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Edited Transcript of LUN.CO earnings conference call or presentation 9-Aug-17 9:30am GMT

Thomson Reuters StreetEvents

Q2 2017 H Lundbeck A/S Earnings Call

Copenhagen Aug 15, 2017 (Thomson StreetEvents) -- Edited Transcript of H Lundbeck A/S earnings conference call or presentation Wednesday, August 9, 2017 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anders Gersel Pedersen

H. Lundbeck A/S - EVP of Research & Development

* Anders Götzsche

H. Lundbeck A/S - CFO and EVP

* Kåre Schultz

H. Lundbeck A/S - CEO and President

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Conference Call Participants

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* Carsten Lønborg Madsen

SEB, Research Division - Research Analyst

* Emma Katherine Newey

BofA Merrill Lynch, Research Division - Associate

* Jacob Lademann

Carnegie Investment Bank AB, Research Division - Research Analyst

* James Daniel Gordon

JP Morgan Chase & Co, Research Division - Senior Analyst

* Jo Walton

Crédit Suisse AG, Research Division - MD

* Marietta Miemietz

* Martin Parkhøi

Danske Bank Markets Equity Research - Senior Analyst

* Michael Novod

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

* Peter Welford

Jefferies LLC, Research Division - Senior Equity Analyst

* Timothy Michael Race

Deutsche Bank AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the H. Lundbeck Second Quarter Results 2017. Today, I'm pleased to present President and CEO, Kåre Schultz. (Operator Instructions)

Speakers, please begin.

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Kåre Schultz, H. Lundbeck A/S - CEO and President [2]

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Thank you very much, operator, and thank you all for your interest in Lundbeck. Welcome to this Lundbeck teleconference covering our financial report for the first half of 2017, released early this morning. With me, I have our CFO, Anders Götzsche; and our head of R&D, Anders Gersel Pedersen.

On Slide 2, you can see the company's disclaimer which I always presume you have seen many times before and I will refrain from reading out aloud. So we'll go directly to Slide 3.

We will elaborate on the key performance measures in a minute, but please allow me to summarize on the strong financial performance we've had through the period. Revenue in the first half of the year was the highest in the history of the company. Based on the strong performance, we are raising our financial guidance for the full year 2017, and we are well underway to achieve Lundbeck's best ever financial results. We have continued previous quarter significant improvement in our profitability as well as shown solid growth in revenue. We're very satisfied with the progress of our operational performance. Revenue grew 13% in the half-year, thereby reaching DKK 8.5 billion. Our key products have continued their strong growth and sales of these products have grown 44%. In general, all key products are performing well and especially Northera, Rexulti and Trintellix are growing fast.

I would also like to point out that in the second quarter of the year, our key products constitute more than half of our revenue, so the past year's journey to replace lost revenue from generic competition is well on track and is expected to continue going forward. In parallel with the sales growth, we've managed to bring down our costs and have reached an EBIT margin of 24.3% for the period. Therefore, we're well on track to achieve our long-term target of an EBIT margin of 25%.

As our tax rate is declining, we see very strong growth in earnings per share of 186%. Our business is in such good shape that we have improved our cash position. And since last year, we've increased our net cash position by close to DKK 3 billion. Anders Gersel will revert with a pipeline update but let me just say that we're satisfied with the progress in our development and registration work, most recently leading to the approval of Abilify Maintena for treatment of bipolar disorder in the U.S. and the approval of Azilect for treatment of Parkinson's disease in China. Anders Götzsche will revert with a financial update, so let me just conclude the highlights by saying that we have lifted our revenue range for the full year and raised our EBIT guidance with DKK 500 million based on the underlying operational performance and the gain from divestiture of properties. 2017 is therefore expected to provide Lundbeck with the highest sales and profit level ever. Please turn to Slide 4.

I think it's important to continue to point out that we have a portfolio of mature and relatively stable products, and we have a portfolio of key products which generate substantial growth. During the first half, we realized revenue growth of 13% despite the continued generic erosion of products such as Xenazine in the U.S. To preempt questions, we have not yet seen any changes in the market dynamics of Sabril. It is our North American region that delivers most of our performance in foremost products like Northera, Rexulti and Trintellix. The region is up 22% for the period and constitutes 61% of our sales. The second point to note is that international markets is going up 8% and is beginning to show growth again. Even though Europe is negatively impacted by generic erosion, the region is turning the corner and isolated for the second quarter, we are also seeing growth in Europe. That means we now have growing sales in all regions. Finally, I think it's worth mentioning the very strong improvement in our profitability which follows the quarterly improvements we've seen in the past year or so. Please turn to Slide #5.

International markets which besides from our emerging markets also consist of countries such as Japan, Korea and Australia, grew 8% in the first half of the year and constitutes 22% of our revenue. An important point is that emerging markets are a dominant part of the region and a key growth driver, especially driven by Brazil and China. It's my view that this region will become increasingly important, especially following the upcoming launch of Azilect and the expected approval of Brintellix in China around year-end, combined with a strong underlying growth. Please turn to Slide #6.

We continue to execute on our strategic growth platforms and we've seen continued significant sales increases in our key products. In the first half of 2017, our key products generated revenue of DKK 4.2 billion, corresponding to 49% of total revenue. We expect continued high growth for these products. Please turn to Slide 7.

