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Lars Rebien Sørensen - Chief Executive Officer, President and Member of the Senior Management Board

Jesper Brandgaard - Chief Financial Officer, Executive Vice President, Member of the Senior Management Board, Chairman of Novo Nordisk Engineering A/S and Chairman of Novo Nordisk IT A/S

Mads Krogsgaard Thomsen - Chief Science Officer, Executive Vice President and Member of the Senior Management Board

Lars Green - Manager of Corporate Finance and Member of Senior Management Board

Göran A. Ando - Chairman


Mark Dainty - Citigroup Inc, Research Division

Sachin Jain - BofA Merrill Lynch, Research Division

Brian Bourdot - Barclays Capital, Research Division

Kerry Holford - Crédit Suisse AG, Research Division

Keyur Parekh - Goldman Sachs Group Inc., Research Division

Novo Nordisk A/S (NVO) Q1 2013 Earnings Call May 2, 2013 4:00 AM ET

Mark Dainty - Citigroup Inc, Research Division

Good morning, everyone. For those of you who don't know me, I'm Mark Dainty from Citi. It's my pleasure to have with us, our senior management from Novo, Jesper, Mads, Lars and Lars, and I guess over to you, for a bit of a review.

Lars Rebien Sørensen

And not to forget our Chairman of the Board.

Mark Dainty - Citigroup Inc, Research Division

Oh, of course. Apologies. And the Chairman.

Jesper Brandgaard

All right. We thought it would be a good idea also to bring Göran Ando to this roadshow. Göran just took over at our Annual General Meeting in March in Denmark as Chairman. Some of you may be very familiar with Göran Ando due to his past history with some major pharma cos, including Glaxo and Pharmacia. Göran has been on our board for the last, I think is it 8 years now Göran, so significant experience and been Vice Chairman for the last 7 years or so. So very pleased to have Göran as Chairman. And if there are any governance questions, we can also deal with them in the Q&A session.

On the podium also, I'd like to make a special introduction to Lars Fruergaard, who with effect from the annual general accounts and in February, was promoted to Executive Vice President, Lars has been reporting to me. Up until then, he is now made responsible for IT, that's been part of his area until now, also corporate development including strategy, patents and business development and then in addition, Lars has taken over responsibility for quality. So if we get down some of those links, Lars will also be able to give us additional insights. And then, of course, with me, I also have Mads Krogsgaard, CSO; and my Senior Vice President for Corporate Finance, Lars Green, who will cover the finances. This first quarter roadshow is one where we are displaying significant strength. We are seeing an unusually high local currency growth of 14.4%, I'll get a little bit more into the underlying quality of that. Of course, we also need to highlight in this presentation on Page 2 that there are a whole page on the different difficulties in making forward-looking statements. I think the period just following last year's, or this year's full year release in February, just showed the difficulties in making predictions on what's going to happen in the pharma industry, and we will have a lot of deliberations on how we'll move forward with Tresiba in the U.S.

The way we have we've got to split it is that, I'm going to cover the highlights and key events, and then also give you a short update on sales, and then Mads will give the update on R&D, and I'll ask Lars Green then to cover financials and outlook.

If I then can just take you to Slide #4, the highlights for the first 3 months. As I said, a local currency growth of 14.4%, very strong. There are some elements of nonrecurring nature in that first quarter, which I would put at about 1.5% of growth. It's partly related to movements in the inventory between Q4 and first quarter of this year in International Operations related to the deliveries of human insulin in Brazil and modern insulin in Russia, and then it's related to an event we had at a distributor in the Middle East, where he basically froze all the goods and we had to do an extra delivery to them, which because the first goods were destroyed and that was also making up for this 1.5%.

Then in addition, you should bear in mind that the first quarter of last year had a particularly weak NovoSeven sales. So it's not so that NovoSeven sales in the first quarter of this year is very strong, but the comparator is quite easy. And if you adjust for that as well, you could say the underlying quality in terms of growth is probably more in the ballpark of 12%.

If you zoom in on where we're doing well, we're doing reasonably well in North America with a very strong performance first quarter of 24%, and coming both from stronger prices but also, a clear momentum in both our modern insulin and Victoza in North America, steadily gaining market shares for those 2 products. If we zoom in on the growth for the modern insulin, a 16% growth, very well anchored by all of the 3 core products going double-digits. NovoSeven sales grew 36%, and you will see the growth rate have been particularly all along, the growth rate for Victoza will gradually go down, as we are growing on an ever higher base. And that also actually has implications if you look to the full year growth numbers for Novo Nordisk, the relative contribution from Victoza in terms of growth percentages, will come slightly down, even though the absolute growth quarter-by-quarter is pretty stable and also predicted to be in the ballpark of 150 million to 200 million on average, growing quarter-by-quarter during the year.

We have now launched our next-generation modern insulin, the basal very predictable Tresiba product launch now in U.K., Denmark and Japan, and we'll get back and talk a little bit about that. We're also in a constructive dialogue with the FDA on how to move forward with Tresiba and getting that approved in the U.S. through a cardiovascular outcomes trial, and Mads will get into that in more detail.

We've also completed the second of the SCALE trials for liraglutide in obesity, and where we saw people with obesity obtaining a 6% weight loss on the obesity dose of liraglutide, and you have to bear in mind here that the expected weight loss in the diabetic population will be lower than in a nondiabetic population, as the better HbA1c regulation will leave the patients basically storing more energy and secreting less glucose through the urine as they would otherwise have done in a poorer glycemic control situation.

In terms of our new program for once-weekly GLP-1 versus the Sustain 6 program that we have now initiated in Phase III, and Mads will also cover that. The stable level of growth -- the stable level of growth have basically converted the 14.4% sales growth into a 21% operating profit, both in local currencies reported terms 18%. And as we this year have a challenging financial in terms of headwind from the currencies, we are actually having better net financial impact on the net earnings, so we're seeing a 32% growth in our earnings per share, both reflecting development in net financial, but also reflecting a continued effect from our share repurchase program.

