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Edited Transcript of LUN.CO earnings conference call or presentation 14-Aug-19 11:00am GMT

Q2 2019 H Lundbeck A/S Earnings Call

Copenhagen Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of H Lundbeck A/S earnings conference call or presentation Wednesday, August 14, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anders Götzsche

H. Lundbeck A/S - Executive VP & CFO

* Deborah Dunsire

H. Lundbeck A/S - President & CEO

* Jacob Tolstrup

H. Lundbeck A/S - EVP of Commercial Operations

* Johan Luthman

H. Lundbeck A/S - EVP of R&D

* Peter Anastasiou

H. Lundbeck A/S - EVP of North America

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Conference Call Participants

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* Carsten Lønborg Madsen

SEB, Research Division - Research Analyst

* Emily Field

Barclays Bank PLC, Research Division - Research Analyst

* James Daniel Gordon

JP Morgan Chase & Co, Research Division - Senior Analyst

* Marc Harold Goodman

SVB Leerink LLC, Research Division - MD of Neuroscience & Senior Research Analyst

* Michael Leuchten

UBS Investment Bank, Research Division - Co-Head of Pharmaceuticals Research of Equity Research

* Michael Novod

Nordea Markets, Research Division - Director of Healthcare, Healthcare Analyst & Sector Coordinator

* Peter James Welford

Jefferies LLC, Research Division - Senior Equity Analyst

* Peter Sehested

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Trung Chuong Huynh

Crédit Suisse AG, Research Division - Research Analyst

* Wimal Kapadia

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

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Presentation

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Operator [1]

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Hello, ladies and gentlemen, and welcome to H. Lundbeck Second Quarter 2019 Results. (Operator Instructions) So today, I'm pleased to present Deborah Dunsire, President and CEO; Anders Götzsche, Executive Vice President and CFO; and Johan Luthman, EVP, Research and Development. Please begin.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [2]

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Thank you very much, operator, and thank you all for your interest in Lundbeck. We welcome you to our teleconference covering the first 6 months of 2019. As you know, we have Anders Götzsche, our CFO; and Johan Luthman, our Head of R&D here. I'm also joined by Jacob Tolstrup, Head of Commercial Operations; and Peter Anastasiou, Head of North America.

On Slide 2, you can see the company's disclaimer, which I know you've read many times before. So I'm not going to read it aloud. I'm sure you'll be glad to hear.

Turning to Slide 3. In the first half of 2019, Lundbeck has delivered a solid set of numbers, and we're on track to deliver on our financial guidance for the year. Anders Götzsche will discuss the financial performance in detail later in our call. Importantly, our strategic brands continue to show strong volume and value growth in all regions. I'm also pleased that our international markets and Europe regions continue to show solid growth driven by strong demand. The overall performance is, as expected, negatively impacted by the Onfi erosion in the U.S. Excluding Onfi, we realized a healthy revenue growth of 4%.

Lundbeck's financial position is impacted by major payments. For example, the Abide Therapeutics transaction. But even so, it's robust and continues to provide us the flexibility to implement our Expand and Invest to Grow strategy, which we announced in February. We continue to invest behind our strategic brands and have decided to initiate new trials for brexpiprazole in post-traumatic stress disorder and a proof of concept in borderline personality disorder.

With that, please turn to Slide 4. We have a marketed portfolio of 4 strategic brands which are generating substantial growth, up 27% in aggregate, adding DKK 0.9 billion in sales compared to the first half last year. Each of the brands have achieved double-digit growth and are growing in all regions and now constitute over half our sales. The continued growth in these strategic brands is a testament to the value these products provide as well as the excellence and execution by our organization in development and in sales and marketing around the world.

Next slide, please. Revenue from Brintellix/Trintellix reached DKK 1.3 billion in the period, a growth of 30%. 54% of the revenue was generated in North America. In the U.S., Trintellix continues, as in all other markets, to increase its market share. We saw strong demand growth in the first half driven by an increase in new patients as well as improving persistence on therapy. We started launching Brintellix/Trintellix in November of 2013, and the products' continued strong growth, close to 6 years post approval, reflects the market's appreciation of the value it provides in addressing the unmet needs for patients with depression.

In value, the U.S. leads with more than 24% share for Trintellix, making it the biggest anti-depressive -- branded anti-depressive in the market. In the major European countries, Brintellix is approaching a 10% share. In China, we're encouraged by the progress but it's still early days, given that we launched last year, and we still await public listing for reimbursement. In Japan, the regulatory review appears to be on track, and we continue to expect an approval in Q3 of this year. So we see sources of growth for this brand well into the future.

Please turn to Slide 6. Rexulti is still mainly a U.S. franchise. In Europe the product has recently been launched in Denmark, the Netherlands, Norway and Switzerland. Additionally, outside of Europe, it's launched in Australia, Mexico and Saudi Arabia. More countries will launch in the coming year. As you can see from the graph, the significant uptake continues. Rexulti achieved more than DKK 1 billion in sales for the period, representing a growth of 37%. The product also continues the very strong demand growth with 26% in the second quarter.

