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Edited Transcript of LUN.CO earnings conference call or presentation 5-Nov-19 12:00pm GMT

Q3 2019 H Lundbeck A/S Earnings Call

Copenhagen Nov 19, 2019 (Thomson StreetEvents) -- Edited Transcript of H Lundbeck A/S earnings conference call or presentation Tuesday, November 5, 2019 at 12:00:00pm 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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* Emily Field

Barclays Bank PLC, Research Division - Research Analyst

* James Daniel Gordon

JP Morgan Chase & Co, Research Division - Senior Analyst

* Jo Walton

Crédit Suisse AG, Research Division - MD

* Marc Harold Goodman

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

* Martin Parkhøi

Danske Bank Markets Equity Research - Senior Equity Analyst

* 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

* 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 the H. Lundbeck third quarter results. (Operator Instructions) So today I'm pleased to present Deborah Dunsire, President and CEO; and Anders Götzsche, Executive Vice President and CFO. Speakers, please begin.

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

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Operator, and thank you all for your interest in Lundbeck. We welcome you to this Lundbeck teleconference covering our financial report for the first 9 months of 2019. Together with me today are our CFO, Anders Götzsche; Johan Luthman, the Head of R&D; Jacob Tolstrup, the Head of Commercial Operations; and Peter Anastasiou, the Head of North America.

On Slide 2, you can see this disclaimer, which I know you've read many times before, so I'm not going to read it out. I'm sure you'll be glad to know.

Let's go directly to Slide 3. In the first 9 months of 2019, Lundbeck has continued to deliver strong momentum on our promoted brands around the world. We are therefore increasing our financial guidance for the year. Anders Götzsche will elaborate on the solid financial performance later in the call. During 2019, Lundbeck has made significant progress against our Expand and Invest to Grow strategy. Our strategic brands continue to show remarkably strong growth both in volume and value across all regions. We've made 2 important acquisitions, which significantly supplement our pipeline and expand the range of brain diseases that we address.

As you know, we closed the acquisition of Abide Therapeutics in June, and on October 22 this year, closed the acquisition of Alder BioPharmaceuticals. We've also made important progress in our internal pipeline, finishing Q3 with 11 compounds in clinical development. Our financial position is sound despite the several major payments through the first 3 quarters. This gives us some headroom to make continued progress on Expand and Invest to Grow in future years. As previously announced, Q4 will of course be impacted by the execution of the Alder transaction, which brings us into a net debt position.

With that, please turn to Slide 4. Our 4 strategic brands are generating substantial growth, up 29% in aggregate, adding DKK 1.5 billion in sales compared to the first 9 months last year. These growth products constitute more than half of Lundbeck sales. Each of the brands has achieved double-digit growth and are growing in all regions. The continued growth in these strategic brands is a testament to the value these products provide to patients as well as the excellence in execution by our organization around the world.

Next slide, please. Revenue from Brintellix/Trintellix reached DKK 2 billion in the period, a growth of 31%. 50.4% of the revenue was generated in North America. In the U.S., Trintellix continues to increase its market share. We saw strong demand growth in the first 9 months, driven by an increase in new patients as well as improved persistence on therapy. I'm very pleased to see that this brand is growing dynamically at 30% in its sixth year on the market, reflecting the patients and physicians' appreciation of the benefits it provides in treating depression.

Trintellix is the biggest branded antidepressant by value, with the U.S. market share exceeding 25%. Demand growth was 22% in the third quarter. In the major European countries, Brintellix is approaching a 10% market share. In China, we are encouraged by the progress, but it's still early days given that we launched last year, and are still awaiting public listing for reimbursement. We're happy to report that Trintellix was approved in Japan in September this year. And together with our partner Takeda, we will launch once pricing is finalized later this month.

Depression affects approximately 2.5% of the population in Japan, over 3 million patients. We firmly believe that Trintellix will be an important new treatment option for patients and health care professionals in Japan. We foresee this brand continuing to grow well into the future.

Please turn to Slide 6. Rexulti is still mainly a U.S. franchise. In Europe, the product has been launched in Denmark, the Netherlands, Norway and Switzerland. Additionally, outside of Europe, it's launched in Australia, Chile, Mexico and Saudi Arabia, and more countries will launch in the coming year.

As you can see from the graph, the significant uptake continues. Rexulti achieved more than DKK 1.6 billion in sales for the period, representing an impressive growth of 35%. The demand growth is a healthy 22% in the third quarter, impressive in its fifth year on the market. Rexulti's U.S. value share has increased from 13% to 15% since January of 2018.

Johan will elaborate on the progress with additional indications for Rexulti in a minute. Let me just say that we continue to have high expectations for this product as Rexulti has an attractive profile and is highly valued by the medical community.

Please turn to Slide 7. Abilify Maintena grew 23%, approaching DKK 1.5 billion for the period with strong double-digit growth in all regions. Abilify Maintena was launched in 2013, and volume share approaches or exceeds 30% in markets such as the U.K., Italy, Canada and Switzerland. And it is continuing to gain market share. In many markets, Abilify Maintena is now the second most prescribed long-acting injectable treatment for patients with schizophrenia.