We have slightly upped the guidance for the sales growth, so it's now, in local currencies, around 9% to 11%, and with the currently predicted about 3% negative impact from currencies, primarily coming from the Japanese yen and the U.S. dollar. And in terms of operating profit, predicting about a 10% growth, so a relative even growth in local currencies for sales and operating profit. The currency impact on operating profit will be approximately 5%.

If you look at the growth picture, North America becomes ever more important to Novo Nordisk. Here, you can see the, as reported, growth of 23%, 24% in local currency for North America, really been driven by the portfolio of modern insulin and Victoza in North America. We also actually seeing in reported terms a 4% growth in Europe, which is in a European setting, this is quite strong numbers, and they are actually providing a 6% contribution to overall growth. So I think the focus on diabetes care and the gradual rollout of Victoza is actually ensuring that we are seeing a quite steady performance from our European operations.

International Operations, growing 17% local currency, a little bit of inventory movement there. I think more steady, they're growing at the 15% level. Region China also doing pretty well at a 16% growth level. The challenge we have clearly in Japan and Korea with a declining insulin market share and an overall decline in insulin consumption in the market due to a very strong introduction of the DPP-4. That's the challenge and that's what we have to do something about, especially with the rollout of Tresiba in Japan.

If we look to the distribution of our products, we now have almost 80% of our turnover coming from our diabetes care franchise and the diabetes care franchise growing in local currency terms 15%, and providing more than 80% of the overall growth. Also, do note that the biopharmaceutical franchise have had a very strong first quarter, partly because of the comparison number I mentioned for NovoSeven, but also because of very strong performance of our Norditropin franchising, we are now the world's leader in terms of value in sales of growth hormone, hardly reflecting a very strong performance in our North American markets where clever contracting, but also a better product offering had delivered these results and also, very strong performance in the non-brokerage International Operations markets.

If we look to the overall growth, we continue to see a diabetes care market which is very attractive. Here, you can look at the total growth for the market on a 5-year, sorry -- on a 10-year compounded annual growth rate, with a growth of 10%, and if you zoom in on the injectables, including both GLP-1 and insulin, you are looking at a growth rate north of 15% and of course, Novo Nordisk being the market leader in insulin and being the market leader in GLP-1, that basically gradually expands our overall share of the market as GLP-1's increase their share of the total diabetes care market and we are now tracking at a 26% of the total market.

If we zoom in on the insulin markets, the insulin market is growing at a value rate of about 16% and here, we're looking at the last 5 years, and the 16% is, of course, being also impacted by the value upgrades towards the modern insulin and devices, as you can see on this slide, and also are impacted clearly by a higher level of prices in North America and a relatively stable market situation between the 3 incumbents in the modern insulin space.

Zooming then on North America and looking at how the performances in North America. Do note first on this slide, that you have a very strong performance, both in volume terms, in the very big, in the U.S. market, basal segment growing just over 9%, and the growth in the mealtime segment growing in the ballpark of 9% also, but a declining premixed segment. But Novo Nordisk's market share in all of the 3 segments are gradually expanding, and this is very reassuring to us. Remember, that we did a significant expansion of our U.S. sales force in the third quarter of 2012 with a 650 people expansion, and we're actually seeing a very nice return on that in terms of steady market performance for all of our 3 modern insulins in the North American market.

If we then focus on Victoza, we have on this slide actually now move the focus on the moving annual total not to get too big impact on the quarterly swings for Victoza, and do note also that we for Victoza, like we have for the insulin, will have a tendency to see a higher absolute sales number in the fourth quarter of the year to the first quarter, that's the swing we have seen in our business for decades, and we also seeing that for Victoza, but we're very comfortable with the steady growth we see in the Victoza franchise, and that's also clearly replicated in the underlying script data that we see for the overall importance. North American market you can see here, that North America, from a value perspective, constitutes almost 2/3 of the overall value.

You also note that International Operations and China are beginning to be -- shown on the slide even though the product is not yet reimbursed in China, we are seeing a very steady and solid growth in the Chinese market for GLP-1. And then as my final slide, just noting in -- noting on our launch of Tresiba, launching it 4th of March, both here in U.K. and in Denmark, in both of these markets, getting -- obtaining reimbursement is a gradual process that doesn't come overnight and hence, the penetration will be slowly as we gradually get reimbursement from the healthcare institutions. We do note that the premium that we are pursuing for Tresiba will be a quite significant one around 70%, and that will ensure that we get a more uniform price level for Tresiba, globally. Do bear in mind that the price we actually take, especially in our home market and Pan Europe will be used as reference price for the price setting in other markets.

In Japan, we have obtained what we think is quite attractive price and a price that's higher than the one we have in Europe, but do bear in mind that per patient, the use of insulin is lower, so the actual cost per patient may not be that significantly different from the price in Europe, but we've obtained full reimbursement and the product is doing really well in Japan, and we are seeing that our market share in terms of capture of new patients in the basal segment, in the Japanese segment in Japan is improving gradually. And Mads, if you will take it from here in terms of regulatory process and U.S. for Tresiba.

Mads Krogsgaard Thomsen

Thank you, Jesper. Well, first of all, the regulatory process for the insulin degludec compounds, both Tresiba and Ryzodeg is progressing at least outside of the U.S., according to plan, such that we continue to have countries, not only approve the product, but in the very near product also launch the product starting with the Tresiba. Obviously, the one that's on everybody's mind is the United States, where I will just provide an update on where we vis-à-vis, the discussions with the U.S. regulator, FDA.

First of all, you can put it very briefly and say that in reality, what Nordisk is about to embark on, first, planning and then conducting starting within the next year, is a trial that pretty much is reminiscent expectedly of what the FDA is asking Type 2 diabetes drugs to be doing, i.e., a study where you at the time of submission of your new drug application or resubmission in this case, you rule out a upper bound of the 2-sided 95% confidence interval to the tune of 1.8, with a reassuring point estimate for the hazard ratio, compared to the comparator, which in this case is insulin glargine in a double-blinded setting.

