諾和諾德 (NVO) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2013 Novo Nordisk A/S earnings conference call.

For your information, today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Lars Rebien Sorensen, CEO.

Please go ahead, sir.

Thank you very much, and welcome to this Novo Nordisk conference call regarding our performance for the first nine months of 2013 and outlook for the full year.

I'm Lars Rebien Sorensen, the CEO of Novo Nordisk.

With me I have our Chief Financial Officer, Jesper Brandgaard; Mads Krogsgaard Thomsen, our Chief Science Officer; and also present are investor relations officers.

Today's earnings release and the slides for this call are available on our website [as usual].

The conference is schedule to last approximately one hour.

And, as usual, we'll start with a presentation as outlined on slide number 2. The Q&A session will begin in about 25 minutes.

Turn to slide number 3. 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 the 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 note that this conference call is being webcast live and that a replay will be made available on our website.

Turn to slide number 4. We're pleased with the robust sales for the first nine months of 2013.

Sales increased 13% in local currencies and 8% in Danish kroner compared to the same period in 2012.

Sales growth was driven by robust performance in North America and international operations.

Sales growth was realized both in diabetes care and biopharmaceuticals, with the majority of growth coming from the modern insulins and Victoza.

The rollout of Tresiba, insulin degludec, the once-daily new-generation insulin with an ultra-long duration of action continues to progress.

Tresiba is now also being commercially launched in Sweden and India.

On the R&D front, the first patients have now been enrolled in DEVOTE, the cardiovascular outcome trial for Tresiba.

This marks a significant milestone in the process of making Tresiba available for people with diabetes in United States.

In August, the phase 3 program for our faster-acting insulin aspart was initiated.

And in October the US FDA approved Novo Nordisk biologics license application for recombinant and coagulation factor VIII, turoctocog alfa under the brand name Novoeight.

Turning to financials, reported operating profit grew 10% in the first nine months of 2013 and diluted earnings per share grew 25%.

In 2013 expectations to operating profits are unchanged.

Sales growth measured in local currencies are still expected to be 11% to 12% -- 11% to 13%.

And operating profit growth measured in local currencies is still expected to be 12% to 15%.

Preliminary outlook for 2014 indicates high single-digit growth in sales and operating profit measured in local currencies.

Turn to slide number five.

The first nine months of 2013, North America accounted for 69% of growth, followed by international operations which account for 17% of growth in local currencies.

Sales growth in North America was 20% in local currencies, reflecting continuous robust market penetration of the modern insulins, in particular Levemir and NovoLog.

Despite increased competition, Victoza continues to perform well in North America.

Sales within international operations grew 15% in local currencies, driven by continuous penetration of all three modern insulins, a contribution from human insulins and Victoza who had sales growth primarily being driven by a number of Middle Eastern countries.

Sales in region China increased 12% in local currencies.

The growth was driven by all three modern insulins, while sales of human insulins only grew modestly.

The reported growth in region China reflects a significant negative impact for a change in our inventory set-off for NovoNorm, our oral anti-diabetic agent.

Adjusting for this, the underlying development of our business in China continues to grow around 15%, which is in line with the growth rates achieved in previous years.

The performance in Europe and Japan continues to reflect the challenging operating environment and stagnating volume growth in the insulin market.

Turn to slide number six.

The modern insulins continues to exhibit robust growth in the first nine months of 2013, amounting to 15%, while Victoza also continues its steady growth trajectory.

In the first nine months of 2013 the diabetes care franchise grew 13% measured in local currencies.

Modern insulins were the primary growth driver, accounting for 51% of growth, followed by Victoza, accounting for 26% of growth in local currencies.

In the first nine months of 2013 the biopharm franchise also exhibited robust sales growth, with 12% growth measured in local currencies.

Turn to slide number seven.

Let's zoom in a bit on the performance of biopharm franchise so far in 2013.

In the first nine months of 2013, NovoSeven grew 11% in local currencies.

The higher-than-normal growth is driven by a higher number of bleeds, more major surgeries and additional acquired hemophilia cases in a number of countries.

Further supporting the growth is the lower level of clinical trial activity and a positive contribution from pricing in the United States.

Norditropin grew 12% in local currencies in the first nine months.

Growth is positively impacted by a contract in the US as well as rollout of new device FlexPro, which has strengthened the competitive offering of Norditropin.

Hormone replacement therapy, HRT, which comprises the majority of other biopharmaceutical sales, was 17% in local currencies.

This is primarily driven by North America and reflects the positive impact of pricing and non-recurring rebate adjustments.

Turn to slide number eight.

Net sales of Victoza reached DKK11.1b in the first nine months, reflecting robust sales performance in North America, Europe and international operations.

Victoza holds a global market share in the GLP-1 segment of 70% value market share compared to 66% in 2012.

In volume terms, the growth of the GLP-1 market has been decelerating, while the GLP-1 segment's value share of the total diabetes care market has increased to 6.8% compared to 5.6% in 2012.

Despite increased competition in the United States, Victoza continues to drive the expansion of the US GLP-1 market and now accounts for 68% of the GLP-1 market value in United States.

Turn to the next slide for an update on Tresiba's performance in Japan.

The rollout activities for Tresiba are progressing as planned in all markets.