At the American College of Neuropsychopharmacology Conference in Florida in early December, data from the so-called PRELAPSE study led by Dr. John Kane will be presented. This study included patients early in the course of their disease and demonstrates the feasibility of engaging the overwhelming majority of early-phase patients in the use of LAIs when the clinical staff are appropriately trained. The use of LAIs in this population produced a significant delay in time to hospitalization.

Turning to Slide 8. Northera grew 25%, finishing the period above DKK 1.5 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 18% against the lower quarter last year, where we experienced a temporary backlog based on moving the patient hub. We do continue to expect good volume and value growth for this product in 2019 and beyond.

Next slide, please. Our North American region is overall impacted by the expected generic erosion of major brands such as Onfi and Sabril. In spite of this, we are very pleased with the strong growth of our strategic brands, which now constitute more than 70% of the regional revenue. Actually, if one takes out Onfi from the equation, then growth is 13% for the period and a very strong 15% for the third quarter. North America constitutes 56% of our revenue.

Next slide, please. International markets increased 8%, reaching DKK 3 billion for the period or 24% of our revenue. This region is still in the early part of the rollout of our strategic brands, which show growth of 38%. We expect to see significant long-term growth for these products in the region. The largest markets among our international markets are Brazil, China, Japan and South Korea. These constitute more than 50% of regional sales.

Japan is an investment area for Lundbeck, and we have now established our own commercial organization for the planned launch of Trintellix in the coming months together with our partner, Takeda.

In China, our second largest market overall, we're progressing the launch of Azilect and Brintellix. It's early days for both products as it takes time to obtain national reimbursement listing in China. We did obtain this in September for Azilect.

Next slide, please. Europe is delivering strong growth, with revenue increasing 7% to DKK 2.4 billion. The European region is an important part of our overall performance and is driven by our strategic brands, which grew 27% and now constitute more than 50% of the sales in the region. Rexulti is launched in Denmark, Netherlands, Norway and Switzerland. The launch of Rexulti in some of the larger countries in Europe will take place in 2020. So we look forward to continued growth in this region.

Next slide, please. As announced on October 22, we have now successfully completed the acquisition of Alder Biopharmaceuticals, and the integration is progressing rapidly. The acquisition of Alder brings the exciting investigational drug eptinezumab into our pipeline, expanding the breadth of our portfolio into migraine. This represents a major step in the execution of our Expand and Invest to Grow strategy. Lundbeck can now take part in helping migraine -- the migraine community where so much unmet medical need remains.

I assume you are all aware of the PDUFA action date on the 21st of February for eptinezumab. We're also working on the Canadian submission planned for Q1 next year as well as the European submission, which will likely be towards the end of 2020.

Next slide, please. Migraine is a serious neurological disease. And according to the UN's Global Burden of Disease survey, it is the most disabling of all diseases for people under the age of 50. There is a high unmet need for new, effective and well-tolerated prevention options. According to the chronic Migraine in America survey, 9 out of 10 patients don't use preventive therapy, will discontinue its use within 6 months to a year because they experience a lack of efficacy or develop side effects. And even for those patients where the treatment is effective, it can take weeks or months to achieve meaningful clinical benefit.

The results of the pivotal program for eptinezumab in the PROMISE 1 and PROMISE 2 trials clearly demonstrated a powerful, fast and sustained response to eptinezumab. Patient-reported outcomes were also significantly improved. We believe eptinezumab will offer a unique and differentiated value proposition to patients and those that care for them. Our market research has uncovered that symptom relief and quality of life measures are extremely important to migraine patients, and that most patients would choose a product based on its effectiveness and speed of prevention effect. Given eptinezumab's clinical profile, IV administration is not a barrier for them. We also note that in the U.S., most of the specialists treating migraine patients have already access to IV delivery capabilities.

I'll now hand over the microphone 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 14. I'll turn to our financial numbers but firstly conclude on the Alder transaction.

The financing of the deal is complete. We are financing a deal through existing cash reserves plus bank financing. I think it's important to reiterate that we expect the transaction to be core EPS accretive in 2023, and that we expect to stay within our current financial policy being investment-grade. However, you will see us invest significantly into this asset in order to get the full value out. We are currently establishing the commercial infrastructure in the U.S. for the planned launch next year. We are starting programs to expand indications. And we are also initiating a Phase IIIb started to support the European market access process following approval.

For 2019, transaction costs are expected to reach around DKK 200 million, and there will also be integration and retention costs, which we expect to reach between DKK 400 million and DKK 500 million, of which DKK 50 million to DKK 100 million will hit the profit and loss in 2020. Additionally, we recognized some 2 months of operating expenses totaling DKK 325 million to DKK 400 million.

