H. Lundbeck's (HLUKF) CEO Kare Schultz on Q1 2016 Results - Earnings Call Transcript

| About: H. Lundbeck (HLUKF)

H. Lundbeck A/S (OTC:HLUKF) Q1 2016 Earnings Conference Call May 11, 2016 7:00 AM ET

Executives

Kåre Schultz - President & Chief Executive Officer

Anders Pedersen - Executive Vice President-Research & Development

Anders Götzsche - CFO & Executive VP of Information Technology

Analysts

Carsten Madsen - SEB Enskilda

Sarah Potter - Deutsche Bank

James Gordon - JPMorgan Securities

Eleanor Fung - Goldman Sachs International

Michael Novod - Nordea Bank

Olivia Capra - Barclays Capital Securities Ltd.

Martin Parkhøi - Danske Bank

Peter Welford - Jefferies International Ltd.

Trung Huynh - Credit Suisse

Operator

Hello, and welcome to the H. Lundbeck Q1 Report for 2016. Throughout this call, all participants will be in listen-only mode, and afterwards, there will be a question-and-answer session.

Mr. Kåre Schultz, please begin.

Kåre Schultz

Thank you, all, for your interest in Lundbeck. Welcome to this Lundbeck teleconference covering our financial report for the first quarter of 2016 released this morning. With me, I have our CFO, Anders Götzsche; and our Head of R&D, Anders Gersel Pedersen.

On slide two, you can see the company's disclaimer, which I presume you have seen many times in the past, and I will refrain from reading it out loud. So, we'll go directly to slide three.

We will elaborate on some of these items in a minute, but please allow me to summarize a very eventful start to the year. I will start by saying that the complete response letter we received back in March on our sNDA on Brintellix, and not mentioned on the slide, was a disappointment to us, and Anders Gersel will get back to this.

Our restructuring program, which we announced back in August last year, is well on track. And the [indiscernible] might even come faster than anticipated. I'm, therefore, very comfortable with the improvements we have already been seeing on our profitability and which we expect will continue.

Additionally, we see a continued, very fast growth in our key products, as well as our U.S. operations in general. Also adjustments for the tailwind currencies are providing for us. Therefore, we are able to raise our full year guidance.

Lundbeck now expects revenue of around DKK 14.2 billion to DKK 14.6 billion, and EBIT is expected to reach DKK 1.3 billion to DKK 1.5 billion for 2016, compared to previously DKK 13.8 billion to DKK 14.2 billion, and DKK 1.0 billion to DKK 1.2 billion, respectively.

Please turn to slide four. In the U.S., the strong uptake of key products more than mitigates the Xenazine erosion and this region has, therefore, grown 32% in local currency and constitutes some 50% of our sales. International Markets show decent growth in local currencies, but is negatively impacted by Venezuela and the handback of Azilect in selected markets in the region.

Europe shows substantial negative growth primarily as a result of the Azilect handback and timing of market access on our new products. Please turn to slide number five. We continue to execute on our strategic growth platform. We have seen significant sales increases in our key products, which we're very happy about. For the quarter, the key products generated revenue of more than DKK 1.3 billion, corresponding to 36% of total revenue. We are expecting continued high growth for these products.

Please turn to slide six. We will now look at our key products individually, and let's start with Rexulti. As you can see, the significant uptake continues, and as we announced some nine months into the launch, I believe the momentum looks solid and sustainable. The week-over-week growth continues to outpace the branded market, and the competition and the uptake relative to prior analogue antipsychotic launches is strong. Rexulti has so far achieved more than 6% branded TRx market share, and some 8% branded NRx market shared. In terms of revenue, Rexulti achieved DKK 116 million in sales in the first quarter compared to DKK 58 million and DKK 59 million in sales in the third and fourth quarter, respectively, last year. I'm, therefore, very confident in Rexulti as a growth driver for Lundbeck.

Please turn to slide seven. Revenue from Brintellix reached DKK 238 million in the first quarter of the year. The growth was primarily driven by the continued sales growth in the U.S., however, also from launches in countries such as Canada. In the U.S., Brintellix, or Trintellix as it will be called in the future, reached revenues of DKK 138 million for the quarter. Trintellix volume share of branded total prescriptions currently stands at 20.5%, and the share of branded NRx volume stands at 23.6% by the end of April. In general, Trintellix is the only branded anti-depressive which shows growth.

Anders Gersel will get back to the disappointing feedback from the FDA concerning our sNDA. We have recently launched Brintellix in Brazil and some smaller Asian markets, but it is still too early to assess the progress. We do, however, see substantial opportunities for the product in Latin America.

