Earnings Call Transcript - NVO Q1 2022

Richard Vosser, Analyst

All right. Welcome, everyone, to Novo's Q1 roadshow. I'm Richard Vosser at JPMorgan. It's a great pleasure to have the Novo management team here in this roadshow. Munk Karsten, the CFO; Camilla Sylvest, Head of Strategy; and Martin Lange, Head of Development. So I'll hand over to Karsten for a few introductory remarks in the presentation. Thanks, Karsten.

Karsten Knudsen, CFO

Great. Thank you, Richard, and thank you to JPMorgan for hosting this launch presentation, and thanks to all of you participating in person. It's always good to interact in person. And I'd like to remind you that this launch session is being recorded, just for general use. So we have a great team here in London, and we released our results last week. So you could say it's not as stressful as we had anticipated, but the reason why we released our numbers, as I'm sure you're aware, is that we have to follow Danish regulations for listed companies in Denmark. When you identify material information, you have to report as quickly as possible without any undue notice. So that entails a lot of hard work from everybody in the organization and the Board meeting, etc. So it's not something we take lightly. The benefit for you is that you had the weekend to prepare for this launch session. The session today will be reasonably quick on the presentation, and then we have a good time for Q&A and perhaps a bit of time afterwards in the breakout if you didn't manage to ask your question during the launch session. I have to remind you about forward-looking statements. Predicting the future can be difficult, and real events might differ. In terms of our strategic aspirations as a company, we launched a concept back in 2019 and updated a couple of them at our latest Capital Markets Day. We report to the market on an ongoing basis. To cover some of the key components, in terms of our purpose and sustainability, our ESG performance, we continue to drive performance both on CO2. This year is particularly challenging because people have started to travel, and product distribution is moving more towards air distribution linked to our supply chain situation. So we're still down compared to 2019, but not as much down as last year. On our social responsibility piece, I think it's a great achievement by Martin and the development team that we now have a positive scientific opinion around our thermal insulin solution that enables our human insulin to be stored at below 30 degrees for a month, which is a key feature in developing markets. The reason for the European registration is that we can reference that in all these countries where it is more relevant, where perhaps there is less access to electricity and so on. And finally, diversity and inclusion are also key priorities for the company, and we will continue to progress in that area. On our pipeline, which Martin will come back to later, after last year which was more of an investment year and trial execution year, we are starting to see some really good trial readouts. You saw some at the Capital Markets Day between Mim8 concizumab and now you've seen ONWARDS 2, the first Phase III results, favorable Phase III results with the once-weekly insulin. We are very happy about that, as you'll hear later on, and of course, the high-dose Ozempic in the U.S. marketplace. Commercially, we keep performing against our aspirations or even ahead of those aspirations. Some of you will remember our initial obesity aspiration about doubling obesity — that's actually exactly what we did in the first quarter, compared to the first quarter last year. So we are seeing fantastic traction in our obesity franchise. This has all turned into a great sales growth of 18%. Actually, the strongest sales growth in relative terms in two decades for Novo Nordisk and the biggest absolute sales growth quarter-over-quarter ever in our history. So an amazing performance in terms of commercial execution and translating it into financial results also at 18% operating profit growth. I will come back to that in more detail. In terms of capital allocation, we had very strong cash conversion in the first quarter, and also allocated to shareholders at DKK 20 billion, a lot of value allocated to shareholders in terms of both dividends and share buybacks. So with that, I'll hand it over to Camilla to cover our status on commercial execution.

