Novo Nordisk A/S
Q2 2014 Earnings Call Transcript

Published: 8 Aug 2014

[Lars Rebien Sørensen:]

[Audio Gap] But apart from that, I'd like to welcome you all to the Novo Nordisk half year conference call and investor meeting here in London. And this year, we bring the strongest team that we have ever been able to bring with almost the entire management team, as you will see, sitting up there. But in case there are things we cannot manage, then we have also brought the Chairman of the company, Göran Ando, who's sitting up in the front, and well-known former executives from a number of different pharmaceutical companies who are helping us steering in the right direction. Also as a change this time, we have changed -- tried to innovate the format a little bit. We don't know really how it's going to go, but we have inquired how you would like to do this and we thought that this time, we should try something different. So basically, what we will be doing is we're giving you a presentation much more or less following what you have in front of you. Then we will breaking and breaking into 4 groups. These 4 groups will be circulating to 4 different stations, being able to confront management with different perspectives of their interests. So basically, it's a Q&A session spread into 4 smaller groups and let's see how it works. The only thing we have to apologize is for those that are listening in on the web. Obviously, you're going to find it difficult to find the meeting rooms and the conversation in the meeting rooms are not going to be transmitted, so we apologize for that, but that is another incentive to be here next year if we continued doing it the same way next year. But let's move into the presentations. I'm going to start with some highlights. Then Kåre will give you the presentation on the sales update, Mads Krogsgaard on the R&D. Jesper will conclude on the financials and the outlook, and then we will move to the Q&A sessions, which will take place in the 4 distributed meeting rooms. As always, I need to advise you that the statements that we are making is, of course, to the best of our knowledge and our best assessment at a given point in time, but things could turn out materially differently. And for acquainting yourself with the risk factors, please review this slide. It's on the table. It's included everywhere, and you know it from every year that you've been here. But I can tell you we'll do our utmost, of course, to predict things as accurately as we possibly can. These are the statements from the front page of our company announcement. I'm not going through it verbatim other than to say that the second quarter was a solid second quarter after a somewhat disappointing first quarter. Sales growth of 7% in the first half in local currencies, but the momentum behind our business and in particular, better comparators in the second half allows us to retain the guiding that we gave you in connection with the first quarter announcement of growth of the top line between 7% and 10%. So from the numbers, you can gather that we should see different growth rates in the second half. The growth is derived from North America, International Operations and China; from modern insulins, in particular, Levemir; but also growth from Victoza and Tresiba, although still at a relatively modest level, are performing extremely well in the markets where it's been launched, and in particular, those markets where it has equal reimbursements status as Lantus. One of the most positive things, I think, beyond the fact that the business is developing nicely is that we were able to advance a time line for DEVOTE, which is the outcome study that will allow us to refile for approval of Tresiba in the United States. I'm sure this will be part of the Q&A. It has been part of the Q&A all day yesterday and it will be all day today, so I'm not going to go into the details that I'm sure Mads will be very happy to share with you. Xultophy was approved. I believe this is a phenomenal product. You will not see the immediate phenomenal results from Xultophy when we launched this in Europe because it's a combination of 2, at least in European perspective, rather expensive products. The real financial impact of this you will see only after we've got Tresiba approved in the U.S., and following from that, being able to start the application process for Xultophy in the U.S. where we believe this product has an enormous potential as well as Tresiba. Imminently, we will have an interesting panel on 9/11 for 3-milligram liraglutide in obesity. I'm sure that will be one of the major parts of the Q&A today, so I'm not going to go into it. On a more pessimistic note, we had to conclude that Anti-IL-20 didn't meet primary endpoints, and henceforth, we will be closing all trials related to this compound and collating the data and then based on that, make an assessment of our activities going forward later in the year. Financial results. 