Novo Nordisk A/S
Q2 2019 Earnings Call Transcript

Published: 9 Aug 2019

[Operator:]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Q2 2019 Novo Nordisk A/S Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. [Operator Instructions] I must advice you that this conference is being recorded today, Friday 9 of August 2019.I will now like to hand the conference over to your speaker today, Lars Fruergaard Jorgensen, the CEO. Please go ahead sir.

[Lars Fruergaard Jorgensen:]

Thank you very much. Welcome to this Novo Nordisk's conference call regarding our performance in the first six months of 2019 and our performance – sorry, our outlook for the year. I'm Lars Fruergaard Jorgensen, the CEO of Novo Nordisk. With me I have our Chief Financial Officer, Karsten Munk Knudsen; and our Chief Science Officer, Mads Krogsgaard Thomsen.Today's earnings release and the slides for this call are available on our website, novonordisk.com. The call is scheduled to last for one hour. The presentation is structured as outlined on slide two. Please note, all sales and operating profit growth statement will be at constant exchange rates, unless, otherwise specified. The Q&A session will begin in about 20 minutes. Please note that this conference call is being webcasted live and a recording will be made available on Novo Nordisk’s website.Please turn to slide three. As always, I need to advise you that, this call will contain forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For further information on the risk factors, please see the earnings release and the slides prepared for this presentation.Please turn to next slide. In the first half of 2019, sales increased by 9% in Danish kroner and by 5% at constant exchange rates, driven by international operations sales growing 12% and partly offset by North America operations declining by 2%. All therapy areas contributed to growth. The combined diabetes and obesity sales grew by 6%, while biopharm sales increased by 3%.So then on the several treatments are worth mentioning. We are investigating the clinical benefits of semaglutide and we have initiated three major late-stage outcomes trials with injectable semaglutide and alongside a cardiovascular outcomes trial for all semaglutide.Since May, we have had a handful of product approvals and filings supporting our continued efforts to ensure that our products are accessible to patients. Just to mention a few. In Japan, we have in July filed our semaglutide for treatment of Type II diabetes and following the approval of high dose Victoza earlier this year, the Japanese regulators have approved Xultophy in June. We have also received the approval of Ryzodeg in China. Lastly, the USFDA has approved a label update with pediatric data for Victoza and the European CHMP has adopted a positive opinion for adding the pediatric indication in the EU as well. Mads will elaborate further on the key R&D milestones later in this conference call.Turning to financials. Operating profit increased by 12% in Danish kroner and by 6% at constant exchange rates. The diluted earnings per share decreased by 3% to DKK8.39. For the 2019 outlook, both sales and operating profit growth are now expected in the range of 4% to 6% at constant exchange rates, and an expected positive currency impact of 3 percentage points and 5 percentage points, respectively. In line with previous years, the Board of Directors has decided to pay out interim dividend for 2019 of DKK3 per share, which will be paid out in August this year.Please turn to slide five. Today we announced a change in the Executive Management. Executive Vice President and Head of Business Services & Compliance, Lars Green has decided to resign to take up an Executive position outside Novo Nordisk. Lars joined Novo Nordisk in 1992 and during his 27 years with the company held several positions across the global finance organization prior to his promotion to Executive Vice President in July 2017.Following Lars’ recognition, Monique Carter, who joined Novo Nordisk in November 2018 has been promoted to Executive Vice President, Head of People & Organization and Member of Novo Nordisk Executive Management. I’d like to take this opportunity to thank Lars for his strong contribution to Novo Nordisk over many years with the company and wish him all the best of luck with his new endeavor.Please turn to next slide. International operations continues to deliver solid sales performance with 12% sales growth, supported by growth across all regions and therapy areas. Adjusting for the positive impact from timing of shipments and tenders, the underlying sales growth is still in the range of 9% to 10%.The key factor supporting the growth and growth potential in international operations are; our broad innovative product portfolio with several new product launches; from commercial execution with market-fit approach and the underlying demographic development. North America operations declined 2% driven by the 3% sales decline in the US, negatively impacted by inventory reductions in first quarter of 2019. Growth drivers in North America continues to be just 1% and obesity growing 14% and 28%, respectively.Please turn to slide seven. When applying a therapy split on the 5 percentage growth, we note that the trends seen in the first quarter has continued throughout the first half of this year. Insulin sales declined by 1% due to the sales decline of 15% in North America driven by the US.The development reflects lower realized prices due to the higher rebate rates across the portfolio, and increased coverage gap exposure as well as prior period rebate adjustments and inventory reductions in the first quarter of this year. The decline was almost fully offset by insulin sales growing by 9% in international operations.GLP-1 sales increased 14% in North America supported by the strong uptake of Ozempic as well as the GLP-1 sales growth in international operations of 28%, supported by the promotional activities of Victoza and the launch of Ozempic.Our obesity [indiscernible] sales grew 56% with both operating units contributing to growth. This is supported by the promotional activities and continued global roll-out of Saxenda. Biopharm sales increased 3% driven by international operations growing 5% and stable sales in North America operations.Please turn to slide eight. Over the past 12 months, Novo Nordisk has increased our global diabetes market leadership by 0.8 percentage points to 28.3%. This development reflects both the general expansion of the GLP-1 segment, which now accounts for 16.2% of the total diabetes market, as well as our improved global insulin market share. The competitive pressure in the US insulin segment remains changing, which is also reflected in the sales performance.However, from a global perspective, we have a broad portfolio of innovative diabetes products and several new product launches that combined with our marketed approach is driving our continued relevance and complexities in the global diabetes market.Please turn to the next slide. Ozempic has now been launched in 18 countries in Europe and the launches are off to a solid start. The initial feedback from the launched markets of Europe has been very positive and has led to a stabilization of our markets here. Since the CV labor update for Victoza and now with the launch of Ozempic, Novo Nordisk share of growth in European launch markets has accelerated to more than 50%.Please turn to slide 10. In the US, the solid uptake of Ozempic continues and the new-to-brand prescription market share for Ozempic has now surpassed 35%, bringing Novo Nordisk combined GLP-1 new-to-brand prescription market share above 53%, and steadily increasing the gap to competing GLP-1 products.In the US, the GLP-1 market grows 30% annually, primarily driven by the ones week the GLP-1 products since the launch of Ozempic 17 months ago, the declining normal is total GLP-1 market share has stabilized around 45% for which Ozempic now accounts for more than one-third.The GLP-1 sales in the US for the first half of 2019 grew 13% primarily driven by the continued uptake of Ozempic and partly offset by declining Victoza sales. Victoza sales were negatively impacted by changes in payer and general mix and the increased coverage gap exposure impacting average realized prices as well as an inventory production in the first quarter 2019.Please turn to slide 11. Saxenda sales increased 56% in the first half of 2019 and the growth trend has continued since the launch of Saxenda. Novo Nordisk maintains market leadership with a global value market share of 50%. We are committed to changing obesity, which is reflected in the continued global rollout of Saxenda, whereas Saxenda now has been launched in 43 countries. We are investing in market development activities as well as progressing and adding to our obesity pipeline.Please turn to slide 12. Biopharm sales increased by 3% driven by sales growth across all regions in international operations, except Region Europe, as well as stable sales growth in North America. Despite an increasingly competitive environment within the Hemophilia segment, Hemophilia sales increased 5% supported by the continued roll-out of NovoEight and Refixia which have now been launched in 49 and 14 countries, respectively. Furthermore, the solid position of NovoSeven as a haemostatic agent in critical treatment is widely recognized.With this over to Mads for an update on R&D.

