Novo Nordisk A/S
Q1 2017 Earnings Call Transcript

Published: 3 May 2017

[Keyur Parekh:]

Good afternoon, and thank you, all, for joining us. My name is Keyur Parekh, and I cover Novo for Goldman Sachs. It's a pleasure to have the management team from Novo here post Q1. I'm not going to waste a lot of time. So, Jesper, straight over to you for making opening remarks, and then we can go to Q&A from there.

[Jesper Brandgaard:]

Yes, we're basically on the road with our first quarter results, and a good first quarter, probably better than what we anticipated, but partly marked by some one-time effects that makes it looks probably slightly better than the underlying trends. What we are going to go through here is basically highlights and key events, I'll handle that. And I will do a few comments on the sales and hand over to Christian, our Head of Global Marketing, who will review the performance of our brands. Mads will give an update on R&D; and our Head of Corporate Finance, Karsten Munk Knudsen, who will cover financials and outlook. Of course, making predictions about the future is inherently difficult, including making predictions about what happens to U.S. healthcare politics, which is changing by the day. So do read this with some caution to note the difficulty herein in making predictions about our future. The first two months of the year came out quite positively. Do bear in mind that the first quarter is marked also by significant currency tailwind. The full year is expected to have modest currency tailwind and the prime part of that currency tailwind we have actually realized in this first quarter, if currencies stay where they are. So, sales realized a 5% growth, 3% local currency and driven by North America, with a 5% growth in Danish kroner, but 2% in local currencies, and a third of growth coming from there. International operations growing 4% and two-thirds of growth. On individual regions, key driver Europe, for the first time in quite a while, growing 4% Danish kroner, 6% in local currencies, reflecting an impact from the lowering of the British pounds with the Brexit. In terms of key drivers from a product perspective, Tresiba really now being a major component of the growth, and also positive in the first quarter. Now, we're seeing Tresiba, in terms of gross margin, being a positive contributor to overall gross margin, as we have now ramped the volumes up on Tresiba, and now constitute 5% of total sales. In terms of the R&D front, just before we released our quarterly announcement, the EU approval taken for the label update on Tresiba from the SWITCH trial. We have, end of March, resubmitted the drug application for Fiasp, fast-acting insulin aspart. And we remain assured that we have cleared the challenges raised in the Complete Response Letter from the FDA, and that hopefully should lead to a six-month review time, and hence approval by the end of third quarter in the U.S. And then, finally, from the CHMP, and actually at the same meeting as where the SWITCH trial was discussed at CHMP level, we got positive opinion from Refixia, our long-acting factor IX for hemophilia B. Operating profit, clear leverage between the strong growth in the sales compared to expectations in hand, a 6% growth on – 3% local currency growth and 10% reported in Danish kroner on operating profit growth. Also showing that the cost initiatives that we took in the second half of last year, including dismissal of approximately 1,000 people, is now solidly working. And if you look on the individual cost items, the major cost items, actually, gradually, or slightly declining measured in local currencies. Diluted earnings per share increased by 9%. For the guidance, we basically narrowed the guidance for reported sales growth to basically reflect a higher certainty of where the outcome is going to be, given that we only now have eight months to go compared to 11 months when we gave the guidance back in February. So, now the expectations is 1% to 4%, based on a 1% positive currency impact compared to previously 2%. As for operating profit, the lower end of the range was taking out, reflecting a high level of other operating income from royalties, but also a slightly favorable situation for our overall cost structure, leaving us with a 4% range for operating profit and 3% range for sales growth. We have change in executive management. Lars Fruergaard Jørgensen is taking over with effect from 1st of January. And the executive team is now a full team listed below, constituting of me and Mads, as you could say old-timers. I'm responsible for Finance, Legal and Investor Relations. Mads sill running research and development. Henrik Wulff responsible for Product Supply. As of 1st of March, our former Head of Market Access in the U.S. has been promoted to President of North American Operations, Doug Langa, replacing Jakob Riis who left Novo Nordisk 1st of March. Mike Doustdar is handling International Operations. So everything that's not North America, under the auspices of Mike Doustdar based in Zurich. I should mention that Doug is based in North America, of course. And then, finally, Lars Green will join Executive Management 1st of July. Up until July, he is the Finance Director for our North American Operation, as he's been for the last three years. So with this, we have a full management team to oversee the progress of Novo Nordisk. If you look to the sales growth in the first quarter, really in terms of the distribution, half of our sales is coming from North America. Ragion Europe growing solidly, reported 4% and 6% in local currencies. And as you can see to the right, the growth distribution, the prime part of growth is really coming from Europe, U.S. and Region China. Comments to the individual markets, as for U.S., U.S. growth has been impacted by some one-offs. Karsten will allude a bit more to those one-offs. As for Europe, also approximately 2% one-off elements in the Q1 growth. It's a while ago since we've seen Europe growing 6%. Region China, 8% growth. I think it also worthwhile commenting that we are seeing a higher growth level of the insulin market in China. It's now rebounded to a growth level in volume terms of about 10%. We're seeing a real positive development in our (07