12% operating profit growth. Diluted earnings per share, 9%, and the outlook for the financials is unchanged from first quarter. This picture, which depicts the way we think about strategy in the company is also something we can dive into in detail. It's based an assessment of what is our core capabilities and how we leverage those core capabilities into different therapeutic areas. The core capabilities evolve around our ability to identify, develop, manufacture and administer human proteins and most notably, of course, in the area of diabetes but also, hopefully in the future, in obesity, in hemophilia. It's a well-known oral therapeutic area for us. Growth is all of the same, and of course, we also have attempted to do the same in inflammation with our investment there. Nothing changed in that over -- look compared to a year ago. Now this is perhaps the most important slide to give you reassurance that there's growth opportunities for Novo Nordisk going forward. About 400 million people with diabetes is estimated, at this point in time, 600 million in about 20 years' time. And if we look at the total population of diabetics, of all the ones we estimate that exist, only 6%, that is 10% -- less than 10% get a proper outcome of their treatment if they are diagnosed, treated or have access to health care capacity in the first place. Obviously, as we all know, diabetes has a long-term debilitating effect on individuals that are left untreated or poorly treated. This has enormous individual human consequences, also a societal cost, if this is -- the situation is left to persist. So obviously, what we're going to do is we're going to try to work on changing the rules that we have, so that more people are becoming diagnosed, that we expand the health care capacity, that we educate health authorities, educate the health care capacity to become decent care for people with diabetes and then we do more research. Because even with today's decent health care and the most advanced products, people still get complications. And therefore, there's still room for innovation going forward. Over the last 10 years, this is the performance of the company in sales, averaged 13% top line growth; and operating profit, 19%, average operating profit growth. So how do we get from, say, the 13% to the projection of about 8% in 2014? Well, it is almost entirely, given the few ups and downs in the other areas, ascribable to the business in the United States. In the United States, we've had some one-off effect of running out of Prandin, which is happening this moment, so that the month of August going forward, Prandin will have been gone and was gone last year. And therefore, the comps for our second half will be much easier in the United States with that out of the picture. It's also due to a loss of a contract with Express Scripts. Consolidation and distribution changes in insurance schemes, meaning, that we have to accept a higher rebate and higher coverage for the donut hole for patients in the United States. So it's almost entirely ascribable to the U.S. Now how do we get back to growth then going forward? And why do we believe that we'll be able to grow? Two important things, the most important one being Tresiba. That's why the DEVOTE trial is so important, and we believe that there is no cardiovascular risk with Tresiba compared to Lantus. Of course, we obviously need to convince the agency, and we intend to do that, with that, get to the U.S. market, which is the biggest basal market in the world, where we currently only have 24% of that market, and hence, we should be having an opportunity of expanding our business in the U.S. following a potential launch in the beginning of '16 of Tresiba in the U.S. significantly. The second thing, which is -- and following from that then comes Xultophy. I already mentioned that. The second interesting thing is the 9/11 panel on obesity. This is the active ingredient, liraglutide, which is on the market in the form of Victoza. A positive opinion on the obesity indication will strongly support the expansion of the GLP-1 market also in diabetes. And therefore, this is an event which is not solely related to obesity but has implications for our diabetes business as well. We are, of course, optimistic and believe that we'll be successful in both these 2 key parameters. And therefore, when we look at the long-term projection for the company, we foresee the company will be coming back to double-digit growth. Given all the uncertainties and all the moving parts, all the competitive moves that may happen, we've modeled it all and we still believe that we have an opportunity to come back to double-digit growth going forward. But with that, a few more details from Kåre.