We will now look at our key products individually and let me start with Rexulti. As you can see, the significant uptake continues and the momentum looks solid after the normal volatility seen around the turn of the year. We continue to have high expectations for the product as Rexulti has an attractive profile which is highly rated by the medical community. The week over week growth continues to outpace the branded market in general and the uptake is strong relative to prior competitive antipsychotic product launches. Rexulti has so far achieved more than 13% branded total script market share and some 15% branded new script market share. In terms of revenue, Rexulti achieved DKK 574 million in sales in the quarter which represents a growth of some 85%. We expect to see the effect of the first launches outside the U.S. during 2017, starting with Canada where Rexulti was launched in the private market in April.

Additionally, Rexulti was recently approved in Australia and launch is expected later in the year. Finally, we have filed a product for schizophrenia in Europe. Please turn to Slide 8.

Revenue for Brintellix/Trintellix reached DKK 778 million for the period, of which 56% was generated in North America. However, countries like Brazil, Canada, Italy, Spain as well as France are beginning to make valuable contributions to the total Brintellix revenue. In Spain and Italy, Brintellix continues the encouraging start. In December last year, we were also able to launch it in France and even though it's early, we see an encouraging performance. In these markets, we see volume market shares exceeding 1%.

For Trintellix, we did receive a complete response letter from the FDA regarding cognition. Takeda and Lundbeck will determine next steps following an end of review meeting with the FDA. However, as you have seen, we had a great quarter on Trintellix and the sale has had absolutely no impact on current performance. As the leading branded antidepressant, Trintellix is poised to continue the impressive growth achieved last year as adoption continues to steadily increase with psychiatrists and general practitioners. Expanded clinical experience further strengthens prescriber appreciation of Trintellix's long-term efficacy and favorable tolerability profile to maximize further potential. This sustained growth trend reflects a significant unmet need that continues to exist for MDD patients, and a strong appreciation of the benefits Trintellix can offer to patients who are struggling with symptoms beyond need. In the past 3 years, since its launch in the U.S., more than 570,000 patients have been prescribed Trintellix. In the U.S., over 3/4 of all antidepressant prescription volume flows through commercial and Medicare Part D channels. Trintellix coverage continues to strengthen and is supported by strong growth in patient and prescriber demand. Trintellix is covered without prior authorization for roughly 80% of commercial insured patients and over 97% of Medicare Part D patients. Please turn to Slide 9.

If we turn to Abilify Maintena, our long-acting antipsychotic drug, this product is doing well in most, if not all, markets. The product has more than 15% of the total atypical LAI market worldwide. In the first half of 2017, sales of Abilify Maintena grew 23% and reached DKK 659 million, of which close to 60% was generated outside North America. The long-acting injectable market remains strong, especially outside the U.S., with double-digit growth rates supported by a shift from oral to long-acting antipsychotics as well as new product offerings. We're also able to strengthen the overall product profile in the U.S. with the expanded label which now also includes bipolar I disorder. Please turn to Slide 10.

Onfi reached sales of close to DKK 1.5 billion in the first half of 2017, following a growth of 28%, and we expect to see continued increased demand for this product. Please turn to Slide 11.

Northera reached sales of DKK 716 million, following a growth of 60% and also for this product, we expect to see continued increasing demand. I will now hand over to Anders Gersel to go through the latest in the pipeline.

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Anders Gersel Pedersen, H. Lundbeck A/S - EVP of Research & Development [3]

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Thank you very much, Kåre. Please go to Slide 12. I'm satisfied with the progress in our development and registration work leading, first and foremost, to the approval of Abilify Maintena for treatment of bipolar disorder in the U.S. We have also reached an important milestone with the approval of Azilect for the treatment of Parkinson's disease in China, leading to an important first step in expanding our presence with our newly registered products in this region with importance for us.

Regarding the FDA process around the sNDA for Trintellix, I do not have much additional information. Takeda and Lundbeck are in the process of reviewing our positions following the end of review meeting that we've had with the FDA. Concerning Rexulti on Alzheimer's agitation, a Tox (inaudible) team meeting request has been submitted to the FDA to discuss the findings, but no date has yet been set for a meeting. Additional analysis on the completed studies are ongoing. The result of these studies will obviously be presented at Future Scientific Congress and we'll be discussing the data with the FDA at the Tox(inaudible) meeting. We'll work together with (inaudible) following that meeting at this time on the potential path going forward with this product and the FDA.

Regarding the early pipeline, I can say that the Lu AF20513, our [anti-A]ß vaccine, we have completed the enrollment of all the patients into the last cohort and all have had, therefore, the last immunization. So we just have to wait for the maturation of the data to decide when to move on with this project.

This is all from my side of this meeting, and I will move on -- I'll pass it on to Anders Götzsche to go through the financial performance.

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Anders Götzsche, H. Lundbeck A/S - CFO and EVP [4]

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Thank you very much, Anders. Please go to Slide 13. In the first half of the year, revenue increased with 13% and reached DKK 8.5 billion, with limited impact from foreign exchange rate movements. It's also worth mentioning that in the second quarter, the growth reached 14%. Our gross margin has improved considerably, following improved product mix with reduced royalties and reached 77% in this period compared to 72% in this period last year -- same period last year.