And then after completion of the trial, few years later, once you have put together the complete amount of major adverse cardiovascular event, the MACEs, you rule out the 1.3, pretty much as mandated by the cardiovascular diabetes guideline.

So in reality, Novo Nordisk is hoping to be able to kick off this trial within the next year. That will also imply that the interim analysis would be available 2 to 3 years after initiation of the trial with the full analysis of the complete data set at a point in time where we expect it to be 4 to 6 years after launch of the trial. So overall, this puts us in a position where we think we have gotten good feedback from the meeting with the regulator, in such a way that we're able to proceed with the plans as shown on this slide.

If we then move from Tresiba into the GLP-1 segment, I'll start with a very quick update, as Jesper also did on the liraglutide 3-milligram for obesity and in this case, it's the SCALE diabetes, which in reality is represented by patients who are both obese and Type 2 diabetic at the same time. I won't walk you through the data, we've announced those in a separate company announcement, but just highlight the notion that there are 3 important elements in this trial. One is that we, actually, have been able to define the dose that seems to be the right one, i.e., we have a statistically significant difference on numerous parameters, both the primary weight endpoints, but also secondary glycemic endpoints and cardiovascular risk biomarkers and quite a few others as well, in favor of the 3-milligram dose, i.e., we've been able to see a duplication in favor of the 3-milligram dose. And moreover, we're actually hitting one of the FDA endpoints in terms of approvability even though this is a diabetic population.

You're probably aware the as glycemic control improves as Jesper alluded to, you see 2 things happening: one is that glucosuria terminates, that means that you're preserving calories in your body, which is negating the anti-obesity effect of the product, and the other is that caloric expenditure goes down as you can say, glycemic control improves. So these 2 factors together imply that Novo Nordisk is very happy with the 6% achievement, and we will expect in the trial to report in this quarter, which is the SCALE, obesity and prediabetes trial to see numbers that relatively and numerically are even better than what is shown up here.

So if we then look at semaglutide, our liquid ready-to-use, once-weekly human GLP-1 analogue, we have kicked off the critical path trial, i.e., the one that is determining when Novo Nordisk can complete the Phase III program, also known as the sustain program, and this is essentially a cardiovascular outcomes trial, such that we can adhere to the U.S. FDA guidelines and basically, achieve the approximately 100 MACEs or so to rule out the 1.8 from the confidence interval prior to submitting the NDA for this compound. It is actively recruiting, and over the last part of this year, you will expect us to see a kick off of a number of trials, with the overall aim to prove superiority against the number of drug classes, including also once-weekly GLP-1 from our peers.

I'd like to mention that the 2 doses we've selected are the 0.5 milligram and the 1 milligram, and they have been selected based on the Phase II trials, where when you model these, the 0.5 milligram dose is the equivalent or expected equivalent of about 1.2-milligram Victoza and the 1 milligram dose of semaglutide, given once-weekly, will be the equivalent of approximately 2.4 milligrams of Victoza. This is also why we've designed the trials to actually not only document superior convenience in terms of the drug and the device, but also performance in terms of glycemic and weight control.

Now lastly on this slide, I just like to highlight that for IDegLira, the fixed ratio combination between Liraglutide and insulin degludec, we have completed also now, the 26-week extension from the DUAL 1 trial which was in the oral antidiabetic failure patients, the one where we were able to see superiority versus the individual components of the IDegLira combination, and the very convincing data, i.e. approximately, 4 out of 5 patients that achieve the ADA target for glycemic control, being HbA1C going below 7 is maintained over a full year of treatment. This also means that the regulatory dossier in the European Union will be submitted during this quarter and obviously, the further regulatory progress, vis a vis the FDA is contingent upon the discussions that we're having on insulin degludec with that regulator.

In biopharmaceuticals, we are progressing lastly, both with the launch of a new delivery system for NovoSeven, called the MixPro in United States, essentially, a prefilled solvent syringe, making the number of steps before intravenous infusion is done by the patients significantly reduced compared to the existing setup.

For the long-acting factor N8-GP, we have now initiated pivotal pediatric trial, which as you know according to the European Pediatric Commission under CHMP, is mandatory before you can submit also your regulatory dosage in EU. And finally, for the Anti-IL-21, very [ph] pleio-tropic cytokine blocker, the Anti-IL-21, where we already are having a Phase IIa trial ongoing for rheumatoid arthritis, and the Phase I trial for systemic glucose erythematosus. We have also now initiated in moderate to severely diseased or active Crohn's patients, a Phase IIa trial with the Anti-IL-21. So with that, over to you, I guess, it is Lars, for a financial update.

Lars Green

So when it comes to the highlights from the financial results, Jesper walked you through the underlying phase development at the beginning of the presentation. The 14% underlying growth in sales became 13% in reported terms, as the currencies were slightly lower as compared to the average rate of 1 year ago. We realized an improvement in the gross margins of approximately 1 percentage points, driven primarily by an improving price -- or better price environment in the U.S. and also, to some extent, an improved product mix, as modern insulin and Victoza, with higher average gross margins, higher gross margin than the average, they grow faster than the other products, giving us a positive contribution on the gross margin.

So sales and distribution costs increased in line with sales, driven primarily by expansion in our U.S. sales force in the second half of last year but also, expansions in the sales forces in a number of international markets and international operations, and approximately 3 percentage points of the growth is related to reversals of the provisions we did in 2012. So we can say the organic growth in the S&D costs is approximately 3 percentage points lower than what the reported numbers indicate.

R&D costs grew by 6%, you will notice we have a relatively low R&D-to-sales ratio in the first quarter, and we expect this R&D-to-sales ratio to come up again in the remainder of the year, as the Phase III program for semaglutide gets going, and also as we get started to prepare for the CV outcomes trial. So the R&D ratio in the first quarter is somewhat lower than what we would expect for the full year.

