Earnings Call Transcript - NVO Q4 2020

Operator, Operator

Hello, and welcome to the Q4 2020 Novo Nordisk A/S Earnings Conference Call. Today, I'm pleased to present Lars Jørgensen. Please proceed with your meeting.

Lars Jørgensen, CEO

Thank you very much. Welcome to the Novo Nordisk full year 2020 and outlook for 2021 earnings call. I'm Lars Jørgensen, the CEO of Novo Nordisk. Joining me are our Chief Financial Officer, Karsten Knudsen, and our Chief Science Officer, Mads Thomsen. Also present for the Q&A session is Executive Vice President and Head of Commercial Strategy and Corporate Affairs, Camilla Sylvest. Today's earnings release and presentation slides are available on our website, novonordisk.com. Please note that this call is being webcast live, and a recording will be available online. This call is scheduled to last for one hour. The presentation is organized as outlined on Slide 2. All sales and operating profit growth statements will be at constant exchange rates unless specified otherwise. The Q&A session will begin in about 25 minutes. As always, I need to inform you that this call will include forward-looking statements, which are subject to risks and uncertainties that may cause actual results to differ significantly from our expectations. For more information on the risk factors, including uncertainties surrounding COVID-19, please refer to the company announcement for the full year of 2020 and the related slides. Novo Nordisk has faced challenges in the past year due to COVID-19. During this time, our primary goals have been to protect our employees, maintain the supply of life-saving medicines, and support communities worldwide. We believe we have successfully met these goals while also advancing our strategic objectives. Novo Nordisk has made significant progress towards our strategic goals for 2025 in all four dimensions. We launched our social responsibility initiative to combat diabetes and increased our commitment to renewable energy, extending it to include our direct suppliers. Later, Mads will discuss our successful year in innovation and therapeutic focus. Our commercial execution has led to an increase in market share in diabetes, and we have made strides in obesity and biopharmaceutical objectives. Additionally, our financial performance showed a 7% growth in both sales and operating profit, and we returned DKK37 billion to shareholders, demonstrating our commitment to attractive capital allocation. Before we delve into the details of this year's performance, I would like to share some changes in executive management. After more than 30 years with Novo Nordisk, and 20 years as Chief Science Officer, Mads Thomsen will retire from his position at the end of February 2021 and will become CEO of the Novo Nordisk Foundation. Mads leaves the role of Chief Science Officer at a pivotal time when Novo Nordisk's pipeline is strong and we are on track to enter new therapeutic areas. Consequently, effective March 1st, our R&D will be restructured into two areas: research and early development, led by Marcus Schindler, who will be promoted to Executive Vice President and Chief Science Officer, and development, led by Martin Lange, who will also be promoted to Executive Vice President. As we expand our technology platforms and research into adjacent disease areas, Marcus will play a vital role in fostering innovation across all therapy areas, ensuring the sustainability of our business for years to come. Furthermore, with an increasing number of projects and a broader strategic focus than ever in our history, development is crucial for ensuring our portfolio of innovative drugs and devices moves forward effectively, enabling us to provide better treatments to patients. I want to thank Mads for his significant contributions and wish him success in his future endeavors. I also want to welcome Marcus and Martin to Executive Management and congratulate them on their promotions. The 7% sales growth at constant exchange rates was primarily driven by a 10% increase in International Operations, with all areas and therapies contributing to this growth, while North America Operations grew by 3%. Sales performance was supported by growth across all therapy areas. Diabetes care grew by 8%, even though insulin sales fell by 3% due to lower realized prices in the U.S. GLP-1 sales surged by 29%, fueled by a 32% increase in International Operations and a 28% increase in North America Operations. Obesity care sales rose by 3%, driven by International Operations but partly offset by North America Operations. Sales growth was adversely affected by COVID-19 as fewer patients began treatment. Biopharm sales saw a 1% increase, led by International Operations. We aim to capture one-third of the global diabetes market value and have reached 29.3%. This growth reflects our gains in the GLP-1 market share. For insulin, we have increased our volume market share by 0.7 percentage points over the past year, primarily due to market share gains in EMEA and the Rest of World. Since 2019, we have improved our GLP-1 market share by about 3 percentage points to over 50%, thanks to gains in EMEA, Rest of World, and the U.S. This also demonstrates the global uptake of Ozempic and the launches of Rybelsus in nine countries. In the U.S., the GLP-1 volume market continues to expand by around 30%, driven by once-weekly GLP-1 products. With the uptake of Ozempic and the launch of Rybelsus, Novo Nordisk holds a new-to-brand market share leadership of 57.1% and is the leader with approximately 50% market share based on total prescriptions. Since the initial focus launch, Rybelsus uptake has matched that of select SGLT2 launches. In its first full financial year after broad launch, Rybelsus achieved sales of DKK1.9 billion. Despite a challenging launch environment, including instances where we had to cease face-to-face interactions between our sales team and doctors, we are pleased with Rybelsus's performance. In the U.S., Rybelsus market access is now about 90%, with 80% of new prescriptions going to patients new to the GLP-1 class along with ongoing direct-to-consumer advertising. Outside the U.S., Rybelsus has been launched in eight countries and has captured about 5% volume market share in the modern non-insulin anti-diabetic market in select launch countries. Additionally, in the first quarter of 2021, we plan to launch Rybelsus in Japan, where the OAD class constitutes roughly 8% of the total diabetes market. In International Operations, diabetes care sales increased by 11%, supported by all regions and therapy areas. This growth reflects our increased share of the diabetes value market, indicated by a 37% share of growth, which has led to a 1 percentage point rise in our market share, now at 23%. Obesity care sales experienced a 3% increase to DKK5.6 billion, though it was negatively affected by COVID-19 due to fewer patients initiating treatment. In International Operations, sales grew by 11%. In North America, sales declined by 1% due to channel mix effects. Notably, we have submitted a marketing authorization application in both the U.S. and EU for semaglutide 2.4 milligrams for obesity treatment. Biopharm sales rose by 1% in the full year 2020, driven by a 5% increase in International Operations along with the introduction of new hemophilia products and treatments for growth disorders. For hemophilia, the 4% sales decline was mainly due to decreased NovoSeven sales, while the hemophilia A and B franchises grew, fueled by Esperoct and Refixia. Norditropin sales increased by 8%, positively influenced by heightened demand following supply challenges faced by competitors in certain countries. Now, I will hand it over to Mads for an update on R&D.