And feedback from patients and prescribers is encouraging.

The launch of Tresiba in Japan is especially interesting because it was the first market where the product was launched with a broad reimbursement.

The launch of Tresiba is progressing well in the Japanese market, with an estimated 7,300 doctors having prescribed Tresiba by now, and around 42,000 patients are estimated to be using Tresiba in Japan.

Tresiba is steadily gaining market share and now holds a value market share of 8.7% of the Japanese basal insulin market 35 weeks after launch.

Over to Mads for an update (inaudible).

Thank you, Lars.

Please turn to the next slide for a status on the insulin degludec products.

The regulatory [re-use] of Tresiba and Ryzodeg continues around the world.

New drug applications are under way for Tresiba in 41 countries and approval has now also been obtained in Russia and Lebanon.

Please turn to the next slide for an update on the cardiovascular outcomes trial for Tresiba.

As mentioned by Lars, Novo Nordisk this month initiated DEVOTE, the cardiovascular outcomes trial for Tresiba.

DEVOTE is a double blind trial with insulin glargine as comparator.

And it is expected to include around 7,500 type 2 diabetes patients that have existing or high risk of cardiovascular disease.

The primary endpoint of the study is major adverse cardiovascular events, i.e.

cardiovascular death, non-fatal myocardial infarction and non-fatal stroke.

The study will be event-driven and complete when a predefined number of major adverse cardiovascular events have occurred.

Novo Nordisk expects to have sufficient data to support a pre-specified interim analysis within two to three years and to complete the study in four to six years.

The interim analysis is intended to support the US approval of the degludec family members, while the complete analysis will provide [activity] data on CV outcomes.

Please turn to the next slide.

In August, onset, the phase 3a program for the novel faster-acting insulin aspart formulation was initiated.

Two of the three initiated trials to investigate the efficacy and safety of faster-acting insulin aspart compared to insulin aspart in combination with basal insulin in around 1,100 people with type 1 diabetes for a total of 52 weeks and around 670 people with type 2 diabetes for 26 weeks respectively.

In the third trial, faster-acting insulin aspart, used as part of a basal-bolus regimen, is compared with basal insulin treatment for 18 weeks in around 220 people with type 2 diabetes.

In all these trials, the primary endpoint will be HbA1c.

But important secondary endpoints will, among others, include postprandial glucose control, outcomes related to continuous glucose monitoring, hypoglycemic episodes, as well as general safety and tolerability.

Dose and flexibility will also be elements to be studied in the onset program.

The last phase 3a trial, onset 4, is expected to start later this year.

The trial will investigate compatibility of the new drug formulation with the insulin pump while performing continuous subcutaneous infusion with fast-acting insulin aspart in around 30 people with type 1 diabetes.

Finally within diabetes, Novo Nordisk initiated a phase 4 trial this quarter, comparing Victoza 1.8 mg with lixisenatide 20 microgram.

This randomized open-label superiority trial will investigate the efficacy and safety of Victoza versus lixisenatide treatment for 26 weeks as add-on to metformin in 400 people with type 2 diabetes.

Please turn to the next slide for an update on biopharmaceuticals development.

In October of this year the US Food and Drug Administration approved Novo Nordisk's biologics license application for recombinant coagulation factor VIII, turoctocog alfa, known as Novoeight.

Novoeight is approved for use in adults and children with hemophilia A for control and prevention of bleeding, perioperative management as well as routine prophylaxis to prevent or reduce the frequency of bleeding episodes.

Novoeight is the first biological product to be approved under FDAs PDUFA V Act which was introduced in 2012.

In Europe, the CHMP under the European Medicines Agency adopted a positive opinion for Novoeight and recommended marketing authorization for the treatment and prophylaxis of bleeding in patients with hemophilia A. Novo Nordisk expects to receive the final marketing authorization from the European Commission in the near future.

Novo Nordisk expects to launch the product in Europe early 2014 and in the US in the first half of 2015.

In October, Novo Nordisk resubmitted the application for approval of NovoThirteen in the US to the FDA after the receipt of the complete response letter as announced in August 2013.

Lastly, following completion of phase 1, Novo Nordisk has decided to discontinue the anti-C5a receptor antibody called 151.

However, clinical development continues for the second-generation anti-C5a receptor antibody called 215, an [anti-neo-human] antibody that has documented improved properties compared to the discontinued 151 antibody.

With that, over to Jesper for the financials.

Thank you, Mads.

Please turn to slide 14.

In the first nine months of 2013, sales increased by 13% in local currencies and by 8% to DKK61.9b measured in Danish kroner.

The reported gross margin improved by 70 basis points to 82.6% in the first nine months of 2013, primarily driven by the favorable price development in North America and a positive net impact from product mix due to increased sales of modern insulins and Victoza.

The gross margin was negatively impacted by around 0.3 percentage points due to the depreciation of the invoicing currencies versus the Danish kroner compared to the prevailing exchange rate in 2012.

Total non-production-related costs increased by 11% in local currencies and by 8% in Danish kroner to DKK27.5b.

Sales and distribution costs increased by 13% in local currencies and by 10% in Danish kroner to DKK16.9m.