Admin costs growing 3%, primarily supporting the expansion in international markets and also the expansion of the U.S. sales force. So in terms of operating profits, in reported terms, growing 18% underlying, and if we had the same exchange rate as last year, operating profit grew by 21%. We have maintained sort of our hedging policies and are hedging our key invoicing currencies approximately, 12 months out in the future.

Last year, that gave us the financial expense to the tune of DKK 300 million, so from these financial forward contracts, this year, it is giving us income of approximately DKK 200 million. So if we go to net profits that grew by 28% compared to the first quarter last year. And as we continue to buy back shares, the earnings per share grew by 32% in the first quarter compared to 2012.

So here are the 2 main invoicing currencies of importance to the currency development to the reported numbers, so beyond Danish kronor and euro these are the most significant ones, U.S. dollar, first quarter more or less in line with the average of last year, but Japanese yen significantly lower, so it is primarily the Japanese yen development that gives us some headwinds on the reported numbers, as compared to the underlying growth in both sales and operating profit.

So therefore, when we look at the outlook, the right outlook compared to 3 months ago, Jesper shared with us the sort of narrowing of the sales guidance, given the strong first quarter results. And apart from that, it is really the movement in currencies that have been updated will reduce impact of both sales and operating profits, countered by, you can say, a similar effect on net financials, so the approximately 2 percentage points lower currency impact on operating profit is countered by the approximately DKK 500 million lower income from forward contracts on net profit. And we maintain our expectations for around 10% growth in operating profit at comparable local currencies. So with this, Jesper.

Jesper Brandgaard

Thank you. So just to close quickly with this one, there's nothing significant news in this one. Basically, our franchise is driven by the growth in the diabetes care market. We have a 26% value share, and we have 49% volume share in the insulin market and 46% in the modern insulin market. We now have grown to 68% GLP-1 value market shares, and we are still the only company with a full portfolio of novel insulins. We'd like to have had more of them actually approved, but we're going to face a little bit more challenges there, and we'll be busy working with that CV outcomes trial the next 3, 4 years.

In terms of IDegLira, we still think that the results we're seeing from IDegLira, including the extension, as Mads went into, is basically documenting that here we have a very, very unique way of treating Type 2 diabetes, and I think this holds great promises for patients around the world, and also the result we've seen so far, really do encourage us towards using liraglutide more broadly in early stage diabetes care treatment, or even in prediabetic therapy among severely overweight patients. And then we still have some promises in front of us in the biopharmaceutical areas, especially hemophilia, with 2 new clotting factor products, long-acting 8 and 9 in Phase III clinical trials and the phase -- and the Novo 9 product, just imminently to report the final results from Phase III.

So with that, we'll take questions, I think, we will ask each to constraint themselves to 2 questions. Who will go first? Mark?

Question-and-Answer Session

Mark Dainty - Citigroup Inc, Research Division

So just 2 quick ones. Just in terms of the investments in sales and marketing in emerging market, can you just give us a bit more color about where that is and whatever you can give us around how much? And then just a quick one for Mads, you mentioned in the call yesterday, a possibility, at least, that dulaglutide's inability to cross the blood-brain-barrier might reduce its ability to cause weight loss. And I just wondered whether there was any evidence from any of the basic diets [ph] which suggested the relative effectiveness on central versus gut [ph] effect, and the ability to drive weight off with GLP-1?

Lars Rebien Sørensen

Thank you, Mark. On the S&D front, I may need to be a little bit more precise than I was on the conference call yesterday in terms of our ability to continue to drive growth through an expanded sales force. We did this a very significant expansion in the U.S. We have gradually expanded the sales force in a number of international operation markets and also, China. And we anticipate that we'll continue to do so, we've seen great returns on that. The key cost driver for us on the S&D is clearly the expansion in the U.S. Historically, we have chosen to make expansion in the U.S. linked to product launches, and not doing them too frequently because, of course, every time we do the expansion of the sales force, it does disrupt the overall relationship between the physician and our rep. But zooming in on the international operation side of things, you should expect us to continue to invest but of course, the investment is to a very large degree enabled by the 15%, so sales growth that we are seeing in those markets and it will be, at least, that level of growth occurring in those markets. And then in a few selected strategic markets, we may actually grow over and beyond that, and that will continue to happen at the expense of lower growth opportunity markets like for example, Europe, where we'll be constraining the cost development. Overall, I do believe that we can continue to make slight improvements in selling and distribution, and what we have done in 2013 particularly is that instead of kind of channeling a lot of the promotion resources towards Tresiba, those resources have been used to drive, especially the portfolio of modern insulin, including some additional direct to consumer marketing activities, and we continue also to invest significant in International Operations. The guidance we've given for S&D this year is in the ballpark of 28%, I think that's realistic. I think we would be in the 27% to 28% also in '14 and '15, barring any unforeseen events, I don't think there will be a rapid improvement in our ratio in that area. I think we will continue to invest significantly in emerging markets as that's where we see the biggest growth opportunity for the diabetes care franchise. I do note that the rollout of, potentially, a hemophilia portfolio will not have any significant impact on the cost structure. It is quite limited what level of expansion of the medical reps we will need to do in the biopharma area also to cover the 2 additional clotting factors, so that would not be significant. Also bear in mind, that the S&D ratio, roughly for the biopharma franchise only in about 20% range, whereas the S&D ratio for the diabetes is about 30%, so that gives the weighting. So I hope that clarifies.

