諾和諾德 (NVO) 2015 Q4 法說會逐字稿

Thank you all for joining us.

My name is Keyur Parekh and I cover Novo Nordisk for Goldman Sachs, based out of London.

It's my distinct pleasure to have the entire management team of Novo here.

So without any further delay, I'll just pass it over straight to Lars to make some introductory comments and then we'll take it to Q&A, as usual.

Lars?

Thank you very much, Keyur, and thanks to Goldman for hosting this lunch, and in particular thanks to you for attending this lunch.

We've been looking forward to present the 2015 results, and even more so to the dialog which follows usually the presentation.

This is like an examination, but the examination is a day of festivity for the well-prepared student.

So we have been looking forward to this and we do indeed think that the 2015 results are excellent for the Company.

They lived up to our initial guidance in the beginning of the year and came all the way through the year, and was very, very close to our original projections.

We've had very, very significant progress in our R&D pipeline and as we will I'm sure talk a lot about will be the expectation for 2016 and the long-term financial targets, which we will be elaborating on this.

First slide here is a picture of Shanghai.

It's actually the front page of our annual report for 2015, which you will be able to receive or get access to on Monday.

This is also to stimulate your interest in urban diabetes, the focus area for our project called Cities Changing Diabetes, where we try to highlight the fact that people, when they move to cities, end up in traffic like in London, which is not very good for your health because that means you get late to lunch or may not get a lunch at all.

And therefore city life is dangerous in many ways, but also for your health.

And we try to assess what are the risk factors and what can we do about it together with a number of cities in the world, one of which is Shanghai.

If this works, then I would be moving on.

Here we are.

So the usual standard presentation, with some highlights and key events, sales update, R&D, financial outlook and then a Q&A.

And we will be moving relatively rapidly through the presentation, because you've now had a couple of days to consume the announcements that we've sent out so there's no real reason for going too much into detail rather than getting to your questions as quickly as possible.

As always, things may turn out differently than we project.

We tend to believe that we are normally relatively accurate in our projections, but of course things can change.

So please familiarize yourself with the risks and uncertainties on the statement.

The highlight is basically the key statements on the front of our stock exchange announcement, and I'm not going to go through these because these are actually the highlights we're going to go through in the subsequent slides, but these are basically the key take homes for 2015.

If we look at full-year sales as we see it in reported terms, DKK108b.

First time the Company exceeded DKK100b in sales, up 22%; significant tailwind from currencies, in local currencies.

You can see on this slide also the local currency sales growth was 8%.

So we had a 14% tailwind from strengthening of currencies outside the Danish krone and euro zone.

We can also see on the slide here that 32% of the reported growth came -- or US grew 32%, Europe grew 3%.

International operations, which is all the emerging markets with the exception of China, grew 19%, China 22% and Japan/Korea 11%.

So, in reported sales, strong growth with the exception of Europe.

When we look at the other part of the chart, where we are taking out the currency impact, North America constitutes more than 60% of the growth for the Company, followed by international operations with 26%.

Nice, interesting growth with 2% in Europe.

That is not normally what we would say, but if we also take into consideration the PPRS rebates that we have to give here in the UK, the growth is actually more like 3% to 4%, which is the first in a number of years where we see a contribution to the Company in terms of growth from Europe.

China 4%, slightly anemic, but of course many other markets would be delighted with 4%, so it's more the relative growth rate in China right now compared to historic growth rates.

Japan/Korea, nice growth of 5%.

We are returning to growth in Japan.

I remind you, though, that in 2016/2017 we will be seeing price adjustments, so we may not in individual years be able to sustain the growth that we have shown here in Japan.

If we look at growth from a product perspective or therapeutic perspective, 22% growth of our diabetes and obesity care business, and still very, very dominating with almost 80% of our total business.

Hemophilia 14%, Norditropin 20% and others 28%.

And if we look at the chart where we show it in reported terms, which are perhaps more relevant, we can see that 41% of the growth came from the modern insulins.

That is NovoRapid, NovoLog; it's NovoMix and it is Levemir.

So, strong growth for that whole portfolio of very strategic products for us.

Second growth driver was Victoza with 32% and third growth driver was the new generation of insulins, which are Tresiba primarily but also Ryzodeg and Xultophy.

And so this means basically that the diabetes and obesity franchise constituted 84% of the growth of the Company, whereas hemophilia, Norditropin and other biopharmaceuticals contributed 16% of growth.

With that, I'd like to introduce the Vice Chairman of our Operations Committee, Head of Personnel and Corporate Development, Lars Fruergaard Jorgensen.

Thank you, Lars.

I'll review the key products and the performance of those.

If we start out with Victoza, one of the key value drivers in 2015, here I think it's really important to note that we now see very strong growth coming back into the GLP-1 segment, on the back of having cleared out some of the safety concerns and now also having a number of competitors pushing the GLP-1 class.

We see here on the left-hand side that we saw a growth of 25% on a MAT basis, which is very attractive.

In this market we are losing share, as expected, when more competitors come in, but overall we are quite comfortable that we can grow with the market.

And we can see that looking at the scrip levels that we are actually maintaining a steady scrip level also after the introduction of dulaglutide.

Lars mentioned that we had a growth of 18% for Victoza.

That was somehow impacted by some rebate adjustments and the underlying growth was 20%.

If we then look at Levemir, a fantastic performance for Levemir in the US.

I think this is a strong sign of our commercial capability, that in the US we have managed really to grow the share for Levemir to 24% and taking share from the market leader glargine.

And this is in a setting where Sanofi is launching their new generation insulin, the U300 formulation.

If we look across the other regions, we see that continued growth in both IO and China, whereas in Europe and in Japan where we have launched Tresiba we are declining on the Levemir franchise, which is according to plans.

If we take a look then at Tresiba, a continued strong rollout launch performance.

We are very pleased with uptake in these markets where there is access, and we are now launched in 39 countries.

We have unfortunately had to cease distribution in Germany.

We have been through a number of iterations of discussions with the German authorities, and it was not possible to obtain a price that was satisfactory for us.

It was actually only possible to get the price of human insulin, and that's obviously not attractive for Novo Nordisk.

But we are launching in a number of other European countries.

We have adjusted a bit on our pricing policy and we can see that we gain access, and this is an access that is based on getting a premium compared to Levemir.