Furthermore, our EBIT exceeded DKK 2 billion for the first half and has therefore, more than doubled. This is partly driven by the topline performance and partly driven by the positive effect from product mix as well as the restructuring program which we initiated in 2015. In the second quarter, EBIT grew from DKK 469 million last year to slightly more than DKK 1 billion. The EBIT margin has significantly improved from last year. The margin has improved from 13% to 24% for the quarter. This means that the positive development we have seen in the last few quarters continues.

The effective tax continues to decline and as a result, we see a very strong growth in our net profit and subsequently, our earnings per share which has grown by close to 200%. Please also let me repeat what I said last quarter regarding our forecast for the tax rate going forward. And please be aware that it's very dependent on our geographical mix as well as our product mix. The reported tax rate is expected to be around 40% in 2017 and then decline in the following years and by 2021, probably end up around 30%. Beyond '21 the long-term reported tax rate is expected to decline to a level between 23% and 25%. It's also important to note that the cash tax rate is somewhat lower from being around 38% in 2016 to around 30% in '17 and '18. And from 2019, the rate is expected to decrease to a level between 23% and 25%. Please turn to the next slide.

The successful execution of the restructuring program is best illustrated by the continued reductions in the number of FTEs which is now at the lowest level for 15 years. So we're back to 2002, 2003 where we had the same number of employees. We have seen a positive effect on sales cost due to a low number of FTEs following the restructuring, including finalization of the European negotiations. Cost of sales declined from around DKK 2.1 billion to just below DKK 2 billion while at the same time, growing the topline. The gross margin has, therefore improved from 72.1% to 76.9%. SG&A costs increased from DKK 3.1 billion to DKK 3.2 billion, driven by a 6% increase in sales and distribution cost which is less than the growth in revenue. The SG&A ratio for the period was 38% compared to 40.8% in the same period the year before. Please turn to the next slide.

Lundbeck continues to generate a very strong cash flow but remember that we in the second quarter have cash outflow from dividend payment and tax. Furthermore, we have invested in securities and repaid a large portion of our debt. We ended the quarter with a positive net cash position of DKK 1.1 billion. The strong improvement in our net cash of close to DKK 3 billion from last year is obviously a reflection of our improved cash flow, mainly driven by our improved profit. We expect a net cash flow -- a net cash position to -- our net cash position to be around DKK 3 billion by the end of 2017. Please turn to the next slide.

We assumed that the remaining part of 2017 will be somewhat impacted by introductions of generic versions of Sabril and the continued generic erosion of Xenazine. We also expect continued growth for our key products and higher sales for the year. However, that is partly offset by the current trend of a declining main currency. For 2017, we expect higher revenue and have updated our revenue outlook to be in the range of DKK 16.7 billion to DKK 17.5 billion. We expect to see a continued significant improvement in our profitability in 2017 and EBIT is now expected to reach between DKK 4.1 billion and DKK 4.5 billion for the year. The revised EBIT guidance includes DKK 200 million in gain from the divestiture of properties here at the Valby site which was not included in our previous guidance and of course, the improvement of DKK 300 million from our better performance.

For the financial analysis, you should expect a net loss of around DKK 50 million to DKK 100 million for the year which is unchanged from previous guidance. And now I would like to hand back to Kåre for the concluding remarks.

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Kåre Schultz, H. Lundbeck A/S - CEO and President [5]

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Thank you, Anders. With that, I would like to thank you all for your interest and open up for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from James Gordon of JPMorgan.

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James Daniel Gordon, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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Two questions, please. One on Alzheimer's agitation which should just be which conferences are you targeting presenting the data at, subject to being accepted? And where does your confidence on being able to get an approval on the existing data? How confident are you that the further data won't be required? And then the other question was just on margins. You mentioned being on track for 25% EBIT margin but actually, you got there today for the quarter and the midpoint of the guidance of the year gets you there as well. So when could we see a higher margin target be set? Could we get something like a 30% margin by the end of the decade? Or are there headwinds that mean that might not be possible?

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Kåre Schultz, H. Lundbeck A/S - CEO and President [3]

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The first question, I'll pass on to Anders Gersel.

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Anders Gersel Pedersen, H. Lundbeck A/S - EVP of Research & Development [4]

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Yes. Concerning the Alzheimer's agitation, we have not yet decided exactly which conference to send it to, but they'll come out and we'll let you know as soon as we have that clarified. And with respect to the upcoming strategy for the filing with the FDA, I will refrain from commenting specifics on that until we have the meeting with the FDA, because that obviously has a huge bearing on that.

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Kåre Schultz, H. Lundbeck A/S - CEO and President [5]

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Thank you, Anders.

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Anders Götzsche, H. Lundbeck A/S - CFO and EVP [6]

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With regard to the margin question, I'll address that. It's correct that we are very close to the 25% long-term EBIT margin target. As I've said before, we will not comment on any new targets until we have actually reported and reached in our reported numbers, the target we have. So that if everything goes well, it might be sometime next year. But until we reach it, we won't start speculating about what we and the board could potentially set as new targets.

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Operator [7]

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Our next question comes from Michael Novod of Nordea Markets.

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Michael Novod, Nordea Markets, Research Division - Director of Healthcare, Healthcare Analyst & Sector Coordinator [8]

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A few questions as well. So looking at the full year guidance and also Sabril generics, bearing in mind that the first generic rarely sets a very aggressive price, doesn't the full year guidance still look a bit conservative also based on, Kåre, your comments in media around expecting the same growth in Q3 and Q4 as you've seen in Q2? And then secondly, on Rexulti. If you look at the gross sales in the U.S., it seems like there's additional discounting taking place on Rexulti or is this just a matter of quarterly fluctuations between Q1 and Q2 and how rebates are paid?