Jesper Brandgaard

Yes. So you can address this important issue, either empirically or scientifically, and I'll try to do both. So if you look at the chemical data that are at hand, either as regard to human genome one analogue, liraglutide, semaglutide as one. When you basically extract all those patients that are reporting GI side effects, such as nausea, vomiting, diarrhea, et cetera, you will find that there's the same statistically significant weight reduction, suggestive of, if not a central nervous system mediated, then at least not a GI-mediated effect. Now that is probably, also why we are seeing that compounds that molecular size-wise to the magnitude of either a Fc construct, or an albumin molecule, such as dulaglutide, being the Fc chimeric construct, and albiglutide or Syncria from GSK, being the DNA construct with a merge or fusion between albumin and human GLP-1, or actually 2 human GLP-1, essentially, seem to provide less of a weight-loss, and in some cases, not even significant weight loss. The speculation there is obviously, that the molecular size that is difficult to penetrate the blood-brain-barrier. Then you can ask yourself a question, is there evidence that GLP-1s at all do penetrate the blood-brain-barrier, because these are at all peptides to the tune of 30 amino acids in one stretch? And I can reveal some data that we will be publishing very soon, where we have actually done an interesting experiments. So we look specifically at the lateral ventricles, at the fourth ventricle of the brain, which is the area around which you have both the hypothalamus and appetite, and you can see some Type 2 regulating centers. And we've studied animals that either have GLP-1 receptors or that the GLP-1 receptors knocked out. And interestingly, you will see an accumulation of tritiated, i.e., radio labeled GLP-1 analogue, liraglutide, only in those animals that have the intact GLP-1 receptor system. This is visually, extremely appealing, because you basically see the nice staining exactly where you want to see it. Whereas, in the GPL-1 receptor knockout mice, there's no staining at all, i.e. no accumulation. So I think we are starting to understand much better the level to which GLP-1 agonist, at least those that gain access, are having effects, both on the hypothalamic system, even on the brain stem, and in situations, maybe, who knows, in the cognitive disorders, even in some cases, in parts of the frontal [indiscernible].

Sachin Jain - BofA Merrill Lynch, Research Division

Two questions. First is just a follow-up -- Sachin Jain, Bank of America. Two questions, first is just a follow-on on the S&D. So my understanding from what you said is limited leverage on duress points [ph] [indiscernible] for '15. I would imagine that if you launch Tresiba U.S. '17, '18, that would also be an investment period. So if we thought about a 5-year time frame of '13 to '18, and we think you're at limited S&D leverage, then where is that relative to your S&D leverage assumed within the 40% margin target that you put out at the beginning of the year. And then related, as part of the long-term target, I guess is perceived lower conviction from yourself, I understand, when they give you Tresiba. You said that you'd update it in February. What are the main positives, negatives that could influence your thought process in that timeframe? That's the first of my questions. Second is just on the Victoza 3-milligram A1c. I think you've made in your comments, superior A1c at 3 versus 1.8 I just want to check that because it doesn't appear like that on the slide. And so how do you intend on using that A1c data within an obesity label?

Lars Rebien Sørensen

Thanks, Sachin. On the expectations for long-term expansion of operating margins, I think it's highly likely that we will continue to make an improvement overall in our S&D ratio, and might have seen that gradually occurring. I mean, you don't have to go more than 4, 5 years back then when Novo Nordisk's selling and distribution ratio was above 30%. What we've also said historically in years of launch, it is likely that you will see that the S&D ratio will increase by approximately 1 percentage point when we are launching key products. It's basically the U.S. market that's being the key driver. It's quite interesting, when we do the long-term modeling, we've actually done some modelings where you make very significant spikes in the S&D ratio, the effects that when you then sit and look back at the actual years, it actually turns out to be much more even because the ability to do launch, or to make the big investments very rarely occur at the same point in time in all markets. So what I'm trying to say with this is, yes, I think it is likely that you will see a gradual improvement in the S&D ratio in years where there's not significant new launches, and then maybe stable S&D more in the years where rollouts are taking place. And it will then depend on the commercial opportunity of the product. So what it means, there will be very substantial investments. And if you then ask, well, what are the products that could cause those substantial investments? I'd say, in our portfolio, currently, I clearly see the investment that is likely to be required to build knowledge with IDegLira will be significant. I think it is a fantastic opportunity for us. I would say the obesity opportunity will probably more focused on the U.S. market and in market where we, to a large degree, do have the reach into the market that will enable us to market it. There's not so many new physicians that we'll need to reach with an obesity indication. And then, moving on from there, of course, the figures will require a significant splash, and then Tresiba will be, hopefully also, will get that from the U.S. market, will require a significant investment. And those would be then depending on what exact the opposite is going into, at what magnitude. And then a continued, you would say, relative higher investment going on in markets like China and the high-growth opportunities in international operations and a lower and potentially, even lower than market growth in markets like Japan and Europe. So that will be kind of the model [ph]. The second part of the question, Sachin, that was...

Sachin Jain - BofA Merrill Lynch, Research Division

[indiscernible] understanding -- understatable. Just -- and you said you would review them in February, just the pushes and pulls in that timeframe between now and then that would will give you more confidence or less confidence in that?

Lars Rebien Sørensen

Well, if you look at -- what we said in February, we're saying, we still believe that our long-term financial targets are realistic. And of course, assuming that we are successful with the target outputs out of [ph] Tresiba from '17 onwards, I think we have a major growth opportunity in our hands that makes it even more positive. Then if you look at the interim period until then, say from '13 to '16, what we can see now in terms of '13 with the start we've had to this year, there's nothing there that leaves us kind of worried that we cannot deliver in the ballpark of double-digit growth near-term, and I think that is realistic. I think the key swing factor that is uncertain, and I think I've been mentioning that, quite a few times, will be how exactly would the US basal market develop when we have large ongoing off patents in the U.S. I think that is the key event which creates some uncertainty. We believe still that the long-term financial targets are -- basically targets put on order [ph] to pursue, we believe we have an opportunity to expand our operating margin, driven significantly from our production economies, but also from admin area and, to some degree, S&D. And we'll continue to pursue that in the near-term horizon. How these specifics are going to be in the individual years really depends on how is the obesity trial coming out. And I think we'll just have to accept swings in the individual unit, depending on the launch opportunities.