So even though European setting is a challenging environment in terms of prices, we can see that we can also get modest price increases and premiums in Europe.

We are now launching in the US; been on the market for a couple of weeks.

It's still early days, but we are positive around the dialog we have with the payers and the market access we're getting.

We have secured the first commercial access and we have actually also gained a few Part D contracts already, although that's the focus for the year to come.

There are a few markets where Tresiba is going flat, and those are markets where we are launching Xultophy or Ryzodeg.

So adding those, we see a continued penetration of the degludec based product family.

Turning to Saxenda, we are quite pleased to see that after a bit of seasonality, growth has come back here in the fourth quarter.

And in terms of value market share, we have captured 31% of the market, noting that of course Saxenda has a significant higher price.

So it is possible to penetrate the US market with innovation also when it comes at a high price, and we are quite encouraged by this performance.

We are now rolling out in more countries.

We are in four countries so far and we'll be expanding into more countries during 2016.

And with that, I will hand over to Mads Krogsgaard Thomsen, our Chief Science Officer.

Thank you, Lars.

So on this first slide, we have the very recently emerging SWITCH 2 data.

And as a reminder, SWITCH 2 is one of the two trials that has been designed to accommodate or to take into account some of the concerns the FDA had during the advisory committee for Tresiba years back.

And those four major concerns were need for blinding; need for having more patients at risk of hypoglycemia so it's a more real world like population; need for randomizing patients to the same time of day, whether it's Tresiba or Lantus, so we're not kind of cheating related to the pharmacokinetic differences of those two products; and finally, a definition of hypoglycemia that has to include the word symptomatic.

So they have to be symptomatic hypoglycemic episodes as defined rigorously.

Now, all of that was taken into account in the study design of this blinded trial, first of its kind to cross over.

And we are very happy to announce that what we have seen up against insulin glargine is that we both hit the primary endpoint of demonstrating a significant reduction in overall severe or blood glucose confirmed symptomatic hypoglycemia across the day and night.

Moreover, we hit the, you can say, highest ranking secondary endpoint of nocturnal hypoglycemia reduction by 42%.

And if you look at severe hypoglycemia, inasmuch as we did not in the maintenance period achieve statistical significance with a 46% reduction relatively in the event rate, it was indeed the case that over the entire study period of 64 weeks there was a 51% and significant severe hypoglycemia reduction for Tresiba.

Now, this trial has to be seen in the context also of the SWITCH 1 data that are emerging over the next month, based upon which Novo Nordisk will decide either to submit a supplemental NDA to the FDA based on these two trials or await the outcomes of DEVOTE, which also has blinded and adjudicated severe hypoglycemic episodes in vast numbers, reporting late this year.

Now, on the next slide we have really exciting data.

This is an aggregate of the first four SUSTAIN trials, really highlighting that semaglutide, our once-weekly human GLP-1 analog, provides more than two out of every three patients in all trials excellent glucose control, bringing them below the 7% point.

This is unheard of and it is the basis, or it is on the backing of HbA1c reductions at or in excess of 1.5% and in each case superior to the comparator drugs, whether they be Bydureon, Lantus, Januvia or a placebo.

Now, interestingly, this is achieved at the same point in time on this slide, where you can see that the weight reductions that we've seen across the four first to report SUSTAIN trials have been way over what we see normally for a GLP-1 based product, and you can compare that in SUSTAIN 3. Bydureon expected a weight loss of 2 kilos and they demonstrated it, yet the semaglutide number was closer to 6 kilos.

So we're actually achieving a great weight reduction for what we believe is a future best-in-class molecule in the face of very severe or important glycemic reductions, which is an unusual but favorable combination of two efficacy endpoints.

Now, I will not take you through all the key development milestones, but just highlight the notion that we continue to develop Xultophy in significant and important post-approval studies, such as showing enhanced durability compared to Lantus.

But also, and importantly, we hope to get US approval of the two remaining new generation insulin segment players, namely the mealtime insulin and also Xultophy in the US FDA, such that all four segments will have new players and superior players in the US market in the years to come.

I would also like to highlight that within hemophilia we have submitted N9-GP, our very long-acting hemophilia B factor IX based product in Europe, and we anticipate to do so in the US in the second quarter of this year.

And finally, we are now having committed to decide or to move into NASH with semaglutide, where we basically will target this liver fat problem both via metabolic and potentially anti-inflammatory routes.

Finally, on the last slide, we have a very, very nice and emerging news flow throughout -- we hope.

We don't know the data, apart of course from SWITCH 2. We are awaiting SWITCH 1, DEVOTE and numerous GLP-1 related milestones, obesity related milestones throughout the year that will actually be winding up on the backing of DEVOTE data that are supposed to report both MACEs and severe hypos at the end of the year.

Now, with that, it's over to Karsten Munk Knudsen, our Head of Corporate Finance.

Thank you, Mads.

Our financial results for the full year equate to a sales growth of 22%, which in local currencies corresponds to 8%.

We got a significant currency impact in 2015, with especially the US dollar coming up by roughly 20 percentage points, which you also see in our gross margin that improves by 140 basis points, which is driven again by currency, 150 basis points.

Our sales and distribution costs are in line with sales, in underlying terms up 9%, the key drivers being investments in promotional activities in the US as well as field force in international operations further driving growth in that region.

R&D costs are down in reported terms, but do bear in mind that 2014 was impacted by information that we closed down in Q3 2014.

If we adjust for investments into information in 2014 of roughly DKK1.7b, our R&D cost increased in 2015 in underlying terms to the tune of 8%.

All of that translates into an operating profit growth reported of 43%, or 21% in underlying terms.

Net financials were negative by almost DKK6b.

Again, this is linked to the US dollar appreciation, so the gain we get in operating profit.

We have the hedging losses in net financials of roughly DKK6b.

So our net currency impact in 2015 is favorable to the tune of DKK1.9b.

Then, with the tax rate of 19.8%, impacted by the partial divestment of NNIT, which is a one-off positive impact of 130 basis points on our effective tax rate, as well as lowering of the statutory Danish tax rate.

All in all, a net profit of DKK34.9b, up 32%.

Then, with our share repurchase program of DKK17.5b, corresponding to almost 2% of shares, our diluted earnings per share is up 34%.

So, as you saw, currencies is a big piece of our financial performance in 2015; US dollar up 20% or so.