We launched Rexulti in August 2015 in the U.S., and Rexulti's value share has increased from 13.1% to 14% since November last year. We continue to have high expectations for this product as Rexulti has a very attractive profile and is highly valued by the medical community for what it can do for patients. Johan will elaborate on the life cycle management programs in a minute.

Turning to Slide 7. Abilify Maintena grew 23%, approaching DKK 1 billion for the period with strong double-digit growth in all regions. Abilify Maintena was launched in 2013, and volume share now approaches or exceeds 30% in markets such as the U.K., Italy, Canada and Switzerland. And we continue to gain market share. In many markets, Abilify Maintena is now the second most prescribed long-acting injectable treatment for patients with schizophrenia.

Turning to Slide 8. Northera grew 19%, finishing the period above DKK 1 billion. There have been quite a few moving parts for this product in the last 12 to 18 months. In this quarter, we see good volume growth of 24% and continue to expect good volume and value growth for the product in 2019 and beyond.

Next slide, please. Our North American region is obviously very impacted by the generic erosion of major brands such as Onfi and Sabril. However, we see very strong growth of our strategic brands, which now constitute 2/3 of the regional value. Additionally, if one takes Onfi out of the equation, then the growth in North America is actually 12% for the second quarter. One additional comment I'd like to make is that even though the volume decline for Onfi and Sabril is more or less as we expected, we do see a more unfavorable payer mix, which impacts the average unit price negatively and creates uncertainty for the development of those 2 products in the coming quarters.

Next slide, please. International Markets increased 4%, reaching DKK 2 billion for the period or 24% of our revenue. The region is still in the early part of the rollout of our strategic brands, which now constitute 18% and had a growth of 35%. We expect to see significant long-term growth for these products in the region.

The largest markets in our International Markets region are Brazil, China, Japan and South Korea, and they constitute about 56% of the regional sales. Japan is an investment area for Lundbeck, and we have now established our own commercial organization for the expected launch of Trintellix pending approval towards the end of the third quarter. In China, which is our second largest market overall, we've launched Azilect and Brintellix. It's still early days for both products as it takes time to obtain national reimbursement in China as we've previously mentioned. We have successfully completed the transfer of Lexapro back to our organization from our partner, and that transition has gone very smoothly.

Next slide, please. Europe is delivering solid growth with revenue increasing 7% to DKK 1.6 billion. The European region is an important part of our overall performance, and it's driven by the strategic brands, which grew 28% and now constitute 50% of the sales in the region. The launch of Rxulti in the larger countries in Europe will likely not take place before next year.

I'll now hand the microphone over to Anders Götzsche to expand on the corporate financial picture.

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Anders Götzsche, H. Lundbeck A/S - Executive VP & CFO [3]

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Thanks, Deborah. Please turn to Slide 12. I'll turn to our financial numbers. Deborah has already elaborated on our performance for the strategic brands, so no need for me to do that as well.

In the first half of 2019, we saw a decline in our overall sales from Onfi in line with our expectation. Both for Onfi and Sabril, we saw a negative development driven by the payer mix, which for Onfi has been offset in the second quarter by a positive impact from revaluation of return provision. Onfi will continue to decline, and we have previously guided a decline of 60% to 70% versus last year. Our best guess right now is that the decline will be in the high end of that range and that the uncertainty is higher than in the beginning of the year due to the increased gross to net.

Revenue declined 9% reported or 8% in local currencies, reaching DKK 8.5 billion. This is driven by all 4 strategic products. Please also note that the effect from hedging has moved from a gain of DKK 277 million to a loss of DKK 93 million. Cost of sales declined 4% to DKK 1.6 billion in the half year. Thus, our gross margin therefore declined from 81.6% to 80.7%. This is fully in line with our expectation, and we still expect the gross margin for the full year to be in the range of 80% to 82% of revenue.

We still have a good control our -- of our operational cost. The SG&A cost only increased DKK 100 million or 3.5% while investing in our commercial organization. The main reason for the increase is due to FX and mainly appreciation of U.S. dollar. The SG&A ratio was 35.8% compared to 31.6% the year before. The increase in the ratio is a consequence of the decline in revenue compared to last year. R&D costs increased by 2% to DKK 1.5 billion, representing 17.7% of revenue. Considering the sales performance, I think we have managed our costs effectively. So reported EBIT -- thus, reported EBIT decreased by 23%, reaching DKK 2.3 billion, and core EBIT declining 24% to DKK 2.7 billion. Core EBIT margin thereby reached 32%. We see this as a very solid result for the first half of 2019.

It might also be worth mentioning, again, that we still see room for margin improvements. Our gross margin is expected to improve by 4 to 5 percentage points in the next 5 years, and amortization will contribute around half of the improvement and reduced royalty costs and production efficiencies the other half. We will need to invest in our business, but we still expect that our EBIT margin, both reported and core, will show healthy improvement as well. The effective tax rate is unchanged, and consequently, we see a decline in earnings per share of 23%.

Please turn to Slide 13. Lundbeck continues to generate a strong cash flow, although the first half has been impacted by some major payments. Cash flow from operation has declined from DKK 3.4 billion to DKK 850 million foremost as a result of the lower profit. The net cash flow reached DKK 1.9 billion compared to a cash inflow of DKK 416 million last year. We expect the net cash position by the end of the year to be at a range of DKK 5 billion to DKK 5.5 billion. And with our solid cash flow and limited debt, I believe we still have significant flexibility to pursue additional growth initiatives and execute on the Invest and Growth strategy.