[Christian Kanstrup:]

Excellent. Thank you, Jesper. If we look at it in terms of products, what is it that's driving growth is new generation insulin, and it's Victoza that's driving growth. In a total view, diabetes and obesity care is growing by 11%. We have our biopharmaceuticals business being down by 25%, when we look at it in local currencies. And if we start with the biopharmaceuticals segment, then of course, it's because of two elements. One is the Vagifem generic competition in the U.S., which is impacting our HFC (09

[Mads Krogsgaard Thomsen:]

Thank you, Christian. What I'll do is slightly unusually start with the biopharmaceuticals business, talking about Refixia, our recombinant factor IX product for hemophilia B. As you are aware, we have factor VII, factor VIII, factor XIII products in the marketplace, but this is indeed our first entry into the hemophilia B space. And Jesper already mentioned that the CHMP has issued a positive opinion, for which reason we are waiting EMA approvals or EU Commission approval in the very near future. Also we actually were invited for a ASCOM meeting with the blood products division in the United States and had a really good discussion surrounding, as usual, the safety aspects that's typically what these panels are for, in most cases surrounding the safety aspects of, in particular, the (15

[Karsten Munk Knudsen:]

Thank you, Mads. So, going through the P&L, as Jesper and Christian covered, then the global sales growth of 5% in reported terms, which corresponds to 3% in local currencies for the first quarter, yielding a gross profit improvement of 5% covering an improvement of 70 basis points in our gross margin, which is predominantly driven by currencies. So, if you take out currencies from our gross margin improvement, then we have a 10-basis point deterioration. This covers two offsetting factors, namely that we have a positive contribution from product mix between sales from Victoza, which is one of our highest gross margin products, growing 22% in local currencies in the first quarter and then, as Jesper alluded to, Tresiba now yielding an above-average gross margin and hence contributing positively with the growth in Tresiba sales to the gross margin. This is being offset by the 5i rebate adjustment we had in the first quarter of last year to the tune of 20 basis points and then the price pressure we're seeing in the U.S. marketplace. So, net-net a underlying 10-basis point deterioration of the gross margin. S&D cost up 1%, down 1% in underlying terms, driven by the fact that we launched Tresiba in the U.S. marketplace Q1 of last year and hence had higher spend in that quarter, which we do not have in the first quarter of this year. And then on top of that, we have had our cost management program initiating in the fall of 2016. And hence we're entering 2017 with a lower number of – unchanged number of FTEs compared to the first quarter of last year. R&D flat or down 1% compared to first quarter of last year. We see our development portfolio progressing, as Mads just covered. The key cost driver on our development portfolio is our oral semaglutide program with the 10 PIONEER products we have ongoing there. This is being offset by our research portfolio where we closed down a number of projects in the fall of last year. So, net-net, down 1% in same currencies. Then I'll skip admin costs. Slightly better on other operating income, some slightly higher royalty payments than what we anticipated, yielding an operating profit growth of 10%, or 6% in local currencies. Then tax rate, not too much to mention. As you know, we are booking our effective tax rate for the quarter towards our anticipation for full-year effective tax rate. So, this is in line with the guidance we already set out previously, yielding a net profit improvement of 7% and then with the share buyback program, reducing the number of shares by 2%, we have a diluted earnings per share increase of 9%. Then as I cover before our cost management program, here you'll see on the right-hand side that in terms of number of FTEs, we do have a reduction compared to Q3 of last year of roughly 1,000 employees and hence flat compared to 12 months ago. So, we have tight management of our FTEs, are managed. That doesn't mean that we are not increasing in places where we see a solid return. So, when we look at sales reps, we have seen a reduction in the U.S. in the non-profitable channel, but we do have sales force increases in a number of countries in international operations. So, net-net in terms of our commercial pricings and sales reps, it's broadly unchanged compared to last year. Looking at the cost side, I think I covered most in my prior comments, so I'll skip that on the left-hand side just saying that in terms of cost management in the first quarter, then net-net across the different cost lines, our costs are flat compared to first quarter of last year. Then currencies and the tailwind we've been getting in the first quarter of this year, you will see from this slide on our main currencies, then the U.S. dollar is the main driver behind the positive currency contribution on our results. So, the U.S. dollar in the first quarter of this year against the Danish kroner is up roughly 3% compared to the first quarter of last year being the main positive contributor. Then on international operations, then historically we've seen some challenges on some currencies, the Venezuelan bolivar or by the Argentinean peso, we don't see that in the first quarter of this year. So, net-net in international operations we have a zero currency impact on our results for the first quarter. That brings us to our financial outlook for the year. Sales growth, we have narrowed the range to 0% to 3%, but it's important to note that the midpoint remains unchanged. So, we are still executing against the plans that we set out in connection with the full year and we're basically confirming that we're executing according to those with time progressing, as Jesper alluded to, then uncertainty has been going down and that has enabled us to narrow our guidance range. Currency impact slightly less favorable compared to full year, so now we are looking at a 1 percentage point improvement from currencies for the full year. Operating profit, there in connection with the slightly improved royalty payments, we've seen in other operating income and our cost management. We have been able to eliminate the lower part of our guidance range, so now the range is from minus 1% to plus 3%. Same comment applies with in terms of currency impact and then you see the current – reduced positive currency impact we get on our above the line numbers. We get a lower hedging loss on our financial net items from DKK 2.4 billion to now DKK 1.8 billion. So, net-net that is balancing the lower impact on our operating profit numbers in reported terms. And then finally, we're confirming effective tax rate, our CapEx program, depreciations and free cash flow. So, no changes there compared to what you saw in connection with the full year. With that, I will hand over to Jesper for concluding remarks.