In this slide, we use the rates as of February 1, where the US dollar to the Danish krone was DKK6.86.

It has been sliding since then, linked to interest rate expectations in the US, so as of today we are more at DKK6.68 or so, US dollar to Danish krone.

In terms of the side currencies, we've seen a significant drop in the Russian ruble in Q4 but also in the Argentinian peso in December of 2015, impacting our net financials.

Outlook for 2016.

So we are guiding an underlying sales growth of 5% to 9%, currency impact of around 1 percentage point, linked to the assumptions you had on the prior slide.

Same when we look at operating profit growth, 5% to 9%.

Do bear in mind that is adjusted for the non-recurring impact of the partial divestment of NNIT, as well as the assets -- or the sale of information assets, in total roughly DKK2.8b adjustment to 2015 numbers.

Again, operating profit in reported terms, around a 1 percentage point negative impact to our results.

Net financials shows a loss of DKK1.3b, which for all material purposes is driven by the US dollar.

Or as you saw on the prior slide, the average US dollar rate in 2015 was DKK6.73 and the spot rate as of February 1 was DKK6.86, so that appreciation of the US dollar has a negative impact on our hedging contracts and hence the negative net financials.

Effective tax rate, 20% to 22%, and a CapEx level of around DKK7b, partially driven by the fact that our investment portfolio is increasing, including API expansion in the US.

And then finally, free cash flow.

So we're converting our expected net result into cash, so a free cash flow guidance of 36% to 39% (sic - see slide 18 "DKK36b to DKK39b").

So with that, over to Jesper and the long-term financial targets.

Thank you, Karsten.

Name is Jesper Brandgaard.

I'm the Chief Financial Officer of Novo Nordisk.

I have the pleasure of reviewing the updated long-term financial targets with you.

Just to remind you all that Novo Nordisk has a long tradition of working with long-term financial targets.

First were established prior to the demerger of Novozymes back in 1996, and we've worked with these targets since.

Typically, the long-term targets are something that has been achieved on a 4 to five-year horizon, but they are of course also very sensitive to the evolution of currencies, and hence in the most recent period we actually set the targets based on our annual report from 2012 and then realized them within a three-year period.

So they do vary a little bit on the horizon, and that's why we don't state a very specific year when they're going to be achieved, but we set them with a view to the next four to five years.

If we look to the current guidance we're giving in terms of long-term targets, we're really basing them on our core diabetes care franchise and the opportunities that the core diabetes care franchise holds, as alluded to in Mads' presentation.

Here, we've illustrated for the last five years how the compounded annual growth has been.

The bars are illustrating in reported terms, but if we take out the currency effect, the underlying compounded annual growth rate for the diabetes care franchise has been more than 10% at 11.2%.

And if we look ahead, we also believe that it's realistic for our diabetes care franchise to deliver double-digit sales growth.

It's really coming from a continued belief in the need for the world market of insulin to continue to grow by around 5%.

We don't see any patterns in the global economy that will not dictate a continued need for insulin treatment for people with diabetes around the world.

On top of that, we do believe with the current portfolio based on degludec, but also with the important filing in December of faster acting insulin aspart, that we have a portfolio of insulin that is superior to anybody else on the market.

And it is our obligation then to utilize this portfolio of products to actually gain market share and have that as a driver to growth to our shareholders.

In terms of value upgrade, we have continuously upgraded the value of the insulin market, initially upgrading from animal derived insulin to recombinant human insulin, then from recombinant human insulin to the modern insulins, the Levemir and the NovoRapid, NovoLogs of this world, and then now the next move moving us towards a new generation of insulin with Tresiba, Ryzodeg and faster acting insulin aspart.

We believe that that value upgrade will continue and it provides great opportunities.

And on top of that opportunity is of course also the opportunity for type 2 starts to actually start with a combination of insulin and GLP-1, which also clearly offers an opportunity of value increase per patient for Novo Nordisk and a better treatment for the patient.

And then finally, the GLP-1 franchise has been a significant contributor, as actually alluded to by Lars Fruergaard, to our franchise, adding more than 30% of the growth in 2015.

And we have, with semaglutide and the hopeful filing of that by the end of this year, probably the best-in-class once-weekly GLP-1 that should ensure our competitiveness within the GLP-1 space.

So we believe that basically merits for a continuation of growth for our diabetes care franchise in the near-term horizon.

If we look to the long-term financial targets, we have based on this assumption said we believe that our long-term target should be growing our operating profit to the tune of 10%, and that 10% is really based on the growth level from our diabetes care franchise.

We recognize that in the near-term horizon we do going to see some challenges from our biopharmaceutical franchise, noting that we will have a generic entry of our HRT franchise, Vagifem, the topical administration of estrogen, that will be exposed to generic competition from Q4 2016 and three quarters of 2017, deducting half a percentage of growth in 2016 and approximately 1.5% of growth in 2017.

So the prime growth is going to come from the sales of diabetes.

In terms of operating margin, we believe it's realistic that we would stay at the current level of around 44% in terms of operating margin, because we will need to continue to invest in being able to launch the full portfolio and produce them, so a broadly unchanged gross margin.

We believe we will work with a broadly unchanged level of selling and distribution costs, at the 26% to 27% level, and also a roughly unchanged investment in terms of R&D at the 12% to 13% level, i.e., that each of these cost items are likely to grow in line with sales.

There may be some marginal improvement continuing to come from our admin ratio.

Over the last 15 years, we've taken our admin ratio from around 7.5% and now down to the level of just over 3.5%, so continued efficiencies coming from that area.

In terms of the other two main ratios we have, the return on invested capital or operating profit after tax to net operating assets, we're basically keeping the target there.

We believe the growth in operating profit will enable us to keep that target, despite a slightly higher investment level in fixed assets in the near term.

And then finally, our cash conversion ratio.

We measure that over three years.

Inherently it will be a little bit volatile, but we've seen good stability in our actual cash conversion ability historically and we believe that will continue at the 90% level.

And then talking about what we do with that cash, we believe that having this very steady organic growth in our business also enables a steady return of cash to our shareholders, and we've done that historically in combination of two factors, the annual dividend paid and a share repurchase program.

For 2016, we have proposed a 28% increase in our dividend to DKK6.40, and that will be paid out the day after our Annual General Meeting on March 18.

Sorry, I think that's a Friday so it's probably going to be on Monday.