Next slide, please. Deborah has already elaborated on our performance for the strategic brands, so no need for me to do that as well. In the first 9 months of 2019, we saw a decline in our sales from Onfi in line with our expectation. Onfi will continue to decline, and we have previously guided a decline around 70% versus last year. Revenue declined 9%, reaching DKK 12.6 billion. This is driven by the loss of exclusivity for Onfi and Sabril, which is partly mitigated by the strong growth from all our -- from our 4 strategic products.

Please also note that the effect from hedging has moved from a gain of DKK 308 million in 2018 to a loss of DKK 194 million in 2019.

Total costs are unchanged. So we continue our disciplined cost spending, and we even have DKK 55 million in transaction costs, which is recognized under SG&A in the quarterly release. Cost of sales declined 7% to DKK 2.4 billion in the period. Our gross margin, therefore, reached 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. Based on non-GAAP numbers, the gross margin is unchanged.

We maintained good control over our operational cost. The SG&A cost only increased 5%, which is mainly linked to FX, investment in China and Japan as well as other growth initiatives. The SG&A ratio was 36.8% compared to 31.7% the year before. The increase in the ratio is a consequence of the decline in revenue compared to last year.

R&D costs decreased by 3% to DKK 2.2 billion, representing 17.6% of revenue. Considering the strong sales performance, we have managed our costs effectively. So as reported, EBIT reached DKK 3.3 billion, and core EBIT reached DKK 4 billion. The core EBIT margin thereby reached 31.8%. We see this as a solid result, which also creates the basis for our raised guidance and narrowed guidance range. The effective tax rate is unchanged and consequently earnings per share reached DKK 12.3 per share.

Please turn to Slide 16. We expect continued growth for our strategic brands: Abilify Maintena, Brintellix/Trintellix, Northera and Rexulti, which only partly mitigate the generic erosion on our mature portfolio. We have raised our expected revenue range to DKK 16.7 billion to DKK 16.9 billion, which should be compared to our initial guidance in the beginning of the year of DKK 16.1 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 closing of the Alder transaction as well as the impact from erosion of Onfi sales. EBIT is expected to reach between DKK 3.4 billion and DKK 3.7 billion for the year, which indicates a margin of at least 20%, and for core EBIT, the implied margin is at least 28%.

Please note that in the fourth quarter, some of the transaction, integration and severance costs will be recognized in other operating items net. We expect this to be in a range of DKK 400 million to DKK 500 million, and the remaining cost of DKK 400 million to DKK 500 million will be recognized in the individual cost lines.

For the financial items, you should expect a net amount of 0 to minus DKK 100 million, depending on the currency development. The reported tax rate will be slightly impacted by the Alder transaction and will probably be in the high end of the range of 26% to 28% this year. It will also be slightly elevated in the next couple of years.

It is important to note that the cash tax rate is somewhat lower, and we expect it to be around 19% to 23% for the following years. However, be aware that due to utilization of NOLs, there will be swings between the years.

We are currently early in our budgeting process for next year, so I will refrain from being too specific on the cost ratios for 2020. But we will invest in building a strong eptinezumab franchise. And just to give you some inputs to your modeling, you need to include some DKK 2 billion in additional operation expenses for 2020. Amortizations regarding these assets will furthermore amount to around DKK 0.5 billion.

Next slide, please. Lundbeck continues to generate a solid cash flow, although the period has been impacted by some major payments, which certainly also will impact Q4. Cash flow from operations has declined from DKK 4.6 billion to DKK 2.2 billion, foremost as a result of the lower profits following Onfi erosion and a decline in working capital as a result of the payment of the settlement with Justice Department and fluctuations in other short-term liabilities. The cash outflow reached DKK 632 million compared to a cash inflow of DKK 694 million last year. We expect the net position by the end of year to be around DKK 7 billion, mainly as a consequence of financing the Alder acquisition.

With that, I would like to 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 18. This is our current R&D pipeline, and you will note it looks materially different from beginning of the year. Around half of these products were not included in February. We are continuing executing on the Expand and Invest to Grow strategy by carefully adding external products to the pipeline. Also we continue to aggressively move early-stage products forward, while being disciplined to close down less attractive products as early as possible.

Next slide, please. As you know, we have a comprehensive life cycle management program ongoing for brexpiprazole. We have begun the first of 2 planned pivotal studies in PTSD. PTSD is a constellation of symptoms that emerge following traumatic life events causing significant impact in disability. Currently, there are only limited treatment options and therefore a substantial unmet medical need. The first trial initiated tests a flexible dosing schedule while the second study, which also commence soon, tests a fixed-dose schedule. In total, we expect to recruit some 1,250 patients in the program. We expect to finalize these studies during 2022.

Next slide, please. Last quarter, we told you that we would begin a proof-of-concept trial with brexpiprazole in borderline personality disorder, and this trial is now underway. BPD is another serious psychiatric condition with substantial unmet medical need. There is no drug approach for this challenging condition. We believe that brexpiprazole, with its multimodal mechanism of action, may well have the ability to address a range of the symptoms of this serious condition. The study will be a 2-arm flexible dose study, and it is expected to enroll some 240 individuals. In October, FDA designated this program as a fast track development program.