[Jesper Brandgaard:]

Thanks, Karsten. And just a short remark here. Just reminding you that Novo Nordisk is the leader in diabetes care with 27% global market share. Based on a solid growth of insulin 4% global volume growth, 46% volume market share, more than 20% growth in the GLP-1 segment, and the 58% volume market share within GLP-1s. And also and I think maybe not an item that gets too much attention in the market, a gradual rollout of Saxenda leaving us with a significant value opportunity and I think quite positively that the Saxenda product is proving to have opportunities outside the North American market. And we remain very confident about our obesity franchise and it's an area you will see us continuously invest in, in expanding the market, the understanding of the drivers of the opportunities, but also investing in our clinical and research pipeline in terms of obesity. And with that, we will move on to Q&A. And Keyur, you'll kick off. We'll need a microphone. You probably need to state your name.

[Keyur Parekh:]

Keyur Parekh, Goldman Sachs. I'll let Peter ask his customary access question for 2018, but I'll focus on the two separate issues. One, Jesper, you guys sound a lot more confident about the obesity approach than you historically have. Is that reading too much into it? Can you just talk about how you see that market developing? And then secondly on China and Victoza kind of on the cusp of potentially being on the reimbursement list, just help us think about that opportunity. And then, Mads, from your perspective, what's going to be the big highlight at ADA? What do you think we will learn new, what will change our perceptions from ADA?

[Jesper Brandgaard:]

Thanks, Keyur. First on obesity, I think it's apparent to us in our annual strategy update that we will present to our board of directors here in June, that you will see us place a significant more emphasis on the opportunity within obesity. And it's really coming from realizing steady growth in the markets we go into and we are realizing steady growth both in markets where we have reimbursement and in markets where it's privately paid. We're also seeing that patients are staying on product in a reasonable period, so it's not very volatile sales, it's relatively stable. I think some of the flexibility we have achieved in our cost structure by the cost initiatives we've taken over the last nine months, we would utilize that in investing in building understanding of the opportunities for medical treatment of obesity. And I think Christian can probably comment a little bit on that. And then, Christian, if you also want to comment on the opportunity of getting reimbursement in China, you were our former President of China and the expert there.