Please turn to the next slide. We expect continued growth for our strategic brands, Abilify Maintena, Brintellix, Trintellix, Northera and Rexulti, which only partly mitigate the negative effect from generic erosion on our mature portfolio.

We've had a good start to the year and maintain our expected revenue range of DKK 16.3 billion to DKK 16.7 billion. We will continue to be disciplined in our cost spend in 2019, but margins will be impacted by the erosion of Onfi sales. EBIT is still expected to reach between DKK 4.2 billion and DKK 4.6 billion for the year, which indicates a margin of at least 25%.

Please note that the operational costs related to Abide acquisition are included in the guidance. For the financial items, you should expect a net amount plus/minus DKK 50 million depending on the currency development. The reported tax is expected to be around 26% to 28% in 2019, which also will be the range in the next couple of years. It is important to highlight that the cash tax rate is somewhat lower, and we expect it to be around 20% for the next 3 to 4 years and around 22% to 23% in the following years.

Now I will hand over to Johan to provide an update on our R&D pipeline.

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Johan Luthman, H. Lundbeck A/S - EVP of R&D [4]

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Thank you, Anders. Please turn to Slide 15. I will start an update on our Abide Therapeutics integration, which is happening very smoothly following the final approval by end of May. The transition into what is now called Lundbeck La Jolla Research Center is completed. The projects of which ABX-1431 in Tourette's syndrome is the most advanced are progressing as planned, and I expect to have the next project ready for first-in-human testing by early next year.

Next slide, please. As you know, we have very large life cycle management program ongoing for brexpiprazole. In November last year, Lundbeck and Otsuka announced achievement of positive clinical Phase II results in post-traumatic stress disorder. Subsequently, we've had a positive end-of-Phase II meeting with FDA, where we agreed on the design of a pivotal program in PTSD which we expect to initiate in the next couple of months.

PTSD is a serious psychiatric condition as a response to traumatic events and with limited treatment options and therefore with a substantial unmet medical need. We are now going ahead with 2 pivotal studies in this condition, one study being the flexible dose and another study with fixed dose. In total, we expect to recruit some 1,250 patients in the program. We expect to finalize studies during 2022.

Next slide, please. Borderline personality disorder is another serious psychiatric condition with substantial unmet medical need. There is no drug approved for this challenging condition. Borderline personality disorder is disorder that typically includes symptoms such as inappropriate or extreme emotional reactions, highly impulsive behaviors and a history of unstable relationships. Around 80% of people with borderline personality disorder display suicidal behaviors, including suicide attempts, and other self-destructive acts, such as cutting or burning themselves. It is estimated that almost 10% of people with borderline personality disorder will die by suicide.

We have reasons to believe that brexpiprazole with its multimodal activity might have the ability to address the range of the symptoms of this serious condition. We are, thus, now moving ahead to start a proof-of-concept Phase II study during the fall period. This study will be 2-arm flexible-dose study, and it's expected to enroll some 200 subjects with borderline personality disorder.

Please turn to Slide 18. This is our current R&D pipeline. We continue to aggressively move early-stage products forward, and we have products that likely will enter human trials in the coming quarters. We will also continue pruning the pipeline. As a recent example, after a thorough revaluation, we have decided to discontinue further development of 35700.

With that, back to Deborah.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [5]

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Thank you, Johan. Please turn to Slide 19. In 2019, we'll continue driving our current business forward and execute on our Expand and Invest to Grow strategy. We'll continue to invest in additional growth initiatives, in general, and in our strategic brands, in particular. We anticipate the approval of Trintellix in Japan and will advance at least 1 new molecule from our internal discovery into the clinical pipeline.

Next slide, please. To summarize, leveraging our deep neuroscience expertise to restore brain health is our path to grow Lundbeck and create value for patients, for our society, for our employees and for all our stakeholders. Through this, Lundbeck will continue to be a robust and sustainable company in the years and decades ahead. The outstanding operating results over the past years give us the strong financial foundation to go forward to achieve these goals.

With that, I'd like to thank you all for your interest and open the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question for today is of the line of Wimal Kapadia at Bernstein.

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Wimal Kapadia, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [2]

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Great. Wimal Kapadia from Bernstein. So just a couple, please. So first, I'm just curious to know if there's actually any off-label use of Rexulti in PTSD today. And if so, how much? I'm just trying to get a good sense of the outside longer term from the new trial start and then I guess a similar question for BPD as well.

My second question, you clearly invested in headcount within China, Japan and, of course, the R&D personnel from Abide. So when should we really start to see the fruits of this? So specifically within China, when do you expect to be on the NDRL. And in Japan, what are your expectations for Trintellix launch?

And then just one modeling question. Could you just help quantify the inventory buildup impact for Cipralex in China for the -- in the quarter, please?

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [3]

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Okay. Thanks all for your questions. I'm going to ask Peter to address the first one, and Jacob to address the others.

