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Novo Nordisk A/S (NYSE:NVO)

Q2 2012 Earnings Call

August 13, 2012 7:00 am ET

Executives

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

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

Kåre Schultz - Chief Operating Officer, Executive Vice 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

Analysts

Brian Bourdot - Barclays Capital, Research Division

Mads Krogsgaard Thomsen

So Lars, thank you very much and the rest of the team. It's my pleasure, as I said, to introduce all of you without much further ado, I'm going to hand over the mic to Lars Sørensen to make some opening comments on the quarter and also what hope we get over the second half of this year. Lars, all yours.

Lars Rebien Sørensen

Thank you. How do I move? So thank you very much and thanks for the invitation. We've been kind of dreading coming over here not because of the results, but because of the Olympics. As it turned out, it was very quiet this morning and almost sort of silent. So we have prepared ourselves to fight through the city, but that didn't occur, so -- and the weather has been nice. So thank you very much for that. I'm just going to say a few words of introduction and then we will get on with the program. You'll get a little bit more extensive update by Kåre Schultz, Chief Financial Officer, sitting over there; and Mads Krogsgaard will be giving you an update on R&D; and Jesper Brandgaard is here. He's just out for the moment, and then we will enable the Q&A, which we'll take a seat at the table, and hope that works out.

As usual, things may turn out completely differently than what we predict, usually not the case, I have to say, at least, when we speak about diabetes, but there are certain uncertainties associated with making predictions and please study this slide to know what the risk factors are. This is the highlight in fact from the front page of the press release that was sent out. Due to a very strong second quarter, we managed to come out the first half with a 12% local currency growth and because of the weakening of the Eurozone, that is translated into 17% growth in first half and in Danish kroner terms, the growth drivers are North America, International Operations, with 19% and 17%. In terms of product, it's Victoza and the modern insulins. They make up for the total growth. The rest is sort of wash up -- up and down. In the regulatory field, there's quite a few new things here. The regulatory process for Tresiba and Ryzodeg is moving along in all major markets. We have gotten a tentative AdCom date, November 8 in the U.S. and the process in Europe and Japan is moving along quite smoothly also.

We just announced a combination trial results where we combine a GLP-1 and an insulin. And as you could see from the data and from the release, they are actually doing what we had anticipated plus some, meaning, that this may present itself as a very attractive treatment option for a variety of different patient categories. And I'm sure we will be discussing the positioning and the potential of this type of combination drug during the Q&A. Then we have one news which is perhaps not so good. We saw in the last parts of the trial with vatreptacog alfa new factor VIIa analogue, potentially neutralizing antibody formation in one patient, and this needs to be started further. The way this is being assessed is in vitro, so we still need to see the efficacy data of whether any truly neutralizing effect clinically has taken place. We don't believe it has, but it's something we need to investigate further, but clearly, not good news. It just basically shows that when you toil around with biologics, if you go too far, you actually run the risk of eliciting antibody formation, and so this is an example of the associated risk with biopharmaceuticals. When we look at the financials, a very strong operating profit growth, 31%; diluted, 26% and we were able to lift our guidance for the year to 9% to 12% and 15% operating profit growth in local currencies. And with this, Kåre Schultz.

Kåre Schultz

Thank you, Lars. So just a brief comments on sales and as Lars already alluded to, if you look at the sales from a geographical point of view, then there are 2 -- actually, 3 key drivers: North America, International Operations and China. And the background is the same as in previous years, so it's quite different from region to region. In North America, we have a situation where we have actually a positive pricing environment. We have a positive market share environment where we are taking market shares steadily in both the GLP-1 segment and in the insulin segment. And in total, that gives us a very healthy growth also compared to what happens to all pharmaceutical companies in North America. In International Operations, it's a case of demographics. We have basically something like 6 billion people living in what we call International Operations or the emerging markets. This, as you all know, in strong increase in the occurrence of diabetes, strong organization and that drives a very high level of organic growth in International Operations for all the products both the high end and the low end.

And in China, we have a relative lower number here than what we've been seeing in the past. There has been some health care reforms on the pricing on human insulin, which affected us last year, and we will be seeing this number actually come up a little, more towards the 15% level once we get to the end of the year due to the several pipeline changes we saw in China, but basically 3 regions driving growth. Europe and Japan, pretty much you could say saturated markets with low economic growth, lot of pricing pressure and no real positive dynamics for us there.

If we take a look at the products that Lars already alluded to that the 2 key drivers of roughly equal size, that's Victoza on the GLP-1 segment and it's our 3 modern insulins in the basal, premixed and fast-acting segment. And the dynamics are basically unchanged in the sense that we are taking share very nicely in GLP-1 segment and the segment is growing very strongly and I'll get briefly back to that. And then in the space of modern insulins, you could say we are back at a normal growth track. There's been some changes within the last couple of years and I'll comment a little bit on that.

On the other product areas, we are very happy about the growth of Norditropin. That's basically the result of our ongoing life cycle management of a very old product where we continuously try to make the best formulation, the best device for the injection, the best education material and so on. And as a consequence of that in a flat market, we are still taking market shares. On NovoSeven, we basically have a situation where the market is pretty much saturated. There's not much more patients to be found in the industrialized world. So we have a little bit of growth in some markets, but basically a pretty flat situation. The insulin market, long term, I think we've said for the last 20 years at least, there's a 5% volume growth worldwide in the demand for insulin and there's typically a 5% value on top of that through upgrading to beta insulin therapies worldwide. So a 10%plus growth of the insulin market in value totally is what we've been seeing for the past 5, 10, 20, 30 years and it's what we predict for the future.