[Christian Kanstrup:]

Yeah. No, I mean if we look at it, first of all, the opportunity we have at hand in China now is, I mean a number of drugs have been selected for a negotiation list and we have two products, we have Victoza and NovoSeven on that. And that offers a lot of opportunities, of course, nothing is certain with China. I have spent a number of years there and I know that even though you are on a list, then it's not to say where you are negotiating, then it's not the same as an outcome, but it's a huge opportunity for us in terms of GLP-1. But also for our hemophilia business, if we get a extended reimbursement for NovoSeven, we have so far a reimbursement in one province in China.

[Jesper Brandgaard:]

And, Christian, a comment on obesity awareness and investments in (31

[Christian Kanstrup:]

I think to build a little bit upon what Jesper is saying, also our confidence – I mean two years ago, I think everybody was seeing this as a U.S. opportunity. Now it's clear to us that this is a global opportunity. The feedback we have from the market, where we have launched also outside U.S. is very good. And we should remember that the unmet needs, it's not only in the U.S., but it's across the world. There are several countries with significantly higher prevalence of obesity than in the U.S. But, of course, it's also clear that there is no existing market today for pharmacological treatment of obesity. So, this is a long-term investment. This is about educating the physicians about how do you actually treat obesity, how do you even initiate a dialogue with the patients around obesity. And here we have a number of programs in place, both for engaging with the physician, but also for engaging with the patients. And then, of course, we need to work with policy makers across the world in having obesity recognized as a chronic disease. And there we are seeing a number of markets where there is a growing understanding of this being a chronic disease where we need to treat it like that. So, it's something which is going to take a long time, it is something which is going to require a lot of investments in market development, yet on the other hand we are well positioned (32

[Jesper Brandgaard:]

And, Mads, highlights at ADA?

[Mads Krogsgaard Thomsen:]

Yeah. Well, of course, we'll have to see at the ADA, but the things that you can see from the preliminary program that has been announced is that on the clinical side there are, at least, two major trials reporting, one of them being the second SGLT2 inhibitor trial to report cardiovascular outcome data, of course, that's always interesting. But to me, I have to say that coming from where I do, but also in reality I believe the highlight will actually be the world's first ever blinded outcome study in the (33

[Jesper Brandgaard:]

That was not the biggest surprise to me. Next question, Michael?

[Michael Leuchten:]

It's Michael Leuchten from UBS. Two questions, please. One, there was quite a bit of discussion yesterday on the Tresiba prescription trends in the U.S. after the UnitedHealth exclusion that's kicked in. You've mentioned the NBRx share in your opening remark, could you talk about the changes you see in NBRx versus TRx weeklies and what that may mean – you've obviously stated your confidence in the 10% market share? And then a second question on R&D, could you talk a little bit about how you've gone about pruning the early part of the portfolio towards the end of last year? How those decisions were taken and why?

[Jesper Brandgaard:]

If I first comment on the Tresiba and then, Christian, if you want to add, you're welcome. And then, Mads, you will talk about the pruning of the research portfolio. In terms of the trends for Tresiba, of course, it is pretty difficult to read anything conclusive out of NBRx trends whenever you have changes in formulary as these kind of tend to overstate the movements. However, what we can see when we approach the CVS conversion is that we are back at the level of capturing 12% to 13% of new patients. We are not largely impacted on Tresiba from the UnitedHealthcare conversion as that is mainly a conversion between Lantus and Basaglar with a slight spillover to Levemir. What we're seeing now is a trend that make us confident in our ability to reach the 10% which we set out as our objective as the ending market share for the year, but it's not an NBRx level that enables an acceleration of that level. And that's not fully satisfying for Novo Nordisk. So, we're continuing to work hard on that, including slight changes to the focus of the sales force remuneration, et cetera. And that's what we're implementing as we speak. I don't know, Christian, if you want to add to that or.