[Mads Krogsgaard Thomsen:]

Thank you, Lars. Please turn to slide 13. As Lars briefly alluded to, we’ve initiated three large trials for once weekly injectables semaglutide, FOCUS, FLOW and SUSTAIN FORTE, plus the SOUL CV outcome trails for oral semaglutide. In more detail in May, we initiated the five-year FOCUS outcome trial for semaglutide 1 milligram with an unexpected 1,500 people enrolled in 17 countries.The objective of the trial is to assist the long-term effects of semaglutide on diabetic retinopathy in people with Type II diabetes. And based on the long-term blood glucose benefit of semaglutide, we aim to show an improvement in eyesight after five years of treatment when compared to standard of care.We’ve also initiated the [indiscernible] FLOW kidney trial that assesses in a hard outcome setting that beneficial effect of semaglutide on the progression of renal impairment in Type II diabetes patients with nephropathy. The trial is expected to enroll more than 3,000 people in 28 countries.In June, we initiated the SUSTAIN FORTE trial for high-dose semaglutide comparing the metabolic fix and safety of 1 milligram versus two milligram once weekly semaglutide. The trial is expected to enroll 1,000 people with Type II diabetes in 10 countries. The 2 milligram dose will enable easy long-term intensification of therapy over time, while also facilitating individualized semaglutide dose selection in people with different needs.Additionally, we've initiated the oral SOUL CV outcome trial, aiming to confirm the CV risk reduction and expand the scientific evidence base for the diabetic comorbidity benefits of oral semaglutide. The trial expects to enroll around 9,600 people in 34 countries. Overall, these four trials will investigate a number of metabolic micro and macro vascular outcomes in a total of around 15,000 people with Type II diabetes.Please turn to slide 14. Several clinical and regulatory milestones have been achieved in the last quarter. Among these I will highlight that we filed oral semaglutide in July with a Japanese authority PMDA, based on the results from the PIONEER program that included two Japanese trials that showed significant oral semaglutide benefits versus the two leading injectable GLP-1 in Japan.Also, the USFDA has granted six months of pediatric exclusivity driven patent extension for Victoza, which has been added to the patents listed in the Orange Book effective as of May 1st, this year. Related to this, FDA has now approved the use of Victoza as an adjunct to diet and exercise for improvement of glycemic control in Type II diabetic children and adolescents, age 10 or above.Likewise, CHMP has recommended Victoza for the same population in the EU. Following endorsement by the European Commission, Novo Nordisk will apply for six months of pediatric patent extension to the Victoza HPC.Within Biopharm, the European Commission has approved extended half-life N8-GP with a brand name, Esperoct, for the treatment of patients aged 12 years and above with hemophilia A, both prophylaxis and on-demand treatment as well as for coverage during surgical procedures.In terms of clinical updates, Novo Nordisk in May successfully completed the Phase II trial with the combination of the immune-modulator, anti-IL 21 and liraglutide in people with newly diagnosed Type I diabetes.The primary objective was to evaluate beta cell function after 54 weeks of treatment, followed by 26 weeks observation period without treatment. The trial demonstrated statistically significant improved beta cell function as measured by C-peptide levels in the combination treatment arm compared to placebo.Furthermore, there was an improvement in glycemic parameters and a reduction in the use of insulin at the end of the 54 weeks period. There were no safety and tolerability constraint of such during the trial, and we're now evaluating next steps together with the regulatory authorities.In obesity, a single and multiple ascending dose Phase I trial has been initiated with LA-GDF15, long-acting version of Human Growth Differentiation Factor 15, formerly known as MIC-1. GDF15 is a stress-induced cytokine with centrally mediated appetite regulating properties that lead to weight loss in animal models.In Biopharm, we've initiated the global Phase III trial, REAL 4, with somapacitan in growth hormone deficiency in children. The trial were enrolled approximately 200 children and major growth velocity for one year, followed by a three-year extension period.Lastly, within other serious chronic diseases, we've initiated a Phase II proof-of-concept study, combining subcutaneous semaglutide with Gilead’s oral cilofexor and firsocostat compounds for the treatment of patients will non-alcoholic steatohepatitis.Please turn to slide 15. In the third quarter, we expect to receive FDA action on oral semaglutide for the treatment of Type II diabetes. In Biopharm, we intend to submit somapacitan for the adult growth hormone deficiency indication with the US and European regulators based on the REAL 1 and 2 Phase III trials.Finally, towards the end of the year, we expect feedback from the Japanese regulators for Esperoct as well as to submit Esperoct for the Chinese regulators. And finally, to initiate the Phase III program for the cross segment Haemophilia compound, Concizumab.With this over to Karsten for an update on the financials.