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Kåre Schultz, H. Lundbeck A/S - CEO and President [9]

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Thank you, Michael. I'll handle these questions. So with regard to full year expectations and guidance on Sabril, it's a peculiar situation that we have 1 product that is completely approved by FDA, 1 generic product, and it's also included in our shared REMS. So theoretically, nothing should hold back apart from whatever, I don't know, competition from launching the first generic. At the same time, we now have 4 companies who have asked to up into the shared REMS. So I do expect that we get generic competition. Should we not get any generic competition whatsoever, this year, it will be a surprise and it would, of course, lead to a higher performance than what we included in the guidance. So we are assuming that we will see generic competition on Sabril during the next couple of months. With regards to what I've said to the media, I haven't said that we expect exactly the same growth in our topline in the second half of the year as we saw in the first half. We do have a combination of better organic growth in local currency than we expected a quarter ago but also, a headwind from some of the currencies, including the dollar. And the guidance you see now is a combination of these 2 effects as I just mentioned before. With regard to Rexulti, you're absolutely right. It is just, I would say, random quarterly fluctuations. There's no change to the very positive trend in the script, and there's no change in the gross to net position on Rexulti. So it's just those quarterly fluctuations that we will continue to see basically on all our products in the U.S.

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Operator [10]

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Our next question comes from Jo Walton of Crédit Suisse.

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Jo Walton, Crédit Suisse AG, Research Division - MD [11]

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A few questions, please. I apologize, I didn't quite catch it, could you reiterate the financial guidance for the year and also tell us what's the size of the one-off mortgage repayment, early mortgage repayment was so we can get a sense of the underlying net financials in 2Q? And could you also tell us a bit about your expectations for R&D expenses going forward? It's been coming down as a percentage of sales and it's now in the sort of 15% range. Looking at the projects that you have in development, would it be reasonable to assume the same sort of 15% to 16% range for the next couple of years when we're think about our margins? I appreciate you don't want to give us a full margin breakdown, but something to help us on the R&D would be helpful. And finally, I wonder if you could tell us just a little bit more about the adoption, your early adoption in Europe. You gave us some volume market shares for Trintellix in Europe. Could you tell us a bit about the pricing you're managing to achieve? Just some more color on that European take-up please.

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Kåre Schultz, H. Lundbeck A/S - CEO and President [12]

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For the first question on financial items, I'll hand that over to Anders Götzsche.

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Anders Götzsche, H. Lundbeck A/S - CFO and EVP [13]

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So the on guidance upgrade -- if I understand your question right, we have upgraded our EBIT guidance to DKK 500 million. And we had a divestiture of buildings which brought back numbers.

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Kåre Schultz, H. Lundbeck A/S - CEO and President [14]

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The question was very specifically on financials.

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Jo Walton, Crédit Suisse AG, Research Division - MD [15]

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Just(inaudible) the financials.

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Kåre Schultz, H. Lundbeck A/S - CEO and President [16]

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And the breakage cost on the mortgage.

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Anders Götzsche, H. Lundbeck A/S - CFO and EVP [17]

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Okay, okay, okay. You should -- the financial items -- sorry, for that. The financial items is, you should expect it to be around DKK 50 million to DKK 100 million for the year. And because cost this quarter is a bit higher due to the repayment of the mortgage debt. And we have -- we now have a debt of around DKK 900 million and we expect to repay that in the beginning of 2018.

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Kåre Schultz, H. Lundbeck A/S - CEO and President [18]

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And then on the R&D percentage, Anders Gersel, would you comment on that?

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Anders Gersel Pedersen, H. Lundbeck A/S - EVP of Research & Development [19]

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We previously stated that we expect to have an R&D percentage around 15% to 16% in '17 and '18 and it may increase slightly up until 2020. But we're going to stay at that level of magnitude of R&D expenditure.

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Kåre Schultz, H. Lundbeck A/S - CEO and President [20]

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And then I'll comment on the launches of Brintellix in Europe. And it's correct, we see a very positive uptake of the product and we have seen in countries such as I said, Spain, Italy, France, a very positive volume share development. The pricing is sort of around the EUR 1 a day. Some are a little higher, some are a little lower, but that's the pricing we're seeing for the product. So overall, we are very optimistic that with the previous launch of Abilify Maintena in Europe and now with the launch of Brintellix in Europe, we will in the coming years, see a net growth in sales, of course, still being influenced a little bit by continued decline of Cipralex and Ebixa, but that decline has sort of slowed down dramatically. And now we're seeing the positive effects of selling both Abilify Maintena and Brintellix in most European markets.

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Jo Walton, Crédit Suisse AG, Research Division - MD [21]

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And within the DKK 55 million of net financials that you had this quarter, how much of that was just the onetime early repayment of your loan mortgage?

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Anders Götzsche, H. Lundbeck A/S - CFO and EVP [22]

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Most of it is currency fluctuations.

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Operator [23]

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And our next question comes from Martin Parkhøi of Danske Bank.