And there was a little blip for us, just to show here, there was a little blip for us. If you look at the numbers in '11, you can see there Q1, Q2 11 the actual quarterly growth came down. That was basically a result of some of the effects of the U.S. health care reform, which changed the dynamics on rebating and pricing on some of the U.S. products and some of the health care reforms in Europe. And then we had a funny dynamic, which we also commented on about a year ago, where Lilly (sic) [Eli Lilly] went in with some very aggressive price bidding on some contracts. We combatted in the marketplace, but we didn't really see the point of doing it, but we had to, of course, answer back being equally aggressive. We've done that. It looks like the pricing environment is more stable now and we have got our volume share back up, and that's why we can see on a quarterly basis, the last 2 quarters, we're back to this 10% worldwide growth, and so a lot of details about the other markets around the world, but the basic picture is we're back to the long-term growth pattern of roughly 10% value growth.

In terms of Victoza, we also had a very steady development. We had a very small blip that I think we have commented on that was in the fourth quarter. That was due to rebating also in the U.S. and health care reform in the U.S. We didn't know exactly how this doughnut hole rebate and this whole calculation of the new additional rebates in the U.S. would pan out. It was very hard to get full visibility on it. So therefore, when we did those end year adjustments of rebates in the U.S., we had to take down the accrued rebates that's why you get this blip on the Q4 number that's artificial in a way. It's not volume related. It's related to adjustments and rebates in the U.S. So you can see a steady track there with roughly DKK 200 million being added each quarter to the quarterly sales. What's nice to see on the right-hand side is that we are getting some of the other world markets in here. It's not just U.S. and Europe, but we've had a launch in China. It's very small number still, but if we compare the numbers for the first period in China with other launches in the diabetes space, it looks very promising and as you know, in China, you start launching totally unreimbursed and then after some years, you gradually gain reimbursement. So it's a very good sign that Victoza will also have a great future in China. The same thing goes for International Operations, where we have also been launching in a long range of countries and where we start to see some meaningful numbers from areas like Latin America, Middle East and so on. So very positive on Victoza and overall 73% growth in local currencies. So that's very nice.

If we just take a -- and I promise to take a little look at this. For the U.S., the GLP-1 market, then roughly in the last 2 years, you can see we have expanded the markets from being 4% to being 6% in value of the diabetes market. So this is of course, very important because as we said when we launched Victoza, it's not going to be a success if we take the market share of Byetta and nothing happens to the segment. Then it's going to be way too small, and it's way too small compared to what the drop deserves due to superior efficacy on glucose and weight. So what we see here is what's been happening and you can see a steady expansion on the marketplace and steady expansion of the Victoza market share and a steady decline of exenatide Byetta share.

I'm sure all of you have been following, as I have very closely, the tracking of BYDUREON and how that's been going since launch and I think it's fair to say that, overall, it has turned out to be a wash for Amilyn. Everything they've gained on BYDUREON, they have lost on Byetta. So a launch where you cannibalize 100% of your gains on your existing product, at least financially, is not very attractive. So that's something we're very happy about, the tracking of Victoza also very short-term up against BYDUREON.

If we then take a look at Europe, then we have some different situations and that's been the case since very early days of the launch and that's linked to the different reimbursement systems and different health care systems that we have in Europe. But roughly speaking, we can say we have a situation in Germany, where we have been expanding the market and we've come to sort of 4%, 5%, but the German health care system is relatively restrictive on the -- sort of allowing doctors to prescribe new therapies because they are very sort of stringent on trying to keep down health care costs. U.K., we had a slower penetration because you need all the PCTs to go in and approve the drug. That took some time. You need to get your nice recommendation. That took some time, but you can see how it's been growing very nice and steady, and how we are sort of approaching 10% of value for the GLP-1 segment in the U.K., very positive.

And then, of course, in France, we got the best of both worlds because we negotiated full reimbursement for the product, and we've got the market convinced faster than in the other countries that Victoza was the superior alternative in the GLP-1 segment, superior to Byetta. So there, we both sort of managed to bring down Byetta fast and grow Victoza strongly up to this 10% level in value. Now you have to remember the 10% in value is significantly less in volume, so it's significantly fewer than 10% of the patients in volume terms that are using Victoza. What that means is also that it's still unknown for us what the long-term potential is. We have seen markets where significantly more than 10% of the market in value has been turning over to GLP-1 therapy. And in the U.S., for instance, it's only like 1.2% right now of the patients that are on Victoza. So a good tracking there and a good long-term prospect. And with that, I'll turn it over to Mads Krogsgaard.

Mads Krogsgaard Thomsen

Thank you, Kåre. And from GLP-1, actually, excuse me for a minute. Lars mentioned a brief status on the new drug applications worldwide for degludec and DegludecPlus, nowadays known as Tresiba and Ryzodeg. And I think to put it in one sentence, you'd essentially say that the European process has been exactly as we would have expected in terms of time lines and so on, so forth, a very rigorous, iterated process with these various day 150, 180, day 210 reports and so on, where you actually have a process of questions and answers ongoing until you have resolved all issues. And we're at the point where we're about to submit the last input, i.e., responses to the list of outstanding issues that will then trigger the final, you can say, route towards an opinion this autumn.