Please turn to Slide 21. In June last year, Lundbeck and Otsuka started a third clinical Phase III study of brexpiprazole in the treatment of agitation in Alzheimer's disease. More than 220 patients are expected to be enrolled in the trial, and patient recruitment progresses as planned.

Next slide, please. As I said in the beginning, we continue to move early-stage projects forward. And during the third quarter, we have included 3 first-in-human projects in our pipeline. We have replaced our former [PDE1] inhibitor product, which we terminated in the beginning of the year with 88434, which has a specific inhibition profile of the PDE1b subtype of the enzyme. PDE1b is highly expressed in brain regions involved in cognitive processing, and we believe inhibition of this enzyme may have a potential in addressing cognitive impairment in conditions such as schizophrenia and Alzheimer's disease.

We have also begun a Phase I study with an antibody targeting Tau, a protein that plays a role in Alzheimer's disease. This antibody targets species of Tau that are believed to be implicated in so-called Tau seeding, a process that is thought to be critical in the spreading of the [tangled] disease pathology in the brain.

Finally, Lu AG09222, which we have acquired through Alder, has also recently commenced Phase I. 09222 represents a potential new therapeutic option for migraine prevention. This monoclonal antibody inhibits pituitary adenylate cyclase polypeptide (sic) [pituitary adenylate cyclase

activating polypeptide], PACAP, binding to its receptor, a mechanism that is distinct from inhibition of CGRP. PACAP and its receptors have been found across the pain processing pathway, and increased levels of PACAP have been found in blood samples of patients experiencing a migraine attack. In preclinical studies, 09222 has been shown to be selective, high-affinity antibody to PACAP, that are demonstrated in vivo engagement of the target. In Phase I program, our 09222, we will enroll approximately 100 healthy volunteers to assist in safety, [through our ability and] pharmakinetic profile at various doses. Initial results are expected in the second half of 2020.

With that, now back to Deborah.

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

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Thanks, Johan. Looking at Slide 23, 2019 has been a busy and exciting year so far. This is the list of selected deliverables we set up in February, and we've actually delivered on most of them, though I recognize that the outcome of brexpiprazole in bipolar mania was a negative surprise. Unfortunately, we also experienced delay in the finalization of the Phase II study with foliglurax and now anticipate this being completed in the first half of 2020. We'll continue driving our current business forward as we execute on our Expand and Invest to Grow strategy.

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 and achieve these goals.

With that, I'd like to thank you for your interest and open the Q&A session.(technical difficulty)

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Questions and Answers

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Marc Harold Goodman, SVB Leerink LLC, Research Division - MD of Neuroscience & Senior Research Analyst [1]

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Deborah, obviously Alder and Abide, so 2 deals this year. Just curious where your thoughts are on business development and how active you guys are behind the scenes. What kind of deals you're looking at? How things have changed? And if you were -- give us a sense of just how many deals you're looking at, just so we have an understanding of when to expect something else. And then you talked about doing a study for Alder for Europe. Can you tell us a little more about that study and what needs to take place before that product can move into Europe?

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

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Thanks, Marc. First of all, we've made 2 acquisitions this year. We're supplementing our pipeline. We're executing on Expand and Invest to Grow. In the next couple of months, what we need to do first and foremost is make sure that we support the approval and launch of eptinezumab and really get this integration done effectively. We do of course continue to scan the environment and look at things that will fit with Lundbeck's strategic capabilities in neuroscience. And sometimes opportunities present themselves either for partnerships or licenses or even acquisitions, and you need to act when the opportunity arises. And so we'll -- we continue the work. Ideally, I'd love to keep us focused right now. We've got a big job at hand. But we will not overlook opportunities should they come our way. And it'll be across all phases of the pipeline and across all deal types that we would be examining. So I'll stop there with that and then hand over to Johan to comment on what's required for Europe.

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Johan Luthman, H. Lundbeck A/S - EVP of R&D [3]

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Yes. Thanks, Marc. So we're planning to do something we call a Phase IIIb study for Europe to make sure that we have the optimal package basically for the European environment to optimize for market access and also include the current therapy landscape with a preventive therapy. So that's the idea of this study. So we are expanding a little bit on the previous good ideas by Alder, but we need to have a more comprehensive study in Europe going forward.

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Operator [4]

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Next question is of the line of Wimal Kapadia with Bernstein.

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Wimal Kapadia, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [5]

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You've guided to an incremental DKK 2 billion in spend next year for Alder. So firstly, how should we think about the split between SG&A and R&D? And secondly, how should we think about the trend moving forward? Is DKK 2 billion a fair reflection of incremental costs over the long term? Or should we expect that to reduce over time? My second question is on Cipralex. Clearly had a strong quarter, benefiting from some of the inventory stocking in China. Can this be quantified? And should we expect a similar benefit in 4Q? And then is China enough to actually grow international sales for Cipralex in 2020? And then my final question, just on the pipeline, there's clearly a lot of activity with multiple trial starts in recent months. I mean we're expecting multiple readouts in 2020. So which data sets are you most excited about in 2020 and why?