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Martin Parkhøi, Danske Bank Markets Equity Research - Senior Analyst [24]

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It's Martin Parkhøi at Danske Bank. Actually, it's only for Anders Götzsche. It's regarding hedging because could you to try to elaborate a bit on the fact that you take your underlying sales forecast up by DKK 200 million but your underlying EBITDA by DKK 300 million? How much of that is due to hedging because as I understand it, you take a beat on sales in '17 but you put out the hedging gains on your cost side. So is this the driver of the difference of DKK 100 million? Or is it -- are there actually also a relatively cost-saving effect? And then second question, if we look at the current situation we have right now, how is (inaudible) going to be to actually think will take on the EBIT line in '18?

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Anders Götzsche, H. Lundbeck A/S - CFO and EVP [25]

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I can start with saying that we -- of course, the decline in the U.S. dollar for the last 3 months, of course, has been pretty significant and that is, of course, eliminating some of the over performance we have had for our key products and especially for Sabril and Xenazine. So that's the reason for only moving the range DKK 200 million on the top line. And you're fully right, going into '17 we have hedged our net exposure, and therefore there's basically no FX impact on the profit. So we have...

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Martin Parkhøi, Danske Bank Markets Equity Research - Senior Analyst [26]

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Okay. How much hedging gain do you have in your profits?

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Anders Götzsche, H. Lundbeck A/S - CFO and EVP [27]

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I don't have the specific number here. So -- but of course, due to the fact that until -- I don't have the exact numbers, but until February or so, it was -- the dollar was beyond DKK 7. Of course, we have hedged. We took a favorable position at that point of time and of course, that has been included in the guidance. But you have had a very positive effect on performance in local currencies and then, of course, have a negative effect on the dollar. And you will also see that in the second half. You will see that we will report higher growth in local currencies and then there would be a lower reported growth.

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Martin Parkhøi, Danske Bank Markets Equity Research - Senior Analyst [28]

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Yes, because I guess the margin is positive impacted by the decline in sales due to the dollar, but EBIT being flat due to hedging. So my understanding is just how much EBIT impact you actually -- margin impact you actually see from that thing and how much we will see into '18? But I guess I can get the numbers from Palle offline then.

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Kåre Schultz, H. Lundbeck A/S - CEO and President [29]

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Just one comment here from Kåre Schultz on the margin. And it gets a little technical, and we shouldn't get into all the details now. But of course, there are 2 different effects. One effect is if you have your positive hedging recorded on your sales line and you have a drop in your cost because you don't put the hedging there, then that in isolation for the dollar amount improves your margin. However, we also have a lot of cost in Danish kroner, and the Danish kroner cost stays firm versus the top line, which goes down in dollars, which sort of goes the other way. So the net effect on the margin from the change in currency when the dollar drops is relatively complex to estimate precisely.

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Martin Parkhøi, Danske Bank Markets Equity Research - Senior Analyst [30]

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Yes, but the question was just the difference between the sales upgrade and the earnings upgrade is DKK 100 million. Is that solely FX hedging gains-related? Or are there also underlying improved cost effects?

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Kåre Schultz, H. Lundbeck A/S - CEO and President [31]

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I would put it this way, Martin. The key reason for it is that sales in local currency is doing significantly better. But from that effect, you have to then subtract the negative currency effect, which we have done in our top line guidance. And that means that less of the local currency improvement drops down to EBIT. So we see probably, let's say, DKK 200 million of the local currency effect, which is significantly higher, dropping down to EBIT and then we probably see around DKK 100 million in improvements on the actual cost. And then we have the DKK 200 million from the [property], which we don't keep separate.

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Operator [32]

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Our next question comes from Carsten Lønborg Madsen of SEB.

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Carsten Lønborg Madsen, SEB, Research Division - Research Analyst [33]

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Carsten Madsen, SEB. Of the 14% reported top line you have in this quarter, could you talk about how much of this comes from pricing? And then also in line with the many other pharma companies, I guess, you have been in discussions about 2018 access and pricing levels in the U.S. market, do you mind trying to give us some sort of feeling for how we should think about 2018 for Lundbeck in the U.S.?

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Kåre Schultz, H. Lundbeck A/S - CEO and President [34]

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Yes, so I'll try and handle those. In terms of our growth in sales and how much of that comes from pricing, I can say that the majority of the growth comes from increased volumes, so more patients being treated by our really good products. So as you know, the world's best antidepressant and the world's best antipsychotic, they are both growing in prescription numbers in the U.S. And that volume is driving the sales higher, and that goes for all our key products. So the key driver is volume. That being said, we do take price increases in the U.S. at the sort of normal level. And on most products, we take sort of the high single-digit price increases. And then of course, through the contracting, a part of the price increase is then sort of not resulting in increased net pricing, but we do have increasing net prices in the U.S. With regard to 2018, we are not seeing any significant change in the payer landscape. Our negotiations with various PBMs and so on has not really resulted in any significant change for 2018. So we expect to see a stable pricing environment for our products in the U.S.

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Operator [35]

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And our next question comes from Tim Race of Deutsche Bank.