Camilla Sylvest, Head of Strategy

Yes. Thanks a lot, Karsten. Good morning, good afternoon, everyone, I should say, here in London. Our sales growth reflects an 18% increase, driven by a combination of a strong growth of 13% in International Operations and North America Operations growing 24%. We see nice growth across all regions, including EMEA, China, and the Rest of the World, so all units contributing to growth. When we look at therapy area distribution, the 18% is clearly driven by growth in GLP-1, with continued growth in North America of 38% in our GLP-1 franchise and up 60% in International Operations. However, we do see an insulin growth rate of minus 4%, which is driven by minus 15% in the U.S., but there is a slight increase of 1% in International Operations. We also have 107% growth in our obesity franchise, driven by the 146% increase in North America Operations and 63% in International Operations. Additionally, we continue to see single-digit growth in our rare disease franchise. If we zoom in on two of the biggest growth areas, starting with GLP-1, especially our Ozempic franchise, you can see here the four-week rolling estimates of how prescriptions have really picked up at the beginning of this year on an NBRx level. On the right-hand side, you see the TRx level and a very steady performance, increasing the Ozempic share of the total GLP-1 segment. The short-term increase is driven by additional focus on DTC and, of course, on more doctors prescribing Ozempic. We see a better pickup now in lower-tier segments, and there may also be a halo effect from the semaglutide molecule in general. Looking at Wegovy, you can see the total scripts, so TRx. We have not been promoting Wegovy in the last quarter in the U.S. Despite that, we still see continued uptake, but we have now achieved 80% coverage in the commercial segment. We are currently not promoting the three lowest doses as we don’t want patients to be initiated if they cannot continue on treatment. Our contract manufacturer is initiating the commercial production. We expect to be back in the market with supply in the second half of this year and will make our product available again. So that's the plan for Wegovy in the U.S.

Martin Lange, Head of Development

Yes. Thanks very much, Camilla. This is going to be an exciting year in the R&D space. We'll have a lot of interesting readouts, starting with the icodec, but we also see very nice progress across all our programs. We have, as you know, Phase III programs ongoing in all our therapy areas, which is an interesting place to be, especially when we see those reading out in the years to come. I want to highlight two things in the diabetes space. First, we've got the 2.0 milligrams semaglutide approved in the U.S. for the treatment of type 2 diabetes. That is very exciting because you’ve seen the data and the results based on the publication. Now we have it included in the label, describing the benefits of the 2.0 milligram versus 1.0 milligram, namely more glycemic control, more weight loss, but no difference in the safety/tolerability profile between the two doses of semaglutide. We also have a very nice description of the cardiovascular benefits of semaglutide, not distinguishing between 1 and 2 milligrams, which makes it comprehensive. We talked about the ONWARDS 2 program. This is truly exciting. The ONWARDS program consists of six trials spanning type 1 and type 2 diabetes. It's a global program, and it even includes one study catering to payers, illustrating the potential of demonstrating A1c superiority, which is exactly what payers are looking for. We're still waiting for the next five studies to read out. ONWARDS 2 was the first study to read out, and it was, in some aspects, the most difficult and also the most interesting study we had to look at, as the comparison was with insulin Tresiba. Insulin icodec is truly exciting, with a very stable profile and the first reading showing great results. We've seen something that has not been observed in 100 years in this class, where we have a once-weekly insulin displaying a treatment time setting into superiority on A1c. We've also observed no difference in hypoglycemia. We've seen the patients treated with insulin icodec waiting longer before experiencing non-severe events.

Karsten Knudsen, CFO

Thank you, Martin. I'm here as Head of Development and very happy with the insulin icodec. We will get back to this, with the five additional trials in the quarters to come. Looking at financials, you've all seen this as part of our release. Recapping, we had 18% sales growth at constant exchange rates and reported 24% sales growth, thanks to the tailwind from the U.S. dollar. Excellent sales growth on a large base. Our gross margin adjusted for currency is reasonably flat. Our employee count has risen by 9% over the last year, primarily due to an increase in manufacturing. We are scaling manufacturing and, as previously discussed, we have 3 shifts, 7 days a week. Our sales and distribution costs are up 18% due to classic investments in GLP-1 diabetes and obesity market development. R&D is up 29%, influenced by the Dicerna acquisition, the run rate of Dicerna, and although this has a negative impact on our P&L of approximately 2%, adjusting for Dicerna would indicate our operating profit growth would have been 20%. Our R&D costs are primarily driven by our focus on expanding our pipeline and diversifying our investment into other serious chronic diseases like cardiovascular health and Alzheimer's. Overall, we achieved an 18% operating profit growth, and reported terms 28%. There is a hedging impact as we hedge the U.S. dollar for 12 months. We have seen very good hedging efficacy at the beginning of the year, and net profit growth of 13%. Compared to the NBRx trajectory presented by Camilla, this has led us to increase our outlook significantly, from an earlier estimate of 6 to 10% and now from 10 to 14% growth. This is evident across all our financial ratios, so no surprises from top-line all the way through to cash generation and increased share buyback to now DKK 24 billion.