[Karsten Munk Knudsen:]

Thank you, Mads. On slide 16, we present the financial results of the first half of 2019. As previously mentioned, sales increased by 9% in Danish kroner and by 5% at constant exchange rates, to DKK59.3 billion.The gross margin of 83.9%, declined 0.4 percentage points compared to 2018, reflecting a negative impact from lower prices in the USA and growth of lower margin products, partly countered by a 0.6 percentage point positive currency impact.Sales and distribution costs increased by 7% in Danish kroner and by 4% at constant exchange rates, reflecting resource allocation to growth markets and promotional activities for Victoza and Saxenda, as well as launch activities for Ozempic in the international operations and promotional activities for Ozempic and Saxenda in the USA.R&D costs declined by 6% in Danish kroner and by 7% at constant exchange rates, impacted by the reversal of write-downs on clinical prelaunch inventory for oral semaglutide reported in connection with the financial results for the first quarter of 2019.Adjusted for the reversal of write-downs, R&D costs were broadly unchanged, reflecting the completion of the PIONEER program for oral semaglutide and the head-to-head study between Tresiba and insulin glargine U300, offset by the initiation of the obesity trials STEP and SELECT.Administration costs increased 3% in Danish kroner and 2% at constant exchange rates. Operating profit increased by 12% in Danish kroner and by 6% at constant exchange rates. Net financial items showed a loss of DKK2.3 billion compared with a gain of DKK1.5 billion in 2018, driven by foreign exchange hedging losses primarily due to the US dollar, having on average traded higher against the Danish kroner in the first half of 2019 compared to the first half of 2018. Diluted earnings per share decreased by 3% to DKK8.39.Please turn to slide 17 for the financial outlook. The solid financial performance in the first six months has led us to adjust our full year outlook. For 2019, we now expect sales growth to be between 4% and 6% measured at constant exchange rates. The guidance reflects the expectation for a robust performance for the GLP-1 and obesity franchises, as well as a new generation insulin portfolio.Also reflected in the guidance is the intensifying competition within diabetes and biopharm as well as continued pricing pressure within the diabetes segment, especially in the USA. The guidance includes the funding of the Medicare Part D coverage gap, with an expected negative impact of approximately DKK2 billion.Reported sales growth is still expected to be around 3 percentage points higher than at constant exchange rates. Operating profit growth is now expected to be between 4% and 6%, reflecting the sales growth outlook and continued focus on cost control.Operating profit growth is negatively impacted by the funding of the coverage gap, while the costs for the priority review voucher expense in the fourth quarter of 2018 impacted positively. Reported operating profit growth is still expected to be 5 percentage point higher than at constant exchange rates.Net financial items is now expected to be a loss of approximately DKK3.5 billion, reflecting losses associated with foreign exchange, hedging contracts mainly related to the US dollar. The effective tax rate is still expected to be between 20% and 22%, a potential impact on the effective tax rate from Swiss tax reform is not included until the legislative process in Canton of Zurich has been finalized. Capital expenditure is still expected to be around DKK9 billion. We now expect the free cash flow to be DKK30 billion to DKK34 billion.With this over to you, Lars.

[Lars Fruergaard Jorgensen:]

Thank you, Karsten. Please turn to slide 18. We are pleased with the sales growth in the first half of 2019, which is driven by all regions in international operations. The launch of Ozempic is expanding the GLP-1 market and we’re encouraged by the market reception in both North America and Europe. With initiation of four major late-stage clinical trials, we continue to investigate the clinical benefits of semaglutide across multiple indications.The solid financial performance in the first half of 2019 has enabled us to raise our outlook for the full year. We are now ready for the Q&A, where I kindly ask you to limit yourself to two questions. Operator, we’re now ready to take the first question.

[Operator:]

Thank you. Ladies and gentleman, we’ll now begin the question-and-answer session. [Operator Instructions] And the first question is coming from the line of Richard Vosser from JPMorgan. Please go ahead.

[Richard Vosser:]

Hi, thanks for taking my questions. Two questions, please. First of all, could you update us on the progress of your formulary discussions for 2020? And the pricing environment, I suppose for both insulin and GLP-1 in the US in 2020, that will be very useful. And then secondly, as we go into 2020, perhaps you could help us with the impact from changes to the coverage gap for that year or coming forward in 2020, I believe there are changes that could impact both Novo and patients. What should we expect there? Thanks very much.