In Europe, market access remains a constant key challenge, and most European markets are still minor. We have recently launched Brintellix in Spain and Italy, but it is still very early days. Germany, on the other hand, is more difficult. Brintellix has shown negative growth in Germany, and price negotiations with the German authorities have ended without reaching an agreement. In general, however, we continue to see market shares in markets with market access which are substantially higher than seen in the U.S.

Please turn to slide eight. If we turn to Abilify Maintena, our long-acting antipsychotic, this is doing very well in most, if not all, markets. Sales grew 113%, or 110% in local currencies, and reached DKK 255 million in the first quarter. For this product, U.S. and Europe is almost of equal size, and both regions see substantial growth.

Please turn to slide nine. Onfi just continues to impress. The product reached sales of more than DKK 0.5 billion following a growth of 39%. We continue to see increased demand, but the product is also benefiting from positive currency and price development.

Please turn to slide 10. Northera was launched some one-and-a-half years ago. The product reached sales of close to DKK 200 million. Also in this case, we continue to see increased demand, but the product is also benefiting from positive currency and price development.

I will now hand over the presentation to Anders Gersel to go through the latest in the pipeline.

Anders Pedersen

Thank you, Kåre. And please go to slide number 11. I'll first mention that we recently submitted Rexulti to the authorities in Canada and Australia so far only with the indication schizophrenia as additional indications depend on outcome from clinical trials. I'll come back to the complete response later on in my presentation.

Finally, we have just received the first data on a study using Abilify Maintena for the maintenance treatment of patients with bipolar disorder. And I'm pleased to tell you that the study met the primary endpoint and we look forward to presenting the data at future medical conferences.

Please go to slide number 12. While we are pleased that FDA recognizes cognitive dysfunction and depression as a valid treatment target, and that they also recognize the DSST scale as valid and relevant measure, we are obviously very disappointed about the FDA's current position, giving us their complete response letter rather than an inclusion in the label, especially in the light of the positive voting from the AdCom meeting earlier this year.

The process from here will be that we will be requesting a meeting with the FDA, which they also invite us to do in their complete response letter, and then we have to decide what the next steps are from here. Therefore, you should not expect any concrete update on the process before we are well into the third quarter of the year.

Please go to slide number 13. Lundbeck has a long history in the four chosen therapeutic categories and we have solid disease biology understanding where, together with our experience in running clinical trials in these areas, make us better able to translate data into clinical relevance here. I believe we have a solid pipeline with a maturing early stage portfolio and products through -that we are not very communicative about that part of the - or this pipeline. I will, though, highlight here that a change from before is that the Lu AF35700 is now actually in Phase III and actually recruiting patients into a Phase III study.

We have additionally, a broad portfolio of lifecycle management projects to choose from. Therefore, to put it bluntly, we have a - almost have more projects then we are able to handle at this stage in the R&D organization.

With this, I'll hand over to Anders Götzsche to go through the financial performance.

A - Anders Götzsche

Thank you very much, Anders, and please turn to slide 14. As you have seen from the release in the first quarter, our revenue increased by 6% and reached DKK 3.8 billion, and the impact from loss FX activity was more than mitigated by the growth in the key product. However, the growth is, of course, partly offset by the declining mature product portfolio in Europe and in International Markets, as well as we handed back Azilect to Teva in the beginning of the year for certain areas.

The EBIT margin increased by more than 12 percentage points and have, therefore, continued the positive development we have already - that we already saw in the fourth quarter of last year. And I know that many of you are still focused on core EBIT, and I can explain that the only difference between EBIT and core EBIT, when you look into the full year numbers, is around DKK 1 billion in product amortizations or amortizations of product rights.

We, of course, see continued room for margin improvement in the longer term following the continued effect from the restructuring program and, of course, also combining with the growth in the key products with higher margin improving our gross margins. For the remainder of the year, it is, however, likely that the expected erosion of Xenazine could put slight pressure on margins, at least compared to the level reached in the first quarter 2016.

I also think it's prudent to comment on our net finances as well.

In February 2016, the Venezuelan government devaluated its currency, and based on this and combined with decline in transaction that had been settled at the official exchange rate, we have assessed our receivable and considered it to be highly unlikely that we would receive settlement at the official exchange rate.

Consequently, we have recognized in the net financial expenses, exchange rate loss of DKK 125 million, which has been taken into. So we have taken a full write-off of all receivables in Venezuela in the quarter. The tax rate is around 49%, and it is a higher tax rate compared to the Danish corporate tax rate, and that is caused by a couple of factors, one is the amortization of the Northera product rights, which is not deductible for tax purposes, and then it's the increasing activity in the U.S. where the tax base is, in the U.S., with a higher tax rate multiplied to the tax base, and that result in a higher tax rate. Of course, we have a loss in Denmark, but as it is taxed at a lower tax rate, then the totality of the tax rate is 49%.