Cost -- the growth in cost is driven by the expansion of the US sales force in the second half of 2012 and sales and marketing investments in both China and in selected countries in international operations, costs related to the launch of Tresiba in Europe and Japan, as well as an impact on the cost growth percentage arising from changes to legal provisions in both 2012 and 2013.

R&D costs increased by 8% in local currencies and by 6% in Danish kroner to DKK8.2b.

The modest cost increase reflects timing of clinical trial activity.

Within diabetes care, costs are primarily driven by development costs related to the initiation of the Tresiba cardiovascular outcome study, the ongoing phase 3a trials for semaglutide, the once-weekly GLP-1 analogue for -- sorry, the once-weekly GLP-1 analogue and faster-acting -- and finally, faster-acting insulin aspart.

Within biopharmaceuticals, costs are primarily related to the continued progress of the portfolio of development projects within hemophilia and the phase 2 trial for anti-IL-20, a recombinant human monoclonal antibody in rheumatoid arthritis.

Operating profit increased by 17% in local currencies and by 10% to DKK24.1b measured in Danish kroner during the first nine months of 2013.

Net financials showed a gain of DKK0.6b in the first nine months of 2013 compared to an expense of around DKK1.5b in 2012.

In line with Novo Nordisk's treasury policy, the most significant foreign exchange risk for the Group has been hedged, primarily through foreign exchange forward contracts.

The foreign exchange result was an income of close to DKK700m compared to an expense of around DKK1.5m in 2012.

This development reflects gains on foreign exchange hedging involving especially the Japanese yen and the US dollar due to their depreciation versus the Danish kroner compared to the prevailing exchange rate in 2012.

This positive effect is partly offset by losses on commercial balances, primarily related to non-hedged emerging market currencies.

The effective tax rate for the first nine months of 2013 was 22.7%, which is 0.3 percentage points lower than last year.

Please turn to slide 15.

The negative impact from currencies on operating profit during the first nine months of 2013 is primarily driven by the depreciation of the Japanese yen, which, during the first nine months of 2013, on average was 20% below the average rate during the first nine months of 2012.

The impact of currencies included in the updated guidance for the full year of 2013 reflects both the Japanese yen and the US dollar currently are [24%] and 7% respectively below the average of 2012.

Please turn to slide 16.

For 2013 we still expect sales growth of 11% to 13% measured in local currencies.

Given the current level of exchange rates versus Danish kroner, the reported sales growth is now expected to be around 4.5 percentage points lower than the growth measured in local currencies.

The sales outlook in local currencies reflects expectations for continued robust performance for the portfolio of modern insulins and Victoza, as well as a modest sales contribution from Tresiba.

These sales drivers are expected to be partly countered by generic competition to Prandin in the US, intensifying competition within diabetes care as well as biopharmaceuticals, and the macroeconomic conditions in a number of markets in international operations.

For 2013, operating profit growth is still expected to be in the range of 12% to 15% measured in local currencies.

Given the current level of exchange rate versus the Danish kroner, the reported operating profit growth is now expected to be around 7 percentage points lower than the growth measured in local currencies.

This reflects significant sales and marketing investments in the portfolio of modern insulins and Victoza in the US, the launch of Tresiba outside the US, sales and marketing investments in China and in a selected number of countries in international operations.

Further contributing is a significant increase in cost related to the continued progress of key development projects within diabetes and biopharmaceuticals.

For 2013 we now expect a net financial income of around DKK1.1b.

This primarily reflects gains associated with foreign exchange hedging contracts following the depreciation of the Japanese yen and the US dollar versus the Danish kroner compared to the average prevailing exchange rate in 2012.

This positive effect is partly offset by losses on commercial balances primarily related to non-hedged currencies.

The effective tax rate for 2013 is still expected to be around 23%.

Capital expenditure is still expected to be around DKK3.5b in 2013, primarily related to investments in filing capacity and prefilled device production facilities and new offices in Denmark.

Depreciation, amortization and impairment losses are still expected to be around DKK3b.

Free cash flow is still expected to be around DKK22b.

The preliminary outlook for 2014 indicates high single-digit growth in sales and operating profit, both measured in local currencies.

The outlook reflects expectations for continued robust performance of the portfolio of modern insulins and Victoza, as well as a positive sales contribution from Tresiba.

These sales drivers are expected to be partly countered by an impact from a more challenging contract environment in the US, generic competition to Prandin in the US, intensifying competition within both diabetes and biopharmaceuticals, as well as the macroeconomic conditions in a number of markets in international operations.

In addition, the outlook for operating profit reflects significant costs related to the continued progress of key late-stage clinical development projects.

Given the current level of exchange rate versus the Danish kroner, reported growth in operating profit in 2014 is expected to be approximately 5 percentage points lower than the growth measured in local currencies.

The currency impact on reported operating profit growth is expected to be partly offset by a net gain on foreign exchange hedging -- on foreign exchange contracts, hedging operating cash flows in 2014.

Income recognition of this net gain has been deferred to 2014, when the hedged operating cash flows will be realized.

The net hedging gain pertaining to 2014 is currently expected to be around DKK900m.

All of the above expectations are based on the assumption that the global economic environment will not significantly change business conditions for Novo Nordisk during the remaining part of 2013 and in 2014, and that currency exchange rates, especially for the US dollar, will remain at the current level versus the Danish kroner.