Richard Vosser, Analyst

So maybe two then. Firstly, Camilla, you mentioned commercial access is 80%. I think before the opt-in was sort of 40%. Can you give us an update on the opt-in level from commercial employed? Secondly, on Ozempic 2 milligrams, you highlighted, I think Doug mentioned on the conference call that it will be priced in line with other doses for diabetes. How do you manage that, given the brand is very close in dosing to Wegovy? Does that have any impact on Wegovy in terms of cannibalization or...?

Karsten Knudsen, CFO

Thanks, Richard. So there's two questions for you, Camilla, one on opt-ins and the other one on pricing of 2.0.

Camilla Sylvest, Head of Strategy

Yes. So Richard, we are approximately in a situation where we have 80% coverage gross, and about half of the employers have opted in, meaning a 40% net coverage, which is slightly more than what you recalled from before. It continues to improve, and we are working consistently with many employers, but it does improve. On delivery and messaging, it's very important for us to stay true to what the label states. We promote Ozempic for diabetes care. Currently, we do not promote Wegovy for obesity care, but we hope to get back to that. It's crucial for us to stay completely aligned with that for ethical business reasons. Nevertheless, we see an uptick in scripts for Ozempic as I mentioned, partly due to expanding our prescriber base, and also because Ozempic is recognized for its triad of benefits: HbA1c lowering, strong weight loss and significant cardiovascular risk reduction.

Karsten Knudsen, CFO

Thanks, Camilla. Just to add to the coverage in obesity, we now have a contract with the Department of Defense as well. So in addition to enrolling more employers under commercial, we are working with public employers to secure access under various Medicaid plans or the Department of Defense. It looks like we’re making good progress overall, and I’m very happy with that.

Wimal Kapadia, Analyst

Can I come back to Richard's question? Ozempic at a high dose is priced at the same level as Ozempic 1 milligram but is 0.4 milligrams less than Wegovy. If the net price of Wegovy is similar to Saxenda, that's a 30% premium on Ozempic's net price. I am curious about how the payer discussions go. Additionally, the GLP-1s are performing very well. If we consider the diabetes market long-term, metformin and insulin bookings remain quite stable. What is the peak penetration for GLP-1 in the U.S.? Is it 25%? 30%? How much must we leave for the SGLT2s long-term? What implications does that hold for the rest of the world? Can Europe and the rest of the world achieve similar levels to the U.S.?

Karsten Knudsen, CFO

Thanks, Wimal. I counted two and a half questions there. Let me pass this time around, and we will get back at you another time. For Ozempic 2.0 pricing, it's diabetes pricing, reflecting competitive dynamics. Please view it as flat pricing across 0.5, 1, and 2 mg. From a payer's perspective, they purchase the portfolio, and current trends show many patients are still at 0.5 mg. Adopting formularies in the two affected disease categories leads to different management approaches from payers and how they choose to design co-insurance. Camilla, what about GLP-1 patient penetration?

Camilla Sylvest, Head of Strategy

Yes. GLP-1 penetration varies significantly based on new product launches and their efficacy. We are currently at roughly 8% to 12% market volume in Europe and the U.S., but that number is significantly increasing. Much of this can be attributed to the continual benefits from cardiovascular risk protection, weight loss, and HbA1c reduction. For instance, in China, where we've seen Ozempic's reimbursement, the market share of GLP-1 increased from 1% to nearly 7% or 8% within a very short frame. This segment continues to grow at approximately 30% in volume across regions including Europe and the U.S., while other segments grow much slower.

Karsten Knudsen, CFO

Good, thanks, Camilla. We'll move to Pete now.

Peter Verdult, Analyst

Two questions. I want to expand on the discussions from Richard and Wimal. In a couple of years, a formidable competitor is expected in the GLP-1 market, notably affecting pricing dynamics. With the evolving landscape, how should we think about navigation in terms of pricing strategy? Secondly, most of the industry addressed responsible price increases, ideally no more than inflation. In a context of inflation rates around 7-8%, will Novo enact list price increases to protect against inflation?