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Timothy Michael Race, Deutsche Bank AG, Research Division - Research Analyst [36]

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So a couple quick R&D questions and then one financial question. So on R&D, just looking at the pipeline for the long-acting Rexulti result. Can you just remind us of the time line here to get this to Phase III and to market and also what we target for the profile of this in terms of duration of long-acting [and whether this is] subcuta or intramuscular? And then just maybe a follow-on question on that just in terms of -- you state that 80% of your sales of Rexulti today are in MDD. Just what's your experience in research suggesting of the demand for MDD in terms of long-acting injections [sort of] and how long do patients typically take an antidepressant for? And then just perhaps moving on to costs, obviously very good cost control in SG&A and your -- in terms of the new employees. Just wondering how much further you can go in terms of that outside of the current program. And in terms of when we're looking at, say, like the upcoming sort of expiry of Sabril, is there any further cost that you can take out there, or is that already done? And then in terms of Europe with the Rexulti rollout in various countries and Trintellix, do you need to add any extra costs or employees?

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Kåre Schultz, H. Lundbeck A/S - CEO and President [37]

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Thank you very much, Tim. I will hand the 2 first questions to Anders Gersel.

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Anders Gersel Pedersen, H. Lundbeck A/S - EVP of Research & Development [38]

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With respect to the brexpiprazole long-acting injectable, the target is to go for a 2 monthly injection for this molecule and then to have both the opportunity for a subcutaneous and an IM formulation of that preparation. We'll know more about that by '18, and then we would immediately roll into a Phase III program, expecting us to be able to conclude that in 2020.

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Kåre Schultz, H. Lundbeck A/S - CEO and President [39]

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And with regards to MDD, the 80% of Rexulti that's currently on MDD, how do you see that for LAIs?

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Anders Gersel Pedersen, H. Lundbeck A/S - EVP of Research & Development [40]

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I think the LAI is going to be -- if you had a subcu formulation, it's going to be more attractive to use for particular severe patients in this area. So I would not preclude that there will be a use of that here, which is something that we have not seen widely being done for the intramuscular formulation so far being available.

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Kåre Schultz, H. Lundbeck A/S - CEO and President [41]

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Thank you, Anders. And then I'll hand the last question on cost to Anders Götzsche.

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Anders Götzsche, H. Lundbeck A/S - CFO and EVP [42]

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I think you should expect that the level we have for FTEs is the level that we'll continue to see because we do not have any -- we have finalized our restructuring plans. The latest -- the last plans we had to execute on was in Europe, and we have done that. So in the second quarter, we also saw a decline in our sales cost, but we saw also a slight increase in our promotion and that is primarily due to that we continue with DTC in U.S. for Brintellix and Rexulti and we have the upcoming launches -- the ongoing launches for Brintellix in Europe. So you should expect kind of the same level. And for Sabril, of course, we have a sales force behind that. Still have a sales force, but of course, the number of people and the cost for that is on a minimal level, so the profitability for that product is very high.

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Kåre Schultz, H. Lundbeck A/S - CEO and President [43]

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And maybe I could just add with regard to a launch of Rexulti in Europe, once we hopefully get that approved then there's a very, very big overlap between the target group for Abilify Maintena and the target group for Rexulti. So we would not expect to see any increase of the European organization in connection with the launch of Rexulti in Europe.

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Operator [44]

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Our next question comes from Emma Newey of Bank of America Merrill Lynch.

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Emma Katherine Newey, BofA Merrill Lynch, Research Division - Associate [45]

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A couple, please. Firstly, does the second CRL for Trintellix cognition change your long-term expectations for the product? And secondly, ARISTADA 8-weekly dosing was approved in June. How is this affecting Abilify Maintena?

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Kåre Schultz, H. Lundbeck A/S - CEO and President [46]

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I think I can answer both those questions. So we have not seen any effect whatsoever from any of the 2 CRLs on Trintellix in cognition. So we see a very steady, positive momentum on TRx and NRx for Trintellix in the U.S. And we are, of course, disappointed that we didn't make it with FDA to get some kind of text included in the label. But we're, of course, encouraged by the fact that we have scientific data that we are allowed to discuss with experts at [conferences] and so on. So we're very optimistic about the future progression of the Trintellix market share and the script numbers in the U.S. With regard to Abilify Maintena and the competition from ARISTADA, we don't see any change in the sort of curves for ARISTADA or for Abilify Maintena for that matter, so we continue to take market share on a global basis with Abilify Maintena. And we're, of course, very happy about the bipolar approval that we just received from FDA for Abilify Maintena in the U.S. So again, there we see a very positive momentum that we expect will continue.

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Operator [47]

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Our next question comes from Marietta Miemietz of Primavenue.

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Marietta Miemietz, [48]

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The first one is on the sequential sales development from Q1 to Q2, specifically in the international region. So you reported slightly lower sales in Q2 than Q1 even for Brintellix and Abilify Maintena just because currency worked against you. But can you please give us any feel for the local currency growth trajectory or any other granularity on the momentum for Brintellix, Abilify and international as a whole from Q1 to Q2? Because it's really difficult to work out that number from the year-over-year local currency growth rate. And then on the AF35700, the Anew study -- patient study population, can you just explain some of the thinking behind enrolling early and late into these patients and what screening criteria you're using to exclude middle-in-disease patients? Because based on the limited-information clinical trials, the inclusion criteria don't actually look that different from those in the Daybreak trial. And then just quickly on brex in Alzheimer's agitation. I mean, at the last update you were still in the middle of your analysis. Can you actually now say whether the pool data from the 2 studies is statistically significant? And just also a quick one on Trintellix cognition in the U.S. I mean, is it a fair assumption that it won't be included in the label based on any of the clinical trial data you've got now, i.e., you won't be doing any further reanalysis and you either need a new study or a more real-world data to have a chance to get it on the label?