Finally, please note that in order to secure liquidity for both the Novo Nordisk B shares and the American Depository Receipts, the ADRs, and to bring price levels in line with market practice for especially the ADRs, the Board of Directors have decided to split the share in early January 2014 in a 5-for-1 ratio, taking the trading unit DKK0.20 compared to DKK1 today.

The ratio of B shares to ADR listed on the New York Stock Exchange will remain 1 to 1.

This concludes the financial update.

Now back to you, Lars.

Thank you very much, Jesper and Mads as well.

To summarize, we are pleased with the sustained growth in our Company, which is reflected in the robust sales growth achieved in the first nine months of 2013, the outlook for the full year 2013, as well as the preliminary outlook we see, as Jesper just outlined, for 2014.

Rollout of Tresiba, our new-generation insulin with an ultra-long-acting duration of action, is progressing well.

And we remain encouraged by the feedback from patients and doctors.

We're especially pleased with the initiation of the cardiovascular outcome trial DEVOTE, which passes a significant milestone in the progress towards making Tresiba available also for people with diabetes in United States.

We're now ready to take the Q&A.

May I currently remind you all to restrain yourselves to two questions to allow more people to ask questions?

Operator, we are ready to take the first question, please.

(Operator Instructions).

Michael Novod, Nordea.

Yes.

Hello.

It's Michael Novod from Nordea Markets in Copenhagen.

First question relating to the GLP-1 market.

Could you comment on the trajectory you're seeing for Victoza going forward?

You've been talking historically about 200m, then 150m.

What should we expect going forward?

And in that relation also, how do you see the overall US GLP-1 market and pricing in the US?

And then second question relating to guidance and the preliminary guidance.

Standing here today in late October, are you more uncertain on next year's guidance than you have been in the other years where you have given this preliminary guidance, because it seems there are a bit more factors to consider?

Or do you still feel very confident that you are able to actually live up to these expectations?

Thank you very much, Michael.

Let me ask Jesper first to give a little bit of color to his confidence in the guidance.

And then we can both, Jesper and I, can discuss this.

And then we'll come back to the GLP-1 market.

Okay.

Michael, first, if we take the guidance on the sales line, and that's really the key one, high single-digit growth.

We're quite comfortable with that level.

And to take you to that, I'd basically say, well, if you look at the growth so far this year, we are seeing 12.5% growth first nine months.

We've also noticed that there are elements of a non-recurring nature this year, primarily related to rebate adjustments which you should adjust 1 percentage for.

So underlying, you're looking so far at about 11.5% growth year to date and something in that ballpark also expected for the full year in local currency terms.

Then we have some significant swing factors we know will impact us in 2014.

The first one, Prandin.

I've been warning that Prandin would be exposed to new competition.

That has now materialized from August onwards.

And that will impact sales next year with approximately 1% negative.

Secondly, we are also unfortunate in the fact that we have lost a significant contract with Express Scripts, impacting both our NovoLog franchise and our Victoza franchise in the US.

And although it's a bit preliminary to estimate the financial amount fully of that contract, because it do depend on to what degree individual healthcare plans will decide to opt out under the national scheme operated by Express Script, I think it's feasible to assume that an impact on our top line will be in the magnitude of 1%.

And then finally, I think there is an element of lower growth coming from the unusual level of growth, and Lars also alluded to that in his presentation, that we have seen our biopharmaceutical franchise so far this year growing 12% and with NovoSeven growing 11%.

And that is probably higher than what we see the long-term trend for the product, although patients seem very reassured in the very safe profile of our NovoSeven brand.

So overall, those factors would bring it down into the high single-digit level.

And then with a stable operating margin, that should basically provide a similar level of growth in operating profit.

And the factors swinging in the P&L will be a continued expansion of our gross margin, where we continue to see an improvement in our gross margin in the ballpark of 50 to 100 basis points.

And in 2014 I would anticipate that most of that improvement would be invested in a higher research and development ratio as we continue to progress the significant portfolio, or especially the key products in -- within diabetes care.

Over to you, Lars.

Yes.

Thank you very much, Jesper.

With regards to the GLP-1 market, it is correct that our performance in Q3 underlying was somewhat shy of DKK150m added in the quarter.

But we would say though, going forward, it's probably a reasonable estimate to assume about an underlying added DKK150m per quarter.

If we look at the development in 2013 of the GLP-1 market, we did see, following the public debate about safety, pancreatic safety or the increase in [collapse] which emerged in the beginning of the year in March, a slowdown in demand for these drugs, including GLP-1 products.

With the very strong statements that came out over the summer, both from FDA and EMA and other competent organizations, of course one can hope and wish for a rebounding of the demand for GLP-1 class, as such.

It's perhaps a little bit early to have that optimism.

But one thing we duly noted is that we have -- we are conducting at the moment a major DTC campaign in United States.

And when we measure and look at the new scrips to our brand, we can definitely see a pick-up.

Whether that will translate itself to also expansion of the market is something we are hoping for.

We can see some small indications, but we need some more data points to that.

And I think, of course, we have been able to raise price in United States, and that's also anticipated going forward.