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [6]

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That was a lot of questions. So Anders is going to start, then Jacob will address China, and then Johan will address the pipeline, and then I'll finish up.

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Anders Götzsche, H. Lundbeck A/S - Executive VP & CFO [7]

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Okay. With the -- what we tried to do in this quarter was to give you an early heads up on what we expect for 2020 from a cost perspective, taking the Alder cost base into Lundbeck. But of course, we are also -- what we are doing now is we are reviewing the business. We are reviewing how much cost will we make more precise estimate. So what we know for sure is that next year will be the U.S. launch, and then we will start the European launch and the Canadian launch after. So we haven't finalized the numbers, and what we of course need to do is to go through each and every country and see what is needed, what additional costs, will it be incremental, will it be possible to utilize the existing infrastructure and sales force. So it's too easy -- or too early to speculate about that. The split is -- will be more or less that -- you could say more or less 50-50 for -- 40% to 50% will go into R&D. 40% to 50% will go into to commercial. And then we will have some additional costs for our hub in Seattle. So that is more or less how you should think about it. And regarding China?

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

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Absolutely correct. So we have some timing and some phasing. I think you have to look towards last year where we had stocking first half of the year going to our partner at the time, which was first Xian-Janssen. So absolutely correct that China is delivering more growth now, because we're getting into the second half, and we have more, you can say, traditional distribution of our revenue in China for this year. And that also means that the fourth quarter will be strong for Cipralex in China also. I think also for your last question, China alone will not be able to drive growth for Cipralex, but we also have other markets where we do see growth for Cipralex approval. So that also means if we look for Europe, international markets for the full year, I do expect a flattish to slight growing Cipralex for this year.

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

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Then Johan, would you like to comment on what's most exciting about the readouts in 2020 and beyond?

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Johan Luthman, H. Lundbeck A/S - EVP of R&D [10]

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Yes. So obviously, we have a number of activities going on across the portfolio. But when it comes to the more bigger programs, we have the agitation in Alzheimer's disease coming up, which is, as you know, a very, very high medical need. So that's one of the most exciting and of course, with established brands, we're really looking forward to get that third trial readout. We have, of course, in the pipeline, some smaller readouts in Phase I and II, but I probably will not go into those right now. Those are more forward-looking programs that we get back to in more detail in the future.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [11]

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I think what I'm pleased with the pipeline is that the shape, we now have more in the later stages than we had at the beginning of the year. We've got 4 trials in Phase II, 3 of them will read out in 2020. And then a good amount, 5 new programs into the Phase I pipeline this year, which gives us the opportunity to be disciplined in taking forward only the best ones on the line. So I like the balance that's developing in the portfolio.

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Operator [12]

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Our next question is over the line of James Gordon at JPMorgan.

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James Daniel Gordon, JP Morgan Chase & Co, Research Division - Senior Analyst [13]

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Two Alder-related questions, please. The first one would just be on CGRPs [having] a discounting. If we look at the ramp of the products that have already launched, looks like quite a lot of free product sampling and then more recently, some very heavy discount or rebating, particularly we saw that for [IVIVC]. So how do you think the U.S. market might play out in that regard? Are you likely to have to do very heavy sampling as well? And is there a reason to think that you wouldn't have to offer the same sort of discounts? Are you protected from that in some way? Or long term, is this likely to be a very competitive space with lots of rebating for a long time, and we need to bear that in mind where we're thinking about the net price you might achieve for [something like that?] And the second question would also just be an order of [CGPs]. How competitive do you think the oral products are going to be? Are they a big competitive threat? And is that something that Lundbeck is going to pursue? Are you going to do an oral approach as well?

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

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Okay. So I'll ask Peter to start on the first part of the question, and maybe Johan can comment on the second part.

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Peter Anastasiou, H. Lundbeck A/S - EVP of North America [15]

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Yes. James, this is Peter. As we look at the CGRP market and the migraine market in general, I think it's a market that's revealing itself to be quite dissatisfied. There's a lot of interest. Despite the fact there are many treatments and now new treatments in the marketplace, we see the uptake and adoption of some of these therapies as a sign that the older therapies just aren't meeting patients' relief. There were some stats in the manuscript that Deborah and Johan had described around migraine that reveals a very dissatisfied market because of the lack of efficacy and because of tolerability issues.

In terms of your question with regard to discounting and that sort of thing, we certainly won't get into -- as in the past with any of our products, we don't talk about our discounting strategies in gross to net. I will say that it's important for all of you to consider the difference in administration of eptinezumab and other products, whether they be oral or subcutaneous. This is an infusion therapy that is typically paid out of the medical benefit. It's a medical procedure. And so there are key differences in the way it's administered that I think will lead to some differences from a reimbursement perspective. But the other thing I would highlight is the clinical profile. As Deborah had mentioned and Johan had mentioned, this is a strong clinical profile with powerful results, fast results and also sustained, being only once a quarter administration.