Mads Thomsen, CSO

Thank you, Lars. Please turn to Slide 13. In the following slides, I will discuss our advancements in GLP-1 and insulin innovation as well as progress in our pipeline. Starting with semaglutide, we were very pleased with the results from the SUSTAIN FORTE 2-milligram Ozempic trial, which showed a more than 2% reduction in HbA1c alongside a favorable safety and tolerability profile, proving a compelling benefit/risk ratio for type 2 diabetes treatment. Throughout the sustained program, semaglutide at 1 milligram has shown that up to 80% of patients achieved an HbA1c level below 7%. The trial indicates that a statistically significant higher percentage of patients reached the A1c target on semaglutide 2 milligrams compared to the 1 milligram dose, highlighting the potential for the 2 milligram weekly dosage to enhance glycemic outcomes for patients in poor control. This is notable given the low rates of gastrointestinal adverse events reported in SUSTAIN FORTE, which were comparable between both doses of semaglutide. We have now submitted regulatory applications for label expansion in the EU and the U.S. Additionally, we have commenced a Phase III trial with oral semaglutide at 25 and 50 milligrams for type 2 diabetes, with the higher doses compared to the currently approved Rybelsus dose of 14 milligrams. This trial aims to confirm that the higher doses are superior to the 14-milligram dose. Similar to high-dose subcutaneous semaglutide, these higher doses of oral semaglutide are intended to provide more options for those requiring oral treatment intensification over time. Please turn to the next slide. This year marks the 100th anniversary of insulin's discovery in Toronto. Despite this long history, Novo Nordisk's diabetes pipeline continues to focus on delivering improved treatments, including potentially preventative therapies. In Q4 of 2020, we began the Phase III program for insulin icodec, which is set to be the first-in-class once-weekly insulin. The ONWARDS program consists of six trials with various designs to validate icodec's efficacy and safety across different settings. We believe icodec's improved pharmacodynamic properties, along with its enhanced convenience and adherence, can lead to better patient outcomes, distinguishing it from the currently most utilized once-daily insulin. One clinical trial, ONWARDS 5, aims to validate these aspects in a real-world setting with an evidence sampling approach while incorporating app-based dosing guidance. Furthermore, we have been conducting our first clinical trial for a glucose-sensitive insulin since Q3. This insulin aims to improve glucose control while eliminating hypoglycemia and other side effects associated with current insulin treatments. In Q4, we initiated a Phase I trial for what we refer to as the ideal pump insulin, which seeks to enhance glycemic control and convenience, particularly in closed-loop insulin pump systems by eliminating the lag time between insulin infusion and action. Lastly, we have begun a Phase I trial exploring DNA plasmid-based immunotherapy as a potential preventative treatment for those at high risk of developing type 1 diabetes. This innovative treatment involves a subcutaneous tolerogenic DNA plasmid injection aimed at preventing the onset of full-blown diabetes in high-risk individuals. Please proceed to the next slide. The coming year promises to be particularly exciting as we plan to kick off new Phase III programs across all our therapeutic areas, including newly initiated ones. Starting from Q4 of last year, we reached several R&D milestones. With semaglutide in type 2 diabetes, we successfully completed and submitted the Phase III SUSTAIN FORTE data for regulatory review. In obesity, we have filed a new drug application in the U.S. and a marketing authorization application in the EU for semaglutide 2.4 milligrams as a once-weekly treatment for obesity. In the U.S., a priority review voucher was utilized, shortening the expected review time from 10 to 6 months, allowing for the possibility of U.S. approval by mid-2021. We anticipate an EU decision around the turn of the year. In biopharmaceuticals, we recently received a positive opinion in the EU and approval in Japan for Sogroya, the once-weekly treatment for adult growth hormone deficiency, also known as somapacitan. Sogroya is currently undergoing the REAL 4 Phase III trial for children and adolescents, with pivotal results expected by year-end. As we move into 2021, we are looking forward to several exciting clinical developments. We expect to receive proof-of-concept data for Mim8, a bispecific antibody treatment for hemophilia A, in the first half of this year. Additionally, we anticipate several Phase III initiations this year, including for semaglutide 2.4 milligrams weekly in NASH, oral semaglutide once-daily in Alzheimer's disease, and ziltivekimab for atherosclerotic inflammatory cardiovascular disease. On a personal note, as I complete my final roadshow, I want to express how my involvement with this remarkable company and with stakeholders like you has been a significant passion for me over the past 30 years. I will continue to stay closely connected with Novo Nordisk's future growth in my new role as CEO of the Novo Nordisk Foundation. I have cherished our years of interactions and will miss them going forward. Wishing you all the best and please stay safe. Now, I will turn it over to you, Karsten.