But also, due to the situation with Express Scripts, we are now seeing the fact that there's aggressive price competition even within a class of therapeutically different compounds, which is rather unusual, but I'm sure coming back to Express Scripts.

So let's leave it at that.

Take the next question, please.

Michael Leuchten, Barclays.

Yes.

Thank you.

Two questions.

One on the rebates.

They seems to be moving up and down.

We think we have the benefit in the first half and now in Q3 we had a drag from the rebate bookings.

Can you just elaborate what's driving the volatility and whether that's going to continue or whether that will quiet down over time?

And then a second question is on Levemir in the US.

Particularly a strong quarter in Q3, with revenues up 44% in the quarter.

Is that -- how much of that is underlying and how much of that is a one-off please?

Thank you very much.

Yes.

With regards to rebates, it is correct that there were positive rebate adjustments when we look at the beginning of the year compared to 2012, and there was a drag in Q3.

It relates to the amount of the compensation for the donut hole, which we as a company have to share as part of the pharmaceutical industry, the agreement that the industry made with the administration in the US.

And it seems like there are more plans that are changing their plan to become covered by Medicare Part D or become Medicare Part D-like, which helps -- gives the benefit to the participants that the pharmaceutical industry will be closing the donut hole.

So this has impacted the rebate in Q3.

I think, all other things being equal, we will see an acceleration or a shortening of time period before rebates will have to be claimed and paid back.

And as we see the healthcare reform being enacted and as we see the exchanges starting to work, we should see a smoothing out of this relatively volatile [effect] that you have seen so far.

And just adding to what Lars is saying, that is actually a factor behind us keeping a constant level of expected free cash flow at DKK22b, actually an effect of these slightly higher rebate payment being conducted in 2013.

Yes.

And then -- correct.

We've seen a quite strong performance of our Levemir business in particular in United States.

This is something that we actually did acknowledge also in 2012.

And when we got the disappointment that we received the complete response letter on Tresiba, we actually noted that it was our anticipation that until such time that we'll see a change in the marketplace for basal insulin in United States, which is in about 2015, when Lantus goes off patent and when biosimilar Lantus [pens] can be launched.

The market picture would be characterized by us continuing to push and being able to penetrate with Levemir in the US market.

The volume growth is around 8% to 10% of the long-acting segment in United States.

And the rest is basically we're gaining share and we are taking price off.

We are following the price lead of glargine in this case.

And the price change has been around 30%.

So the rest is the volume.

Thank you.

Next question, please.

Tim Race, Deutsche Bank.

Hi, guys.

Thanks for taking my question.

First question is just a long-term guidance and do you still stand by your 15% operating profit growth target, given that next year you're guiding to headwinds, and I can't see in 2015 headwinds going away, given that you might have competition to Victoza and also potentially generic competition?

So just any thoughts on there and when you might potentially update us on that.

And then just a question on China, just overall, the market's having a lot of, let's say, problems.

Your numbers seemed relatively robust.

But could you just talk about what you're seeing on the ground?

Do you think that there's any major changes to the Chinese dynamic and perhaps the arms race that's going on there and just any first signs of things getting better?

Thank you.

Yes.

Jesper, if you can comment on your perspective for the long-term guidance and then I'll take care of China.

After you.

Well we basically stick to our long-term targets.

Targets are something you set for the future, and it is long-term.

We continue to work towards growing our business in operating profit terms from 15% year on year, measured, of course, in local currencies, so taking away the fluctuation caused by currencies.

It is correct that we are next year guiding to high single digits.

I think if I take you back to 2012 and 2011, you would see a similar level of guidance.

And it still looks like that we, in 2013, will work our way towards, in what has been a very challenging year for Novo Nordisk, very close to 15% growth.

That's the upper end of our guiding range in terms of operating profit.

When we looks to the years 2014 to 2016, no doubt that they will be challenging.

I think we have opportunities with our portfolio of drugs.

We now have Tresiba on a number of markets.

We have filed Ideglira.

We hope to file liraglutide in obesity.

So we still have opportunities to work with in the coming years until we clear the degludec family, as Mads alluded to in his presentation, in the US hopefully towards the end of 2016, early 2017.

And so that leaves us confident that we can continue to work towards this target.

And as we've also said historically, it's likely that we will deviate from the target in individual years if investment opportunities should basically prescribe that as being the best long-term solution for our shareholders.

So we're not dogmatic about a 15% target in individual years.

But we do believe it's the right long-term objective in a franchise that has great opportunities, both for the insulin franchise and the GLP-1 franchise.

Yes.

Thank you, Jesper.

It is of course also our hope and aspiration that, with the enactment and the implementation of Obamacare in the US, that that should lead to some volume growth in the US, and this should benefit in particular businesses like ours, where we're dealing with chronic care patients.

To go to China, again, here you're right.

Our business is largely, when you look at the numbers, unaffected.

The 12% growth rate, as we also stated in the call, was impacted by a change in our distribution.

We've gone from shipping material and building and shipping material from Denmark to having consignment stock in China, shortening our distribution chain.

So it's a once-off event that we have taken out, which is good for business, good for predictability going forward.

It's about 3 percentage points.

So if we add that back in, you're looking at a growth of our business in China of around 15%, which is what we've been guiding all along.