Jesper Brandgaard

Yes. And I suddenly realized that the data that you have in that table is not the primary glycemic data, so thanks for pointing that out, Sachin. So in reality, the 3-milligram dose was statistically significantly superior to the 1.8 milligram on HbA1C, with a delta of approximately 0.2%. When you then look at the ADA target, i.e. what fraction went below 7, it is true that there was -- in that one, which is a binary measure, so that if you go to 6.95, you are below. If you go to 7.05, you are above. So it's a very binary measure. In that one, there's no statistical significant difference. However, when you then look at the American Academy of Clinical Endocrinology with the AACE guidelines, which are the 6.5%, you will also there see a statistical difference in favor of the 3-milligram dose. So basically, what we are seeing is that on glycemic parameters, including fasting glucose; weight parameters, including not only the absolute weight loss, but also the fraction that is achieved for instance, a 10% weight loss, which in this case, was about 1 in 4, and we expect that to obviously be higher for the obesity trial, we are seeing these differences. And in each and every case, they are in favor of the high dose. When we look at the clinical chemistry, lipid parameters, triglycerides, pi1 [ph], crp, et cetera, et cetera, you see the very same thing. So it seems as if we have a situation where there is an add-on effect on glycemic control related to the improved weight profile that is secondary to the weight loss. So when we originally did our modeling and ended up with a 1.8-milligram dose of Victoza for Type 2 diabetes, it was based on the primary glycemic efficacy. We are now seeing that if you treat for 1 year, secondarily to the weight loss, that is improved at the higher dose because the dose response curve is different for weight loss as compared to glycemic control, you secondarily reduce you insulin resistance, and that tends to improve pedisol [ph] performance and that relative performance of the insulin distribution [ph].

Brian Bourdot - Barclays Capital, Research Division

Brian Bourdot from Barclays. A question for your Chairman, please. Sir, thank you very much for coming to see us today. Could you please describe what you see as your priorities as incoming Chairman, maybe some thoughts about how you see the group and its direction? And sorry, just a question about GLP-1 use and then so I was wondering if you could, like, give us an update on how patients are using Victoza and what the proportion of those taking Victoza are also taking insulin now, whether there are any differences between the U.S. and outside the U.S. and what the drivers of any differences might be?

Göran A. Ando

If I start, it's a pleasure to be here, actually. Clear priority is obviously working with the management to build the medium- to long-term strategies for us. And we review that every year in great depth. They work with us and we work -- it's a collaborative work. And once you have that, we have a superb management team to implement that. That's key. Obviously, as you know, the Danish system is a two-tier Board system, where no one sits in both of the Boards. So although management participate they're actually not Board members of the Board of Directors. So the work of the Board of Directors is also then, obviously, very focused on building the competencies, ensuring that we have the overall succession plan in the Board. And obviously, in the long-term perspective also in our top management. Nothing sensational in any way, shape.

Mads Krogsgaard Thomsen

And then I think, Brian -- so I think we're all aware that the positioning of Victoza has all along been as the preferred agent once the patient is failing on mid-form [ph] of therapy. And that's an easy-to-understand and logical and based from the clinical data, rational positioning. We did, however, see from day 1, even before we had the label upgrade to allow co-use between Victoza and insulins in particular basal insulins that there was a wide-spread use in conjunction with insulin therapy. Initially, you can say that was off-label, but later on, it has become unlabeled to the tune of, I would say, around 25%. Now that, if anything, we are starting to see being increasing, because not only the clinical data but also the clinical experience of the individual physicians is such that they realize multiple benefits, i.e. you get safer to lower levels of A1c, you get, if anything, weight loss when combining as compared to the weight gain, which is the nuisance to the patients and so on and so forth. So obviously, for us right now, IDegLira submitted in Europe and hopefully also, at a relevant point in time, in the U.S. and so on. The big drama or challenge is how to position the co-use of GLP-1 and insulin. I can shown you data from Q1 extension, et cetera that actually prove the case that over 52 weeks, you basically maintain most people at a non-diabetic drug glucose level by one daily injection. So you could argue use it early, and you will get rid of your disease. But you can also argue, quite frankly, that when people intensify their basal insulin, which today is Lantus, Levimir or NPH, the way they go about that is by actually, typically baby step, intensifying with the parenteral [ph] insulin, first 1, then 2, and then 3 additional daily injections, which is a nuisance, giving hypoglycemia, giving weight gain, giving reduced quality-of-life. So there's a big rationale for actually one daily injections, where you just change the color of your pen, so to speak, and suddenly, you upgrade your therapy by the addition of this GLP-1 component. So we'll be much more crisp as we move towards the market to say which of those segments is the optimal one for primary positioning. But we also realize that, in reality, the physician, at the end of the day, is going to use it at his or her clinical discretion. But still we need a primary position.

Unknown Analyst

It's Daniel at First State [ph]. I also have a question for the chair. I was just wondering, Novo Nordisk is very strong on triple bottom line reporting, and I think had ESG reporting straight to the Board. I was just wondering, does this strength in the ESG give Novo Nordisk any competitive advantages, do you think, from your point of view? And then secondly, I was just wondering what you thought the most important elements on your senior management scorecard would be, and also where do you think they might have room to improve on that scorecard? I kind of think you probably know where they are pretty good, but I'd be interested to know where you think maybe some of that might be improved?

Göran A. Ando

Good question. I actually think that the triple bottom line does give us a long-term competitive advantage. And in placing, a little of overall. When I started spending a little time with our subsidiaries and just got to see people, I like that. And you see the pride they have, not only in the company itself, but actually in how we operated in that. The triple bottom line is actually a core component of that. So to me, it's a tremendous way, not only of operating in an ethical and professional way, but actually also getting, recruiting and retaining top-notch people in many aspects. Second part, there are obviously others, but I'm not going to talk about that. How are we going to assess our management? Well, we have a very systematic way of doing that. This is not about that, I sit down, [indiscernible] at the end of the year, scratch your head and then say, "What's happened this year?" It's much more, you formalize it, you review it and it's a quite a detailed, if you like, scorecard that we review and several times, obviously, and in many ways, and continuously. What is it that, that our company can improve? I think in terms of top management, we're very fortunate to have an extremely stable and, as you can hear and I can hear, extremely knowledgeable group in our management, and that has tremendous opportunities and advantages to me. You can always ask more. And I think for us, it is a medium- to long-term outlook that is important. One of the key elements is just what we've been talking about here, how do we actually bridge the temporary loss of revenues for Tresiba, that we're looking at and that we will work very hard at that to see how we do that. And obviously, that is one key component that showed up slightly off our charts, but obviously will be an important additional part, of course. Otherwise, it's performance on all the parameters we do between the triple bottom line that we're talking about, so nothing special.