Karsten Knudsen, CFO

Thank you, Mads. Please turn to Slide 16. In 2020, sales increased by 4% in Danish kroner and by 7% at constant exchange rates. The gross margin was unchanged at 83.5%. Sales and distribution costs increased by 3% in Danish kroner and by 6% at constant exchange rates. The increase was driven by global launch activities for Rybelsus and continued promotional activities for Ozempic as well as rollout of Saxenda in International Operations. R&D costs increased by 9% in Danish kroner and 10% at constant exchange rates. The increase is driven by amortization of the priority review voucher for semaglutide in obesity and a higher activity level within other serious chronic diseases following progression of the early pipeline as well as patient recruitment for the ongoing cardiovascular outcome trials, SOUL and SELECT. Administration costs decreased by 1% in Danish kroner and increased by 1% at constant exchange rates, reflecting broadly unchanged spend across administrative areas. Operating profit increased by 3% in Danish kroner and by 7% at constant exchange rates, resulting in an operating margin of 42.6%. Net financial items showed a loss of around DKK1 billion compared to a loss of DKK3.9 billion in 2019, driven by foreign exchange hedging contracts. I'll come back to this in the following slides. Net profit increased by 8% and diluted earnings per share increased by 10% to DKK18. Free cash flow was DKK28.6 billion compared to DKK34.5 billion in 2019. The decrease reflects business development investments of DKK16.3 billion from the acquisitions of Corvidia and Emisphere. Please turn to Slide 17. In 2020, Novo Nordisk returned approximately DKK37 billion in the form of dividends and share buybacks to shareholders. At the Annual General Meeting on 25th of March 2021, the Board of Directors will propose a final dividend of DKK5.85 for a total 2020 dividend of DKK9.10, a 9% increase from 2019. In addition to the dividend, DKK17 billion was used for the repurchase of shares. Novo Nordisk has consistently returned its free cash flow to investors through both share buybacks and dividends, with the dividends per share increasing for now 25 consecutive years. For 2021, the Board of Directors has approved a new share repurchase program of up to DKK17 billion to be executed during the coming 12 months. The total program may be reduced in size in case of significant business development transactions during 2021. Please go to Slide 18. In 2021, we continue to focus on top line growth with sales expected to grow between 5% and 9% at constant exchange rates. The guidance reflects expectations for continued sales growth in International Operations in line with the strategic aspiration of 6% to 10% growth as well as growth in North America operations. On a therapy level, the guidance reflects continued sales growth within diabetes care, mainly driven by Ozempic and Rybelsus, and growth within obesity care. The guidance also reflects intensifying competition in diabetes and biopharm and continued pricing pressure, mainly within diabetes in the U.S. Operating profit is expected to grow between 4% and 8%, reflecting the sales growth outlook and continued investments in current growth drivers as well as pipeline assets to secure future growth. As previously mentioned, following the strengthening of the Danish kroner versus our main currencies, reported sales and operating profit growth is expected to be 4% and 6% lower than at constant exchange rates, respectively. The current COVID-19 pandemic causes uncertainty to the outlook regarding new patient initiations and societal impacts, such as the unemployment rate in the U.S., which is impacting health care insurance coverage. Financial items are now expected to be a gain of around DKK0.7 billion. I'll get back to the impact from currency movements in the next slide.

Lars Jørgensen, CEO