What we notice in the marketplace is that there is a reduced, or has been over the third quarter, a reduced willingness on the part of physicians to see representatives from the pharmaceutical industry.

Now, in terms of our business, since it is a business of chronic care, it has not had such a significant impact on the basal stable business we have.

People are, after all, getting prescriptions of their insulin to treat their diabetes.

However, if we should point at one product where we may have seen a slight slowdown, it's the more promotion-centered products, like Victoza, which is not reimbursed and which are very expensive.

There we've perhaps seen a slight slowdown in the Chinese market.

So we do see a tendency, if we should be optimistic, that things are returning to normal.

We do not see at our factories or our operations any vigilance from the authorities in terms of further investigations into the potential marketing practices which were so prominent and visible over the summer.

So we think things are normalizing in China, and that should be good.

Great.

Thanks.

Richard Vosser, JPMorgan.

Hi.

Thanks for taking my questions.

Just going back to the price rises that are going through in the basal segment at the moment, have the payers started to signal any concerns there?

And allied to that, do you foresee more Express Scripts-type deals for the basal insulin segment in 2015?

And if that's the case, then how do you think you could maintain share growth of Levemir during that period given the incremental competition?

And then a second question, please, just going back to China and the lower human insulin growth you're seeing.

Just could you shed a little bit more light on how the local players are competing there, whether there's some more pricing pressure coming through or just incremental competition and more willingness to use the local players' human insulins?

Thanks very much.

Thank you very much.

I'll talk a little bit to basals, United States.

Jesper, if you care to comment a little bit on what you see in China on the local versus the imported international players.

Well, it's interesting because if you look at the Express Scripts story, in the Express Scripts story, we were the incumbent player with about 80% -- 70% of the market in the United States.

And that kept -- of course gave the opposition, if you want, BMS, Astra, an opportunity to go in with an aggressive bid, because that would be so painful for us, if we look at it from a financial perspective, to have to adjust all the [wages] down, as they apparently did.

It's in a way the opposite situation when you look at the basals, because in the basals, it's glargine that has the lion's share, with 80%, and we have 20%.

And so how that's going to play out in the future I'm of course not going to discuss on the call here, but I do think that there might be others that will start to make similar plans as we've seen with Express Scripts.

We have not had any specific pushback on the pricing of basals and we are not price leader and taker in this market.

So I guess if any criticism had emerged, it would have been directed towards our competitor, not towards us.

So I would not exclude others to go down the same route.

How that will play out in the basal segment might be quite different than how it played out, due to the different strength of the players in the marketplace.

Jesper, any comments on the Chinese market?

Yes.

The human insulin market in China is very competitive.

We actually saw that the Chinese government adopted human insulin on the National Essential Drug List back in -- with the (inaudible).

It is likely that this will lead to more increased tender bidding for contracts in the regions in China.

But so far we've not seen any significant amount of that.

That said, we are seeing that the local manufacturers, like Jungwoo or Dongbao and United Labs are being competitive in those segments of the Chinese market.

And where we're seeing the predominant part of our growth is clearly in the modern insulin segment, where the biggest opportunities are, as we see it, for the insulin franchise.

We're seeing the Chinese market gradually converting towards modern insulin, very high pen penetration.

And for our business, more than 90% of the business is in pen and 40% of the market in volume terms are being converted to modern insulins.

Yes, very good.

Thank you very much.

Next question, please.

Luisa Hector, Credit Suisse.

Good afternoon.

Could you please comment on your plans for the size of your sales force as you go into 2014 and what's within your guidance assumption there?

And could you tell us the contribution of price and austerity measures to the third-quarter sales, please?

And then finally, just a quick question, with the launch of Lyxumia in Europe, are you feeling any or hearing any comments?

I know it's early days, but any feedback on that, please.

Thank you very much.

This is Lars Rebien here.

I would -- to [invigorate] Mads Krogsgaard, I will ask Mads Krogsgaard to comment on what he expects from [Lyxumia] in Europe, because, as you probably heard, we are doing a head-to-head comparison study.

So I'm sure he has some expectations for how that is going to play out.

Then Jesper will come back on how Q3 was impacted by austerity and price.

And then I'll come back and talk a little bit about sales force.

Yes.

Thank you, Lars.

And as we are aware, lixisenatide application has been discontinued in the US, but in Europe it is on the market.

It has only, to my knowledge, has sold to the tune of [EUR2m] preceding quarter, and we have not seen any indentation on our penetration in the European market.

The feedback we are getting is that quite clearly Victoza is also compared to lixisenatide in the different league in terms of efficacy.

So that's also why we are setting out to do a superiority trial against lixisenatide, which has started recruiting.

So essentially we do not foresee lixisenatide, as a standalone product, as a serious threat to liraglutide.

One comment would be that it is being positioned mostly as an add-on for basal insulin intensification, probably in realization of the notion that it is not a very efficacious standalone therapy as oral anti-diabetic medication add-on.

And Victoza is positioned earlier in the treatment cascade, but it's actually also being used distinctly in that segment, and we have seen no slowdown in that regard.

Jesper?

And then on prices and austerity measures, I think gradually we are seeing a lower impact from these factors in Europe.