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Johan Luthman, H. Lundbeck A/S - EVP of R&D [16]

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Yes. If I may just to expand on that a little bit first. And obviously, the CRP mechanism is a very powerful mechanism that has been explored by various approaches, as you know, small molecules and monoclonals. And we have a very good position here with the IV treatment. And Peter mentioned a rapid onset, which obviously it's one advantage with the IV approach. We have -- looking at this at a broader level also we are going to work in this field also with the new entrant that we have, the 09222 compound, which is a PACAP molecule. So we're going to approach this biology also with other mechanisms that we believe will take some of those that are a little more treatment-resistant to the current CGRP therapies.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [17]

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And the question was around the orals.

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Johan Luthman, H. Lundbeck A/S - EVP of R&D [18]

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Yes. And the orals, as you know they're primarily progressing with acute treatment. Now that's the first wave. They may come after with later trials in more preventive space. The oral drugs have of course a little different mechanism action. They block the receptor. We are now blocking the ligand, and there is a little bit of a different biology when you deal with this and the perceived effect of the taking out the ligand is actually somewhat stronger than what you see with blocking the receptor.

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Operator [19]

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The next question comes from the line of Emily Field at Barclays.

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Emily Field, Barclays Bank PLC, Research Division - Research Analyst [20]

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A few more questions on Alder. I was just wondering how much of the incremental R&D spend is going to be allocated to the investment of 1910 versus additional spending on epti. And just how long you would expect this European Phase IIIb study to take, just given that the CDR has some timing constraints? And then also regarding the planned acute study for epti, I'm just kind of curious what the incremental benefit would be of having this included on the label given that it seems like the plan is already to promote for the faster onset of action and assuming orals are approved in the acute setting? Just wondering if you could expound on what you see the benefit of running this study would be.

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Anders Götzsche, H. Lundbeck A/S - Executive VP & CFO [21]

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I can start with R&D spending. And most of the additional R&D spending will go in eptinezumab. It will be the trial to support the market access in Europe. It will be the treat and prevent study. And then of course, if you look more ahead of -- in the future, then of course other life cycle management initiatives will also change some R&D spending. But of course, PACAP is in the early stage. It's a Phase I program. So therefore, it goes without saying that the majority of the spending is in eptinezumab.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [22]

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Great. And then Peter, would like to comment?

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Peter Anastasiou, H. Lundbeck A/S - EVP of North America [23]

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Yes. With regard to the treat and prevent study, Emily, first of all, with the launch promotion and the label, we can't speculate on what will be in the final label. But clearly, we have some nice data from the PROMISE 1 and PROMISE 2 trials. But we believe that this is one of their strong benefits, and we've got some evidence to support it now. But we want to bolster that evidence based on this very important concept of rapid onset of prevention. And so we believe that making the investment will be something that will help us continue to bolster that claim. And let's not forget that we have exclusivity for many years with this asset going into the mid-2030s. So you should expect that we will continue to invest in a strong life cycle management program and probably the first step in that life cycle management program are these studies that we're talking about for Europe and also the treat and prevent study.

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

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And I'll just emphasize that by saying when you think about PROMISE 1 and PROMISE 2, we know already on the day after infusion that you get more than a 50% reduction in the number of patients experiencing a migraine. The treat and prevent study will characterize the slope of that curve, if you like. How fast does the migraine get controlled in this -- in the setting of delivering 12 weeks of preventive therapy? So that -- we'll finish up there. Sorry Emily, did you want to say something?

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Emily Field, Barclays Bank PLC, Research Division - Research Analyst [25]

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No. That's helpful. Just on the timing of the European Phase IIIb expectation, if you could comment on that?

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

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I think we expect to start the Phase IIIb trial in the middle of the year and deliver results towards the end of the year or early '21.

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Operator [27]

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Our next question is of the line of Danske Bank, and Martin Parkhøi.

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

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I actually also have a couple of questions on the Alder. Just coming back to the U.S. pricing discussion, I don't expect you to give some kind of net price guidance. But anyway, that if you listen into the conference call of the players, which have launched in the space so far, then it appears that the pricing has been somewhat lower than even was suggested in the [ISA] review. So have you changed your assumption to the net pricing in U.S. during the process?

Then secondly, if we look into 2020 and you expect a launch in Q1 but -- what kind of uptakes should we expect, because on the contrary to the existing products in the market, then I guess you need a J code for your product? How does that impact the uptake, at least the speed of uptake? And then thirdly, should we actually -- we've got this as more as a non-U. S. opportunity as I see it. The price that the Novartis has obtained for Europe is probably more favorable than the price that the [angiopath] for the same product in U.S.

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

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Great. So thank you for the questions. On U.S. pricing, I think our assumptions when we went into the deal are consistent with our assumptions now, and we don't speculate on pricing. Peter, do you want to comment further and comment on the J code? And then Jacob, you can talk about ex-U. S.

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

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Yes. There's nothing further to add on pricing. On J code, you are correct. Because this is a medical procedure, there's not a product-specific code that will be available from day 1. CMS has changed how rapidly they turn around J codes, so we believe it will be a year or less in having that J code. There are temporary J codes that we can access at the beginning. But clearly, having the permanent J code is what we'll be working towards. But our launch expectations that we have internally in uptake are all taking that into consideration.