Please flip to the next slide. As you can see then, all cost ratios have improved compared to the same period last year and it's a substantial improvement. When you look at the cost ratios, we still expect our cost of sales to reach a level around 25% for the year, and we expect that R&D percentage will stay around 20% for the full year 2016.

The SG&A margin is likely to end in - end the year in the range of 40% to 45%. So that is the guidance we can give for our cost ratios for the full year.

Please turn to the cash flow statement at page 16. The solid improvement in our cash flow is obviously a reflection of the improved profitability, but we are also seeing improvement in working capital. We have seen reduced [indiscernible] we are spending cost for the restructuring program. When we finish 2016, we expect that our net interest bearing debt will have been reduced to a level between DKK 1.2 billion and DKK 1.4 billion.

Please go the next slide, page - slide 17. Based on what Kåre also explained, we have had a solid start on the year. We believe it's prudent to raise our financial forecast for the year. We expect the continued growth for the key products, and the outlook for 2016 now indicates a revenue range of DKK 14.2 billion to DKK 14.6 billion, and that is also resulting in a significant improvement in our profitability, and we now expect the EBIT of DKK 1.3 billion to DKK 1.5 billion for the year, which indicate a margin around 9%.

I have already gone through the expectations for the cost ratios, so we are now down to the financial items, and based on the situation in Venezuela, we expect that net financials will be a loss around DKK 200 million. It is, of course, still difficult to provide a specific guidance for the tax rate as it very much depend on how much revenue we have in the different regions, but currently, based on our expectations for now, we expect a tax rate slightly above 50% for 2016. The outlook we have presented today is based on unchanged exchange rate by the end of April and going forward for the remaining part of the year.

And with that, I'll now hand back to Kåre for the concluding remarks.

Kåre Schultz

Thank you, Anders. Before I hand over to the operator for our Q&A session, I would like to say that Lundbeck stands in front of exciting times. We believe that 2016 will be a year where we will see continued positive results of our actions.

With that, I would like to thank you, all, for your interest and open up for the Q&A session. Over to you, operator.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Carsten Lønborg Madsen of SEB. Please go ahead. Your line is now open.

Carsten Madsen

Thank you very much. This is Carsten from SEB. Two questions, first on Northera, where we've seen a strong launch so far. But here in Q1, you actually see almost a flat growth versus Q4 2015. And so, what should we expect for the rest of 2016 and are there any particular reasons why Q1 was a little bit to the weak side? Looking at prescription data, it seems that there is an uptick again now in numbers towards the end of this quarter? And then on AF35700, to Anders Gersel, I guess, when we - as you said, that you are not telling us a lot about your very early stage pipeline, but you have actually also not told us a lot about AF35700. But maybe you could tell us a little bit about what have you shared with the FDA and also get the Fast Track status.

Kåre Schultz

Thank you for those questions, Carsten. I'll answer the first one and then Anders Gersel will answer the second.

So, in terms of Northera sales, it's correct that the growth from fourth quarter 2015 to first quarter 2016 is not as high as the average growth we've been seeing. We've seen a phenomenon in the U.S. over the last couple of years where fourth quarter sales on certain products tend to be higher relative to first quarter. And there's a lot of debate where that has some link to the whole deductible situation and to the prescription patterns up against the end of the year. We still see a continued positive increase in total scripts on Northera. We still expect to see Northera grow throughout 2016, but you are right that there are some quarterly phenomenon that probably will mean that also going forward, we will see lower growth rates between through Q4, Q1, than we will see, for instance, between Q3, Q4 and so on. But...

Carsten Madsen

Okay. There's no change to, for example, rebates, rebate reversals or something?

Kåre Schultz

No.

Carsten Madsen

No?

Kåre Schultz

No. Nothing significant. And we still see a continued uptick in scripts, so we are positive about the long-term outlook. And with that, over to you Anders on AF35700.

Anders Götzsche

Yeah. The AF35700 program is the first one that is going to target patients with treatment-resistant schizophrenia as the primary indication to go through, and that is obviously one of the reasons why the FDA has granted us a special designation here.

What we had shared with them is the Phase I information we have on the drug and also some PK and dynamic data, and some - a few patient cases where we can basically illustrate in these dose escalation schemes that we are at an appropriate dose level with AF35700 in these dose ranges that we are operating with here from 10 milligrams to 20 milligrams. It is a unique profile in the sense that we have a higher D1 binding relative to D2 binding, and that we are seeing effect in patients with a D2 binding, which is around 30% to 40% compared to where you normally would see one excess of 70% for most other antipsychotics. And in addition to that, we also have a five to six active component in the molecule. So, it has a somewhat different receptor profile than any of the other currently available antipsychotics, and because of that and because of the indication we're going for, we got this special designation by the FDA.