And if we take the specific comparison, Q3 against Q3 last year, I would say the overall impact on our business probably has been in the ballpark of 0.5 percentage point negative, primarily related to Europe, but also some effect coming from China and the lowering of the modern insulins in China in the first quarter of 2013.

Yes.

And then finally on how we go into 2014, we are quite bullish about the [field] of the market that we operate in three of the regions.

And one is United States, where we currently have around 3,000 sales reps, and we have plans to expand that further in anticipation of an approval of obesity and also to continue to push our modern insulin franchise, as well as our Victoza brand in the US.

Then we plan to continue to invest in China.

Some of our peers have been slightly worried about the lack of access to the medical profession in China.

We think this has normalized.

And we are intending to continue to expand our operation there because we want to support the government's intentions of rolling out healthcare capacity to immunity clinics in more rural and smaller cities.

And that means that we need to employ more people going forward.

And then finally, the general expansion of our organization in the region we called IO, where -- so China we had about 1,800 reps at the moment.

And if we take the IO region, to us it's about 1,800 as well, slightly more perhaps.

And we are also going to expand that.

Whereas if we look at Europe, it's going to be a flat development of manning and the same thing is applying in Japan going forward.

So thank you very much for that.

Next question, please.

Martin Parkhoi, Danske Bank.

Hello.

Martin Parkhoi.

Firstly a question about Tresiba and pricing.

We know that you have priced it with a substantial premium in several markets, except for Japan, where you have been successful.

Have you met larger resistance than you expected in the markets that you have entered now with this high pricing?

And then secondly, with respect to the trial versus lixisenatide, could you elaborate on what your definition will be on superiority, some kind of a margin or how much you actually have to beat it in order to claim it's superior?

Thank you very much, Martin.

This is Lars Rebien here.

Mads Krogsgaard, speak to what you believe is significant performance of Victoza versus lixisenatide.

Yes.

So, Martin, the way you do these trials is initially you start by documenting non-inferiority.

That's a classical element in the statistical hierarchy.

And in that terms, in terms of HbA1c difference, we, on this occasion, would consider something like 0.3% both clinically meaningfully and statistically valid as a both non-inferiority and superiority margin.

And based on what we know for these two products, that is distinctly expected when you apply these drugs at 20 micrograms and 1.8 milligrams on a once-daily basis.

Thank you.

Then onto Tresiba pricing.

You are absolutely right.

We have been pursuing a rather, if you want, aggressive pricing strategy because we think the drug offers some significant benefits.

It has been around, on average, if you want, in Europe, 70%.

And that has of course meant that it has been somewhat difficult to convince certain authorities.

You know that have an ongoing debate about whether to launch in Germany or not, given the [endnote] procedure and the concern that the drug might be withdrawn again or forced to be withdrawn again because of an evaluation in Germany.

We see relatively slow uptake in the UK and in Denmark.

And we see very strong, as you already indicated, performance of the product in Japan.

It's not because we did not pursue a premium pricing in Japan; it's just such that, given the economic situation in Japan, it is very, very difficult for anybody to get any kind of premium, even for new products, in Japan.

And therefore our assessment was also because the price level in general in Japan is high, that for the benefit of our organization, that it was losing ground in diabetes in Japan, that we would accept a slight premium in Japan.

So it's correct, Japan is the place where we have the most even playing field, if you want, in terms of reimbursement and pricing with the competition.

So that's where we can see the true grit of the product itself, whereas if we take Switzerland, where we have full reimbursement, the price differential is, after all, in our favor.

But there the product is actually doing the best.

So all in all, yes, we are seeing pushback.

We are determined to bring up the issue that the Europeans in general have to pay for innovation.

We cannot assume that the Americans alone will fund innovation for the rest of the world.

And therefore we had to take the political stance that this is what needs to be done.

It will mean a slower penetration.

But eventually it's our hope that once patients gradually get approved and use this product that we will also see penetration in Europe.

Thank you very much.

Next question, please.

Keyur Parekh, Goldman Sachs.

Good afternoon, and thank you for taking my questions.

I have two, if I may.

First, Jesper, I think you alluded to this in one of your comments earlier, but it would be great to hear you repeat just how we should think about the level of conservatism you have built into your initial 2014 guidance, both from a top-line perspective and then from an operating leverage perspective.

And secondly, Lars, I would love to hear your thoughts on how you see the opportunity for liraglutide in obesity.

Should we think of it as a small product potentially, or should we think of it as a much broader indication with the data you now have on prevention of -- in patients going from pre-diabetic to diabetes and in the sleep apnea part of the study?

Thank you.

Yes.

Thank you very, very much.

Jesper, why don't you go through, to the extent to which you can, of course, conservatism in the 2014 numbers?

It is clear, the further you stand away for a period that you are trying to [explain] the outcome of, the more deviation you will have in the likely outcome.

And that's why we use a rather broad range in saying high single digits.

As I also commented before, we have used the similar guidance for the two prior years.

And there it was proven that we, at the end of the day, turned out to be slightly too conservative.

I think when I looked at 2013, it was not apparent to us that we would get this [repeat response lever], that's clear.

On the other hand, we have seen a very strong performance of our portfolio of modern insulin.