Thank you, Karsten. Please turn to Slide 20. We are very pleased with the progress on our strategic aspirations in 2020 despite the challenges of COVID-19. The financial results reflect sales growth in both International Operations and North America Operations, driven by more patients using our GLP-1 treatments. Within R&D, key milestones in the fourth quarter included the regulatory submission of semaglutide 2.4 milligrams, which has the potential to redefine the treatment of obesity. In 2021, we will continue our focus on commercial execution while conducting more late-stage clinical trial programs than ever to meet the unmet needs of people living with diabetes and other serious chronic diseases. We're now ready for the Q&A. Operator, we are now ready to take the first questions.

Operator, Operator

Our first question comes from Peter Verdult from Citi.

Peter Verdult, Analyst

Peter Verdult here from Citi. Two big picture questions for Mads, given it's his last quarterly conference call. Firstly, can you just remind us, Mads, on the sort of broader technologies and timelines Novo is working to with respect to your stem cell therapy efforts in diabetes? Asking the question in light of other companies beginning to talk more about this area. Just want to know or gauge how you're feeling whether Novo's in the vanguard of developments and how you handicap the technologies you are using versus the competition? And then, secondly, usually, when you ask your Head of R&D to name their most promising pipeline assets, you get a very bland and boring answer about loving all their children equally. Now given that you're heading off to a well-deserved retirement from being CSO and perhaps can talk more openly, could you maybe just call out what you believe to be the most interesting and exciting early stage pipeline assets in the Novo portfolio. Thank you, and all the best going forward.

Lars Jørgensen, CEO

Thank you, Peter. Mads, that was two questions for you. Stem cell and then your favorite topic.

Mads Thomsen, CSO

I'll start fresh because I was muted. Apologies, Pete. I'm still the Chief Scientific Officer for the rest of February, so I can't go into too much detail about my personal projects. However, I can say that our leadership in oral biologics, bolstered by the Emisphere acquisition, allows us to explore some truly exciting target areas across various therapeutic domains. Unlike classical small molecules, biologics offer unique advantages. I'm really enthusiastic about this without pinpointing a specific project. For instance, combining amylin, which we now refer to as cagrilintide, with semaglutide positions us uniquely, especially as we work towards WHO approval for the name cagrilintide. The potential of deploying an oral version of cagrilintide and semaglutide is something to watch for. Regarding stem cells, management has set a goal for the Transformational Research Unit to submit one new clinical IND, or investigational new drug application, each year starting this year. The first focus will be on Parkinson's disease, followed by diabetes later. You can anticipate an IND by the end of next year, depending on our progress. It's worth noting that Semma Therapeutics, recently acquired by Vertex, is starting with a non-encapsulated stem cell-derived beta cell injection that requires an immunosuppressive regimen. While this approach demonstrates proof of concept, it's unlikely to result in a marketable product, which is why they are also pursuing encapsulation for their next-generation product. I should remind you, Pete, that we established a research collaboration with Professor Papas and Procyon to develop an effective encapsulation device for our beta cells, which is currently undergoing toxicology trials. This aims at targeting type 1 diabetes, and we hope to celebrate this milestone around the 100-year anniversary of insulin's discovery, though not exactly in Toronto but in relation to our company, Novo Nordisk.