Lars Rebien Sørensen

Maybe just a specific comment on that. The way we need to do the performance scorecard for each of the executive vice president is basically linked on the total scorecard for the company. So we try to distribute all responsibilities into the individual EVP areas. And furthermore, and zooming in on the triple bottom line, if we look at our long-term incentive, we don't solely look at the economic profit generated in the year. And in the economic profit generation, we actually subtract it with saving on and R&D, because we believe that saving on R&D is not generating long-term economic profit. But we're also setting very clear and defined growth and sustainability targets. But what is more important also, specific milestone targets for our R&D portfolio. And one of the things we already know now and have discussed with the chairmanship is, that we will actually get a deduction in the long-term target achievement for 2013 because of having missed a key milestone, which was the approval of Tresiba in the U.S. And then there's just a straight deduction from that from the maximum you can get. So there's a clear link between achieving very strategic important R&D milestones and the long-term duration of the management team.

Kerry Holford - Crédit Suisse AG, Research Division

Kerry Holford, Crédit Suisse. A couple of questions. Firstly, market share, you talked about very strong position in the U.S., which is growing. If we look at the international regions, China or Japan, it's declining somewhat. So I wonder if you could talk about what's driving that? Is it that you're actively pulling away from low margin contracts or is it competition perhaps from the multinationals or is it local players that -- there's domestic players are preferring? And then secondly for math on [indiscernible] insulin and here we have another product into Phase I, joining, I think, 2 others that are still there in Phase I. So what's the next steps to go into Phase II? What are you looking for from these put ups, and how should we think about timelines there?

Lars Rebien Sørensen

Thanks. I'm going to start with the market share development. You're rightly pointing to that there is a decline. If we take them market by market first, Japan. In Japan, we have clearly been suffering from a movement in the market for Type 2 patients in starting more predominantly on the basal insulins instead of the mixed insulins. If you go back 5 years, mixed insulins in Japan was almost 50% of the market, and that has gradually declined towards a 40% mark at the expense of a high-use, especially of basal insulin, but also from real-time insulin. And as we have a much lower capture rate of about 30% in the basal segment compared to a dominant capture rate in the mix segment, that there's basically a market shift that is making it challenging for us in Japan. And the only thing we can in reality do to rectify that, as I alluded to, that is the rollout of Tresiba, and we're working on that. I think you will gradually see that the decline is flattening out, and then it will be for Tresiba to rectify that position. If we look to -- in China, the regulatory situation in China is not as progressed for Tresiba. We are hopefully soon embarking on the final Phase III trials there to enable an approval there, but we'll have to compete with what we have in the market there. The challenge in China is slightly different. That's actually relating to that we had a very favorable situation, remember our market share, it was north of 60% in China overall. In the fast-acting segment, comfortably also in the mix segment in China as they, like, really have not obtained reimbursement in all of the provinces and they have rectified that situation over the last 2 years. So now we're in a more competitive situation, vis-à-vis, Eli Lilly, both for the rapid-acting insulin, but also, to some degree, the mixed insulin. And then there has also been more intensified bidding in human insulin in China. And remember, that the modern insulins in China had only reached about 40%. So there's still some significant human insulin market in there we have seen in more active bidding from some of the local manufactures. So in the low-end of the Chinese market, there is some activity by local producers, which is slightly eroding prices. And we still [indiscernible] stand out as the high-quality offering. Remember, that about 90% of the insulins we sell in China is still in devices even when we look at the entire portfolio. And then for international operations, it is a very different situation market-by-market. We come from a very strong position. But generally, I would say, the challenge we have, if you should kind of generalize, the challenge, is, broadly speaking, the basal segment and capturing in -- of the basal segment, the basal segment broadly is growing the fastest of the segments, and that's the key challenge we have, market share-wise.

Mads Krogsgaard Thomsen

Right. So you can ask the question, why on earth do you keep on pouring new analogs into humans? That, more or less, was the question. And I think, first of all, this is a highly iterative process. So for instance, the analog 287 that is mentioned on the chart, is a, you can say, first-in-class agents with an extreme half-life in at least animals and we'll hopefully confirm that in man with a truly extreme half-life. Obviously, that raises titration issues, but that will be address clinically as part of the program. And why would you want an extreme half-life for an oral insulin? The reason would there be that we are all aware the notion that as you give a macromolecule, like in insulin via the gut, the absolute viability will never be anywhere close to 100% or even 50% or even 20%. It will be, you can say, hopefully, high single-digit, if we do it really well at the end of the day. And that would imply as a day-to-day variability, and that variability can become dangerous to the patient unless you have means and measures to counteract that. And probably the most efficient way of doing that is actually having a half-life that, in reality, would justify every-week application or every-other-week application of the drug, but still administering the tepid every single day, such that you would have a buffering of the day-to-day variability, driven by the long-duration of action of the molecule. I.e. if you, on a Wednesday, have reduced uptake into the body, the dose that you've got in Tuesday and on Monday and so on, will buffer against that variability. This is the reason behind that. In other instances, you will see that, for instance, changing rounds, either with the carrier principle, the coding principle, the granulation principle. We've actually built a, not an army, but close to an army of researchers that are specializing on protein-based tepid formulation technology, about 200 specially. And that is also why we are ready to enter Phase II, hopefully late this year. I think we've announced the 1 or 2, couple of announcements ago that we were targeting actually, a Phase II decision for the first long-acting oral GLP-1 analog during midyear 2013. So with GLP-1, we're slightly more progressed, but we are getting there as we go along on insulin. And I would probably say by having not just one, but at least 2 bits into Phase II, so that you can select the right analog, the right coding technology, the right care technology based on human data in Phase II, as opposed to dogs or rats for that.