Carsten Madsen

Okay. Thanks a lot.

Operator

Thank you. Our next question comes from the line of Sarah Potter of Deutsche Bank. Please go ahead. Your line is now open.

Sarah Potter

Hi there, it's Sarah Potter from Deutsche. I have three questions, please. Firstly on the guidance, which areas have exceeded your expectations in the first quarter to drive the guidance upgrade? Is it just Cipralex looks to have been very strong or rather other areas? And then secondly, on the Brintellix cognition data. I know you haven't yet met with the FDA, but do you have a sense if there's going to be a path forward in the near term or is it more likely to be a multiyear review with the FDA? And then finally on Rexulti, which looked a lot stronger this quarter, is this finally the true demand showing through or do you think there might be some stocking in this number? Thank you.

Kåre Schultz

Thank you for those three questions. I'll handle the first and Anders Gersel will handle the second, and then I'll handle the third question. In terms of the guidance, what has surprised us positively in the first quarter has been the total sales, not so much driven by Cipralex, where we are seeing sort of a flattening out, a plateau, you could say, with a much lower drop in Cipralex sales expected from our side this year compared to what we see in previous years. So it's reaching a more stable situation, but we did anticipate that Xenazine in the same kind of situation would be dropping up slightly faster than what has happened. And we are also seeing very strong growth of our core products more than doubling compared to last year. So that's on the sales side, where there's a positive deviation. And then there is also a positive deviation on the cost side. We're still pursuing our restructuring plan with a total savings target of DKK 3 billion, which we still plan to realize in 2017 compared to when we announced it, and we see that the cost reductions are being realized slightly faster than we were anticipating. So the combination of two elements, slightly better sales than anticipated, slightly lower cost than anticipated, altogether means that we see a better first quarter and that we can see that this will continue through the next three quarters, and that's the reason for the update - upgrade of the guidance. Then on Brintellix, maybe, Andres, you can comment on that?

Anders Pedersen

Yes. As I mentioned earlier on the - we have not yet had the meeting with the FDA. We requested it and obviously, that makes it a little difficult for me to give more clarity than what we have been able to before. The only thing that is clear from what we have seen at this stage is that they continue to accept the cognitive dysfunction as an appropriate and relevant target in depression, which is new. They also accept the DSST as a relevant measure of cognitive effects in these patients, which is also important. In terms of why, specifically, they have not adjusted anything in the label, we need to get that clarity in the discussion with them.

At this stage, without particular reference to our situation, I would say that normally, when you have a complete response letter from the FDA, you would expect that you would have to go out and do another clinical trial before you can change that position. So that's my expectation, that we will have to be extremely [indiscernible] change that position also in this situation. So, I would look into a multi-activity prior to having a label adjustment within the United States, but I can't guarantee anything on that until later on in the year.

Kåre Schultz

And then with regard to the third question on Rexulti demand, I can say that we have a very steady progress in TRx, NRx, and in volume share in the U.S. And therefore, what is - what you see in the first quarter is based on solid underlying demand increase, so that's just very positive. And as we also stated, we are at around 6% share of the branded segment, and we've seen that increasing steadily over the nine months that the product has been in the marketplace. So, very optimistic about the outlook for Rexulti in the U.S. Thank you.

Sarah Potter

Okay. Thank you very much.

Operator

Thank you. Our next question comes from the line of James Gordon of JPMorgan. Please go ahead. Your line is now open.

James Gordon

Hello, thanks for taking the questions. A couple of questions, please, one on pricing, or U.S. pricing. So, my question was just a political commentary around U.S. pricing, it's quite more hostile and at the same time, it does look like Lundbeck's become a bit more aggressive in taking U.S. price rises. So, on that, one question would be just in terms of what have you assumed in the business plan where you've given this medium term guidance on where margins might go, do you assume that you're going to continue to have some further price rises? And would it be fair for us to assume that the recent subpoenas for Northera and Xenazine, do those relate to pricing behavior?

Second question is on Cipralex. Can you quantify how much stocking there was in Japan? And is that something you expect to revert in subsequent quarters or do you think we're now at a steady state there? Any comments about why you get back to the Cipralex? What - could it be sustained that we have a slower decline on Cipralex? And then just finally on the margins and cost savings target, so DKK 3 billion is the plan for what you take out. How much have you now taken out at the end of Q1? Thanks.