The payout ratio is equivalent to 50%, if you adjust for NNIT, the divestment of the IT service company that we IPO'ed in March of last year.

And do note that we actually upped the repurchase program in 2015 by DKK2.5b, actually returning the cash we got from the divestment of NNIT in the form of the share repurchase program.

So the underlying repurchase program in 2015 was DKK15b.

Next year's repurchase program, so the repurchase program for this year, is DKK14b, and the key reason why is that we have decided on actually introducing an interim dividend that is going to be paid in August, because I have to realize with this very steady cash flow generation there is really no need for us to gradually build the cash balance up during the year ending in March and then pay that out in the form of dividend.

So we'd rather split it in two, so you get the first tranche of the cash dividend; you will get that paid as shareholders in August.

And it also eliminates the burden of us having to pay the banks to store the cash for us until then.

So expect a first interim dividend to be paid in August, and that will in totality, if you assume that that dividend is roughly half of what it was in -- or the 2015 dividend paid in 2016, then we are actually going to return more cash than what we happen to have as expectation for free cash flow.

So we'll continue to be extremely disciplined in returning cash to our shareholders in the form of dividends and share repurchases.

So the closing remarks would be we believe we are in a very solid position.

This is the first time we've been able to show that we have a 28% global market share in diabetes care.

We have leadership positions in insulins and GLP-1.

We have a great portfolio of products on the way to the market, and we also have a building -- a franchise that's gradually building with Saxenda within obesity.

So with those comments, I'll hand over to Lars to handle the Q&A.

Thank you very much, Jesper.

And then, ladies and gentlemen, let's open it up for your questions.

If you'd kindly wait until you get a microphone, because this is being webcast.

I'd like you to introduce yourself and restrain yourself to two questions.

Let's take one at a time, because otherwise we may get lost in your questions and it makes it a little bit easier for us.

Let's start over here, since we are here on the left side here.

Thanks.

Thanks, Lars.

It's Keyur Parekh from Goldman Sachs.

Two questions, as you said.

One, Lars, how are you going to achieve to do what nobody's ever done in the history of the industry, and that is to grow revenues at 10% CAGR and not have any operating margin expansion over a five-year period?

Where are you going to spend the money?

Yes, I think it is possible to do.

The question is can you do it sensibly without destroying value, and that's of course the challenge.

We need to expand all parts of the value chain with the exception of administration.

We need to expand and continue to develop the pipeline, which has a number of late-stage assets that need to be going through the regulatory phase.

We need to add real world data that can facilitate market access, meaning an extensive 3b program for these assets.

We need to embark on a set of research programs that are more risky and more complex than we had in the past, to ensure that the future products that we develop have enough clinical utility to in the future warrant market access as well.

Perhaps we can ask Mads to disclose some of these very exciting projects that are beyond the ones that we are working on right now.

Of course, the big pioneer program for oral semaglutide is going to be a huge undertaking.

So that's the research and development side.

And it's never been a problem for Mads Krogsgaard to spend money, so I am sure that he can also live up to this going forward.

Then, manufacturing.

We are currently manufacturing or investing in a huge manufacturing site, greenfield, so to speak, in API in United States.

It is a $2b investment over the next five years.

This is actually, I believe, only the first stage of manufacturing expansion in the US, and we can already see the texture of and even expansion of this plant in the future.

We are expanding all our factories in terms of capacity in Denmark and we are expanding and refurbishing plants in terms of compliance.

So major, major capital expansion programs in the next five, seven years.

And sales and distribution.

If we look at sales and distribution, we are in this very unusual situation that we have to launch multiple drugs.

We have 2,200 sales reps in United States and we are going to push Tresiba in United States.

We also have a very successful product in Victoza.

We are going to hopefully get an approval of Xultophy in United States,, we're going to get an approval of faster acting insulin aspart, and we have Ryzodeg on the shelf already approved.

So if we will want to take full long-term value out of these, we may actually need to expand our sales force capacity in United States, most of the country (inaudible) the rest of the industry.

Of course, we also still need to expand the sales force in emerging markets, whereas we should expect to see a continuation of current levels of sales force and S&D cost in China and in Europe and in Japan.

So I think it is not going to be a problem.

It's going to be a phenomenal -- a wonderful challenge to have, of course recognizing that managing growth like that is of course somewhat challenging, but it's better than the opposite.

(Inaudible) pushes and pulls on how to think about LEADER.

Can you just help us think about what you think, especially given what you know about EMPA-REG and the SGLT2s, help us think about what should be a base case for the LEADER trial?

Where could there be a surprise in either direction?

Thanks.

Mads Krogsgaard?

Yes.

So, Keyur, as regards the LEADER trial, the data we have at hand before the LEADER trial even was contemplated, as you will recall, relates to the hazard ratios we know from diabetes and later on obesity.

And they are well to the left side, i.e., on the good side of point estimate 1.0.

They're down to 0.3 for obesity and 0.7 for diabetes, as you can read in the European EMA label for Victoza.

However, this population is more downstream, i.e., these are patients who are like the EMPA-REG patients above 60, about half of them are receiving insulin already and they are enriched for cardiovascular risk.

And that means it will be very exciting to see, because my personal belief is based on animal models and all the research we've done, that GLP-1 does in fact do good things to the vessel wall pathology, i.e., it inhibits the progression of the (inaudible) process.

So the big excitement in March when we report the LEADER is whether we are able to document that in this study population.

Obviously, the amount of MACEs we have is well above 1,000, and that also implies that we first test for what the real game is about compared to the FDA, namely non-inferiority, so we document safety on the cardiovascular system.

And then the second testing point in the hierarchy is documenting superiority, and if there is a superior profile, the statistics are in favor of us being able to document that.

But that is a forward-looking statement.

It will be extremely exciting a couple of months from now.

Thank you very much, Mads.

I'll get back to you on that comment about being more downstream or more than 60 years old.

I don't see the problem, but maybe you can elaborate for me.

But you're healthy, Lars.

Thank you.

In the corner over there.

Thank you.

Hi.

It's Pete Verdult from Citi.

Two questions.

Jumping away from targets first, Mads, on SWITCH 1, if you take -- if you looked at the phase III data from BEGIN, the data for SWITCH 2 in that basal insulin segment was much more compelling than the type 1 data.