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Peter Anastasiou, H. Lundbeck A/S - EVP of North America [4]

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Yes. Wimal, first, I want to be very clear. We don't do anything to promote Rexulti inconsistent with the label. Having said that, doctors do have the ability to use products as they deem appropriate, and we have heard and seen some reports of use in both borderline and in PTSD. But it's not something I can quantify for you. The majority of the use is, of course, on-label and mostly in MDD.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [5]

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Thank you. Jacob?

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Jacob Tolstrup, H. Lundbeck A/S - EVP of Commercial Operations [6]

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Yes. So on China, absolutely correct and also what we stated in opening remarks. NRDL in China is obviously important, and we have a plan for that internally that we will not share externally. But it is our plan to -- of course, to get a reimbursement at one point in China. And when that happens, that's also when we expect that we can see some more uptake of both Brintellix and Azilect in China.

To your inventory stocking, in China, there are obviously some huge swings in China. You probably also remember last year, we had a lot of stocking on Lexapro in the first half, which is impacting our growth comparables for this year. But for this quarter, second quarter over the first quarter, we have a downside in China of something like 10%, 15%, 20% where most of that is driven by stocking. So again, we do expect to see quite a significant growth in China for the full year.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [7]

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And then I think, Wimal, you had a question about Trintellix in Japan and when we expected...

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Jacob Tolstrup, H. Lundbeck A/S - EVP of Commercial Operations [8]

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Right. Japan, so filing is going well. We do hope for and plan for an approval, and that approval will include also a price that we will get, which is time for November in Japan. So toward the very end of the year is when we expect to have Trintellix on the market in Japan.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [9]

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Great.

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Operator [10]

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We are now over to the line of James Gordon at JPMorgan.

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James Daniel Gordon, JP Morgan Chase & Co, Research Division - Senior Analyst [11]

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James Gordon from JPMorgan. Three questions, please, one pipeline and 2 financial. The pipeline question was on Rexulti for PTSD. Just -- I wanted to clarify on the timeline because one of the slides -- I think the slide on it says later in 2022. Then there's another slide, Slide 18, that says filing wouldn't be until 2024 later. Is that because you need longer follow-up than the 12-week primary? Or you're allowing for the fact that you might need to do some further trials as well. And if it is a filing that late, how does that tally with the patented product? I think the patent goes into '26 in U.S. So you'd only have 1 to 3 years on the market. Or is there a patent extension angle that you're pursuing as well as doing -- so starting more Phase IIIs now? [So that was] the pipeline question.

And then on the financial, SG&A, the comment before was absolutely about flat SG&A Q1, but you're up 5% in Q2. I think some of that's FX, and some of it's Asian investment. But for the full year, is SG&A on that likely to be more like low to mid up? Or did it moderate later through the year? Or could SG&A actually be up, but clearly this year and up more in '20?

And then the bigger-picture question on operating margin. If I heard correctly, there's a comment on further healthy improvement in margins over the next few years. But the full year '18 results for the [comment to] margins could fall below the current level due to higher organic R&D spend and maybe even lower margins in the current level if you did pursue big-ticket M&A. So is that comment about healthy margin expansion from here because big M&A now looks unlikely and there isn't as much there in the pipeline, so R&D is not going to ramp as much? Has something changed there? Or is it (inaudible)?

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [12]

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Okay. So let's start with the pipeline question, the PTSD timeline? Johan will take that.

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Johan Luthman, H. Lundbeck A/S - EVP of R&D [13]

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Yes. Thank you for the question. So we are -- as you heard, we're going to plan to start up the study later this year. And it's a 12-week treatment period in this study, and that will constitute the main data for the filing. We are debating whether we'll have an extension of the study, but that will not affect the regulatory timelines we're working with.

We're working right now with an estimated time lines. As you heard, I mentioned completion in 2022. That is probably in the latter part of that year. We don't want to give any precise estimates because the study has not started yet, and it's a pretty large Phase III program.

In terms of the time -- the filing timelines and approval timelines, we're working on filing conservative estimates that is will be a regular review by the authority/and it's possible, of course, that this may change, but it's all dependent on the conclusion of the study. So I cannot be more precise how we can cut down that, and quite frankly, it's quite conservative estimate at this time point.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [14]

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Yes. Just to comment on the patent expiry, James, that the patent for Rexulti expires in 2029. So I think you're thinking about the Trintellix patent in 2026.

I'm going to hand over to Anders to address your other 2 questions on SG&A and margin.

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Anders Götzsche, H. Lundbeck A/S - Executive VP & CFO [15]

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Yes. So what you -- the SG&A development for all, if we look at SG&A for the full year, we expect, compared to 2018, that SG&A for the full year will increase between 2% to 4%, and that is reported rates. If I make analysis of the SG&A for the first half, the major component would increase is FX. It's mainly dollar. So we have taken on more FTEs, but we have absorbed that in other parts of the organizations by declining costs. So what you should expect, that the increase in SG&A will also be dependent on FX and mainly U.S. currency. But what we have said is it would be relatively stable over the next 2 to 3 years. And when we make that comment, it's based on the business that we have now.