[Lars Fruergaard Jorgensen:]

Thank you, Richard. So I cannot really tell you much about the formulary discussions for 2020, those are ongoing and we cannot share the details of that. We do not know yet truly how that will play out. And guidance for 2020 will be included in our full year accounts.You're right that with regards the coverage gap for 2020, when the Affordable Care Act was passed, a part that was a temporary limiting of the threshold for when patients would enter this catastrophic threshold, and that was for 2014 until 2019. So, unless this is changed, when we come into 2020, patients will be in a situation where the catastrophic coverage kicks in at an amount that is 1,500 higher than what they see this year. So this means that patients will actually have less coverage.So in a world where there's a lot of talk about improved patient affordability where there is a situation where those who are on Medicare here will actually be hit by an extra bill. The entire cost is of course that as we pick up 70% of the drug costs, while they are in [indiscernible] this will also have an impact on us. And we anticipate that this will be in the magnitude of 1% of global sales. Thank you, Richard. Let's move on to next questions, please.

[Operator:]

The next question is coming from the line of Martin Parkhoi from Danske Bank. Please go ahead.

[Martin Parkhoi:]

Yes, Martin Parkhoi from Danske Bank. Two questions. First, on the biopharmaceutical franchise, which actually do quite well here in the second quarter, and I would ask specifically on those NovoSeven, I, of course, completely understand that you stick to your previous communication of 50% of NovoSeven being a risk. But one thing is being at risk and other thing is actually becoming a reality. So has the risk decreased and maybe you can speak to why is NovoSeven actually holding up so quite well right now?And then the second question is just regarding to your guidance, you are lifting the range for sales and are only narrowing the range for EBIT which of course indicates that you will use more money to invest, where will you – where should we expect these investments actually to be made?

[Lars Fruergaard Jorgensen:]

Yeah, thank you so much and maybe Mads, you can talk a bit to what we hear from the clinical setting in terms of how NovoSeven is being used. And then Karsten can talk to a bit to our operating profit guidance for the second half. But first for you, Mads.

[Mads Krogsgaard Thomsen:]

Yes, [inaudible] but I’ll just start by recapping what led us to this up to 50% loss of NovoSeven sales risk that we predicted actually years back. But that was the fact that we added together the aggregated indications where a bypassing agent like leap on an antibody like leap on would be able to supersede NovoSeven and that means, among all inhibitor patients for prophylactic treatment. But when that is that at the on-demand treatment would still be covered by a classic agent like NovoSeven or Five [ph].What we've learned since then is that, five cannot be used, it's contraindicated. And NovoSeven is used on every breakthrough lead in liver-treated patients. And that basically means that probably we are having more NovoSeven sales per liver patient that we would have predicted in those days, where we are not aware of the black box over the contraindication against the five and you can see that on five procedure is going down substantially.Also Haemophilia acquired Haemophilia is an area that we were only and maturely taking off at that point in time. I think we have now gotten diagnosis rates whether it's pregnant women or cancer patients to acquire Haemophilia and that knee treatment with NovoSeven that is occurring to a high extent than in did when we make these predictions, so that is helping us also.And then of course, there's the usual surgical cover that NovoSeven is typically used for. So the totality of that does not necessarily make us change the outlook at this point in time, but it is true that the trend is better than we could have predicted that point in time, driven by these factors.

[Lars Fruergaard Jorgensen:]

Thank you, Mads and Karsten, on the second half operating profit.

[Karsten Munk Knudsen:]

Yeah, so we have updated our guidance. And we've done that based on a very strong performance in the first half, especially based on the sales performance in international operations growing 12%. So that has enabled us to guide between 4% and 6% growth on sales and operating profit. So the way you should look at this is that, we're raising the midpoint of our sales guidance with the 1.5 percentage points and the midpoint of operating profit with 1 percentage points.And that was the split we did based on the investment opportunities we have. And those opportunities there are partly as we disclosed at the clinical trials, we’re starting in the second half in R&D as well as the commercial opportunities, both in driving Ozempic in the US and other launch countries, as well as our obesity business and then, finally pre-launch activities for oral semaglutide.

[Lars Fruergaard Jorgensen:]

Thank you, Karsten. And thank you, Mads for those two questions. Next questions, please.

[Operator:]

The next question is coming from the line of Sachin Jain - Bank of America. Please go ahead.

[Sachin Jain:]

Hi, thanks very much. Just two questions I wanted to follow-up and the last one on the incremental SG&A for the next few quarters, you mentioned Ozempic that we see, but just a bit more detail around oral sema in terms of additional res, and DTC requirements I guess particularly into next year?And then, secondly for Mads on SUSTAIN FORTE. I wondered if you can just talk about the profile for 2 milligrams sema, I think when we’d last discussed the profile, we were discussing the 2.4 milligram. But I think it's still consistent to think about it, A1c delta versus standard sema of 0.3 to 0.4 A1c, and a target weight loss of 10% to 11%. I wondered if you could just confirm that? Thank you.

[Lars Fruergaard Jorgensen:]

So Mads, you want to start with that question?