So if I made the statement that the hurdle rate for SWITCH 1 to show a benefit over Lantus is higher than SWITCH 2, would you agree with that, and if not, why?

Okay.

Let's take that first.

Could you hear the -- it was difficult to hear, so.

Yes.

As I understand it, Peter, the question is that we have seen a differential effect on hypoglycemia benefits in type 2, where they've been very systematic and pronounced across the trials we've done and now confirmed very strongly and robustly, I believe, in the SWITCH 2 trial in type 2 diabetes.

But what you are saying is that that has been less clear in type 1 diabetes, and that is indeed the case because in phase II we got very excited, because we actually saw highly significant type 1 diabetes reductions in hypoglycemia rates in the phase II of the Tresiba program.

However, what that did was cause us to be slightly optimistic, and we designed phase III in such a way that because of these data, people could switch directly one to one, dose wise, from their preceding insulin and onto Tresiba insulin, unlike glargine, which had to have a dose reduction of 20%.

So we stacked the odds against ourselves, based on very optimistic and positive and encouraging phase II data.

Now, obviously, we're not doing that here, Peter.

This is a basal bolus, where you have three mealtime insulins being NovoRapid/NovoLog, and then the basal insulin that is added in a way that is randomized one to one to be morning or evening dosing for both Lantus and for Tresiba.

And we have basically done the study population pretty much as we've done in the SWITCH 2.

And then you can say how many hypos are actually driven by the basal as compared to the mealtime insulin regimens, and it's typically 75% to 80% that are driven by the mealtime insulins.

And then the cynics will say, how can we then document a benefit when we're only tapping into the 20%, 25% of the overall hypoglycemic episodes?

And then the optimists will say, well, the amount of hypoglycemic episodes in type 1 diabetes is almost 10 times as high as it is in type 2. So you still have a nice signal-to-noise ratio to tap into in terms of statistics.

My anticipation would be, as we saw it in the meta analysis in phase III, that nocturnal hypoglycemia, which is driven predominantly by the basal insulin regimen, is the one where we are likely to document superiority versus Lantus.

And if and when that were to be the case, then we in the SWITCH 1 and 2 programs in their totality have a firm basis for actually filing a supplemental NDA to the FDA later on this year.

If that is not the case, i.e., if the SWITCH 1 data are less robust than SWITCH 2 data for whatever reason, then we will await the DEVOTE trial, where we have blinded, adjudicated severe hypoglycemias in the many hundreds, maybe 700 to 800 cases.

And that is a high-ranking secondary endpoint in the DEVOTE trial.

Another question, yes.

Just a second one, yes.

If you'll just give it a little go so we can hear.

Is that better?

Okay.

So second question, sorry, Lars or Jesper, to go back to the targets.

The current sales and marketing base is $4b, and if we just mechanically plug in what you're telling us, it's $1.5b of incremental annual sales and marketing spend five years from now.

Now, you're not going to talk about your commercial strategy in detail.

I understand that.

But we're talking thousands of reps that can be funded with that sort of money.

So I'm just trying to get a sense, is that essentially what you're telling us, that there is going to be a seismic change in the way Novo sells and distributes and your sales force?

No, I think that it's not necessarily entirely only going to be sales reps.

I think part of those costs may go into developing real-world data, may go into experimenting together with some of our partners in digital health, trying to illustrate the clinical benefit of using our drugs.

But I do believe that if you have a portfolio like ours, and if we want to extract long-term value and we launch multiple drugs at the same time in market, that we need an expansion of the size of footprint we have in terms of sales force.

We will of course do this in a prudent way, to ensure that we don't overdo it and it's sustainable for longer periods of time, because we do not see employment as a variable cost.

We prefer to see employment as a permanent expansion of the capacity of the Company, and we don't therefore want to go back and forth, back and forth, depending on the pipeline.

So we have to be very prudent about this, but we do believe that that's going to be required to ensure that we get value long term.

And maybe just adding that it may also be adding a bit more direct-to-consumer marketing in the US.

When you have this huge, rich portfolio of products that has to be pushed at the same point in time, we would expect that we would probably have a higher spending on direct to consumers.

And you actually saw in 2015 that that was the key driver of the American increase in spend, so expect a higher proportion also (multiple speakers).

And that has a little bit more variability, also, in that we can accelerate, we can pull back without any organizational impact, and the American market does respond to direct-to-consumer advertisement, if you do it correctly.

Thank you.

On the table over here, and then we will gradually come over in this direction if we are not answering too elaborately.

Thanks.

Thank you.

Luisa Hector from Exane BNP Paribas.

So the first question would be just to try and get a sense of what could be the biggest risk to you achieving the long-term guidance.

Would it be, say, pricing, competition?

Is Xultophy crucial to getting there?

Is there any more color you could give around that?

I would say offhand that the biggest risk is failure of Tresiba in United States or a dramatic change in the pricing environment for basals in United States based on introduction of generic versions.

I don't think any of the two variants are rather likely, because we know from experience, and Lars Jorgensen demonstrated in markets outside the US that are often much more restrictive how well Tresiba has been doing.

So I think the clinical differentiation for Tresiba is there.

I still think it is possible to launch better product with a marginal premium, as we're doing in United States with some success.

So I'm less worried about that.

The pricing environment, when we get generic competition from Lilly, is of course out of our hands.

But I do take comfort from the fact that both Lilly and Sanofi are seemingly trying to build long-term pipelines for diabetes therapy, and therefore I would say it is not likely to be in their interest to go for short-term profit and destroy the value of the marketplace for basal insulins in US.

But those would be difficult challenges, let's put it that way.

And then the second question, on Tresiba, so you did mention that you had secured some contracts already, so I know it's very early days with the US launch, but could you give any more color, the reaction that you're seeing from payers, anything on tiering and how quickly you would expect those contracts to ramp up?

I would like to introduce Karsten here, because Karsten, even though he is Head of Corporate Finance, he used to be Chief Financial Officer in United States and has been -- he and I have been intricately involved in negotiating the contracts also for 2016.

So, Karsten, would you just describe a little bit about the contracting environment and how we have addressed this challenge for Tresiba in US?

Yes.

So you can say, first of all, not that we wanted it, but Tresiba has been a long time coming in the US, because you remember the complete response letter back in 2013, so we had everything ramped up back then.

And then, of course, following the DEVOTE interim data and the approval by the FDA in September of last year, we were totally ready to roll in terms of market access, which of course has changed to some extent since then.