And that also means if we exit -- we really hope that we will execute on Expand and Invest to Grow strategy and the imperatives that it's about acquisition and strengthening the pipeline. So what we've said before is if we found very interesting projects that we can put into the pipeline and if we come to a stage where we need to invest more in that, then we would, of course, be willing to do so. But that means that we have prioritized the cost internally first. And the same goes for if we make an M&A, then, of course, we need to revisit what is kind of the overall picture of Lundbeck. So the comments we give is, of course, based on the business we know about today.

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Operator [16]

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We're now over to the line of Trung Huynh at Crédit Suisse.

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Trung Chuong Huynh, Crédit Suisse AG, Research Division - Research Analyst [17]

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Three questions from me, please. Firstly, your comment on the increasing gross to net for Onfi and Sabril. Are you also seeing this with your strategic brands?

Secondly, on Wimal's Cipralex China question. Can you tell us what percentage of your Cipralex sales are in China specifically? And I think Lundbeck lost the 4+7 tender this year. How many potential certified Cipralex generics could win these 4+7 tenders?

And then finally, if I can push you on China. Specifically, can you share your thinking on the 4+7 expansion for next year?

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [18]

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Okay. Trung, I'll hand the first question over on Onfi gross to net, which really speaks to payer mix on the gross to net, to Peter. And then I will asked Jacob to give you the commentary on China.

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Peter Anastasiou, H. Lundbeck A/S - EVP of North America [19]

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Yes. First, on your question with strategic brands, no, there's no change in gross to net with the strategic brands. The reason that we are observing a gross-to-net change with Sabril and Onfi is because they're post-LOE. And as Deborah said, the mix changes post-LOE. What we're seeing is that the commercial and Medicare channels are eroding more rapidly than Medicaid, and that mix shift is what accounts for the gross-to-net increase. We don't know if that will continue or if that was just isolated for now. But that's why we've called it out as a potential uncertainty.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [20]

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Jacob?

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Jacob Tolstrup, H. Lundbeck A/S - EVP of Commercial Operations [21]

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Yes. And on China, so first, I think your question was to break out the Lexapro sales on China specifically. I don't think we've done that externally, so I will refrain from doing that here. Looking at Lexapro in China, there are different factors you should consider. And also when we talk about 4+7, so firstly, we have taken back Lexapro from our partner. We're handling that ourselves. That will give us a longer-term upside on Lexapro in China.

Then I think it's also important to remember that you're absolutely right, that Lexapro was on the 4+7 list and we did not choose to go in with bidding for a lower price. So we have seen generic coming in and taking a bigger volume share in those 4+7 cities that were included in the first round. And obviously, you're right. The -- if the 4+7 gets expanded, we will see further volume loss on Lexapro going to these generic quality equivalents in China.

But status today is -- also before 4+7 is that more than 70% of all Lexapro sold in China is already on generic. So of course, this will have an impact. But it's important to remember that Lexapro is already quite heavily genericized in China. But we can continue to grow the brand because of the underlying growth of the Chinese market.

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Operator [22]

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We're now over to the line of Emily Field at Barclays.

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Emily Field, Barclays Bank PLC, Research Division - Research Analyst [23]

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I was just -- I had another question on Rexulti in BPD. I was just wondering if you elaborate a bit more on what gives you confidence that Rexulti could show efficacy there. And are there any therapeutic treatments that to the best of your knowledge that are used off label? Or are generally those patients left untreated therapeutically?

Secondly, just any updates on your approach to M&A. I believe you reiterate that you have approximately USD 4 billion to USD 5 billion in firepower. Are you noticing still a disconnect between valuations that targets want? And what could potentially generate value to an acquirer such as Lundbeck? Or just any updates there.

And then also, just if -- within your U.S. business, how much of your business is in Medicare Part D and then also Medicaid and just whether you see the recently proposed overhaul to each of those programs as having a significant impact on your business, if they were to go through?

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [24]

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Okay. Lots of questions, Emily. Thank you. The first one on borderline personality disorder, maybe [Johan] can elaborate little bit about what gives us the thought that Rexulti could be helpful. And then Peter, you could talk about what's happening in the marketplace.

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Johan Luthman, H. Lundbeck A/S - EVP of R&D [25]

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Yes. Emily, Johan here. You may recall that we have done a Phase II proof-of-concept study that we reported out. So that's, of course, one of the main support for progressing with this program.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [26]

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She asked about borderline personality.

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Johan Luthman, H. Lundbeck A/S - EVP of R&D [27]

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Sorry. I didn't hear that. So borderline is a different case. We have -- first of all, the mechanism of action is promising for this indication. There are some ideas about the pathophysiology, of course, of the disease, but it includes dopaminergic and serotonergic changes. And we believe the profile of the drug fits well with that understanding of the pathophysiology.

The second beat is, of course, that we have data from other studies in our clinical use that indicate that we may dip into some of the symptoms of borderline, which includes acting out and also aggressive behaviors. So we have indirect evidence from other studies. So that lends the support.

But as you heard, we're doing a proof-of-concept study here. So sorry, for the confusion about PTSD. We're actually going to go in more carefully and evaluate this if it truly works in the indication. So we're running the proof-of-concept study, and then we'll decide further development.