[Mads Krogsgaard Thomsen:]

Yes, I can do that. And Sachin, what we've come to realize is that, that the basis for the SUSTAIN FORTE is that, the beta cell, the classic effect of stimulating beta cell insulin secretion, may will be close to being maxed out already at the 1 milligram dose, but we've come to realize that the dose response curve for the weight loss effect of semaglutide is uniquely continuing up until the range of 2.8 milligrams per week and you know that from the Phase II data that we've released in The Lancet in that regard, and there you can actually see that there are rather significant filters wake benefits of adopting of a dose from around one milligram to two milligram.So I think your prediction is spot on. We do expect to see a really significant weight loss benefit, unlike other big GLP-1 molecules that have failed to have a continuous loop on the dose response curve for weight loss, we do expect to see that ongoing at least up to the level of this 2 milligrams as we've seen previously, that then will drive a whole body insulin sensitivity increased by the reduced adiposity and that means that even though the beta cell is neither making more no less insulin molecules, each one of them will work better and create a secondary benefit on HbA1c, which will be, I do believe clinically, meaningfully reduced to the extent that you alluded to.So I can only confirm what you're saying. But of course, now we need the data and the group is going well, so you’ll get them next year.

[Lars Fruergaard Jorgensen:]

So, Sachin in terms of, increased SG&A and also looking into 2020, I cannot get into details on that we do the full year guidance when we release the annual accounts. We also have the Capital Markets Day coming up where we’ll be a bit more explicit in terms of our strategy on oral semaglutide. But bear in mind that DTC for instance, we cannot do that for the first six months past approval.Overall tactics around oral semaglutide will be similar to what we have deployed when we launched the tools in terms of FOCUS and deploying our commercial efforts in a kind of strike type setup. So that's what I can share for now. Thank you, Sachin. Next question, please.

[Operator:]

The next question is coming from the line of Richard Parkes from Deutsche Bank. Please go ahead.

[Richard Parkes:]

Hi, thanks very much for taking my questions. First one, I just wondered if you could talk through what you would expect from impact from the proposed US pricing reform bill has been proposed by the Senate Finance Committee. I'm wondering if the DKK2 billion negative impact we’ve seen this year from a 20% increase in the donut hole funding obligation is a good guide to the relative benefit that you might see if that obligation was eliminated based on new legislation. And if that's not the case, what are the factors should we be considering well that might offset that?The second question, I just wondered, given your discussions you've had with payers for the approval of oral sema, maybe you could update us on your views over the likely time it will take to ensure market access. Obviously, you need to find a balance on the price point last, I wonder how that might affect the time it takes to negotiate access versus your experience with Ozempic? Thank you.

[Lars Fruergaard Jorgensen:]

Yeah. Thank you, Richard. Let me try to give the US healthcare reform and policy setting, some perspective. We have seen over the summer, a number of proposals being made and we've also seen proposals being pulled back, and every time a proposal is being made, it starts a political discussion where amendments are being proposed. So, we cannot really go into a detailed assessment of each and every proposal, because change as fast as they are made. So, when something is approved, we’ll promptly relate to that and explain what it looks like.A general comment, lot of these proposals starts with an eye to actually support patient affordability and they fail, because they turn out to have a negative budget impact on the governmental participation. So it's a very, very challenging situation to execute on something that that helps patients which we believe is where our focus should be. So, there are a lot of moving parts here, so we cannot go into explaining all of them as they evolve.In terms of time of market access, right now, where we do not have product approved by the FDA, we cannot go into specific contracting discussions. So, the discussions we have in the US say medical type discussions where we are making sure that payers have a good insight to look into the profile of the product and those are being conducted as we speak and we believe they're going very well. We do not know yet how the actual contracting will play out.We have used the priority review voucher to have time to do this in an orderly fashion, while we continue with a positive momentum based on Ozempic, and we believe that's a good position to be in. So we are confident on the product profile and also that we can obtain access to have a meaningful launch when we get to that. Thank you, Richard, and next questions, please.

[Operator:]

The next question is coming from the line of Michael Novod from Nordea Markets. Please go ahead.

[Michael Novod:]

Hello, it's Michael Novod from Nordea Markets covering. One question to the announced ISO review of oral sema we've seen the draft scope and also seen the final scope document and analysis plan. How comfortable do you feel with this say, the scope of analysis and also the competitors that they're looking at and the data package and will you be say, delivering and supplying data also for the ISO review that due in September?And then secondly, maybe if you could just elaborate a bit on this Swiss tax reform if I heard you right, whether what kind of impacts there will be just for housekeeping?

[Lars Fruergaard Jorgensen:]

Thank you, Michael. Mads, on the ISO review on say, the health economics?

[Mads Krogsgaard Thomsen:]

Yes, obviously, Michael we've had our own health economic outcome research plan instigated or implemented throughout the clinical trials. So we have our own model where we use to validate a well established Swiss based core model where big landmark study data from UKPDS and other trials are included to predict long-term outcomes and cost associated also with the micro and macro vascular complications of a given drug over a population period of many, many years. And that is coming out really positively also versus comparative drugs.The ISO uses a different approach. Two remarks, one is that, ISO is not at this point in time, having a direct impact, but it could, yes, forward into the future, becomes such a review like we have it in Europe, I mean it’s not today. But they do actually not take into account the long-term comorbidity benefits of shorter-term glycemic and weight improvements, the way that the core model does.So it can easily come out with a different result, then our own analysis, but the one that is more faithful to long-term societal burden is, we believe the one that we've adopted, but we'll see what comes out, it's not really going to impact our actions.

[Lars Fruergaard Jorgensen:]

Thank you, Mads. And Karsten, on the Swiss tax reform.