Karsten Knudsen, CFO

For the first question on competitive landscape, Camilla could cover it. We understood where we are today, and what could be the scenarios for Lilly and our approach towards GLP-1 pricing. As for inflation and mitigating it, we face inflation at the starting point when managing a fast-growing business.

Camilla Sylvest, Head of Strategy

In terms of dynamics, obesity is increasingly being reimbursed for Saxenda outside of the U.S. as markets recognize the value. As investments grow, prices will adjust from previous reimbursement levels. When our products expand into other channels like Medicare, we foresee prices converging, ensuring broader lasting access for patients.

Karsten Knudsen, CFO

Regarding inflation mitigation, we start by passing on increased costs to our consumers. This is seen in various industries. Additionally, we deal with the pressures from our suppliers amid our mature procurement setup, which minimizes immediate inflationary impacts. We also implement efficiency measures and resource allocation, leveraging a high-margin business model for margin stabilization. While creating price adjustments is complex in many markets, existing mechanisms can help manage prices in hyperinflationary markets.

Unknown Analyst, Analyst

The volumes are strong, so does that, given the inflationary environment, slow down any pricing pressure? Can you leverage that advantage?

Karsten Knudsen, CFO

It’s fair to say that differentiation and market share minimize price drops. High demand for products like Ozempic creates pressure on payers to maintain formulary placement. If payers seek to minimize costs amid rising values, they proceed cautiously against removing approved products.

Unknown Analyst, Analyst

For the guidance on growth upgrade of sales, how much of that is volume versus price?

Karsten Knudsen, CFO

For all practical purposes, the guidance upgrade primarily reflects increased Ozempic volumes.

Mark Purcell, Analyst

Two R&D questions. Most KOLs believe that the SELECT trial will be successful and described as a pivotal future study for obesity medicines. It's crucial for you to get it right, and we're focused on Q3 and potential interim. We've observed early CVOT study readouts damage discussions with payers. Can you clarify the stopping criteria to avoid losing power within this trial? Furthermore, for icodec, if we observe severe hypos, how do you treat them in contrast to how you'd typically handle hypoglycemia with standard insulin?

Karsten Knudsen, CFO

That sounds like two meaningful questions for you, Martin. Could you address the SELECT stopping rules and comment on how to handle severe hypoglycemia in relation to icodec?

Martin Lange, Head of Development

The interim analysis is significant because we want to emphasize ensuring that we do not lose statistical power. The trial's success highly rests on ensuring enough events are accumulated or on efficacy to ensure conclusions are well-grounded. Thus, adequate assessment is essential for interim analysis. Our primary plan is for efficacy differentiation to be robust, ensuring potential for comprehensive outcomes. So with icodec, the specific properties allow us to manage hypoglycemia effectively. We've monitored over 5,000 patients under the ONWARDS protocol during which severe hypo rates remained minimal. The flat pharmacokinetic profile of insulin icodec prompts us to study mild hypoglycemia, which can be managed relatively easily with dietary adjustments. We aim to ensure both safety and effective blood glucose control with this new treatment option.

Karsten Knudsen, CFO

We will then move down the line to Keyur.

Keyur Parekh, Analyst

I have two questions. Given what we know of ONWARDS 2, and considering Martin noted the uncertainties with the program, what would be considered a good outcome for icodec in the basal insulin market in 3-5 years? Secondly, you provided a detailed analysis of factors behind Ozempic's strength, but didn’t mention Wegovy which is currently supply-constrained. Is it possible that Wegovy might affect future volumes for Ozempic? Will we see a sequential decline in Ozempic once Wegovy returns?

Karsten Knudsen, CFO

Thanks, Keyur, for those questions. Camilla, in the basal segment, what market share would satisfy our team regarding icodec's positioning? Using your insight, can we anticipate the direct correlation and incremental impacts between Ozempic and Wegovy directly over the next few years?