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Peter Anastasiou, H. Lundbeck A/S - EVP of North America [28]

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And I can describe a little bit what happens. Patients are, of course, treated but there is no approved treatment. Only about 25% get pharmacotherapy, and it's experimental. They try to basically work on the symptoms. So if they have aggression or agitation, they might use a benzodiazepine or an antipsychotic. So there's a lot of experimentation, but there's no real evidence base of effective treatments in borderline. And that's what we're seeking to fill is that unmet need.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [29]

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To your question on our approach to M&A, first, let me say in Expand and Invest to Grow, we said we would look at all flavors of bringing in external innovation to the company from acquisition, license, partnership and across all stages of the pipeline. And so that continues to be the evaluation that we do pretty broadly in diseases of the brain.

By proportion, of course, there are more early stage than later stage. Unfortunately, we're in an area with -- where there is attrition. So there are more things progressing in the early phases. So just by sheer proportions, it's more likely to do early deals than later. But we evaluate across all stages of the pipeline.

And I think it connects a little bit to the next part of your question about valuations. I think there's still in the market, there are the haves and the have-nots in a way. There are some companies whose valuation -- who've received a lot of love and whose valuations have run up very high. And certainly, with our focus at Lundbeck being disciplined about returning to our shareholders, we would certainly not proceed in some -- to go after an asset that we think is overvalued, where we can't make an appropriate return. There are some companies, the hidden gems, where they haven't received as much love and where valuations would still allow us to give a good return to those shareholders and a return to our shareholders. And that -- those are the deals that we like to pursue.

So I'll stop there. And then Peter, there was a question on Medicaid Part D and -- Medicare Part D and Medicaid.

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Peter Anastasiou, H. Lundbeck A/S - EVP of North America [30]

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Yes. First, we're not overly reliant on one channel. So there's a good mix across commercial but there is, of course, some Medicare and Medicaid. We won't speculate on the impact of any proposed actions. As we've seen many times, there have been proposals for actions that haven't materialized or have changed significantly in the process. So we certainly won't speculate about what impact those things could have.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [31]

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I realized I didn't answer your question about the firepower. So I'm handing over to Anders to do that.

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Anders Götzsche, H. Lundbeck A/S - Executive VP & CFO [32]

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So depending on the target and the cash flow of the target that we're looking in through what they're coming with, we anticipate that our firepower is around -- or it is around $4 billion to $5 billion.

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Operator [33]

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Our next question is over to the line of Michael Leuchten at UBS.

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Michael Leuchten, UBS Investment Bank, Research Division - Co-Head of Pharmaceuticals Research of Equity Research [34]

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Just one question for me. Could you talk about the full-time employees you've taken on in China. I understand that you've added about 200. Just wondering what does that get you in terms of penetration to the Chinese market, where are you now in the build-out and how do you think about the phasing as the rest of the portfolio comes through, both in terms of timing and then maybe also the extent of the investment.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [35]

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Okay. Jacob, would you take that question, please?

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Jacob Tolstrup, H. Lundbeck A/S - EVP of Commercial Operations [36]

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Yes, absolutely. Just to correct you a little bit here on the numbers. It's not 200 that we've taken on in China. It's a little less than 100 that we've taken on in China. And we did that as part of the project to take back Lexapro from our previous partner, which was Xian-Janssen. So not only has that given us, you can say, full access and control of our own product, but it also allowed us to come out and see about 1,000 hospitals in China. That gives benefit for us as an organization, but it also benefits Brintellix as we can grow the number of target hospitals that we visit with both products.

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Operator [37]

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We now go to the line of Michael Novod of Nordea Markets.

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Michael Novod, Nordea Markets, Research Division - Director of Healthcare, Healthcare Analyst & Sector Coordinator [38]

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Just a few sort of housekeeping questions. In terms of Onfi and also Sabril, maybe if you can just give a feeling for how we should model this going into 2020 then. Is there also a loss of formulary positioning? I know that you lose most of the commercial first, but there's not always exclusions. So more getting to do -- where should we be at sort of a steady state from 2020 and onwards?

And then for Northera, it's been extremely volatile as you also mentioned. Is the quarter starts giving you optimism for, say, coming in, say, above expectations on Northera, internal expectations? Or should we just expect that there's going to be a continued volatility in Q3 and Q4 for the product and seasonality as we've seen historically? That was it.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [39]

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Okay. I'll ask Anders to start on thinking about modeling this going forward with gross to net.

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Anders Götzsche, H. Lundbeck A/S - Executive VP & CFO [40]

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I think Michael, it's extremely difficult to predict 2020. But what we can say, my best guess is for Onfi that it will be a decline this year around 70% and maybe even more. And Sabril, we have seen a decline, if I remember the numbers right, 29% for the first half and that might -- for the totality of the year, it might even be higher due to the channel mix. But -- then we are also down to pretty low numbers. And is it 150 million for Onfi a quarter? Is it 200 million? Is it -- it will be between 100 million and 200 million, I would assume. But no one knows because it will definitely depend on the change into generics. So it is really difficult to predict. So what we can predict is more or less what we know about this year. And we anticipate accelerated decline for Sabril for the remaining part of the year, and we also see a higher decline for Onfi.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [41]

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Then Peter, would you comment on the formulary question for Onfi and then on the growth of Northera?