[Kåre Schultz:]

Thank you, Lars. And before I get into some of the details on the quarter, just a few comments to some of the long-term trends in the industry, trends that are important for Novo Nordisk. You can see from this graph that the diabetes market over the last 10 years has been growing 10%-plus in compounded annual growth rate. And you can also see that the injectables have been growing faster than OADs. This is a basic trend that we expect will continue also going forward. You can also see if you look at the company's position that the companies with an injectable portfolio, so us, Lilly and Sanofi, we have relatively more steady developments even though that Lilly has gone down, Sanofi's gone up. It's relatively more steady development than the companies who come into the market with an OAD product and then has to leave it again very fast either for safety reasons, such was the case with Avandia; or a combination of patent and safety, such as the case for Actos; or a strong launch, such as the case for Merck and their DPP-4 inhibitor. So historically, if you go back in our 10 years, you will see that the OADs, they come in, peak fast and then they typically leave for either safety or patent expiry reasons, whereas the companies within an injectable portfolio, such as us, have shown more staying power and have been growing their share of the total value on a steady basis. This, of course, is an excellent topic also to discuss later today in the breakout sessions. And our topic which is interesting and which makes our business slightly different from general pharmaceuticals is some of the barriers of entries that are related to biologics and the fact that we basically have a business that's totally driven by biologics. I won't get into all the details now but just say that all pharma companies have patent that protect their products, but we also have a set of our unique value chain characteristics, which are part of the barriers of entry within the field that we operate in, and that's something we can discuss later. Now returning to the quarter and the half year result. Then, as it was said, we grew sales by 7% and 1% reported due to the currency going against us. The far majority of the growth was coming from North America with 61%, and we have the 2 also strong growth regions, International Operations, which is basically Latin America, Africa, Middle East, Southeast Asia and then from China. We have a very low growth in Europe and Japan. It's basically due to both demographics, the financial situation in the market and our position, which basically means that we are looking into, also in the future, modest growth, single-digit in Europe and Japan. But we're very optimistic on the continued demographic drive behind growth in International Operations and within China and also about the dynamics in North America when it comes to upgrading the portfolio and getting continued price increases as we go along. In China, the underlying growth was not quite as high as reported. It's slightly less due to the fact that we had some de-stocking last year, which helps on the comparator. And in IO underlying, there are also some swings up and down and probably, we are underlying slightly above what we are reporting, but basically, very strong double-digit growth in those regions. You can also see that about half of our sales are now coming from North America. 20 years ago, half came from Europe. And the change towards North America, IO in China is something that we expect will continue in the next coming 10 years. If we look at the products then it's also the same trend we are seeing as we've seen the last 5 years, that the relative share of sales coming from diabetes is increasing. We are now really close to 80%, and we have a strong franchise in NovoSeven with hemophilia and also in Norditropin in growth disorders. But they sort of, in a way, struggle to keep up with the strong growth that we see in diabetes care. You can see here that this half year, diabetes care, despite sort of the headwind that we had in the U.S., is still growing more than biopharmaceuticals. It's not because we don't have a strong position. We have a strong position in the marketplace with NovoSeven and a very strong position in the marketplace with Norditropin, but it's simply because these segments are more or less saturated in the sort of industrialized triad markets, and the growth is coming from International Operations where we see increased use of these products. In terms of the diabetes portfolio, it's modern insulin and Victoza that drives growth. And what is really nice to see is that what we call new-generation insulin, so Tresiba, is starting to add to the growth, and let me just show you where that is coming from. In markets where we launched so far, it's a limited number. But it's performing very well in all the markets where we have market access at par with the current basal insulins, so Levemir and Lantus. And you can see here how Japan, which was the first market where we launched, we have roughly been 1.5 years on the market, we are north of 20% market share. And that's a very, very strong launch of any insulin if you look back in history. And it indicates that Tresiba will clearly become the market leader and renewed growth spend within basal insulins. The same goes for Switzerland and the same goes for countries like Mexico and India. Here, we have no reimbursement from the public sector, but neither does Levemir and Lantus. So we are sort of competing at an equal footing. In markets where we do not compete on an equal footing such as U.K. and Denmark, where Levemir and Lantus have reimbursement but we have not yet got full reimbursement for Tresiba, it is, as you can see, holding back penetration. But this also means that we have high hopes for the penetration of Tresiba in the U.S. once we get there, assuming that we can get similar access for Tresiba as what has been the case for Levemir and for Lantus. But better than me talking about how we'll do that, I think I'll hand over to Mads, who will comment on that.

[Mads Krogsgaard Thomsen:]

Thank you very much, Kåre. First of all, if we take a look at the R&D pipeline as it looks today, I think what is evident is that the company has over the last many, many decades been very convinced about the need to do 2 things

[Jesper Brandgaard:]