In Japan, things have been moving faster than expected and I think that's part of the PMDA recent desire to revamp their regulatory process and show that they can be competitive on new innovative medicines and they're offering to the Japanese population, whereas -- and that means that we believe we are on track towards a positive action also here in the second half. In terms of U.S., things have been slower than we would have hoped for. As you know, we got first the extension of 3 months on the PDUFA and lastly, the notification of an AdCom tentatively scheduled for November 8. Obviously, we are preparing ourselves with the utmost vigor for that event on November 8, such that we hopefully are able to get a positive action and a launch in the first half of next year. Other countries outside of China, I would have to say are also in a good regulatory process towards hopefully approval. China is the odd one out in that we are still negotiating with the SFDA as to when we can start Phase III trials. The sooner the better because, obviously, China is a very important strategic market.

Now moving then back to, you can say at least in part, the GLP-1 segment in that we have, as you know, combined what we believe is the best of 2 worlds, namely, the best basal insulin, Tresiba, the best GLP-1 analogue, Victoza, into one fixed ratio combination product called IDegLira, and the first and most significant of the 2 Phase III trials, the one called DUAL I, has now been completed in a very good way such that the 1,660 patients that were randomized into this trial were failing on 1 or 2 oral anti-diabetics; BMI, around 31, duration of diabetes 6 to 7 years; HbA1c at baseline 8.3% across all the groups were randomized 2:1:1 to either IDegLira, Tresiba or Victoza. So we were obligating ourselves, so to speak. And as Lars already alluded to, the data were good. And just to attach a couple of comments, it is highly unusual that you have an end of trial A1c that's actually below the ADA cut-off for defining overt type 2 diabetes. So we are very pleased with the data, but do bear in mind that Tresiba and Victoza took more than half the population to the target with a very benign side effect profile in terms of hypoglycemia et cetera. So strong, strong performance from Tresiba and Victoza, but even stronger performance for the combination of the 2 products.

Now why on earth did we get such good data and let me make quickly an analogy. I think combining Tresiba and Victoza is like having a hybrid car. A hybrid car has combustion engine and an electric motor. The combustion engine is what you use in a highway. So comparing to Tresiba, when you're running on a highway, you would use your combustion engine and that will actually recharge the batteries, the electric motor. What is happening here is that Tresiba is actually hammering away, making sure that you are in control at nighttime and between the meals, allowing the electric motor, which is the pancreas, to replenish its insulin granules, its insulin stores. This allows, just like an electric motor when you use it in the cities, in the hybrid cars to be charged and ready for use. The same goes for the pancreas. Under the cover of Tresiba, you have replenishment of beta cell granules containing insulin and here comes liraglutide and releases glucose-dependent insulin at the meals, giving a high significant decrease in the post-pancreas glucose excursions at all meals. So much surprising, but very powerful finding that accounts for the statistical significant difference between IDegLira and the 2 other products. Weight loss and a very low confirmed hypoglycemia rate. As Lars has already said, it's now up to management, also pending the outcome of the June [ph] 2 trial to be able to actually with this portfolio of many, many products that are all very new, very good, very patent-protected, to find out which ones to use and which segments and there are at least 3 places you can do it for such a part and we'll get back to that once we have come closer to completion of the Phase III program.

Semaglutide is our -- what we call best-in-class once weekly candidate. It is actually only a minor change from the liraglutide molecule such that it is being rendered even mostly before stable and even stronger albumin bound such that kidney filtration and enzymatic degradation will not take place, and that means that rather than an action profile of 30 hours, you get an action profile of 10 days or so. Essentially still used in a prefilled injector, with a very rock solid pharmacokinetic property. What we are seeing is dose dependency on both weight reduction and shown here the primary endpoint A1c reduction to the extent that we, for the first time, have actually seen numerically higher, you can say, blood glucose decreases than actually on 1.8 milligram liraglutide. As you know, liraglutide or Victoza will normally be superior towards Byetta, towards BYDUREON and towards [indiscernible] at the glucose side. In this case, the high dose range of semaglutide is actually able to even numerically show stronger results. So we will entertain a huge program called SUSTAIN. It will be initiated with 2 different doses in the first half of next year, the first study being a cardiovascular risk study, and that will be the supplementary Novo Nordisk offering we hope in the once weekly segment, as it hopefully comes to a successful conclusion.

On my final slide, other topics within R&D outside of the -- well, within the diabetes space, we've taken yet another stabilized basal insulin analogue into Phase I development. We've had label upgrade for Levemir. We've had NovoMet approved in China. We've had the next-generation durable Pen, NovoPen 5, with a built-in memory function showing timing and size of the preceding dose approved for adults in Europe, launched in Denmark. And in the biopharma space we've had the, you can say unfortunate data on the catridecacog, as already mentioned by Lars, where we have to say now we need to see the big picture, but it's obviously not looking good that you have a potentially neutralizing in vitro activity in 1 catridecacog patient. Tretten, which is actually the Canadian name for NovoThirteen, where the NovoThirteen is the A-subunit version of recombinant Factor XIII, has been approved in the first country. Also we have initiated a Phase IIb trial, the first of 2 for Anti-interleukin-20 for the human molecule and antibody for rheumatoid arthritis and finally, a C5a receptor antibody has also entered the clinic. That was all from R&D and over to you, Jesper.

Jesper Brandgaard

[Audio Gap]

In terms of -- within distribution cost, quite a low ratio at the half year in short-term for [indiscernible] going around 8% [indiscernible] we expect the ratio of the credit in the second half, as we see the effect of the expansion of the U.S. sales force, which are being completed as we speak, and that will hopefully also be impacted by some additional prelaunch and launch cost in Europe and Japan for Tresiba prelaunch cost [indiscernible].