And certainly those modern insulins are operating in a pricing environment in the US that has been more positive than what we anticipated.

And secondly, I also think it's clear when you look at 2013 that the development for our biopharmaceutical franchise has been much more favorable than what we thought of.

I think I mentioned -- I noted some of the key events that will swing for 2014.

I won't repeat all of them, but just say that I think there are some factors currently that makes us uncertain.

I think when we stand in January, we'll probably have more understanding of the impact of, for example, an event like the loss of contract from Express Scripts.

And hence I would anticipate that we would be able to firm up the range in January and then hopefully I will be proven to be conservative.

But I would say my gut feeling now is that I'm branding it with exactly the same level of realism as has been used in prior years.

Yes.

And then I think an interesting discussion is the opportunity for us with liraglutide 3 mg for obesity.

Now, of course, we have to mention the disclaimer again here that we don't know whether we're going to get an approval.

We are very, very [cautious] recently, and it's very difficult to predict what the agency is going to do.

But you're right in saying that on the efficacy side, we have very strong data suggesting a very strong weight-lowering effect of liraglutide 3 mg, with around 30% of the cohort in our studies losing 10% or more.

And that is very significant.

It is believed that even 5% to 10% bodyweight loss has clinical relevance.

Now we know that obesity, as such, is underdiagnosed significantly and is undertreated today significantly in United States.

So there are a number of hurdles to overcome.

It's just only recently obesity is being characterized as a condition and a disease in United States, and hence it has up until then been looked upon as a social [psychiatric] problem rather than a medical condition.

I attended the Cleveland Clinic's Obesity Innovation Summit just two weeks ago, where there were about 400 to 500 attendees that were both physicians, investors and entrepreneurs in the field of medical technology.

Cleveland Clinic, they greet you with one hand and a knife in the other hand, meaning that they'd like to cut your stomach up.

And they're highly aggressively promoting bariatric surgery as a way of dealing with obesity.

But there were a number of other potential avenues introduced.

And the audience was asked by the presenters in a query how big they thought the obesity drug market would be.

And they were given three different options.

And the majority of the attendees believed that it would be a $10b market eventually.

So there are people out there that believe it will eventually be a pharmaceutical market.

Whether or not it would be lifelong treatment, what we can see so far is that when you stop drug treatment, people start to regain weight.

So it may be in conjunction with behavior modification programs, maybe even in conjunction with other types of intervention, such as surgery, preparing for surgery.

There's a lot of combinations that one can think of.

We are optimistic that we will be able to get an approval because we do believe that the side effect profile we have seen in the clinical trial is known and is something that we would be able to deal with, but that of course pending FDA discussion, which we expect will take place sometime mid next year, because our filing will be done towards the end of the year.

So we should, all other things being equal and with a little luck and tailwind on the pipelines, we should have a chance to be on the market in 2015 in the United States.

And that goes back to the discussion about long-term financial targets.

This is going to of course support our growth opportunity in exactly that window, which seems a little challenging, which is 2014 and 2015, before we in all likelihood will be able to get Tresiba to the market, say late 2016, early 2017, in the United States.

Okay.

Ladies and gentlemen, we take one more question and then unfortunately we have to close.

But the last one, please?

Carsten Madsen, Carnegie.

Yes.

Thank you very much.

This is Carsten from Carnegie, Copenhagen.

Then I'll just ask you one question then about Novoeight in Europe.

Could you elaborate a little bit about which strategy you will be pursuing also when it comes to pricing?

Maybe also talk a little bit about how your label compares to the one of Advate and what type of opportunity we are looking at here.

Thank you.

Thank you very much.

Mads, can you give an update on the comparison between the label of Advate and our product, and then I'll talk a little bit about the rest.

Yes.

So first of all, you can say it's good news that we have a complete label based on the phase 3a program.

Of course, you do always get some [provisional space], the post-marketing requirement.

But already at approval we have a full label for the product, so we are on parity.

In fact, when we look, because of the purity and homogeneity of the product, we indeed have the upper hand in terms of the stability claims of 30 degrees in use time for six months, which is kind of unusual, i.e., unprecedented, for this group of products.

We also believe that we have very strong, you can say, safety position, based on the way that we produce the product and so on and so forth.

So this is a, you can say, as-good-as-it-gets third-generation factor VIII product.

And hopefully, my understanding is that it's also been perceived so by the key opinion leaders that we're speaking to.

Yes.

And then in terms of the market opportunity, I think you need to bear in mind here that this is a generic disease where the number of new entries to treatment is only 1% of the total patient population every year.

And then in addition to that, another 5% will be switching or will be amenable to switch from one product to the other during the year.

So it is a rather conservative market.

Comparing to, for instance -- we usually say that the insulin market is conservative, but it's significantly more conservative than the insulin market.

Therefore pricing being the same, label being the same, the product, we of course hope that that we'll be able to position it as being an innovative, very high-quality product.

You should not look at this opportunity as something that is going to transform our P&L in 2014 and 2015.

Of course, it is something that will build over time.

Okay.

Thank you.

Thank you very much, ladies and gentlemen, for listening in.

And, as usual, if you have additional questions, call our investor relations officers.

And a replay of the conference will be made available shortly on our website.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may disconnect at this time.