So what has happened since then is that we have been able to secure a certain level of market access, especially in the commercial channel, which would be insurance for private employers.

It's progressing, so we're still in dialogue with a number of payers at this point, but it's progressing nicely.

In Part D, you remember the cycle in Part D is slightly different, because that's more tied to the annual setting, so at this point in time we are contracting in general for 2017.

That said, we have been successful also in getting some contracts in place already for 2016 in Part D.

So it is progressing according to, or if anything slightly better than our own internal projections.

Tier two favorable status?

Yes, so the contracts we have in place is in tier two.

Okay.

And can you give a guide to how much you might expect -- well, the patient pool, percentage Medicare versus commercial?

Sorry?

So now we think, in broad terms, commercial is half of the market and Part D is a quarter of the market.

Thank you.

Thank you very much.

Let's move over here, and we're gradually covering the room.

Thank you.

Good afternoon.

Florent Cespedes from Societe Generale.

Two quick questions.

First, Japan, could you give a little bit more color on the dynamics on this market for of course Tresiba, Levemir, but also the rest of your portfolio?

The second question, for Mads, could we have a quick update on the long acting insulin, the phase I, which was on hold last year?

Thank you.

Could I kindly ask you to repeat the first part, and then speak a little louder, because I may be fit but my hearing is not that good.

Yes.

The first question is regarding the Japanese market.

Japanese market.

Yes.

Could you give us a little bit more color on the dynamics with Tresiba, Levemir and the rest of your insulin portfolio?

Thanks.

Yes.

Yes, you saw actually on the chart that we are having a contraction of the Levemir business in Japan as a result of the very successful penetration of Tresiba.

We now have 33% of the market in Japan.

We are also launching Xultophy, and so this is actually -- or, excuse me, Ryzodeg.

This is actually, together with Switzerland, two most successful introductions.

It's in Switzerland that we are launching Xultophy as well.

And when we combine and look at Xultophy as a better basal, if you want, then we see a very steady trajection and growing market share, where we have passed 30% value market share also in Switzerland.

So things are going extremely well for us, and this is of course what drives the optimism also in United States and other markets.

We have -- we made a price adjustment in Europe, which has allowed us to relaunch in Denmark with full reimbursement.

We are launching also in Spain with reimbursement at the moment.

We have good penetration in Italy and in Greece.

And the only major countries in Europe where we have not been able to convince the authorities of any access is France.

It's very, very difficult in France to get recognition of any scientific significance, and this of course makes it very difficult to discuss reimbursement in France.

And we've already mentioned the discontinuation of Tresiba in Germany.

Thank you.

And, Lars, if I --

Yes.

So LAI287 is our once-weekly insulin, and that's the one you're hinting at.

And we decided in the phase I study that we have concluded that we'd go up against what we perceive to be the new gold standard, which is Tresiba.

So what we did was compare daily Tresiba, both pharmacokinetically and dynamically, using insulin clamp studies to look at the variability and the efficacy and the fluctuations.

And lo and behold, what we have seen so far, and it's early days, is that we are actually able with a molecule that has a half-life of slightly in excess of one week to actually create an environment in the patient where the peak to valley fluctuation over the week is less than you would expect for Lantus and actually pretty similar to what you see on a daily Tresiba regimen, which is very low.

And the variability and the risk of hypoglycemia, early days, hypos of course are fewer numbers in phase I, but they are there, and when we look at them compared to Tresiba, we're in the same ballpark.

So we're optimistic, of course, for the doctors it will be a whole new paradigm to titrate more slowly due to the long half-life and so on.

But I'll get back to you when there are further news.

So let's try here, and then we move over to the table there.

Thank you.

It's Michael Leuchten from Barclays.

One question for Lars, again on the long-term targets.

With the EBIT growth and the margin, you effectively have pegged three variables, which is topline growth, margin and EBIT.

We're going into 2016, where you've already given guidance that you're going to be off that trajectory, and then there's uncertainty in 2017 with the potential arrival of the biosimilar in the US, and then in 2018 potential competition to NovoSeven.

So in those years as a CEO, which one of these three variables is the one that you will be looking at to flex, when you're off trend?

And then a quick question for Jesper, just on the -- where you're going to book the expenditure on the manufacturing expansion.

How much of that is going to show up in R&D, because it is actually semaglutide manufacturing?

So with regard to the first question, it is of course those factors that has impacted our new revision of the long-term financial targets.

We do believe that longer term, with the pipeline that Mads Krogsgaard has been highlighting, that there is opportunities for our diabetes business to grow more than 10%, but we do see specific short-term challenges.

Jesper has already alluded to the first one, Vagifem, the topical HRT treatment, which we know will disappear starting this year and full force into next year.

So we would be spend -- and then the next thing is ACE910 potential impact on our hemophilia franchise.

NovoSeven is a well-established, well-introduced product that is not growing anymore, facing competition from a potential new entry.

It will not go perhaps as fast as many people believe, but it will -- if it's successful getting to the market, it will have an impact on our business.

So all that taken into consideration and also the fact that our human growth hormone business is an old, mature product, where we were very successful last year in gaining contracts in the US, but we can't do that one more time.

So the comparables are going to get more difficult.

That all points in the direction of a biopharm business which at best, if we think we are successful with NovoEight, can counter some of the potential loss in NovoSeven, with Novo 9 GP also can counter some of the potential loss of NovoSeven, at best it'll be stable, but not adding much to our growth.

So that is why we have taken a rather more conservative stance, also because we are coming out of two years where we have delivered less than double-digit topline growth.

We're looking at a year now where we have less than double-digit growth.

And we already alerted you to the fact that next year will be challenging because of Vagifem patent expiration and disappearance.

So if we were standing out here with an operating profit growth target of 15%, with current performance at a quite different level, I think we would undermine our own credibility.

And therefore, it is better for us to say to you, in the short to medium term it's a different target, but this is not precluding that the Company cannot more long term come back to historic growth rates.

But first things first.

And in terms of the impact of actually ramping up production, which is partly going to be for R&D purposes, is going to deliver for the phase III trials, maybe a cost impact to the tune of 50 basis points which you see moving between the lines, but it's still coming back to the criteria that overall we believe that our operating margin is stable.