In terms of research and development cost, 10% growth. We recorded 8% in local currency. Hopefully, that will speed back up to a level between 14% to 15% for the full year, as we initiate the [indiscernible] trials, as Mads alluded, and as we continue with the obesity trials that hopefully should make this [indiscernible]. We've had a nonrecurring event here in the ballpark of EUR 4 million in the nonrecurring cost, so it is artificially low the admin costs probably would be around $4.5 million for the full year. License and other operating income has done pretty well versus half year, and is broadly reflecting recurring incomes in this slide and expecting something like 650 for the full year. Operating profit, 31% and 10% impact here. So again, [indiscernible] 5% positive currency here gets to be 10% here. Note in the quarter, we continue to gain an effect from the buyback program and note there's also been allowed [ph] a buyback program this year [indiscernible] years and we did that actually in April, whereas in prior years, it was done in August. So there's a bit more effect in the half year compared to [indiscernible]. Number increased going at 4%. I think it we'll be at the 4%, 5% for the full year.

In terms of currency tailwind, you can basically see this here. We have used a 6 or 1 to [indiscernible] or significantly above the average for last year, so we do expect a tailwind as we move early into the year and likewise [indiscernible]. Also do note that we have updated the sensitivity we have on currency that's updated in this slide, so slightly higher especially the U.S. dollar impact. We continue to be at around 12 months forward, primarily due to straightforwards. The guidance was operated 1% on the top line, 3% more currency effect on the top line. So 4% in totality, and we are now assuming around 50% local currency growth. It was better in line with the long-term target we have for operating profit of being able to grow it around 15%, and that also leads to the deferrals of our potential launch of Tresiba in the U.S., so that those costs will now come -- more headed into 2013 and then be able to deliver the long-term target growth level of 15% in local currency terms in 2012. The tailwind on currencies proposals also significantly impact the reported operating profit. On the other hand, there's a negative impact on the hedging. But when we look in 2013, it is a predominant part of what we take as impairments in attractive levels for Eurozone [indiscernible] will impact the also reported net profit. We only have something like DKK 500 million in hedging losses that is carried forward to 2013 at the going rates. [indiscernible], is soon to be stable around 23% over guidance. Also stable, we've upped the free cash flow with DKK 1 trillion, reflecting a slightly higher operating profit guidance.

So this is basically it. We continue to see that we can derive at least 10% growth from our diabetes care franchise. We have a 25% market share in insulin expansion. We have 50% share in the insulin space and 46% on modern insulins and [indiscernible] GLP-1 market. We have 2 new insulins submitted for approval. We have a GLP-1 portfolio that can further our opportunity not only in type 2, but also in type 1 and we've -- in the glucose side, we've also illustrated that we would have more than 1 GLP-1, expecting these opportunities. And then I think that the big news in this quarter, the very convincing data that we were able to prove on Phase III in terms of innovative products that really demonstrates the ability to do live result from the sets of data we've taken to insulin molecules off [indiscernible] and then off of the convenience of just 1 injection instead of 2 and getting a very high performance of patient's insulin control. Obesity is still in the making, looks positive in the regulatory environment in the U.S. since we had first quarter release of the 2 drugs approved. We will also continue to pursue the very challenging end of the obesity market with the severe obese patient where the alternative could be bariatric surgery. And then finally, we continue to work with our pipeline within hemophilia. And with those comments, I'll turn it to Lars, and then we'll take the Q&A at the table.

Lars Rebien Sørensen

Yes. Thank you very much, Jesper and the presentation is now open for questions.

Question-and-Answer Session

Unknown Analyst

Lars, let me start. And it's been a phenomenal kind of last segment for Novo Nordisk. But as we look at the next 10 years, can you give us your thoughts on kind of how you see the diabetes market developing globally on one hand? Then secondly, Novo Nordisk as a company and are starting to see some progress on areas beyond diabetes, so kind of how do you see Novo Nordisk in a 10-year perspective as well?

Lars Rebien Sørensen

At least, I can give you the perspective that we do every year. In fact, we do update our 10-year plan and submit that to our Board of Directors and we've done so again this year and I would say the net end result looks remarkably the same for year to year, in that the diabetes business is the predominant business of ours. We are -- with all the uncertainties that we can forecast, health care reforms, biosimilar competition, competition from generic players, growth at the economies or lack thereof and thereby, price pressures and all the rest of it, we still forecast that our diabetes business should be growing at around 10% per year in the next 10 years. And in our planning when we forecast, we do not include speculations. That means we do not include things which are not have proof-of-concept. Of course, we do have projects that are earlier than proof-of-concept stage and they hopefully pan out positively in the 10-year period, but we do not include that. So I think given the demographics of diabetes, given Novo Nordisk's position, given the importance of insulins and the increasing importance of the GLP-1 segment, where we have dominating positions in both areas, we believe that you will see more of the same for Novo Nordisk for the next 10 years. Of course, with all the uncertainties that we cannot predict, the regulatory environment has become more difficult, so we have to anticipate that the regulatory costs are going to go up in terms of assessing new drugs more thoroughly than we have done in the past. We may also have to add clinical evidence for utility, so as to get decent pricing with the payors and the clinical institutes that we typically see in Europe, but all of that we factor into the picture. Yes?

Brian Bourdot - Barclays Capital, Research Division

It's Brian Bourdot from Barclays. I'd like to ask you about 2 things please. First is shifting to the hemostasis franchise. I'd like to ask, it doesn't seem to be growing at the moment. [indiscernible] you described the potential of being roughly stagnant. Despite unmet client need, particularly in emerging markets, can I ask you why you're not getting great financials and why is that unmet need in those market is not driving high utilization, whether it's just simply unaffordable for those markets, please? And the second thing I'd like to ask you about is oral insulin. It is technically challenging. You've described this before, but what is giving you the confidence now to move this molecule into clinical testing and what are your aspirations, I suppose, for what really the hope -- what sort of patients needs you hope for it to address?