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Peter Anastasiou, H. Lundbeck A/S - EVP of North America [42]

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Yes. There aren't any particular major formulary changes, things like that. It really is the post-LOE phenomenon that is more pronounced than what we expected, where there is -- all of the channels don't erode at the same pace. And so there is a faster erosion in certain channels than others. And as a result of that payer mix, that's where the gross-to-net impact comes from.

And in terms of Northera, Northera had a very strong quarter, as you saw, which is great. And there has been, as you pointed out, seasonality effects. And this is -- Q2 is certainly part of the season where we've had good results in the past, as you've seen, but we do expect that there will continue to be seasonal patterns. Part of it is the disease where there is, of course, more activity that the patients engage in, in the better weather months and oftentimes become dehydrated and it worsens their body's ability to control their blood pressure and to -- and so therefore, you see the nOH symptoms more acute in some of those months and less so in winter month. So there's some disease seasonality, and then there's, of course, some seasonality as it relates to various payer dynamics, as you know, in the industry with deductibles resetting in the beginning of the year. So we do think that those seasonal patterns still have pertinence here.

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Operator [43]

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We now go to the line of Carsten Lønborg Madsen of SEB.

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Carsten Lønborg Madsen, SEB, Research Division - Research Analyst [44]

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Just one question for me here. One of the bare cases on Lundbeck is that you have some catching up to do in the R&D and therefore, in the future, you'll have to significantly increase your R&D-to-sales ratio in order to catch up. And this quarter, your print just about 18% R&D cost to sales. Could you maybe take a view since -- couple of years down the road with the pipeline you have now, with [FI] closed and everything, how do you feel about the level you are at right now? And what could move it materially in either one of the directions?

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [45]

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Thanks, Carsten. I'll start, and then I'll ask Anders to comment as well.

I think that the first thing to do with the pipeline is be very disciplined in only taking forward the best molecules, and you've seen us be active in pruning the pipeline where we think things don't have the success. And that creates headroom within the rate of spend in R&D that we have said we would project around 18% of sales. So you can always count on us to do that. If we find the right assets or we have an acceleration opportunity that we think is very strong, once we've been disciplined about all our costs, we wouldn't hesitate to invest more if it's going to give us the best possibility for growth in the future.

Anders?

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Anders Götzsche, H. Lundbeck A/S - Executive VP & CFO [46]

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I think -- yes, just to add to that. Of course, Johan is working with the guys in La Jolla, and they're now coming in with new molecules. We're looking to progress them, and they're doing well.

And then of course -- then you immediately start to say, "What is it -- is there anything you want to prioritize within your organization? Or the projects within your organization, what is it actually that is most attractive?" So it's not that they just have a playing field where they can go all over the places. So of course, the kind of threshold or what we are torturing them against is the 18%. And then if they come up with good plans where we can show to ourself and the outside world that it gives a lot of -- it's meaningful and it will support our Expand and Invest to Grow strategy, then, of course, we could go above the 18%. But I would assume for the next couple of years, we will manage to be within the 18%. Could it be 19%? We cannot exclude that. But we need to make strategic investments in some other assets to go beyond that.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [47]

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Johan?

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Johan Luthman, H. Lundbeck A/S - EVP of R&D [48]

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Yes. If I may add one element to this as well. Obviously, we are working vigorously with portfolio management and strong prioritization on programs. But as you well know, the big cost in R&D is primarily the late stage of the pipeline. And we're going to very carefully look at bringing the high-value assets into a Phase III, meaning that we bring those that have a higher success rate and maybe also burn less in that stage and mainly try to shift our R&D attrition earlier and thereby also hopefully keep the finances under control.

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Operator [49]

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We now go to the line of Marc Goodman from SVB Leerink.

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Marc Harold Goodman, SVB Leerink LLC, Research Division - MD of Neuroscience & Senior Research Analyst [50]

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Two questions. One, Peter, if you could just talk about if there were any major inventory changes in the key products in the U.S., just from the first quarter to the second quarter, that may have helped or hit any of the numbers there.

And then the second question is in R&D. Can you specifically just talk about the Parkinson's programs that you have and just give us an update, foliglurax, just update us on the program and timelines there, if anything's changed. And a couple of earlier programs in alpha-synuclein, the D1/D2. How are those moving forward? And when are we going to see some data there?

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [51]

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Okay. Thanks, Marc. Peter, you'll start.

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Peter Anastasiou, H. Lundbeck A/S - EVP of North America [52]

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Yes. On inventory changes, from that perspective, it wasn't a remarkable quarter. There was -- there's always, of course, inventory fluctuations. But it was normal from that perspective unlike what we saw in maybe other quarters. So nothing really remarkable there.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [53]

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R&D, Parkinson's programs.

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Johan Luthman, H. Lundbeck A/S - EVP of R&D [54]

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Yes. As you see, we have a number of programs in Parkinson's disease. They're all mid- to early-stage programs. So foliglurax you asked about, and that's, of course, a symptomatic treatment. That is now -- we're trying to wrap up the proof-of-concept Phase II trial. And we have had some delays in the timelines with enrollment, but we're doing our utmost now to speed up. And we hope to have the results by Q1 next year.