But the allocation between the functional line, you are right that maybe in 2018, 2019 there might be a slight skew towards actually taking some of the cost as R&D cost, which is then later going to be to production cost.

Thank you very much.

Could we have the microphone here in the front?

Just to come back to ACE910, how specific can you be about your assumptions for ACE910 and the likely impact on your hemophilia business?

We prefer not to be too specific, but Mads Krogsgaard can be specific without being specific.

So why don't you talk a little bit about where you see the potential positioning, given the limitation of the data that we know so far in relationship to the current usage of NovoSeven?

Yes.

I'll try to do that, Lars.

First of all, you have to bear in mind that today's hemophilia A and to a lesser extent hemophilia B, and to a much lesser extent inhibitor markets are prophylaxis.

So in hemophilia A, the norm in the Western world is prophylactic therapy.

I'm mentioning this because ACE910 is a prophylactic drug, not an on-demand drug.

It doesn't work on demand.

It doesn't stop a bleed.

It avoids them to happen, right, so it's prophylactic.

And that means that the easiest gain for ACE910 is to tap into a mature prophylaxis market such as hemophilia A. However, when Novo Nordisk as you know is present today, it's predominantly due to NovoSeven in the inhibitor market, where 90%-plus of patients are using on-demand treatment.

And that means that for them, when they are not bleeding, they will lead a life without medicine, and only when they have a breakthrough bleed or a bleed, they will take their NovoSeven.

So, of course, it's a whole turnaround of the paradigm in the inhibitor space for them to come with ACE910.

That's also why we are guiding and Lars is saying that over time that will clearly happen, but the easier game for Roche, Genentech and Chugai is of course hemophilia A, where the patient is already used to taking prophylactic therapy.

And this one will be more convenient, because it's subcutaneous.

I should highlight, though, because everyone is excited by ACE910, so am I actually, scientifically, but when that is said, we have our own concizumab antibody, which is targeting a different mechanism.

That works not only in hemophilia A and inhibitor space, where ACE910 will work, but also potentially in hemophilia B space, because it's independent of factor IX.

And that is currently undergoing multiple dose trials in hemophilia A.

Thank you very much, Mads.

That was specific without being too specific.

Good.

In the corner over there, if we could ask for the last question, I think we are -- no, we have more time.

Okay.

That's fine.

Don't worry.

We'll have more than this.

Hi.

Excuse me.

Hi.

Richard Vosser from JPMorgan.

So on Xultophy in Germany, just wondering if you could give us some perspective on how the GBA will look at this product.

Is the comparator Victoza, or is it human insulin?

So do you think you need to develop new data there?

And then I could do second question or --?

Yes.

Just second question, just you mentioned 5% volume growth, but I think of the basal insulin growth as more than 5% and I think of the GLP-1 growth as more than 5%, so perhaps you could give some perspectives on that perhaps volume growth is a bigger percentage of that 10% target or whatever.

Thanks.

Yes.

If I should start with the last one, and then, Mads, you can perhaps talk a little bit about Xultophy in Germany and what the likely comparator will be.

It is our anticipation that volume growth is going to be more like 7% than the historical 5%.

We used to have a model for the diabetes protein business which was 5% volume growth and 5% value growth, because there was an ability to upgrade the market and there was some pricing power in United States.

Pricing power is out of the window.

We can still upgrade as a market to better products, which will give us a mix/value upgrade, if you want to call it that.

But we are anticipating that our business will be -- or our portfolio will be superior, that we will be gaining share, so we will be growing more than the historic 5% volumes.

Rather more like 7% is also what we are dimensioning our manufacturing setup.

It's why we are expanding manufacturing.

We're also in particular expanding manufacturing on active ingredients in preparation for the oral entry into the GLP-1 market.

And if I just may add, Richard, what I was stating there was the insulin volume growth.

I was not referring to the GLP-1 volume growth.

It was actually separately stated below, and it's clear that the volume growth we see currently in the GLP-1 segment is certainly more in the mid-teens in terms of volume growth.

There is clearly more opportunities with the GLP-1s, and you're seeing it gradually taking share of the total diabetes care market and I don't see any pattern change in that.

We have seen a significant rebound occurring, with a clearance of the class by FDA and EMEA on the risk of pancreatic cancer, and hence that is built into our long-term target, that we will see certainly a higher volume, probably in the teens growth, of the GLP-1s.

So, Mads, it's clearly a disadvantage for us in Germany that we have had to withdraw Tresiba, because now we are sitting there with Xultophy on the market and one of the key components are not being demonstrated, the clinical value in the marketplace.

So this is clearly making it far more challenging for us also to think about how we can resolve the negotiations with GBA in Germany.

But, Mads, what's your take on the relevant comparator for Xultophy in Germany?

Yes.

And, Lars, here, as you probably all know, there is the discrepancy between what you do regulatory wise, i.e., you have to show that in the DUAL 1 and 2 and so on, that Xultophy actually matches the additivity or the combined mono components, Victoza and Tresiba, together in single treatment arms.

And of course, the discussions we're having with the GBA is that their view is different.

The way they perceive value for money is very often taking very old comparators like metformin, like NPH insulin and so on.

That is of course the debate that is ongoing without shedding too much more flavor on it, because it is an ongoing debate.

But of course, this gives a contrast between how you address regulatory agencies and how you address the payers, the health technology assessors, that behave in a very different way across Europe.

We do see some trends that Germany is becoming slightly more susceptible to innovation, but these are only early signs, and I don't think we'll be more specific.

Lars is correct in stating of course it makes it more difficult that Tresiba distribution has been ceased.

And then without disclosing very specifically our pricing strategy, then you can say that we do not necessarily need to adopt a pricing strategy for Xultophy, which is the direct combination of the cost of Tresiba and Victoza, because of course you can't separate the two products from each other.

And it will in any event be very attractive for us, because of the cost of the Victoza component, to transfer patients from a current basal therapy.

If we were just saying a patient that is currently using Levemir, if we get this patient onto Xultophy it would be a major lift for us.

Correspondingly, also, if we look at the new pricing strategy on Tresiba, if a Tresiba patient is upgraded to Xultophy, there's still a lift component without going the full yard to combine one to one the components.

Yes.

Should we have one more question over there?

Yes.

Hi.

Tim Williams from GVO Capital.

Could I just ask, are you able to speak to the risk in the US with the increased highlight that's been put on pricing in pharma in general and whether you think that there's any chance that that might affect the Company?