Lars Rebien Sørensen

I'd like Kare Schultz, Chief Operating Officer, to comment on the infusion market, the current growth rates and the expectations going forward and the seeming lack of growth in emerging markets as it relates to NovoSeven and then Mads Krogsgaard will talk a little bit about oral insulin.

Kåre Schultz

In regards to NovoSeven, we have a situation where the market is basically saturated in the industrialized world, because basically all patients that are sort of in a situation where they need NovoSeven so they have inhibitors of Factor VIII or Factor IX, they are getting therapy and we have roughly a 70% market share, up against Pfizer. In emerging markets, you have a kind of 2 categories of markets. Some markets that are so poor that nobody really gets treated with Factor VIII or IX. That means nobody develops inhibitors and there is no market. That is maybe the obviously hundreds of poorest 50 countries of the world. Then you have a big middle category of markets where we actually do see increasing demand, and where we do see increasing sales. However, that is this year for instance, being offset by the fact that NovoSeven has run out of patent in basically all these markets, and we've seen a generic product, that the biosimilar product come up in Russia, without any real or good clinical data or anything, but anyway, it's come, it's pretty similar to NovoSeven, and it has taken over the Russian market. So it's that dynamic that results in a flat sales. So we actually do have volume increase in the treatment of people with Factor VIIa in emerging markets, but we've been losing out in Russia, so that's the balance.

Lars Rebien Sørensen

Thank you very much. Mads Krogsgaard, oral insulin.

Mads Krogsgaard Thomsen

Well, Brian, one thing that has been pretty important to us is that once we realize that prandial oral insulin i.e. attempted at a meal is not a way to go. Because there will inevitably be so much food drug interaction in the absorption process that it's a no-go. We focused decisively and with great enthusiasm on oral basal insulin. Now, realizing that taking a probability from 0.05%, which it is for insulin if you give it in a standard tablet, all the way up to maybe 100x higher. You will still have the vast majority of the insulin not ever getting absorbed, and that will create some variability in the day-to-day absorption, and hence probability. Now the way to mitigate against that is to build in a longer and longer and longer half-life in the circulation half-life of the molecule. So if you can treat the normal pharmacokinetic clearance mechanisms of the organism such that they don't get rid of the down molecule as soon as it enters the circulation, but allows you to circulate for potentially more than 100 hours or so, that will buffer against the day-to-day variability. And what you are seeing in these last molecules, the ones that has just ended, for instance, is a longer and longer circulation half-life, hopefully also in humans, but so far we have been able to do what we call allometric scaling, but you have to prove it and show that in humans, both probabilities can be predicted which is for sure not always the case, but also and just as important without the half-life. So I think we're making progress both on the molecule and to some extent also on the carrier systems and the coating and so on. So you'll hear much more, I guess next year as some of these trials come to an end.

Lars Rebien Sørensen

It is a very, very difficult area, and we've had a spectacular incompatibility between the animal models and the human real testing. And so this makes -- has made it very, very difficult for us, and we actually thought that meal-related absorption would be the most readily feasible. That proved not to be the case, and so we had to go the other route. So thank you very much. Other questions? Yes.

Unknown Analyst

Why do you think the BYDUREON has had such a relatively limited impact on your market share? I mean, it seems to have been a reasonably, sort of a nonevent?

Lars Rebien Sørensen

I told you. Well, we actually missed a bit, that -- and our assessment was, in a way, the way it's panned out, that it is not going to fail. The molecule itself works, but the administration is probably so onerous that it's been difficult to attract new customers. And therefore, in our assessment, it's probably primarily doctors that have prescribed the Byetta that is upgrading Byetta patients to BYDUREON. This is pure speculation on me, I can't really say that that's a fact. But what we can see when we look at the Novo brands, scripts, they have sort of split 60-40, which is also something that we predicted if we had to say something prior to launch. And then so, that's where it's coming out. So they're not expanding their share. They're expanding, helping us expand the market, which is good for everybody.

Unknown Analyst

Have you seen any changes in the discount that you're offering on Victoza, post-launch?

Lars Rebien Sørensen

[indiscernible], discounts. When we launched Victoza, we only launched with a very, very low spend at discount. And we -- not related to BYDUREON, I would say, yes as a launch, we started negotiations with the Medicare Part D plans. And in connection with that, you get the slightly higher discounts. So in that connection, that process, with the law on managed care, we did increase the discounts to Medicare Part D, but we're not in general, change our discounting policy on Victoza and certainly not in connection with the launch of BYDUREON.

Mads Krogsgaard Thomsen

And I think the that fortunes that we have had here in Europe for BYDUREON has been much more modest and probably related to their margin setup with Lilly who has a Germanite [ph] duration to it, so that's very modest when we see it as little bit of impact it in Germany.

Unknown Analyst

Just following up on that, Bristol and Astra's been coming in behind BYDUREON. Do you see any change to their competitive make shift from that? Or do you think that you -- they will need the prefilled pen to change that in a couple of months? And would you increase your sales force that way?

Lars Rebien Sørensen

Well, first about the product itself, we believe that it's going to take some change to the product in the formulation or device or something else to have a different penetration rate than what we see currently. So I think, I mean no matter who was put on it, wouldn't be able to change the trajection at this point in time. But as we understand they're working on a different of item and different formulation, so that could change things around and it's going to be some time into the future. Our own situation, in terms of marketing, with the deferral of the launch in the U.S. of Tresiba. Obviously, we have a good sales force that we put even more pressure on Victoza as is right now. So that's playing in our favor. So we think we are ready, also for Astra and BMS, but they are of course formidable players in the GP territory and BMS has a history in diabetes some years ago with Glucofast, so they're to be reckoned with and apparently making a strategic intent to grow into the diabetes area. So we should look forward to meet them.

