than inflation and have done so for a long time, and that will continue. But if you look at it in absolute terms, people in -- employees in China are not that expensive. And so you have to -- you might say, well, people are going ahead, 5% salary increases above inflation, 4% or 5%, that's a lot compared to the West. But then people earn a lot less than they do in Western countries. So China needs to have that sort of investment into their staff. So I don't think it's a problem for us as a company to see salaries increasing at the rate that they are. What we more importantly do in terms of retention of staff, which is the point you're getting to, is we do a lot of work in other aspects of our business to retain people, to make their jobs interesting, to give them opportunities, et cetera. And that's why we have, traditionally, had a much better retention of staff than other companies. So in general, yes, of course you're right, the biggest problem in business is always people and retaining people is a problem. But we find, as a company, we have -- we are able to recruit from within our own staff for most new management positions without any problems at all. So generally, we can develop up. We have many, many programs. I don't have time to go into it, but we have many programs that enable us to develop our staff at various levels so that we can have our own internal source of future management potential. As a company, Novo Nordisk has a way of working, which we refer to as the Novo Nordisk way, and that sort of is imbued throughout our organization and our operations. And we find that, that's very attractive to people. I think a good indication of that is the fact that a significant number, and I can't remember the exact percentage, but it's more than 1/3, but less than 1/2 of the people that we recruit are personal referrals from existing staff in the company. We have a very good reputation out there, people often want to come and work for us. And the way of working of our company has struck a chord with Chinese individuals and people do like to work for us as a Danish company and for Scandinavian companies, in general, I would say. So overall, you're right. Personnel is a big problem for all of us, but we manage well. I don't expect any increasing problems going forward. There is -- that's not to say that there's no problem. There are some very specific highly-skilled technical positions where there is a lot of competition for staff, and we find ourselves subject to a lot of poaching from our staff. But that's only a few incidents in general. It's a manageable process, and I don't have any concerns about salaries of staff going forward. If we look at our operating margins, they do improve year-on-year, so things are obviously running pretty well.

Kasper Roseeuw Poulsen

Thank you, Ron. And this concludes our conference call. Thank you for participating, and we hope this call has consecrated to your understanding of the pharma market in China and Novo Nordisk's strong position in the diabetes market. Please feel free to contact anybody in our Investor Relations team to ask follow-up questions you may have.

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