Operator, Operator

Our next question comes from Wimal from Bernstein.

Wimal Kapadia, Analyst

Wimal Kapadia from Bernstein. Firstly, just congrats to Mads on the great success at Novo. You'll be missed and best of luck in the new role at the Novo Foundation. So my first question is just on the ONWARDS program for weekly insulin icodec. Now I kind of always assumed that you would run a relatively tight Phase III program that was quite cost-effective, ensuring quick speed to market. So it looks like quite a robust program is planned. So just your thoughts if anything has changed on the potential role of a weekly insulin and the role it can play in the basal market? And if so, was there any data that's driven that change? And then my second question is just one on the guidance and obesity. Clearly, this is the most impacted franchise within your portfolio from a COVID perspective given it's highly discretionary. So I'm just trying to get a sense of how Novo thinks about the next 6 months for Saxenda and the launch of sema in obesity. Should we be expecting a strong uptake in the second half even in a COVID world given it's significantly superior to Saxenda? So just your thoughts on the launch there would also be helpful.

Lars Jørgensen, CEO

Thank you, Wimal. Mads, first on the ONWARDS program.

Mads Thomsen, CSO

Yes. So Wimal, originally, we were anticipating a very slim program, realizing that this was, in all likelihood, an undifferentiated, clinically speaking, insulin, but with an attractive convenience and thereby adherence profile because it was once weekly instead of once daily. What we came to learn in the data that were published, for instance, in the New England Journal of Medicine recently for one of the most critically important Phase II trials was that we actually exceeded our own expectations for the molecule. This means that the coupling of a molecule that we believe is clinically differentiated compared to, for instance, insulin glargine, while at the same time being more convenient. And the advent of new technology, if you look into the ONWARDS 5 trial, we have done a real-world evidence-like study with very few clinical interventions, quite few site visits. It resembles very much a real-world evidence trial. And that means that you get an impression of how this is performing in the real-life setting and integrating that with some new technology where we have an electronic patient interaction device, which enables both dose guidance, but also easy interaction remotely between physician, patient, and even company collection of data for that matter, has allowed us to do a slightly broader program than originally anticipated. But we are recruiting and there's high enthusiasm we can see from the investigators. And part of it, of course, is based on high-impact publications with good data such as in the New England Journal of Medicine. So we're excited. It's a slightly broader program than we originally anticipated. We apologize for that, but it will also mean that we'd get a more attractive late review.

Lars Jørgensen, CEO

Thank you, Mads. Camilla, some perspectives on obesity?

Camilla Sylvest, EVP

Yes. Thank you, Lars. So on obesity, there is no doubt that we will continue our efforts on developing the market. As you recall from when we discussed last time, there are 650 million people suffering from obesity, but only 10% of those are actually seeking care. And when they seek care, it's only a fragment of those that are being treated with anti-obesity medication. So from the 650 million down to less than 1 million being treated with Saxenda. So there's still a lot to do on market development in the coming 6 months. And hopefully, that will also pave the way for a much more efficacious product in semaglutide 2.4 with almost twice the efficacy of Saxenda. So the awareness building, the physician support and then, of course, also the digitalization are some of the efforts that we are working on right now that hopefully will also be useful in a COVID-19 context, meaning that online care for obesity is something that we're also embarking on.

Operator, Operator

Our next question comes from Simon Baker from Redburn.