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Kåre Schultz, H. Lundbeck A/S - CEO and President [49]

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Thank you very much, Marietta. So that's basically 4 questions. I'll handle the first one together with Anders Götzsche and then the last 3 ones, I will ask Anders Gersel to answer. I'll just give you a brief comment to International Markets and then Götzsche might comment a bit further. In International Markets, we have a combination of markets of which some are quite traditional with normal sales on an ongoing basis where you have prescriptions and you have wholesalers and the whole thing. But we also have tender markets where we have huge shipments in one quarter or in one month and then basically no shipments for a specific product in the following quarters because it's gone to(inaudible) organizations buying sometimes huge quantities. So that's just a general comment to International Markets that in emerging markets, there's a lot of tender business and that swings a lot. If I should comment on the more traditional sort of launch performance of products like Abilify Maintena and Brintellix, then both these products are performing extremely well also in all the International Markets where they have been launched. So we see very, very nice launch uptake curve for both Abilify Maintena and Brintellix in all markets with steady growth quarter-by-quarter. But of course, we do have some of these swings on both currencies and on shipments. But Anders Götzsche, do you have...

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Anders Götzsche, H. Lundbeck A/S - CFO and EVP [50]

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And it's fully right what Kåre is alluding to is that we have some -- we have launches in Egypt and Saudi Arabia. We also have a continued uptake and resource from stocking in Brazil, and that is impacting -- making fluctuations between the quarters. So it is exactly as Kåre explained, that we see a nice growth, but we're also launching in these regions and that might be -- give some bumps because we have some pipeline filling.

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Kåre Schultz, H. Lundbeck A/S - CEO and President [51]

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Then on to Anders Gersel, 3 questions for you.

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Anders Gersel Pedersen, H. Lundbeck A/S - EVP of Research & Development [52]

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Yes, the first question, on the Anew study on 35700. It's a study where we try to get more insight into the range of effect we may see in different types of patients with TRS. As you may be aware, there are some patients who very early on in their disease basically have features of TRS and then there are some who don't get until quite late. And there's obviously a group in the middle who are difficult to say if they are one or the other. We're trying to see if there is a difference in terms of how the 2 categories of patients are responding to 35700 even if they're all classified as TRS patients, merely based on the timing of the TRS condition to emerge in these patients throughout their disease lives. In terms of the Trintellix data, if we're going to try to incorporate the currently available data into the label, we're actually discussing what we can do currently with Takeda in terms of do we need something additional or what do we make out of the second CRL discussions that we have had with the FDA. I think the bottom line here, while I cannot be very precise on that, is that it is our clear understanding that even within the FDA, there's not a clear position on this, and that is why we need to have some further discussions about how to approach that. If we look at the agitation data, then we will not discuss details of this data until we had the meetings with the FDA. So I'll not go into further discussions on that. But we will have a meeting. As I've said, we have requested a Type C meeting with the FDA and submitted that to them.

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Marietta Miemietz, [53]

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So just to clarify on the 35700, so do you actually have specific screening criteria where you say, okay, an early disease patient is somebody who got it within the first, I don't know, one year of this disease and a late-disease patient got it at like 10 years of his disease and those are the only patients we take into the study, we analyze them separately and that really informs the second Phase III trial? Because I mean, it's really not very clear on the clinical trials what the inclusion criteria are.

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Anders Gersel Pedersen, H. Lundbeck A/S - EVP of Research & Development [54]

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We are specifically asking for a group of patients to be amongst the early ones that have not had disease for a prolonged period of time, that's correct. So we are trying to separate them out as much. And the same regard to do with we want to get a sense of what impact does prolonged exposure to the 2 treatment have on the pathology of these patients in itself, but also when you subsequently treat them with 35700, which has a different receptor profile.

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Operator [55]

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Our next question comes from Jacob Lademann of Carnegie.

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Jacob Lademann, Carnegie Investment Bank AB, Research Division - Research Analyst [56]

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Just briefly on Xenazine, I mean, the result in Q2 looks perhaps a bit surprising given the sharp erosion in Q1. So I'm wondering if you could break down for the full year update of the sales guidance how much of the Xenazine performance during Q2 is carried forward as expectation for the rest of the year. And basically also the same question to other pharmaceuticals. Is this a category that you expect to be quite strongly performing and what would the contribution be to the full year sales guidance? And finally, just a question on AF35700. Is it correctly understood, and just a clarifying question actually, that the Anew and Daybreak studies are the only planned pivotal trials or -- because the Anew study is actually registered as a Phase II study? So just wondering if you expect to make the submission based on that data alone or perhaps there would be a second Phase III trial later.

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Kåre Schultz, H. Lundbeck A/S - CEO and President [57]

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Thank you very much, Jacob. I will try and answer the first 2 questions, and then Anders Gersel will answer the last one. On Xenazine, there are some, you can see also here, some quarterly fluctuations. But the way we look at it is that the decline we've sort of, on average, seen over the last basically 8 quarters since it got generic competition 2 years ago, that decline, the way we've seen over the last year, we expect that to continue and therefore we expect a continued decline in Q3 and Q4 of Xenazine. In terms of other pharmaceuticals, this is a lot of different, very old products that we sell in many countries around the world. And basically, we expect that to be sort of very close to stable. But it does have products that also get sold in tenders and so on, so it can fluctuate up and down. But there's no dramatic change expected in terms of other pharmaceuticals in the second half compared to the first half.