We have another symptomatic program at play, dopamine modulator agonist program, which we think is a good mix of balance for add-on to standard of care. Quite similar in thinking, like the foliglurax, so it's symptomatic play, no other possibilities.

And then obviously, we have our disease-modifying approaches. We have something going on, of course, in research. But what you see from our pipeline, we have the alpha-synuclein antibody, which is approaching end of Phase I. And it's -- we look forward to thinking about how we'll bring that to a proof-of-concept study in the coming year.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [55]

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Any -- those are such early programs, I think, to your question on when will we see data, as Johan said, foliglurax, hopefully in the first quarter of next year. Other programs in Parkinson's disease, the aSyn mAb and the D1/D2, they'll be much -- the Phase I isn't going to tell us a whole lot. It will have to be through the Phase II proof of concept that will take another couple of years.

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Operator [56]

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We are now over to the line of Peter Welford at Jefferies.

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Peter James Welford, Jefferies LLC, Research Division - Senior Equity Analyst [57]

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Three, please. Firstly, just on the BPD indication for Rexulti. Curious why not wait for the readout from the investigator-sponsored study in April. It seems like it's a relatively short time away so why -- I guess why initiate the -- your own proof of concept if there's already a study ongoing, which seems to have similar endpoints, albeit underpowered. Have you already seen any initial data from that study?

Secondly then, just on China. I understand, obviously, you said you're targeting 1,000 hospitals at the moment. I have no idea how many hospitals there are in China, but I'm guessing 35,000, 40,000 or something. Can you give us some sort of idea, is that sufficient if you do get on the drug list for Trintellix? Or is this just the start and much more significant expansion will be needed if you're going to promote a product of that sort of value?

And finally then, just on Abilify Maintena, your largest product at the moment in Europe. I wonder if you could comment do you still envisage this being the case by the time we get to the -- I think it's 2024 patent expiry of that product in Europe. Or do you think there'll be another brand that could surpass Abilify by the time we get to that point in 5 years' time?

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [58]

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Okay. Thanks, Peter. Johan, would you like to comment on borderline personality disorder?

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Johan Luthman, H. Lundbeck A/S - EVP of R&D [59]

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Yes. Thanks for that question. Obviously, as you know, there are 2 elements here: one is the robustness of the data to move forward and the other one is timing. And when it comes to robustness, of course, we are better in control of a study that we're running ourself. And without going into details of the investigator study, we think we have designed a study where we'll have much clearer stop-go criteria. So it wouldn't help us so much to wait for that investigational study really to make that decision, which, of course, will be a Phase III decision.

We also, of course, have had conversations with the authorities about the endpoint. So we think we have a good understanding what it will take to bring it forward. So that's, of course, in the balance when we decide to go into Phase III.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [60]

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Okay. And then Jacob, would you comment on the hospitals in China and Abilify Maintena in Europe?

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Jacob Tolstrup, H. Lundbeck A/S - EVP of Commercial Operations [61]

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Yes. Absolutely. So 1,000 hospitals that we are targeting right now in China is primarily for Lexapro, which is a fully reimbursed product in China. So to give a short answer to your question, 1,000 hospitals is sufficient, and having that sales force also allows us to take Brintellix out to more hospitals in China than we did before.

On Abilify Maintena in Europe, with the portfolio that we have today, then I continue to expect that Abilify Maintena will be our biggest product also in 2024, closely followed by Brintellix.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [62]

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I think it's fair to say that we're very selective in China. And we're not trying to reach out to all the hospitals but really looking, as the principal for Lundbeck, at where can we grow profitably, so being selective.

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Operator [63]

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Our final question for today is from Peter Sehested from Handelsbanken.

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Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [64]

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It's Peter from Handelsbanken. I have only one, and that is for Anders. Anders, could you -- just for housekeeping purposes, just give us an indication of the gross margin impact due to the channel mix.

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Anders Götzsche, H. Lundbeck A/S - Executive VP & CFO [65]

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The gross margin, I think we are not willing to disclose the impact from the -- gross to net, was that the question?

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Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [66]

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No. It's just for our modeling when we model these numbers on our line item basis, which we plug in a roundabout...

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Anders Götzsche, H. Lundbeck A/S - Executive VP & CFO [67]

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Peter, could you repeat your question?

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Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [68]

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Yes. It was just -- if you could guide us on the gross margin change. There was a delta to the gross margin for these 2 products due to the channel mix. It's just modeling purposes.

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Anders Götzsche, H. Lundbeck A/S - Executive VP & CFO [69]

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No. Sorry to not being able to do so. We are not wanting to go down to the details for the -- each specific product. So what I can repeat is that what we anticipate is what we have said during the year is that we expect to have a gross margin of 80% to 82% for the year. That's unchanged, including the change in gross to net for -- or not the change in gross to net, but the changed channel mix for Onfi and Sabril.

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Operator [70]

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Okay. So I'll just pass it back to you now for any closing comments.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [71]

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I'd like to thank you, again, for your interest in Lundbeck. We're very happy to report the very strong growth of our strategic brands, and we look forward to a strong performance in the second half. Thank you.