Michael Novod, Analyst

It's Michael Novod from Nordea. First of all, a question to the CapEx expansion. So it comes rather soon after you sort of complete the expansion in the U.S. So how sort of comfortable are you with the current expansion plans and what you sort of put into your demand schedule for semaglutide going forward? How far does this take you in terms of your projections on the demand for oral sema across the different indications? And then, secondly, on icodec and also circling back to a previous question regarding market growth. How do you see icodec going forward, also bearing in mind the larger Phase III program? Is this more a market share gain globally? Is it also a market volume growth game in the Rest of World? Is it even a potential market expansion game in the U.S. and also on the value side, whether it can drive additional value to the U.S. insulin market?

Lars Jørgensen, CEO

Thank you, Michael. First, Karsten, on CapEx, oral sema and how far that will get us.

Karsten Knudsen, CFO

Thank you, Michael. Regarding CapEx, as we've mentioned in the past, if we need to increase our annual CapEx from around DKK6 billion, it will depend on positive developments in our pipeline. Currently, we are in the final phases of preparing for a regulatory site submission to the FDA for a facility in the U.S. The main construction is essentially complete, and we are awaiting quality approvals before we can start production in the purification area, followed by fermentation and recovery. This project is progressing according to our initial plan. We are now considering raising our CapEx forecast due to the pipeline projects we've discussed, like the high-dose oral sema and the Alzheimer’s Phase III trial we plan to initiate. The increase in capacity is to address the potential demand for these pipeline projects and others on the same platform that have not yet been publicly announced.

Lars Jørgensen, CEO

Thank you, Karsten. I want to share some insights on icodec. Observing the current dynamics in the diabetes market, we've seen a shift in the GLP-1 category from daily to weekly use. In a clinical setting, when a patient seeks intensified treatment, developing a product that offers clear benefits in terms of a weekly regimen and a broader timing range represents a significant opportunity. Additionally, lower glucose monitoring requirements could lead to a major improvement in insulin usage, which remains the most effective treatment for diabetes, addressing a considerable unmet need among insulin users. We believe there is a strong opportunity ahead. While we await the results of the Phase III program, we see potential in both expanding the insulin market and capturing market share, thanks to what we hope will be a differentiated product in terms of convenience and clinical effectiveness. I'm very pleased that we have this project, and I genuinely believe insulin will have an important role in the future, allowing us to enhance innovation and redefine the market, complemented by our glucose-sensitive insulin program.

Operator, Operator

Our next question comes from Richard Vosser from JPMorgan.

Richard Vosser, Analyst

Just going back to the Rybelsus launch in Japan. Perhaps you can hear me?

Lars Jørgensen, CEO

Yes. Now, we can.

Richard Vosser, Analyst

Okay. Excellent. Sorry about that. So just going back to the Rybelsus launch and think about the launch in Japan and how we should think about that relative to the uptake in the U.S.? Clearly, there's not much COVID in Japan. But also the OAD market in Japan, maybe give us some idea of the sizing of that relative to the GLP-1 market in the U.S. and what opportunity you see there? And then second question, just thinking about if we could have an update on the PCSK9 and other options there to add on within the SNAC technology with semaglutide, maybe how many things can you co-formulate? And maybe an update on the PCSK9?

Camilla Sylvest, EVP

Yes. So we're quite excited about the launch of Rybelsus in Japan because the OAD market, as you know, is 80% of the diabetes market in Japan. The GLP-1 market in Japan is still in a size of less than 10%. So there's a big opportunity here, of course, to expand the treatment of GLP-1 with Rybelsus. And we are planning for, of course, launching very soon from now. And we are, of course, also building on many of the experiences we've had in other markets. But we have also co-teamed out with Merck, MSD to make sure that they can help us co-promote Rybelsus in the primary care space where they have a lot of experience where we primarily, up until now, have had experience in the injectable segment.

Mads Thomsen, CSO

Yes. I would prefer to take a broad view on the oral platform with SNAC and other enhancers we are implementing. Currently, we have numerous options for peptides up to about 10,000 Dalton, which seem to be suitable for varying degrees of our latest generations of SNAC technology. We are currently on the fourth generation. PCSK9 is one possibility, but we have many others. We will keep you informed as the company gradually enters them into clinical trials over time. Thank you.

Lars Jørgensen, CEO

And I can confirm we will update you once we have progress. So this concludes our earnings call. Thank you for participating, and feel free to contact our Investor Relations officers should you have any follow-up questions. Thank you very much, and have a good day.