[Christian Kanstrup:]

I can just say – I mean, of course, I understand when you – if you look at the NBRx trend, which seems to be coming down, then that gives rise to a little bit of concern, but we need to remember that it was heavily impacted by the CVS conversion in the first quarter. And if you look at the total amount of NBRx's, then it is at a significantly higher level than normal. Typically, you will see NBRx's coming up in January when you have the formulary changes, but it has remained high and now is, of course, distorted by UnitedHealth as well, which is not going to impact Tresiba. But I mean we are out there now with SWITCH and we are hoping to – or we are expecting to get, of course, the formal SWITCH label update later on this year. And even say for the rest of this year, this is going to be about execution in field and fighting for the scripts and as Jesper said, we have the right IT structure in place now. And we have shifted slightly the promotional focus from U200 to U100 and are seeing an increasing share of U100 along the scripts. So, I mean, we're confident about the 10%, but also a lot of dynamics going on in the market with all the formulary changes, which makes it difficult to look at it, for instance, what is the impact of the SWITCH data that we are talking about now. We can see that two-thirds of all physicians, they recall the SWITCH data and we get a lot of positive feedback. But does that translate into NBRx's? That we need to see when things settle down somewhat.

[Jesper Brandgaard:]

Mads?

[Mads Krogsgaard Thomsen:]

Yeah. So, what we did last year was a real exercise of looking into the various elements of managing and balancing and pruning an R&D portfolio. So, to give you just a few examples. If you look at diabetes, we looked at efficacy of either new mechanisms or follow-on generations to existing mechanisms. We looked at convenience and we put it all into the context of cost. So, if we look at something like GLP-1, with the realization that the SUSTAIN program has proven what it has and that the PIONEER program is poised, I do believe, to do the same in the oral space. We, for instance, did not find it relevant to continue a once-monthly program. We simply don't see a market for once-monthly GLP-1 when we have once-daily tablets and one-weekly injections, that's one example. Another and the same example can be used for growth hormones where we had a once-monthly, we don't see the true unmet need for it, to be quite honest. When we look at things like oral, you can say oral insulin based on the basal pricing evolution in the U.S. and the success of oral GLP-1, oral semaglutide, we did not see a commercially viable place for insulin. It's going to be presented at ADA as one of the hot topics and elected by the president and whatnot. So, it's good, good signs, but it's not commercially deemed viable by management, in general, and R&D management, in particular. If we then move into, for instance, co-agonists like we have tri-agonists, we have two co-agonists and we have fixed ratio formulation. So when we have so many approaches to stimulating both the GLP-1 receptor and, let's say, the glucagon receptor, we simply have to prune and say we don't need three different co-agonists plus seven different fixed formulation ratios plus a triple-agonist, so we let some of them go, put them on the shelf and are ready to resurrect them if there might be a need one day because the ratio was wrong in the (40

[Jesper Brandgaard:]

I probably have to ask the questioners to give us a little bit less open-ended question because it tends to be rather long answers. Sachin, you're next.

[Sachin Jain:]

I'm Sachin Jain, Bank of America. Mads, you touched on SUSTAIN 7. I'm wondering if you just talk about in a little bit more detail what delta is needed for superiority (41

[Jesper Brandgaard:]

Okay. First, Mads on SUSTAIN 7 trial and the positioning of that trial.

[Mads Krogsgaard Thomsen:]

Well, the SUSTAIN 7 is a relatively big trial. In many ways, you could say just another phase 3b trial. That being said, we expect to have in the packet insert ND SmPC (42

[Jesper Brandgaard:]

All right. And in terms of Xultophy, first on U.S. just launched here early May, priced at a 20% discount to the some of the parts. And also noting that SOLIQUA which you also referred to is priced at approximately 30% discount to our Xultophy price. If you look to the price you paid per percentage point of HbA1c reduction, the cost in the U.S. at list price is about $18 per percentage point of HbA1c reduction for SOLIQUA whereas the drop for Xultophy or the price of Xultophy is $15 daily per HbA1c drop. So there is, I think, a competitive pricing for Xultophy and the discount offered compared to some of the parts. In terms of Europe, launched in more than 10 countries, very solid results. If we look to where we are getting patients from on Xultophy, it is approximately two-thirds actually coming from an insulin background. So it is intensification of insulin-treated patients. Still it provides a value opportunity for Novo Nordisk for the intensification. With that, we'll take the next question. Vincent in the back.