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Jacob Tolstrup, H. Lundbeck A/S - EVP of Commercial Operations [31]

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And so just to add, Martin, on the ex-U. S. Of course, U.S. is the most important market for us due to its size obviously. But I think like you, we're very encouraged about the pricing levels that we see for ex-U. S. in Europe. And one thing with the Phase IIIb study that we're doing is that is going to support us going into those discussions. So the plan is that we have that study once we're ready to having those discussions with authorities in Europe. But you're right, very encouraged at this time point. But we have maintained that price assumptions throughout the whole deal and transactions with all the -- when we started that some time ago.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [32]

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And just circling back to our strategy to Expand and Invest to Grow encompass the world. And one of the things that we have always liked about the Alder transaction and the eptinezumab launch is that it will be a global launch for Lundbeck. Our colleagues at Alder have done a great job building the brand, but we really have the global reach to make this a global brand for patients.

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Martin Parkhøi, Danske Bank Markets Equity Research - Senior Equity Analyst [33]

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If I just can follow up on the respect to the J code. Just to make sure that -- so if before you have a permanent J code then don't you expect any kind of material sales as I alluded to 2020? I see from the Schedule 14 D-9 from Alder, they have some quite substantial sales in all their scenarios, but does that include that J code impact?

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Peter Anastasiou, H. Lundbeck A/S - EVP of North America [34]

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Well, we won't speculate on our projections for the product certainly for the first year. But we do have that built into the temporary and then permanent J code into our own expectations. But even with a temporary J code, of course sales are able to take place, and clinicians are able to utilize the product and get reimbursement for it. It's a little less clean of a process than when we have a product-specific permanent J code. But all of that has been built in. And this is not unique to eptinezumab. Any product that's infused in an outpatient setting or, for that matter, any product that's administered as a procedure, has the same exact issue. And all of that is built into our expectations.

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Operator [35]

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Our next question is over the line of Philippa Gardner at Jefferies.

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Peter James Welford, Jefferies LLC, Research Division - Senior Equity Analyst [36]

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It's actually Peter Welford at Jefferies. A few questions left, please. Firstly, just with regards to the OpEx build around DKK 2 billion during 2020, which I think is around half the build on the commercial side. I guess returning to some extent to Wimal's question, can you give us some sort of an idea though, in terms of that DKK 2 billion or, I guess, DKK 1 billion of commercial spend how far along is that in the U.S. rollout? I mean is that bigger than a full-sized U.S. infrastructure we should be thinking about? Or is there still further U.S. investment that will be required beyond that to maximize the potential in the U.S. market?

Secondly, then just on the financial expenses, I wonder if you could give us any sort of idea for 2020 what we should be thinking about ex-FX, obviously, or alternatively some sort of idea of what the average financing cost is for the net debt do you believe to the year-end of this year? And then finally, just briefly on China. Just in regards to, you said you've got reimbursement in September for Azilect. Would you give us a time line for perhaps some other products? And also if possible, any commentary on whether or not Cipralex could or when it could perhaps be considered in a 4+7 or value type program in China? And how we should think about that?

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [37]

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So thank you for your questions. Regarding the U.S. infrastructure, we will be hiring in sales force to support the launch of eptinezumab and making the appropriate investments to support the brand in the market, which includes additional further studies. So Peter, I don't know whether you'd want to comment. We're not specific for each year. Anders, you want to?

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Anders Götzsche, H. Lundbeck A/S - Executive VP & CFO [38]

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Yes. I think it's a great question because of course what we will do is we were hiring the reps from the beginning of the year. So to -- with -- in that respect, we actually have a fully fledged commercial organization. But of course, the launch will first take place in the beginning of year. And therefore, you could foresee in the years to come that we will invest more in promotion activities. But you also need to take into account that what we also is facing in '21 is a loss of exclusivity for Northera. So of course, we will make a balancing act about securing that we have the right cost balance and utilizing the very strong sales force we have for all the U.S. product to create the optimized or make synergies between these sales force. So that is of course what you cannot -- we are not going to predict that today, but -- so you need to say 2020 as isolated year. And then when we move ahead, as I also said, I told you about Europe before, is we would also look into Europe as we have been doing in the past. How can we optimize and structure all the sales forces at the right level to secure the right push in the market. And that is how we will approach it.

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Peter Anastasiou, H. Lundbeck A/S - EVP of North America [39]

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And I would just like to add, in general, in terms of launch progression and planning, the Alder team had done a very nice job, and I think we're in very good shape preparing for launch. And many of the Alder leaders will continue and help us maintain that institutional knowledge and that therapeutic expertise, coupled with the great infrastructure and commercial experience we have had, having launched 7 products in 8 years very successfully in the U.S. And so it's a really nice marriage of their preparation and expertise and then certainly the infrastructure that we have at Lundbeck.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [40]

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You want to comment on the cost of debt?