[Karsten Munk Knudsen:]

Yeah. So on the Swiss tax reform which was adopted at the federal level in back in – in May, it still needs to be adopted in Canton Zurich. Potentially there'll be no impact on our numbers and potentially there will be an impact which is an account impact, meaning, that there's no cash impact to our cash taxes. But there could be an accounting impact that will reduce our effective tax rate and increase our deferred tax assets.

[Michael Novod:]

Okay, thank you.

[Lars Fruergaard Jorgensen:]

Thank you, Michael. Next questions, please.

[Operator:]

The next question is coming from the line of Carsten Madsen from SEB. Please go ahead.

[Carsten Madsen:]

Thanks a lot. Carsten from SEB. Regarding 2020, I know you will not give a lot of details here, but you mentioned this donut hole funding increase that could impact you, but is this the only thing you are eyeing right now in terms of a special situation price pressure points, because and that also talked about the maximum rebate rule in Medicaid which seems to be something that could fairly easily be changed to the disadvantages of you and maybe have a view on this for 2020?And then, Mads, on the positive Phase II results you have with the anti-IL-21 and liraglutide? What's the magnitude of difference here for patients also in terms of insulin dose and maybe a hypo data? I think that was the problem with the liraglutide alone in Taiwan was the hypo date as far as I recall? Thanks.

[Lars Fruergaard Jorgensen:]

Thank you, Carsten and maybe start with the first one. So the reason why we can’t comment on the impact on the temporary change in the catastrophic threshold is that, that's something that was put in place years back and has been known for long so we are quantifying what that is. It might be changed, but I don't know, but that at least that's with some certainty going to change. What else policy change they'll be? We don't know and I think in the state finance proposal, there are some items that could potentially be beneficial to us, others that would not. And we don't think it's meaningful to go in and get into an ongoing dialogue of commenting on all of this. So I refrain from commenting on this as we speak. Mads?

[Mads Krogsgaard Thomsen:]

Okay, so it's a really good question. Let me start in fact to talk a little bit, because now into Type I diabetes, we're into people who within the last 20 weeks or so have encountered their autoimmune disease and being diagnosed. That also means that these are young adults aged, I don't know, 18 to 45, I think we included and essentially, the reason why we did and are doing these activities is that, there is a belief based on the DCCT publications back in the United, that those patients who are able to have preserved beta cell function is measured by stimulating of C-peptide secretion after mixed meal or whatever. Those patients in the long haul will have a lower risk of long-term communications written off nephropathy and neuropathy. Nothing is known about the cardiovascular risk.But the micro vascular risks are going down in those patients who are able to maintain some degree of beta cell function, because that will then function as a buffer to the swings in glucose during the 24-hour day and night cycle as compared to those who are not able to do that.So we designed the anti-IL-21 antibody, because our research group in Seattle saw in animal models that Il-21 is playing a role in the destruction of the eyelids of langerhans and the beta cells. So by blocking it, you would actually tamping an immune system and then by adding the liraglutide, you would nurture the beta cell so that it would have a better chance of performing better, while still alive. Hence, we decided to trial for four arms placebo, lira, IL-21 and anti-IL-21 plus lira. Four arms in total for one year with a washout period of half a year.And what we decided to study to show as a primary endpoint was actually preservation of the beta cell function over a full year of treatment and donut hole, what we saw was that only in the combo group with anti-IL-21 combined with lira, we saw a highly significant preservation of beta cell functions when compared to the placebo group or for that matter, you could also see the anti-IL-21 alone or lira alone did not do the trick. So it seems as if the theory was right, we are seeing reductions in insulin dose and also some benefits on the glycemic parameters and a well tolerate profile.Now what we're going to do next is that, because we all realize we have a open graft designation for this, because the amount of people diagnosed with Type I diabetes in the US per annum is less than 200,000. Hence, we are able to have a really constructive dialogue with the agency and we will have a meeting during this quarter for the path forward and we'll be able to update your maybe already at the next quarter.

[Carsten Madsen:]

Okay, thanks.

[Lars Fruergaard Jorgensen:]

Thank you, Mads. Thank you, Karsten. The next questions, please.

[Operator:]

The next question is coming from the line of Luisa Hector from Exane. Please go ahead.

[Luisa Hector:]

Hello, good afternoon. I wonder whether you could give us an indication of the contribution of volume, price and donut hole to Victoza in the quarter. And then on the oral semaglutide filing, do you have confirmation of whether there an FDA advisory committee will be called or not? Thank you.

[Lars Fruergaard Jorgensen:]

Mads, on oral sema, FDA meeting first anything around that?

[Mads Krogsgaard Thomsen:]

Not really so much. We're having a really constructive dialogue with the agency. We do believe we are on track to meeting the PDUFA action date of September 20 in case of the diabetes indication and also a progress has been made on both the Ozempic and the oral semaglutide cardiovascular indications. Vis-a-vis an outcome we have not heard that there should be one for that is always the possibility is the prerogative of the agency to call for an outcome even when they need such, but we've not heard of any trends in that direction.

[Lars Fruergaard Jorgensen:]

Thank you, Mads. Karsten, what can you share on volume price mix on Victoza?

[Karsten Munk Knudsen:]

Yeah. So tier one in the US in the second quarter that we're seeing a market growth of some 30% and since launch of Ozempic and full market access, then we've been growing with the market since Q2 last year. So our volumes are at the same magnitude and we're reporting 22% in net sales we realized.So we have around a 10% gap between the volumes realized and the net related sales, which is then the price and that price you can split predominantly in two equally sized targets, one related to the donut hole we just discussed with the donut hole legislation, and the other part related to pay ons and channel mix.