[Vincent Meunier:]

Thank you. Vincent Meunier from Morgan Stanley. So the first one is a follow-up question on semaglutide and 0.3%. I mean you say 0.3% potentially clinically meaningful or meaningful for regulatory, what about formulary because we know that for the insulin segment, we had two new-generation insulins beating the old ones, but when we take a look at the ramp-up, we know that for both products, it's not great. So it might be the same for semaglutide. Maybe the PBMs will not really agree with the fact that 0.3% is enough. And what is your view on the potential impact from the biosimilar of Humalog on your franchise? And also a more broader question regarding the ongoing negotiations with PBMs (47

[Jesper Brandgaard:]

All right. I think I will ask Mads to comment further on the impact from the CMS trail on formulary status if you have any comments on that. And then Christian, you want to comment on Humalog competition potentially in generic version from Sanofi. And then I'll try to comment on the ongoing negotiations to the degree I can say anything meaningful.

[Mads Krogsgaard Thomsen:]

Yeah. Jesper, I actually think it's probably better that Christian comment on the formulary thing. I'll give just one generic statement. I do believe that when you talk to these folks, also the medical people in these managed care organizations, what you look at is all the things that are accepted and respected by them as meaningful endpoints that have some cost utility and they're actually doing two things such as A1c. You can always discuss what amount of A1c improvement is meaningful and it's all a balance between the price you demand as Jesper alluded to, what is the cost of lowering 1% A1c for this product versus the other and so on? So I think of course the stronger the bills that we have, the better it will look, but I think maybe Christian, you could add some flavor.

[Christian Kanstrup:]

No, I think the short answer to this is that we do see a 0.3% delta on A1c as being meaningful from a payer point of view. I think making the comparison to the basal insulin space where you're not selling in on A1c, but on (49

[Jesper Brandgaard:]

Okay. Thanks, Christian. And then on the negotiations, I think I will just reiterate the facts. The first facts, in relation to the contract negotiation in the U.S. for 2018 season, is that in terms of the basal insulin, the Part D segment was not included (50

[Unknown Speaker:]

Just two follow-ups, one for Jasper, one for Mads. Just on Xultophy, when you speak to the (52

[Jesper Brandgaard:]

All right, Mads, if you start on Xultophy, then I'll try to once again giving comment on ongoing negotiations with the inherent limitation (54

[Mads Krogsgaard Thomsen:]

So, Peter (54

[Jesper Brandgaard:]

Okay. And the question about the negotiation and Sanofi behavior, you asked whether it may be unfair. I think these contract negotiations (55

[Richard Vosser:]

Thanks. Richard Vosser with JPMorgan. I have just two follow-ups. Just on the Xultophy extra clinical development, just – you started a Tresiba versus Toujeo study. There is an obvious potential of doing Xultophy versus SOLIQUA, so just a thought there. And clearly, your products – I think your comments were prioritizing semaglutide anyway, but just a thought whether you would do that trial. Then, secondly, just whether this guidance this year leaves any remainder of – for this year's guidance, whether there's any U.S. pricing reform from Trump in there? I think not, but if there is, then should we just be thinking about rolling that as a pressure into 2018? Thanks.

[Jesper Brandgaard:]

Okay. I think I'll deal with the guidance question first. And then I'll give to Mads the head-to-head on Xultophy after. In terms of the guidance, we have not anticipated in the narrowing of our range in terms of both sales and operating profit that there will be any significant impact this year. It didn't look likely to us that the U.S. regulatory process would be competed with an impact on 2017, when we had the discussion with our Board of Directors on Wednesday. But I must admit that it seems to be a changing environment every day. So it is hard to make prediction on, but no significant impact. And I think we would have to make explicit – once you had a legislation through, then actually accounting for this specific items, and it would be highly speculative to be there. It may come up for voting in the Congress today, but my understanding is that the Senate is looking at it, and let's see how it plays out. Mads, on Xultophy, should be do a head to head?

[Mads Krogsgaard Thomsen:]

Yeah. So, first to comment, you also mentioned the Toujeo versus Tresiba. In that regard, we are eagerly awaiting the Profil Institute in Germany that did this head to head study in a (01

[Jesper Brandgaard:]

Thanks, Mads. This ends our first quarter presentation. Do feel free, if you have additional questions to contact. Our Investor Relation Officers' phone numbers are listed here. And we look forward to be back on the 9th of August. And judging from the questions today, some of you may turn up at that point in time. Thank you very much for your attention.