Mads Krogsgaard Thomsen

I think one issue -- specialists, they can handle complicated devices, they can also handle like if there are some -- not health disturbing but still frustrating skin nodules and so on and so forth. It's distinctly more difficult for a GP who only sees the patients for a very few minutes, both to educate on the device and also tell the story about what could you expect to see with this product. So it's not necessarily so that even the biggest GP sales force will radically change the picture if the product lends itself better to the specialist.

Lars Rebien Sørensen

That's also of course, why the GP before inhibitors have been so successful. Yes?

Unknown Analyst

Could you maybe just remind us why IDegLira is -- that's been commercialized? What will that do for IP wise and so just here to [ph] and on Victoza, [indiscernible], just your thoughts, first about beaconed [indiscernible] in terms of your confidence approved [indiscernible] and seeing how that's played out with the FDA? And then specifically on Victoza, the [indiscernible], how much danger in terminal patients, and how much duration use do we have about [indiscernible]?

Kåre Schultz

Head-wise, obviously, IDegLira it's the first time that it's been possible to incorporate an insulin analogue or any insulin into a GLP-1 preparation and the way that we've been able to get degludec and liraglutide, and the excipients and constituents of that formulation that has enabled it to take place, has been patented, I think robustly until the end of the next decade, not this one but the next. So yes, it is, of course, this is not why we're doing it, but it is also a nice way to extend, of course, the effective pen life of lira. Obesity, well, first of all, I think the 2 alls [ph] that have come through the FDA process, it must be good news for patients, good news for society, because there hasn't for, much more than a decade, been any agent in there actually agent's been pulled out of there and there's a desperate need for medications as the U.S. political system knows, and that has probably also helped a little bit, giving some tailwind to those 2 products. We like them being out there because as Jesper, I think, mentioned in his statement, we foresee that liraglutide 3 mix is actually more for those who are really seriously obese i.e., above 35 BMI and with a, in particular, a prediabetic comorbidity, such that liraglutide can do something that the others can't, Point 1. And Point 2, something that is of societal value in health economic terms and it is to postpone or avoid a prediabetic going to diabetes as opposed to normal glycemia, is clearly valuable to society. So our positioning as such will not be right on top of the other guys, meaning that as -- and look at hypertension, the lipid market when you have a big market, there's really umpteenth opportunities to position individual products, and we'll of course, do that in a way that's meaningful. In terms of CV data, well, it is true that most of the data that we have on CV, obviously at 1.8 milligram, and this is also things that we've been discussing now for 2 times with the agency. Obviously, the exposure difference per kilogram of body weight is not like 60% to 1.8. It is rather like in the 13 -- 30 year range, because these are BMIs of late 30s as opposed to BMI around 30. And of course, we'll have in-market data from all the [indiscernible] ingenics database systems that we are following, according to the PMR [ph] we have with the FDA. We will potentially even have interim data from the leader, albeit at 1.8 milligram, a lot of women in there, for whom 1.8 milligrams actually corresponds to the premixed perfect meal, obese person and so on. So we have a hierarchy of suggestions that we will follow with the agency until we fulfill the need. Hopefully, not ending up with a preapproval CV trial. That's a theoretical outcome, but that's basically, by no means where we are coming for and I hope also not the agency.

Lars Rebien Sørensen

Next question, and please state your name and affiliation from for those that are listening on the call. Sorry I should've gotten should have given that.

Unknown Analyst

It's Daniel with First State [ph] . Just with the upswing [ph] on FDA meeting. Are you aware of the questions, or the kind of questions that the FDA wants the committee to answer? And how comfortable are you that you have all the bases covered in terms of being able to answer their questions? And then secondly, just in terms of the neutralizing antibody, do you think it's specific to just your molecule? I know it's only been in one patient [indiscernible] a bit you're more -- or do you think it's maybe a question of the fact that the molecule itself is not a whole version but I think [indiscernible]?

Lars Rebien Sørensen

Mads, I think -- all the questions relate to you, but it should be very, very clear. No, we don't know the questions that we have to answer. So that's very clear. So I can't really speculate, because whether they can come up with questions that we can't answer, we tend to think that the drug is provable, we've analyzed it from A to Z, back and forth in all different ways and directions. And we believe the drug is very efficacious, has a very good profile and a benign side effect profile. But maybe Mads can add color to that as well.

Mads Krogsgaard Thomsen

Well, actually not so much, Lars, I think you said it, and we'll have to wait until the reasons book comes out from the agency. Obviously, we will seek a closed dialogue, the so that we -- the sooner we can learn more, the better. But the lines of the text, so to speak, or discussion so to speak, that we are envisioning could happen at the AdCOM, are all being pursued by our folks, such that we, together with external experts, are looking into each and every avenue of the benefit side, and the risk side to profile in an honest, but also proactive manner as positively as possible, this wonderful molecule. So I think we are preparing ourselves in the right way. And we hope to get back to you around Q3, which is close to the AdCOM, of course, with some more flavor as to the topics.

Lars Rebien Sørensen

And then the[indiscernible]...