And then just tagging onto that, whether there are any actions planned to address that level of risk?

Thanks.

Well, it is -- the public debate in the US is already having an impact on the behavior of the companies.

So there it's clearly dampening the appetite for list price increases in the US.

As it relates to our business, I think our business is more impacted by the actions of our competitors as opposed to the political debate, and we have been tremendously impacted and the market's perception of the price level for our business has been tremendously impacted by the change of direction for Sanofi last year in terms of their pricing in the basal segment.

So it's more, I would say, short term.

Until we define who is the new President and what measures they want to take, it's more the competitive dynamics that will determine the pricing environment for our portfolio in the US.

Then, it's of course always -- and now I should be careful of course not talking negatively about any of the presidential candidates, even though it might be tempting.

We see typically, and we've seen it in our own country, that there are a lot of promises being made which are popular during election campaigns, but which are very, very difficult to implement after the fact.

Let me give you an example.

In our business, it is so that we generate the large proportion of our profit from the commercial market and from pensioners' Medicare, Medicare Part D, whereas the business that we have is predominantly more generic types and older-type products, which goes into Medicaid and which goes into Veterans Administration and other governmental subsidized programs.

And pricing in those segments of the market are extremely low, so low that sometimes we see bits in the business that we are competing against where there is no profit.

So basically, it is the commercial market and the profitability from the commercial market which allows the pharmaceutical company to make available drugs for the public sector and public funded program in the US at almost no cost.

And I think the politicians need to just get their head around that, when they start to think about healthcare reform, pricing reform and what have you, because it's a very complex system.

The moment you start to pull one plug out of this, the whole house becomes very, very unstable.

So it's tempting to institute reference pricing and other instruments, but the US pricing system is extremely complex.

And it is not just, if I may say, not just the pharmaceutical industry which is interested in retaining value in the pharmaceutical sector.

The people that are distributing pharmaceuticals are also interested in retaining the value in the pharmaceutical sector, because that's how they are being remunerated for their services.

So it's a very complex issue.

I think it remains to be seen who is going to become President and what types of reform they will have an appetite to implement, how it's going to be implemented and how quick, before we put up the tombstone of the pharmaceutical industry.

I think it's a little premature.

Yes.

We have one -- let's take the last question here.

Thank you.

It's Tim Race here from Deutsche Bank.

Two questions for Mads, if I may.

So first up, on the LEADER study upcoming, in terms of the way you look at GLP-1s and where they can be positioned in diabetes, you've obviously had the SGLT2s and they've shown cardiovascular benefit.

And then you've got insulins after GLP-1s, and they're -- because of the cost of the disease, you can't necessarily go all the way into that.

How do you think the LEADER data, whether it's either a nice trend versus a nice, significant benefit, can actually change the course of GLP-1 uptake versus just your market share within that?

And I'll ask the next one in a second.

Okay, Mads.

So on this one, Tim, it's a very valid question, and first of all, I don't think you say they when you talked about the SGLT2s.

I think we have to realize that neither GLP-1s are created alike.

We have the Byettas and Exenatides of this world with very short half-lives of three to four hours, and you at the other extreme have the semaglutide molecules with the half-lives at or beyond one week and with the unusually high efficacy.

And that means that you have to discriminate them on [cardiovascular side].

I think the same will be the case for SGLT2s, for a number of reasons.

As you are aware, there are compound specific phenomena related to bone fragility and whatnot, and the same may indeed be the case, cardiovascular performance, unless it's a simple diuretic effect, which there are many people who speculate it is.

On the other hand, unlike GLP-1, if and when we were to show positive data later this quarter, then my -- as I mentioned earlier, my belief is that it is a fundamental intervention into the vessel wall disease process that would advocate, in my view, that doctors should prescribe GLP-1s such as Victoza early on in the treatment, because then the likelihood is that benefits will be larger and you will prevent a catastrophic event later on in the life.

Unlike EMPA-REG, which was done in rather sick patients who have either congestive heart failure or emerging congestive heart failure, many of them, and basically are more susceptible to the diuretic effect, which may not actually be a benefit at all in the early stages of the disease where the heart is pumping adequately.

So I see these classes, A, as not within class being the same, and B, the benefit for us to show something might be bigger, because it might enable us to tap into what is today the oral anti-diabetic space due to a heart core benefit, such as cardiovascular performance, whereas the SGLT2s, what we are seeing is EMPA is clearly tapping into its own class, the SGLT2s, with nprx's going up from 16% to 26% since the advent of the EMPA-REG study, and maybe also some stalling effect on the growth of the DPP-4 class.

We'd much rather hope and expect, if we get good data, to see that more people will accept injections at an earlier part of the disease process.

Thank you.

And the second?

(Inaudible - microphone inaccessible).

In the forecast, and the whole management can testify to this, this forecast that we have discussed a lot today and yesterday is not based -- it's taking into account things like ACE910 and so on that we know are on the horizon, but it's not taking into account that we get hooray data on LEADER or that we get hypoglycemia data in SWITCH and DEVOTE.

They are not in there.

There, we have adopted what we had of knowledge and put into the model.

And --

(Inaudible) SWITCH 1 data.

Thanks for sharing the severe hypo rates.

If my calculations are right, it looks like the number needed to treat is 25 or 30 for treating patients for a year or so to prevent an event.

First, is that right?

And then second is, if you mirrored that in the DEVOTE study, would that be enough to get a concrete label claim as opposed to just label -- data in the label?

Yes.

So depending on which of the endpoints you look at, Tim, you are in the right ballpark.

But in DEVOTE, we are not measuring symptomatic general hypoglycemia.

We're only measuring severe hypos requiring third party assistance, exhibiting neuroglycopenic symptoms, i.e., brain symptoms that either you're underway into subconsciousness, a coma or a total state of confusion, that kind of thing, and these are extremely costly.

So the number needed to treat in DEVOTE, if that's like 30, whatever, that would be quite fantastic.

And because the numbers are so high, the statistical significance can be achieved a lot below the 51% mark that we saw here, but I think you're aware of that.

But let's discuss more once we get there.

First, we need a SWITCH 1, and those data are rather imminent.

So, ladies and gentlemen, we thank you all for attending the lunch.

We look forward to keeping you updated and we are very excited about the news flow and the business outlook for 2016.

Thank you.