Keyur Parekh - Goldman Sachs Group Inc., Research Division

Keyur Parekh from Goldman Sachs. As point of clarification on something you said on this one of Sachin's question, which was, that when you do launch Tresiba in the U.S., you would expect it to be a high kind of S&D investment here. My understanding was you already recruited the sales force you need kind of back half of last year and therefore, if we -- should we think of it as extra kind of direct marketing spend that would be on top of what you have? Or do you plan to expand your sales force back in the U.S.? And then 2 questions. First, on the human insulin segment. I understand there's some kind of variability in the quarter. Less than 80% of your reported revenues this quarter comes from market that are growing north of 10%. The client consensus kind of forecast that market to go down double-digits over the next 5 years, kind of how do you think the human insulin markets panned out over the next 2 to 5 years? And secondly, you mentioned about kind of the big unknown on the U.S. marketing, what happens with -- when land secluded [ph] protection and kind of what happens to the basal market. As you think about the long-term kind of 10% growth on the revenue line, what are your base assumptions on how that market pans out?

Jesper Brandgaard

Let's just take them all in order first. The sales force, it's quite interesting to get -- to me, what is a tactical decision, which is sales force adjustments. And then on a strategic perspective, which is 2017, it is going to be pretty hard to say now what exactly we can do with '17. Of course, a key factor there is looking at how is the competitive environment, what share voice do we have. I think is going to be almost impossible to give a specific reply to that. Clearly, there will be a lot of direct promotions at that point in time. What I do think is quite reassuring. If I look at our sales voice currently and the payback that we are seeing in terms of the development in the market share position, both of the portfolio of modern insulin and for Victoza in the U.S. market, we actually feel -- and we discussed that with the Board 2 days ago. I think we feel that the situation is very reassuring. We feel that we did a very good return on the sales force. As I mentioned, obesity could be one of the factors near-term that could call for an adjustment. There are some new decisions, theoretic decisions that we may want to get access to. It's not, they will not have significant impact on sales force, but there may be some adjustments. Apart from that, with the diabetes portfolio we have, I don't think that there will be significant changes near-term. But we're happy with what we have. What we will do in '17 will clearly depend on sales force. So far it looks good. I think we also noted that Lilly will probably, basically, led 1/3 -- or sorry, it's about 30% of its sales force would go, as we have heard it. So there's nothing to me that indicates that we will not be competitive with the current sales force in a 1- to 2-year horizon in the U.S. market. So that was the first one. Then in terms emerging markets and -- the factor there was, to what degree do we see a change in the growth level that we are seeing from the insulin franchise in the emerging market? And I think what you will see, and that we have actually seen over the last 5 years, is a gradual decline in the growth percentage from the market, but not in the absolute volume added in the market. So with the development trends, I see, GDP-wise globally, I think this will continue. We are seeing very solid growth and a high degree of willingness to continue to invest in [indiscernible], especially diabetes. So I would assume that would continue, but I think also, it's likely, when we look at our models, that the percentage of growth for international operation in China will gradually come down, but they will grow from a bigger base and they will have a higher weight in the total portfolio. I think we are not far away from saying that we have 2/3 of the Novo Nordisk's portfolio in high-growth markets and 1/3 only in the lower-growth markets, and that trend will continue. So I do feel that, that's pretty reassuring. If we then go to the strategic models, for how do we see these situations safety [ph], maybe, Lars, that's an area that you could also perhaps comment on.

Lars Rebien Sørensen

Comment on that. So we can say, we believe there is an underlying growth in the volume in the market in demand going to take place. And then you ask, what will the scenarios be when biosimilar competition is brought after having an experience in Atlantis. We believe that the future is possible not be too different from what we see today. Today, you have premium-priced products, and you have lower-priced products. And you need to have in order to compete in all the segments of the market, you need to have products in both ranges. So as long as there is a drive for innovation, like the one we have and what we also see from Sanofi and Eli Lilly, we believe that all is possible, the same also in the future, that there will be a premium price to markets for those who can afford that and pay a premium price. And there'll be a contracting market or tender [ph] market based on a second-generation or an earlier generation of products. So that will drive a price increase also for the future on top of the volume growth we see probably continuing at the same level as we've seen today. So of course, it takes that there is the drive for innovation. But we see that, that is basically the strategy being pursued by the 3 largest players in the industry. So we believe that stuff will be the same for the future.

Jesper Brandgaard

And then being a little bit more specific, in terms of what does the modeling assume in terms of price changes occurring in the market, I think we have, we've taken the biggest inspiration from what have happened in growth hormone, with the generic growth hormones, and we would be assuming that some of the biosimilar offerings will come at a approximately 30% lower price, and then they will try to basically contract their way into -- through high-control plans to capture a share of the market. One of the elements that is also a very key element in Novo Nordisk strategy, is to ensure that the -- on the device front, that our offering comes with a more convenient offering, and that will make it more challenging to actually convert patients from one trend to another. And we see that very clearly occurring at times in Europe when some governments have tried to halt reimbursement for the modern insulins. There's been a high degree of patient loyalty and through -- patient loyalty through the diabetes organization, putting a big pressure on the health care provider in terms of getting access to the device that they used to have. So you should also expect that we will see a continued offering on the divisor offering that we have as an element in insuring high-patient loyalty and lower impact from biosimilar modeling. Okay. I think that will end the Q&A session. Thank you very much for coming and the interest. And we will be back first at the American Diabetes Association Conference in Chicago. I hope to see some of you there. If not, then we'll meet in August [indiscernible]. Thank you very much.

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