Kåre Schultz

Thank you. So I think I'll try and answer question one and two, and then Anders Götzsche can answer question three. So in terms of pricing, you're absolutely right that it's part of the political debate in the U.S. It has been for many years actually, but it's certainly also part of the debate right now. We do not see any dramatic change, and I won't expect any dramatic change in our pricing behavior in the coming years compared to what we've done in recent years.

We see a situation where we do take these price increases, but we do also increase the rebate in both to Medicaid, Medicare and Managed Care, and we expect that, that will be continuing. With regard to the two subpoenas, then - there is no reason to believe that, that is specifically linked to pricing. It's not something that we are aware of at least, we have very limited information, we've just had a request for information on sales and marketing activities on Xenazine and Northera, and that's really all we know.

On Cipralex, I think what you should look at is the big picture, so not so much the small deviations from quarter-to-quarter.

And the big picture is that the substantial patent expiry in the U.S and Europe, Canada, a few other countries, that is over, washed out. Now, we have a situation where there is still some pockets left of Cipralex in certain countries that is dropping at a slow speed. And then, we still have sales growth in China and in Japan due to the fact that Cipralex got to these markets very late, so it's still protected in those markets. And that is why instead of this very steep drop, we are now getting more to a plateau. We still expect the product to marginally drop in turnover this year, but nothing compared to the dramatic drops we've seen the last four years. And then on the last question, would you, Anders?

Anders Götzsche

What the - the margin improvement and the link to the cost or the restructuring program, what we said was that we had ambition of improving the cost base with DKK 3 billion, and that we would improve the cost base with DKK 1.5 billion in 2016 and DKK 1.5 billion in 2017.

What we have now communicated is that it's going slightly better and we are doing better with the restructuring. So, you should expect that we'll gain savings of DKK 1.5 billion to DKK 2 billion this year. And then, of course, the savings will be a little less in 2017 because what we are aiming for is the totality of the cost saving.

James Gordon

Thank you. And how far through this year are you already on the DKK 1.5 billion to DKK 2 billion?

Anders Götzsche

How far?

James Gordon

Yes, as in...

Anders Götzsche

Yeah. I would say - how far? We expect that by mid-2016, we have more or less executed on all the plans. You know that, of course, we need to make the restructuring, it's in different geographies, but we expect that. We have finalized everything and then there will be a tail, and that is, of course, the reason for that we'll have this be lower, in fact, into 2017.

James Gordon

Thank you.

Operator

Thank you. Our next question comes from the line of Eleanor Fung of Goldman Sachs. Please go ahead. Your line is now open.

Eleanor Fung

Hi, thank you for taking my questions; three, if I may. Just firstly on guidance. Just looking at the numbers, it implies an uplift to the EBIT margins. How much of this comes from a shifting product mix driving higher gross margin versus faster pull through from the cost savings program that you anticipated? Secondly, and thinking about gross margin evolution over the next 12 months to 24 months, how should we think about that as your product mix shifts towards these new products and you lose the lower margin Xenazine and Azilect products? And finally, just one on Brintellix cognition, recognizing that you still have to have your meeting with the FDA. But as I noticed, there are a number of trials in clinicaltrials.gov ongoing for cognition. Wondering what your thought process is in using these for a potential refiling versus commencing on a new trial. Thanks very much.

Kåre Schultz

Thank you very much. I'll try and answer the two first ones and then Anders Gersel will take the last one. In terms of the guidance and the fact that, of course, the increase in the EBIT is over proportionate to the increase in sales, and therefore, the margin is indicated to be increasing, you could say that there's some - there's a couple of effects, but the most important effect is really, that compared to our original expectation, we're seeing a slightly improved cost profile due to the faster realization of the restructuring, and then also some better sales on our key products which are carrying a higher margin. So, that is the short explanation for the improved implicit EBIT margin in the guidance. In terms of how the gross margin will develop the next 12 months to 24 months is, of course, hard to say precisely because we have a lot of moving parts, products growing and other products declining.

But in general, you will see a situation where the gross margin will be improving, and this is actually something that will follow us for the next coming years; some of the older products where we pay high royalties are fading out and some of the new products that we have developed ourselves are kicking in. So improved gross margins also over the next 24 months. And then, Anders, on Brintellix.

Anders Pedersen

Yeah, you're correct. We have a couple of smaller studies ongoing as we speak and they have not been designed size-wise with an aim to actually support a claim as such. But if, in any way, they can contribute to any information following our discussions with the FDA in terms of when we learn what they really are looking for, we will obviously take advantage of whatever we can with those studies. But I have no assumption at this stage, they will be the key driver of the discussions with the FDA.