Mads Krogsgaard Thomsen

Yes, that one. One small correction the Turoctocog, the B domain concaded [ph] that's the turoctocog for the [indiscernible] somehow. That's the Factor VIII. This one is essentially a 99% homologous molecule. It's only got 3 immunized substitutions around the catalytic cleft, which is not even on the surface of the molecule, but inside the molecule. So it's slightly surprising, to put it mildly, that you actually have immunity that's going on here. I think, and that's my personal view, that the clotting factors are so big and have so complex primary, secondary, tertiary and even sometimes even quarternary structures, that they seem to be a little bit prone to triggering the immune system. We have to be aware that all of us, who are developing these molecules, when that is said in 80P and 90P and turoctocog, they have no amino acid substitutions and pibulation [ph] as a protraction [indiscernible] is not known to be immunogenic. So I think that's no -- if you are worried about spillovers into our own portfolio that -- there should basically not be any based on this, other than the notion that the immune system doesn't always like coagulation factors.

Lars Rebien Sørensen

Thank you. Other questions? Yes.

Unknown Analyst

Patrick Arberery [ph] from AKA [ph] Capital. And can you just talk about what's causing your market share loss in Europe please? In insulin?

Lars Rebien Sørensen

Kare? It's your fault.

Kåre Schultz

Yes. The market share loss is regularly linked to the perception in the marketplace of lenses versus Levemir. So it goes back to the -- all the way to the clinical development of Levemir, where we have to adjust the strength of the product because we basically didn't get the dose right in the first get go. And that creates a wrongful perception in the marketplace that was used by our competition that Levemir was not a true once daily, which it clearly is, and the reason why we still see good growth on Levemir is actually then of course, we've been following up with a lot clinical data, and we keep pushing the message and that's why Levemir grew 22% last quarter. And so -- but the real reason is that in the basal segment, we are still losing share in Europe and in Japan.

Lars Rebien Sørensen

And then we had last year, this discontinuation here in the U.K. where we pulled out generic human insulin product in the anticipation that we would catch a significant portion of the new patients on our modern insulins, but Lilly lowered the price on their human generic and captured the market instead of us. So that was a, another mess-up on our own part. Yes?

Unknown Analyst

I'm Peter Bekrun [ph] [indiscernible] that you expect to get 80% of share of new prescriptions if [indiscernible] comes through as expected. I'm wondering whether you feel that you left it into the [indiscernible] not taking to the [indiscernible] on that target? And secondly, I'd probably never ask this, but is [indiscernible] doesn't come to the market with the high expectations as you hope and there's [indiscernible]?

Lars Rebien Sørensen

I just -- I think I have been on the record for stating that I think we'd get 7 out of 10 patients. So that will be 70%. I still believe that to be the case and the possibility for us going forward. And I'd hate to think about hypothetical scenarios. Our current dialogue seems to indicate that it is possible for us to get the regulatory authorities to understand the significance of the hypo reduction. It is possible for us to communicate the long profile and it is possible for us to communicate the flexible dosing. So I'd hate to speculate on a Plan B until we have to. We'll do that in the meantime, but privately.

Mads Krogsgaard Thomsen

It looks more like it's going to be a slightly later launch than what we hoped for that it's not going to come?

Lars Rebien Sørensen

Yes?

Unknown Analyst

If we cannot look out 4, 5 years, you're going to have what is essentially a 2-player market in spatial insulin today could end up being a 3- 4-player market with some sort of [indiscernible] competition. Can you give us your perspective on how do you see market share evolving, kind of monopoly in the U.S. and kind of industrialized nation who all of a sudden the rest of the world and freeze kind of how that equation might get skewed?

Lars Rebien Sørensen

Yes, I think there's going to be 3 players. It's going to be the current players. Lilly is out of basal insulins now. They're coming back in with the biosimilar lenses and some innovative play as well, which is a little bit further off. And so I think it's going to be the 3 players that we know of. And we are planning on coming to market with innovations, and with innovation, you can still capture the dominating market share. So it is, it's our anticipation that we should grow our share in the basal segment, gradually over time, with the introduction of Tresiba. We should be able to hang on to, and perhaps even further expand our mixed share. We have a very high share in the mixed market, the mixed segment is declining though, because of the increased tendency to stock on basals. And with regards to the short-acting segments, the segment which is, first going to approach patent expiration human up's already off and so we are hoping there that we will be able to come up with some innovation before '17, when our patents are, and formulating patents are running out. And so I hope that we'd be in a situation where we can stop the decline in the markets where we've been declining. Japan is a question. Europe's -- is a question mark. How far we can take the market share it's a little bit uncertain. It's 3-dimensionals. GS obviously is, we don't know the true comparative situation. But it seems like it's going to be the same 3 innovative players and we don't believe there's going to be any of the smaller biosimilar players that are going to have any importance in the industrialized world. Kåre, I don't know whether you want to...?

Kåre Schultz

Maybe just a more -- a comment on the biosimilar situation. You have to remember, that we have human insulin which is total off patent everywhere where we have top biosimilar competition, and this has not lead to any significant increase in the market share of the biosimilars or the generics. And insulin is not really a product that lends itself very positively to biosimilar or generic competition for a long list of reasons I won't repeat now, but that we've been talking about.

Lars Rebien Sørensen

And I think, seen from our perspective, having a generic human insulin is good, because we would like to be able to offer this to societies where cost is very, very important. I mean we hope that we don't get into that situation in Europe, where cost is so important that we have to go back to old fashioned product, but I mean, so we can offer this to the big public markets in the emerging countries and we'll, at the same time, in the same markets, have the modern insulin range in the private market. And then people will be trading off as they go along, and if they become affluent enough to be able to do that. And so it plays out well for us. And as you are looking at it from a competitive perspective, and of course, it also has the effect that none of the biosimilar manufacturers, generic manufacturers becomes big, because we completely dominate the market.