[Lars Fruergaard Jorgensen:]

Thank you, Karsten and Thank you, Luisa. Next set of questions, please.

[Operator:]

Next question is coming from the line of Peter Welford from Jefferies. Please go ahead.

[Peter Welford:]

Hi, thanks for taking the questions. Just two quick follow ups. Firstly just on the FDA outcome given obviously I guess noted from the similar agency very recently at the last minute that then delayed the PDUFA date. I guess can you give us confidence perhaps in terms of the FDA is reviewing the two different NDA filings for both the Type I diabetes or HbA1c and then the cardiovascular indication separately and happy with concurrent filings I guess an equally what was the potential things could perhaps maybe out for discussion at the moment in terms of your debate so far with FDA?And then secondly just regards to big toe now, can you give us an update on the paragraphs for filings. I saw there was a Mylan filed and obviously we know what happened with TEVA in the status there. But are there any other files we should be aware of or anything else that this ongoing details are powerful? Thank you.

[Lars Fruergaard Jorgensen:]

Thank you. Mads, first on the FDA process for the two submissions?

[Mads Krogsgaard Thomsen:]

Yes, well so first of all you are obviously aware that at pre-NDA meetings one typically will notify the agency of one submission strategy, both the use of the priority review voucher and the speed of the application such that there's a six month fast track application and then two 10 months normal track applications for the cardiovascular indications for the two administrative rules of semaglutide.And that was all seen as fine and technically good step final winners and they have also of course, acknowledged our submissions. And more importantly, so, the agency is clearly diligently reviewing the dossiers as evidenced from the questions that are flowing to and from the company. So I have no reason to believe anything else, but the PDUFA action dates that are 6 and 10 months, respectively after March 20. And that leads us to September 20, 2019 and January 20, 2020.

[Lars Fruergaard Jorgensen:]

Thank you, Mads. And on the Victoza Mylan filing, we have got some experience in assessing our participation here and we believe we have a good position. So we'll be using the same old Texas as we have used in the TEVA case, because it's really not anything different from that. So it is pretty much as one would expect I would say, and we know what to do to defend ourselves. Thank you, Peter. Next set of questions, please.

[Operator:]

The next question is coming from the line of [indiscernible]. Please go ahead.

[Unidentified Analyst:]

Yes, good afternoon, many thanks for taking my questions. Two queries, if I may. The first is, can you quantify what proportion of Ozempic growth is due to Victoza cannibalization? And secondly, I'd be interested in hearing Mads’ thoughts on the impact from efficacy of aminoacid modification in the GLP-1 sequence beyond position 8, if you could add some color on that? Many thanks.

[Lars Fruergaard Jorgensen:]

Thank you. I think Robert [ph] first on the Victoza cannibalization. I know when we launched Ozempic, a last part of the object came from existing GLP-1s, so four time we have seen that its majority come from addition to insulin. And we saw some more and more from the existing OD so we're down to 25% coming from existing GLP-1s. And that's kind of equally split between Victoza and Trulicity. So a relative small part.

[Mads Krogsgaard Thomsen:]

And I must admit, I didn't quite get the question. Could you repeat it, please? The one for me?

[Unidentified Analyst:]

Yes, sorry the impact on efficacy of aminoacid modification in the GLP-1 sequence beyond the position 8?

[Mads Krogsgaard Thomsen:]

Okay, now I got it. So we’re all aware that position 7 and 8 are cleaved by [indiscernible] peptides for unless you make an unnatural change such as the methylation and using AIB in position 8. That is done in the vast majority of the long-acting compounds, including semaglutide and liraglutide and dulaglutide as I recall. The impact on receptor finding is miniscule, if present at all, because it's not part of the receptor binding motive.

[Unidentified Analyst:]

Okay, okay.

[Mads Krogsgaard Thomsen:]

But the reason why potency, so the intrinsic potency seems to be enhanced when you do this AIB substitution. But that's essentially only because even in vitro you might have peptides mediated degradation of the anti-IL-21. So you get apparently high affinity and potency by doing the IV, but if you do a simple receptive binding experiment as I recall it, there's no big difference.

[Unidentified Analyst:]

Excellent.

[Lars Fruergaard Jorgensen:]

Thank you, Mads for clarifying that aspect. And thank you too, Robert. The next set of questions, please.

[Operator:]

The next question is coming from the line of Trung Huynh from Credit Suisse. Please go ahead.

[Trung Huynh:]

Hi, guys. Thanks for taking my questions too for me. Firstly, can you outline how much the four late-stage trials will cost? And how does that compare to the cost of the PIONEER studies which now rolled off? Should we think of the cost of these studies as a wash or should we think that these as significantly higher than the PIONEER program?And then secondly, just on growth ex-US, ex-EU we noted that was quite strong, LatAm grew 30% in the first half, China 12%. Can you perhaps talk about the trends in these regions? And how sustainable are these growth rates going forward? Thanks very much.

[Lars Fruergaard Jorgensen:]

So firstly on the cost for trials compared to past twice et cetera, we cannot go into that level of detail unfortunately. We can say that for this year, we've had a relatively low R&D spend in the first part of the year, because we have rolled out of trials and now we're ramping up, but I cannot get into details about the relative size of these.And then through sustainability of growth in China and LatAm, Karsten, can you share some perspectives on that?