Thanks, Mads. Here, you have a slide with all the numbers for the first 6 months. A few key comments from me. Sales growth was significantly impacted by currencies. Sales was growing 1.5% reported and around 7% in local currency, so about 5.5% negative currency impact. Our gross margin expanded by 40 basis point -- had a 40 basis point negative currency impact. So in local currency, we saw approximately 80 basis points improvement in our gross margin, primarily driven by higher prices in the U.S. and an improved product mix where Novo Nordisk was selling more, as Kåre was alluding to, of our modern insulins and Victoza. For the full year, I would anticipate that our gross margin would expand in local currency in the vicinity of 50 basis points. Looking at sales and distribution costs. This has been a key driver of our operating performance in the first half. There's been a very cautious spend linked to the very cautious developments to start the sales in the U.S. and also in Europe, but also reflecting some adjustments to legal provisions. I would anticipate, as we move into the second half, that we will see a speedup of our promotional activities, especially in the U.S. We have at the mid-June launched FlexTouch, our new device, with Levemir in the U.S. And you should anticipate that there will be direct-to-consumer marketing for that product as we move along. And consequently, the sales and distribution costs will probably move towards the 27% mark. We traditionally have a higher S&D spend in the second half of the year compared to first half. Research and development. Mads was just alluding to the quite impressive pipeline we have. That has a cost consequence to it. It's certainly a higher proportion of the overall R&D costs of this year is related to late-stage development activities. As a consequence, you see the 16% growth, the first half year. And I would anticipate we would be between 15% to 16% of sales in R&D costs when we look at the full year 2014. Admin costs continue to gradually improve and continue, and I also expect for 2014 to see a 20 basis point or so improvement to the level of around 4 or just below 4 percentage point of sales. License income and other operating income will be about double that, so probably DKK 800 million for the full year. We have divested one asset to a French biotech company, and that's the key driver behind the growth in the first half of this year. Net financials is reflecting the challenging currency situation. I'll get back to that in the next slide. I should mention on the tax rate that we are seeing a slight decline in our tax rate, down to 22.2%, similar rate is expected for the full year. The tax rate for Novo Nordisk is impacted by gradual lowering of the Danish statutory corporate tax rate, down to the level of actually 22% from 2016 and onwards. Net profit growing to the tune of 6%. And because of the repurchase of shares, we are seeing our diluted earnings per share actually growing by 9%. I got stalled here. Let's see. Do we -- yes, there we are. In terms of currencies, we've had a very challenging first half. I mentioned the 5.5% negative impact on currency. You can also see from the charts here that the challenge has been bigger in the first half than we anticipated it will be in the second half. And as we are guiding to a sales impact of 3% negative for the full year and as we've had 5.5% in the first half, it will only be a modest negative impact. You can also see that from the non-hedged currencies, which have been challenging for Novo Nordisk, that the main part of the drop actually occurred in the third quarter of last year. And hence, the comparator on currencies are also getting gradually easier for Novo Nordisk as we move along. I know that these currencies, the ruble, Indonesian -- Indian rupee and so on, they are basically all having a 5% movement, will give us an approximately DKK 15 million to DKK 30 million negative impact on operating profit. The financial outlook for the year is being illustrated here. No significant changes compared to last time. You could say the only really substantial change is the lowering of the currency impact on sales and operating profit, but a similar negative, then, movement to the hedging income as a consequence of the improved outlook for -- especially U.S. dollar and Japanese yen. Apart from that, the main financial outlook parameters are unchanged compared to the outlook we gave in May. It's not really getting anywhere. I tried that, and that didn't work either. It wouldn't signal. There we are. We also probably would use this opportunity to just remind you about the long-term financial targets. I won't go a lot into them, but I think we have good opportunities in the breakout session to dig into them. Just noting that on operating profit, of course, Novo Nordisk is significantly impacted by currencies, and the ambition level is in relative, reflecting what the underlying growth is. And as you can see last year, we managed to deliver, in underlying terms, about 15% growth. This year so far, the ambition level is to deliver around 10%. And of course, we are highly reliant on successful being able to launch Tresiba in the U.S. to really reignite growth in Novo Nordisk. Operating margin of 40%, that's approximately where we are operating now. The return target we have for operating profit after tax to net operating assets are making gradual progress towards the 125% target. And the cash conversion ratio is pretty much in line with the operating level of -- the target of 90% is pretty much in line with the operating level we have now. And let's see. Will I get this one to work? Yes. In terms of closing remarks, just noting that we are in a very attractive market segment of the pharmaceutical industry that is growing more than 10% per year. We have a solid leadership position with a 21% -- 28% market share as Kåre illustrated. It's based on our position within insulin, having 47% volume share of the overall insulin market and a 46% share in modern and new-generation insulin. And I should too note on this slide that we are beginning to combine the modern and new-generation insulin as that is where we are getting the value from. And the conversion to the new-generation insulin, we'll have them in different stages dependent on the approval situation for -- especially Tresiba around the world. And then finally, we have a very significant market position within GLP-1 and hope to be able to continue to expand that leadership position, also with the exciting Ad Comm upcoming as Mads alluded to for liraglutide 3 milligram. In terms of the pipeline, I think we've covered that, and you have plenty of time to deal with that. So let me just end by giving you some practical details. The group sessions will start in approximately 7 minutes, 12