Unknown Analyst

What do you think of somebody like Markel or somebody like Astra BMS do with it if [indiscernible] because they have a half step blood portfolio of diabetes they obviously want to get broader at some point of time? Kind of how do they solve [indiscernible]?

Lars Rebien Sørensen

I don't know. It's -- in relationship to insulins, I think it's going to be very difficult. They can try other avenues, they are obviously trying avenues with DPP-4 inhibitors and SGLT2s and with BYDUREON, in the case of BMS and Astra. We happen to think they're not going to be very successful, I mean, but obviously, we are biased. In terms of insulins whether it's Merkel, whether it's Pfizer, whether -- whoever it is, there's nobody that can compete with us in generic insulins. You can see that every year when the auction is on for the Brazilian tender, who can sit around the table longest. That will give you a good benchmark for where the competition is.

Mads Krogsgaard Thomsen

By a concert we say long -- very long. [ph]

Brian Bourdot - Barclays Capital, Research Division

Brian Bourdot from Barclays again. Can I -- can I ask you a follow-on question to that. How important do you think it is to offer as broad a range of solutions in diabetes care as possible? I mean, clearly one of your major competitors, Lilly, has taken a different approach, doing a deal with [indiscernible], to bring some orals [ph] in, as well, you focused on proteins. Are you of the view that focusing on proteins is going to give you the biggest return on capital, and you don't necessarily need to be there in the non-protein space as well? Is that --

Lars Rebien Sørensen

That's clear to us. We had been in the non-protein business for quite a number of years. Together with [indiscernible] in fact [indiscernible] was codeveloped by our 2 companies and marketed as such. But what we have realized is number one, it's very difficult with synthetic chemistry to come up with new medications for type 2 diabetes without it being toxic. Number two, it's very difficult to differentiate, so you can -- you will end up having 8 DPP-4 inhibitors that are slightly different, doing about the same thing on HbA1c but have a different toxicity profile. And then it becomes a mass marketing game of who can convince most doctors which product is the best. In proteins, it's a different thing. So that's why we made the decision when we had our own headwind in insulin sensitizers back when we had collaboration with Dr. Reddy's to say we get out of small molecules. We are only in proteins. That's what we understand the best. And as it -- has turned out, protein therapy for diabetes is expanding with the GLP-1 segment, and with the understanding that insulins are safe. There was a cloud hanging over insulin some years ago about cardiovascular issues associated with insulins. This has now been demonstrated that, that's not the case. And it's being increasingly understood in the medical communities that you should treat diabetes as early and as aggressively as possible, and that lends itself to the downstream active ingredients that we are selling, namely the GLP-1s and the insulins. So no, we're not going to be in small modules. Small modules is for the big boys with the big sales forces and the big marketing budgets.

Mads Krogsgaard Thomsen

But we would like to be orals, as long as that's GLP-1 or insulin in that --

Lars Rebien Sørensen

No, there's proteins in them. Yes. Okay, so we'll take one last question.

Unknown Analyst

Given the trajectory and level that you're seeing in the more developed market, what [indiscernible] in the U.K.? Is 10% now, just too conservative an estimate for what GLP-1 can take as an overall share of the market?

Lars Rebien Sørensen

I think it was a pretty good bet when we started, without having any indication of where we could take it. But we can see, I mean, in my own country, Denmark, it's far beyond, I think it's more close to 20%. And so it depends on the willingness to prescribe and willingness to pay for modern medication and the current financial and economic situation is pushing that ability and willingness back somewhat. So I still think that if we could -- we'd be content that if we could develop it to 10% of the diabetes markets there, of course, you got to remember there are many markets where it's not penetrated to any great extent, U.S. is 5%, 6%.

Mads Krogsgaard Thomsen

I think the missing element we also have in that puzzle is what is going to be the long-term average stay time for patients. It looks to us, currently in a market like the U.S. that we have a stay time of at least 2 years on average for the patients. Of course, we've only been just above 2 years and what's the average data and how well that's going to develop and what time it will also have a big implication for that side of the market.

Unknown Analyst

Just a follow-up. In the U.S., do you think there needs to be pricing cut in GLP to be, to hit that higher level of market share? Do you now get enforcement?

Mads Krogsgaard Thomsen

No I don't think that's the key issue. It's more an estimate of what actual volume share of patients will be in an insurance scheme and in a situation where they will be able to obtain coverage. And since the coverage is already very high on the U.S. population, more than 70%, without any problems. And I think it's more a gradual process. And if you look at this current trend, then of course obviously it will go beyond 10% at some point in time. But that remains to be seen, of course. The important thing is to understand the difference between the patient volume share and the sales value share that that's a big gap there.

Lars Rebien Sørensen

And as in you know well, I mean if you take the total pharmaceutical market, it's projected to be in decline of 1% to 2%, that means that societies are paying less for drugs, even though they are consuming more. So when we had the political discussion with the Treasury and the politicians, it's not correct when they say that drugs are getting too more expensive and we are paying too much for the drug. It is the hospital drugs, very specialized drugs and new introduced drugs but they are so huge patent run-off, that on the governmental budgets, the bill is not expanding. We just should remember that. So there's room for a little bit more diabetes drugs and a little bit more innovative diabetes drugs because society will save a lot of money on that, because of less amputations and heart disease and blindness. Thank you very much for joining us this afternoon. We would be coming back again shortly.

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Source: Novo Nordisk A/S Management Discusses Q2 2012 Results - Earnings Call Transcript
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