Eleanor Fung

Thank you.

Operator

Thank you. Our next question comes from the line of Michael Novod of Nordea Markets. Please go ahead. Your line is now open.

Michael Novod

Hello, it's Michael from Nordea; three questions, also. First of all, to Brintellix, the plan is to - or Trintellix - started DTC campaign here during the summer nationwide in the U.S. Are those plans still intact given the name change, but also that there will be no cognition claim? So are you running full speed with that or how do you see that? And the second thing, also relating - a follow-up to pricing. Could you please try to back out pricing of growth? Most other companies can give us that information, so I would be appreciative to get that. You grow 32% in the U.S., maybe you could comment on what growth is in volume and in pricing. And then lastly, on a follow-up to the cost reductions, can you try to split out the - of the DKK 3 billion, how much is actual, say, operating cost reduction and how much is coming from, say, the royalties that you don't have to pay losing Xenazine and Azilect?

Kåre Schultz

Thank you. I think I'll try and handle all the three questions. And if we take the first one on Trintellix, then it is correct that we've been doing some pilot DTC in a regional fashion to see - decide on which format would work the best for us. And then there, we've concluded that it's looking good and that we will have it, of course, using the name Trintellix, because we're changing to that name. So, it looks good and we're starting soon, and we have high hopes that this will further increase the nice penetration we're seeing of Trintellix, where basically, on a constant monthly basis, we're seeing new all-time high market shares for Trintellix in the U.S.

In terms of the second question on pricing, I can't give you the specific split between volume and price for the first quarter, but I can tell you that the key driver of the growth is the volume, as you can easily imagine from newly launched products that are doing well such as Rexulti, Trintellix and so on. There, the volume increase is a key driver.

But, of course, pricing also plays a positive part on this, so it's a combination. Then on the cost reductions, you can say that there's one part you could call the gross margin improvement, and the other part is what [indiscernible] between the gross margin and the operating margin. And my expectation is that once we get to the end of this, then you will roughly see a 50-50 between the two. So, a significant part of the improvement is the fact that we are changing the portfolio from being in-licensed products, where sometimes both cost of goods or royalty or amortization, whatever element it is, plays a higher burden on the gross margin, to own developed projects - products, developed either with partners or alone, which typically carries a better gross margin.

And then, at the same time, the cost reductions throughout the operational part of the organization, you can say, well, manufacturing is also operational, but throughout the sales and marketing and R&D organization. So, in both areas, there will be significant cost reductions.

Michael Novod

Thank you very much.

Operator

Thank you. Our next question comes from the line of Olivia Capra of Barclays. Please go ahead. Your line is now open.

Olivia Capra

Yes. Hi. Thank you very much. I think a few might have been answered, but if I can just have two more please. For Rexulti, if I'm correct, most of the scripts right now are actually being written for MDD rather than schizophrenia. Is this a normal breakdown versus what we see for other oral antipsychotics at this stage of the launch or is the MDD component unusually high for Rexulti? And could we see the schizophrenia segment expand now that you're going to have the maintenance treatment added to label? And then, just lastly for Rexulti in terms of launch into ex-U.S. markets, any update on your thoughts here?

And can you just remind us what are the obvious markets where you think the return to Lundbeck stacks up? And then just lastly on Abilify Maintena, [indiscernible] has had a little bit in the last few months, the high dose option will be the biggest driver of taking share from Abilify Maintena. I know it's too early to see this in IMS because of sampling, but what is the feedback you're getting from the sales reps or are there any signals of a slowdown in new prescriptions? And then what do you think will it take to see use of injectables overall pick up?

Kåre Schultz

Thank you very much. I will try and comment on both questions, and Anders Gersel could also comment on Abilify Maintena, how we see that with the news we've just had on clinical trials we've done in bipolar. But if we take Rexulti first in the U.S., then it's correct that about 80% of scripts are assessed - estimated to be from MDD. And it's really not, I think, that different from other antipsychotics, but it is a very, very good profile for MDD.

And if you look at the patient populations, then of course, the size of the MDD segment in terms of numbers of patients is significantly higher than the size of the schizophrenia segment. And that alone, given that it's a very good therapy, sort of lends itself to the fact that you will see higher absolute numbers on MDD than schizophrenia. But it's also penetrating very well in schizophrenia, and we don't expect to see any sort of dramatic step changes due to the maintenance approval from FDA, but we think that it's, overall, looking very positive.