[Karsten Munk Knudsen:]

Yeah. So it’s a relevant question. When we look at the 12% growth in China, then the underlying market dynamics in China are that there's a huge underlying market growth and demand for diabetes products. So the market growth is there to fuel our business. So our insulin business is solid and with a clear market leader in insulin.And then on top of that, just the one business of Victoza is heading to that, so we're not guiding on individual regions for the full year, but the first half is not significantly impacted by any special items for China in terms of growth rates. As to LatAm, 30% growth, LatAm has more kind of fluctuations in terms of the tender timings. So the 30% is skewed especially high in the first half compared to what one should expect for the second half. And that also links into our commentary that the 12% all IO growth is positively skewed towards the first half and for the full year, one should more expect an underlying level towards the 9%, 10% growth.

[Lars Fruergaard Jorgensen:]

Thank you, Karsten and Thank you, Lars.

[Trung Huynh:]

Hello, could I ask my first question another way? Just how confident are you in sustaining your margins with the added investments going forward? Thanks very much.

[Lars Fruergaard Jorgensen:]

I think that's a very general question. We see an opportunity right now to make sure that we back our products that we have going into the market. So it's not that meaningful to guide on margins in general, because that will change over time. And but, we have, here I invite you to attend our Capital Markets Day and we will have a full day to explain our strategy and how we invest into fuel growth. I think that's a better setting to give comprehensive perspective on that. Thank you very much, I think we -

[Trung Huynh:]

Thanks very much.

[Lars Fruergaard Jorgensen:]

We’re having the last round of questions.

[Operator:]

The last question is coming from the line of Wimal Kapadia from Bernstein. Please go ahead.

[Wimal Kapadia:]

Thanks very much for taking my questions. Wimal Kapadia from Bernstein. So I appreciate you cannot give future pricing guidance, but if I look at Ozempic realized pricing, it seems to be about 30% higher than Victoza, if I look at the first half of ‘19 in the US. So I guess the first part of the question is, is that roughly correct? And how should – and should I think that that gap will close over time, i.e., Ozempic price declines will be larger than Victoza moving forward.And then secondly on obesity, continue to perform extremely well. And Saxenda this year is going to get close to $1 billion globally. So if sema is two times efficacious like we've seen from the Phase II, what are your I guess your internal expectations for sema and obesity? Could this be a $3 billion to $4 billion indication standalone, and if not, why? Thank you.

[Lars Fruergaard Jorgensen:]

So Karsten, will you try to shed some light around pricing was of course of time and the limitations we have for being –

[Karsten Munk Knudsen:]

Yeah, yeah. So again we had a commentary around the delta between the market growth and our volume growth and our net realized price which was impacted by donut hole and payer channel mix which was a similar comment as to similar level as in Q1. So and the payer channel mix, here the channel mix is a professional when you launch a product then you launch a product normally in first to some extent, non-contracted and then managed care and then your product gets available into some other channels that could be Medicare Part D later on. So that's why there is a channel mix element that will impact over time. But we cannot quantify specifically how that is, but that's natural that you see for all products.

[Lars Fruergaard Jorgensen:]

Thank you, Karsten. So on obesity, we’re clearly very encouraged by Saxenda performance. Now we have a situation where it's largely an underdeveloped market. So we are becoming a bigger, bigger player in a relatively small punt. We believe that market has to be developed, it will to a large degree be based on the efficacy of the next products that's coming.We are confident on several pieces, but obviously we need to see the profile of that product we can decide on what we do. We don't really have any guidance on what we see as obesity this is clearly an area where there will be a significant range as a function of how the markets, the market opens up, how payers are receptive to pay for it. But it's interesting to note that, the growth of our obesity business is slightly different composed and what we see on traditional diabetes business, we see a significant willingness to pay out of pocket.So and saying in a European setting less so far maturity in terms of an obesity market, so this is different, but there's no doubt that we believe there is a significant unmet needs and we see individual willingness to pay for drug that actually works. And these are individuals who have been paying a lot already to deal with weight related issues. So that's kind of what we can guide. We’ll see the significant opportunity proportionately to see the clinker profile and then we need to establish that market. So I think we can quickly take one very quick set of questions.

[Operator:]

The next question is coming from the line of Peter Sehested from Handelsbanken. Please go ahead.

[Peter Sehested:]

Yeah, it’s Peter Sehested, Handelsbanken thank you for squeezing me in here at the last minute. Could you just elaborate a bit on your situation in the fast-acting space self indicating significant costs in the price, suggesting that it's hard to penetrate, you said six contracts. Do you see any change going forward also with Trulicity and biosimilar version of glargine which is seeking to change ability in that segment?

[Lars Fruergaard Jorgensen:]

Thank you. Thank you, Peter. So it was very hard to hear you, but I think the question was related to the dynamics in the fast-acting category. Whether we'll see any change and what are our success so Karsten, can you share a bit around that?

[Karsten Munk Knudsen:]

Yeah, so the fast-acting insulin base been competitive for a long time with the tender like situation and an exclusive pulmonary in the US between Novo Nordisk can and Eli Lilly. So the rebate percentages are already high and it is already a competitive place we've seen with the launch of epilogue from Sanofi, they've had a tough time penetrating some formulary so their main business has been in Managed Medicaid.And I think what we can say is that, when we look at our results for this year and not going into any pricing guidance for the future then we see price erosion and we see the donut hole impact in the fast-acting space.

[Lars Fruergaard Jorgensen:]

Thank you so much. It has past 2 o'clock in Copenhagen. So we thank you all for your interest in Novo Nordisk. And we'll hereby close the half year in this call. Thank you very much. Bye-bye.