Camilla Sylvest, Head of Strategy

Thank you, Keyur. For icodec's future market share expectations, we're currently at 37% in value and 33% in volume within the basal segment; however, these figures fall short relative to our expectations in other segments. We’re evaluating how we can significantly enhance our standing in the basal segment, considering safety in patients' mentalities regarding hypos. Fully understanding the real-life influences of how patients interact with their medication regimes will optimize future adherence rates. On the question regarding Ozempic – we’ve seen a rise in prescribers from lower-tier segments, and the benefits of GLP-1s are well documented. That said, I can't entirely discount the possibility of existing diabetes patients being interested in Wegovy's weight loss benefits. Nevertheless, we need to promote Ozempic for diabetes care and Wegovy for obesity care distinctly. We will monitor if a decline in Ozempic coincides with Wegovy restocking, but we ensure we’re prepared to manage various scenarios.

Karsten Knudsen, CFO

Forecasting NBRx trends can be quite complex, and the subsequent movement from NBRx to TRx presents its challenges as well. Historical patterns show varied correlations, which we will analyze to understand trends moving forward.

Sachin Jain, Analyst

A follow-up on the hypoglycemia query; previously, a variety in definitions was discussed. My question focuses on the specific metrics you're emphasizing concerning icodec's hypoglycemic effects. Furthermore, can you address ONWARDS 5 and evaluate potential conversations with payers? Given insights from the previous study, what are expected outcomes regarding A1c? Would you consider a head-to-head study of Cagrisema and Tirzepatide?

Karsten Knudsen, CFO

Thank you, Sachin. You have a skilled trio here with multiple queries directed towards Martin. Let’s begin with his analysis regarding hypo definitions, and the payer conversations for ONWARDS 5 and head-to-head prospects. Martin?

Martin Lange, Head of Development

Regarding hypoglycemia, it’s critical to draw distinctions in comparing rates that are, in essence, very low numerically. Comparatively speaking, our proportions of A1c below 7 show impressive management without defining significant clinical relevance. We expect different results in ONWARDS 1 versus historical trials, given the variances in hypo-risk discussions. Regarding ONWARDS 5, we had to raise our target aligned with U.S. payers, insisting on demonstrating superiority in A1c outcomes. Additionally, the advent of remote digital monitoring will allow us to effectively observe real-world scenarios with diligence. As for the Cagrisema versus Tirzepatide inquiry, if the data continues to be consistent, I’d be confident pursuing competitive head-to-head studies because the emerging data indicates competitive prospects for efficacy and safety.

Karsten Knudsen, CFO

Thank you, Martin. I will take the final questions. Jo, the floor is yours.

Jo Walton, Analyst

I’d like to present a thought experiment. Should your sales growth persist in demonstrating performance similar to Q1, at what sales growth levels should we anticipate margin leverage to commence? Currently, your robust growth enables ample reinvestment, so I'm curious when diminishing returns set in. For my quick follow-up, is there evidence indicating a decline in stay duration for obesity patients on Ozempic, given that it typically experiences less adherence compared to diabetes management?

Karsten Knudsen, CFO

We are operating under a stable margin outlook. At higher growth rates, we intend to invest predominantly in R&D. Nonetheless, it's essential that each investment offers an attractive return. Although we anticipate utilizing revenue towards R&D projects, we will evaluate unnecessary expenditure. Thus far, we don’t possess conclusive data on patient behavior with Ozempic in relation to obesity.

Peter Welford, Analyst

Two quick ones. Can you remind us whether it's generally true that higher doses of GLP-1 in 2 mg are needed for larger obese type-2 diabetes patients? What proportion of the initial obesity Wegovy data patients had type 2 diabetes? Any idea on the future demand range for Wegovy production and preparedness as you build inventory?

Karsten Knudsen, CFO

Regarding inventory levels, we establish supply sizes based on projections cultivated through various historical scenarios due to potential volatility. Detailed assessments based on patient prescribing patterns aim to ensure a robust launch; however, demands of healthcare partners significantly impact these strategies.

Martin Lange, Head of Development

For dose relationships, established insights display a necessity for glycemic management versus weight when it comes to dosing, yielding distinct plateaus in both aspects over time. A general observation sees minimal overlap between diabetes patients versus obesity behavior engagements.

Karsten Knudsen, CFO

Thank you for attending this Novo Nordisk Q1 launch meeting. I’d also like to thank Richard and JPMorgan for hosting the event. We will be at ADA and will be hosting a sell-side event at ADA in the U.S. early June. Hope to see you all there with more data to share from R&D, but...

Martin Lange, Head of Development

Who knows?