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Anders Gersel Pedersen, H. Lundbeck A/S - EVP of Research & Development [58]

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And this is Anders. I will just comment on the Daybreak and the Anew study, the two 35700 studies. They're the only studies currently ongoing, and obviously we will not decide on the additional Phase III study until we've seen the results of the 35700 study in terms of how it's going to look like and what -- how we're going to size it and position it. The current Anew study is not what we've previously commented on as a second Phase III study, just so that you are aware of that.

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Operator [59]

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Our next question comes from Peter Welford of Jefferies.

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Peter Welford, Jefferies LLC, Research Division - Senior Equity Analyst [60]

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I've got 2 questions left. Firstly, just on the margin trend. I appreciate you don't want to provide any sort of targets for the margin [from the term] at this point in time. But are you confident you can continue to see margin improvements in the EBIT line during 2018, '19 given some of the headwinds you face? Or should we be thinking about margins perhaps stabilizing for a while and then picking up again longer term once we're beyond some of the current headwinds that you're facing in the, I guess, older portfolio? And then just on the pipeline question on [2513], I think sort of the Alzheimer's vaccine, just wonder there if you can give us some sort of insight into what we should be looking for when we see those data next quarter in terms of, I guess, both the immunogenicity and safety, but also -- or whether we should be looking for anything else potentially in the data that will give you some insight into each development plan?

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Kåre Schultz, H. Lundbeck A/S - CEO and President [61]

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Thank you very much, Peter. I'll try and answer the first question, and then I'll leave the second one for Anders Gersel. So as I said before, we won't comment on a new target for our long-term financial targets before we've reached the ones we have right now. And as you rightly say, we are close to reaching the 25% target, but we haven't actually reached it yet. Once we reach it, we will discuss with the Board of Directors and look at the whole situation in order to assess what our new long-term financial targets should be for the EBIT margin. All that being said, of course, personally I would be disappointed if at some point in time we were not able to improve that margin further, but it's too early for me to comment on exactly with what speed and magnitude that, that can happen.

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Anders Gersel Pedersen, H. Lundbeck A/S - EVP of Research & Development [62]

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Yes, with respect to the vaccine program, what we expect to see out of that is obviously if we are raising antibodies of the kind that we would like to see and of a magnitude that we would like to see using this kind of vaccine and it will, as such, not be expected in any way that we'll get any sort of, if that was what you were asking -- any effect results on patient response or anything like that because that is clearly not possible with such a small study with so few patients. We basically are doing it as a way of understanding if we -- were the vaccination that we are giving was, at the magnitude we are giving, are able to raise antibodies at a level and of a nature that we think are appropriate for us to move on with.

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Peter Welford, Jefferies LLC, Research Division - Senior Equity Analyst [63]

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And sorry, I appreciate that the efficacy [was unlikely]. But I guess with regards to the nature of the antibodies, I guess, what I'm trying to tease out is what is it you're trying to get specifically in terms of the type of antibodies that you're looking to generate and, I guess, the persistency as well that you're looking to see?

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Anders Gersel Pedersen, H. Lundbeck A/S - EVP of Research & Development [64]

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Well, first and foremost, as you know, this is a vaccine that generates internal antibodies, and therefore you are not getting a monoclonal response antibody-wise there. And we need to make sure that the antibodies that we do raise are targeting the right types of Abeta precision that we want it to be, so that we see that we are getting a possible effect on different aspects of Abeta accumulation either as monomers or polymers, whatever, and see that that's hitting the right places. So it's rather complex to decipher that, and that's what we need to know upfront because if we, let's say, we get a profile that is closer to a profile resembling a solanezumab, it would be different in terms of strategic decision as to if it was someone that look more closely to an aducanumab, for example, in its antibody profile.

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Operator [65]

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And the final question in the queue so far is a follow-up from Michael Novod of Nordea Markets.

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Michael Novod, Nordea Markets, Research Division - Director of Healthcare, Healthcare Analyst & Sector Coordinator [66]

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Just follow up on the 35700. You talked about on the call after Q1 that enrollment was perhaps a bit slower. And we now see you, you're moving the trial completion into 2018 -- 2019. Are you certain on that timing? Or do you continue to see some enrollment challenges in terms of timing?

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Kåre Schultz, H. Lundbeck A/S - CEO and President [67]

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Thank you for that question, Michael. I'll pass that on to Anders Gersel.

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Anders Gersel Pedersen, H. Lundbeck A/S - EVP of Research & Development [68]

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Currently, the enrollment is as we expect it to be. And I think the statement that I made in terms of the Q1, saying that we needed 12 to 18 month of enrollment, still holds true. As you can imagine, it's a little difficult to be very accurate about how quickly we get these types of patients in there. But so far, things are looking okay, and there's no expectations at all that we will see a delay in that.

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Operator [69]

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As there are no further questions, I'll hand back to our speakers for the closing comments.

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Kåre Schultz, H. Lundbeck A/S - CEO and President [70]

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Thank you, everybody, for listening in and thank you for your interest in Lundbeck and have a nice day. Bye-bye.