In terms of outside the U.S., then we are waiting for some clinical data in several of the markets before we'll see the launches, but we have sort of started the regulatory process in different markets including Canada. So over the coming years, we will see launches in terms of value creation. We probably have to be realistic and say that the biggest value creation will be in the International Markets and United States, whereas in Europe, we will probably be facing reimbursement challenges that will limit the total value of the product in Europe.

With regard to your second question on Abilify Maintena, I'll just say in general on LAIs, so products that are injected once a month or every third month, it's quite clear that this market segment is growing in all geographies. And due to the benefits of the stable therapy you obtain with this type of therapy as opposed to daily oral therapy, I have expectations that the volume share of the market being on long acting injectables will be increasing over the next five years to 10 years. So we will hopefully see Abilify Maintena growing sales both as a consequence of the market increasing in terms of volume, but also as a consequence of us taking market share. And in that connection, maybe, Anders, you could comment on the latest clinical data.

Anders Pedersen

Yeah, first and foremost, I think when you look not only on the Abilify Maintena bipolar scenario where we have gotten positive data, but also in your question on Rexulti relative to other antipsychotics, you have to remember that there are only very few antipsychotics that actually have claims outside of the schizophrenia area, and particularly both in depression and in bipolar area. So you can't look to all products and see what they're behaving like.

For bipolar, we had some very positive data, and I think the type of study that we've been running here is one which clearly indicates the value of intervening both with bipolar and depression in general, because it's sort of a relapse prevention type design, which clearly shows the benefit of staying on therapy for a long time. And there, obviously, long acting injectables have a particular role to help patients, both from a compliance but also from a efficacy and general perspective. So we see this as a strong addition to the current position with Abilify Maintena to have that sort of data now becoming available.

Olivia Capra

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the line of Martin Parkhøi of Danske Bank. Please go ahead. Your line is now open.

Martin Parkhøi

Thank you very much. Martin Parkhøi, Danske Bank. Also, three questions. I think firstly on Sabril, just seeing your experience now with Xenazine this year, where the generic erosion has been lower than you expected, what do you then think about Sabril for - I know you don't give any guidance, but just in broader terms since this is a - this could face a generic competition also later this year or the next year, and this has a much tougher REMS, so - and also lower sales. So, do you have changed your mind on how bigger erosion you would expect on that product? And then a second question, I have to come back to the cost side goal because it's not the first time since you started this year that you're saying that the cost are going - cost savings are going faster than expected. That's a little difficult for me to understand because, I guess, you shouldn't be able to pretty good control on the cost. So in reality, is it just the buffer coming through? And is there also, since you don't really - you were surprised by this, so is there a risk chance that the actuals come out higher than the DKK 3 billion?

And then, final question just to Anders Götzsche on the tax rate. Of course, it will be very high for 2016. Could you give some broader comments on 2017 and then later on given that I think that, of course, the impact from this year will be lower, lower as the overall earnings becomes high?

Anders Götzsche

Thank you very much, Martin. I will try to answer the two first ones, and then Anders can handle the tax at the end. With regards to the generic erosion that we will expect to see on Sabril, it's very difficult to say. And I think that your analysis might be as good as our analysis on it because it's very complex. It hinges on a lot of detail factors. One factor here is what's going to happen with the REMS, another factor is how many generics will actually be launching and at what time will they be launching, which we've seen now with Xenazine. It's pretty hard for us to predict actually when the first will launch, but also will the next one then launch immediately after or will there actually, as there has been with Xenazine, be quite a long time gap before the next generic launches?

So this is not a very precise answer, I know, but it's simply because we do not exactly know when we will have a generic competition on Sabril and how it will play out. I think it's fair to say that long term, you need to expect to lose most of the turnover you have on a product that goes generic in the U.S. But recent experience shows that the short term planning of the first couple of years can be difficult, and therefore, it's also going to be hard for us to say exactly how it develops.

Then on the cost, it's correct that we have seen a couple of times that the execution by the organization is a little bit faster than we were expecting. And it's not because we're not trying to plan this carefully, it's more, you could say, the effect of the management and employees doing an excellent job in following the strategy and the reorganization. And then if you have a hundred departments all do a great job and they do slightly better than you're expecting, then before you know it, it turns out to be real money. So it's really the way we see it, that we have the same plan overall. We don't see that it's going to end up in more than DKK 3 billion in total cost reductions throughout the whole P&L, but we do see it being realized slightly faster than what we were planning for. And then the last one on the tax rate, over to you, Anders.

Anders Götzsche

Yes. You should expect that when Northera has - is coming off exclusivity in 2021, then our structural tax rate will be between 22% and 24%. They will, of course, depend on how the revenue mix is, but then will be very close to the Danish tax rate, and then there will be these transfer pricing rules, which will lead to 1% to 2% addition to the Danish tax rate. And from 2016 until 2021, it will, of course, decline the tax rate. Next year, we'll see a reduction to maybe around 40%. It's difficult to predict fully, and then it will, of course, decline very fast until 2021. So that's what you should expect. And now, I'm talking reported tax.

Martin Parkhøi

Yes. That was fair. Thank you very much.

Operator

Thank you. Our next question comes from the line of Peter Welford of Jefferies. Please go ahead, your line is now open.

Peter Welford

Hi. Yes. Thanks. Just two left. Firstly on Brintellix, looking at what Takeda reported for U.S. sales, I'm trying to extrapolate from that. Maybe my math is wrong, but it looks like you've booked more perhaps royalty income than we'd anticipate for the quarter. I wonder if you could perhaps give us some insights into the fact [indiscernible] and how we should think about that going forward. And then just on the pipeline, with regards to the Alzheimer's program, not idalopirdine, but [indiscernible], if memory serves me right, I wonder if you could give us an update on how that's going and what [indiscernible] we can anticipate seeing any results from that this year, and perhaps any comments you'd state on the safety profile so far, whether there have been any stops due to safety or [indiscernible] at all? Thank you.

Kåre Schultz

Thank you very much. I'll answer the first question and Anders Gersel will answer the second question. So with regard to Takeda, I can't really comment specifically on their numbers. There's currency conversion and there can be some timing issues and rebating and accruals and so on. But in general, we see a very steady progress on Brintellix. We're now above 20% volume share on scripts. So we see a steady growth quarter-over-quarter in the U.S., and we are very optimistic about that this will continue, and we have an excellent collaboration with Takeda. Everything is working extremely well with our collaboration in the U.S. But the details on their reporting, you have to basically clarify with them.

Anders Pedersen

This is Anders. The sound was a little bad, but I think you were asking about the AF2513, I believe, in the pipeline. And that is a vaccine program for Alzheimer, and for these programs, the progress is very slow because you have to wait to see readouts of titers for different dose levels before you dose escalate. So, you should not expect to see any - or hear any data from that program this year. We don't know for sure. We are obviously dosing patients and we are also monitoring titers. We have - in terms of adverse event, we have not seen anything that has any cost for concern in any respect. So, it's a slow-going program, but that's the nature of these vaccines, where you need to see a titer before you can escalate to the next dose level.

Peter Welford

Thank you.

Operator

Thank you. Our next question comes from the line of Trung Huynh of Credit Suisse. Please go ahead. Your line is now open.

Trung Huynh

Hi, guys. I've got three questions, if I can. A couple on Brintellix and one for Anders. First one is, could you give us an update on Brintellix across the other European markets? If Lundbeck doesn't reach an agreement in Germany by the end of the year and it's removed, what loss of sales would this be? And then secondly, how long are people taking Brintellix for? And how long is this compared to other antidepressants? And finally, what is the cash cost for the restructuring this year and next year? Thanks very much.

Kåre Schultz

Thank you very much. So, I will answer the first questions and then Anders will answer the last one about the restructuring. So, in terms of Brintellix penetration in Europe, then we have primarily launched in a couple of the smaller countries where we have been able to get reimbursement, and in those countries, we see very nice penetration curves with market shares that in volume, significantly exceed that of what we've seen so far in United States.

In Germany, we have this specific situation that, as you know, you're allowed to launch and then you have the whole MNOC discussion about the pricing, and we have not been able to reach a conclusion on the pricing, which means that until that is clarified, we will from now on be booking quite limited sales in Germany. Maybe we can reach an agreement, then of course, we will continue to see strong penetration in Germany; or we cannot reach an agreement, in which case we will withdraw the product from Germany.

The effect on our total Brintellix sales will be marginal, but of course, we would like the product to be available in all European markets in order to bring the benefit to all patients. And in that context, of course, we're happy about the fact that basically, as we speak, we are launching in Spain and Italy. And we hope, of course, to be able to negotiate solutions where we can launch in most European markets. But the reimbursement discussions and negotiations have taken longer than we sort of were used to five years, ten years ago. But that is simply the situation overall in the European pharmaceutical market right now, that it takes longer to get market access than it used to do.

Anders Götzsche

And with the cash question around how the restructuring is impacting, last year, it was around DKK 250 million; this year, we expect approximately DKK 600 million, and then the remaining part will come in, in 2017.

Trung Huynh

Great. Thanks.

Operator

Thank you. [Operator Instructions] And we have no further questions at this time. Please go ahead, speakers.

Kåre Schultz

Thank you very much for listening in. It was a pleasure to answer all your questions. Have a nice day. Good bye.

Operator

This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.

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