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Anders Götzsche, H. Lundbeck A/S - Executive VP & CFO [41]

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Yes. We have financed the debt with RCF and also a DKK 2 billion debt facility, our term loan. And we are now evaluating how we are going to finance it. It will be partly in euro and partly in dollar. So for euro, for the euro loan, it will be less than 1% or around 1% in total cost. But of course, the dollar loan that will hedge the exposure for the U.S. will be more expensive. It might be up to 3%. We haven't finalized the split, but you should expect it to be maybe between 1% and 2%, the interest rate on our debt. And we start the year with 7 billion, and then we will, of course, then you can yourself calculate what is kind of the average interest we will have for 2020.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [42]

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I'll hand it over to Jacob to comment on your China questions.

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Jacob Tolstrup, H. Lundbeck A/S - EVP of Commercial Operations [43]

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Yes. So Pete, I think the first question was around the -- with Azilect, and you're actually right. We are now on the regular list for Azilect, and that means that for the beginning of 2020 the Azilect will be in our deal, and that still means that there is some work to do in terms of getting it into the different provinces, but it is great news and a clear recognition of the benefit that Azilect also provides to patients in China. I think I missed a little bit the second part of the question. Maybe it was a general question was related to Lexapro only, regarding 4+7. But even before going into 4+7 with Lexapro, we had lost the majority of our sales going to generics. In the 4+7, we of course lost more due to volumes as we did not go in and try to bid for the winning price. And the expansion then of the 4+7 will have an impact but less so as the reasons that it is being expanded to is the regions where we had already lost quite a significant portion of our sales to generics. But I don't know if that was your question or if it was more generally related, Peter.

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Peter James Welford, Jefferies LLC, Research Division - Senior Equity Analyst [44]

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No, that was great.

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Operator [45]

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Let's please go over to the line of Peter Sehested at Handelsbanken.

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Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [46]

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Just a couple of questions left here. Could you please remind us about the amount that you've booked in the balance sheet for foliglurax? Secondly, with respect to again Alder and costs, should we have any hopes for, let's say, synergies coming out of this acquisition on the cost side or to basically see it as -- or should we mainly see costs relating to the acquisition or OpEx expense as increasing for the next 2 to 3 years, basically in line with the scenarios, which were in the [10-D9] filing that [Martin] mentioned?

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Anders Götzsche, H. Lundbeck A/S - Executive VP & CFO [47]

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Foliglurax, we have EUR 100 million on the balance sheet. And of course, what we need to take into account when we make our guidance for 2020 is that there is of course a risk if the data are -- shows no sign at all, and our R&D folks say this drug will not show any improvement for patients going forward in whatever indication we can think about, then we need to take a write-off. That's how the mechanics works. But it can also be other scenarios. It can be mixed data. It can be -- of course if it's a yes, if it's good data, then we keep with the balance sheet position, and then we see how the next phases are developing. If it's mixed data, then we need to make a valuation of what can it be used for. So there are different outcomes. But if you wanted it black or white, then it's write-off or keep it on the balance sheet.

I think with the synergies, I think it's back to what I said before. We have acquired Alder because we believe that we will be some of the best in the world actually to launch this product. We're a specialized pharma company. We are extremely good working with these specialists. We have shown that over decades. And therefore, we also have a strong backbone platform. So we will of course utilize the commercial platform. The commercial launch will -- in the U.S. will be driven out of Deerfield, where we have our home office in the U.S. And of course, it will be -- Alder will be heavily integrated into Lundbeck, but we will also build on the strengths that they are coming with excellent data packs, excellent knowledge about the market. And therefore, we are thankful that a lot of these folks will stay and be integrated into the commercial operation.

But -- so there will be synergies, but we are also decisive in that we want to secure that this will be a blockbuster drug, and we will launch it globally. And this drug can actually -- will solve, hopefully if we execute well, on some of the strategic challenges we have in the past. We wanted to strengthen the pipeline. We want to secure that we also continue growth for -- in Europe after loss of exclusivity for Maintena. We will already from -- hopefully in next quarter, and definitely from next year start to see growth again in the most important market in the world, U.S. And therefore, we think this is a great deal, and it's a great fit for Lundbeck.

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Operator [48]

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The next question is over to the line of Jo Walton at Crédit Suisse.

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Jo Walton, Crédit Suisse AG, Research Division - MD [49]

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I think if we look at the consensus earnings estimates, a DKK 2 billion increase in operating expenses was not in most people's minds for 2020. You have told us about where that fits between R&D and SG&A. But in order to help us understand how much of this is a fixed new incremental base level of infrastructure, I wonder if you could help particularly on the selling side, telling us a little bit more about what your investment plans are. You talked about building more of a sales force in Japan. You've told us that you're going to be rolling out Rexulti into more EU major markets next year. I wonder if you could help us look at that perhaps ex-U. S. infrastructure build. And presumably, when it comes to your migraine drug, that will be able to sit on top of your existing infrastructure to a greater extent in Europe? Or come 2021, when you're looking to roll that out in Europe, should we see another material increase in infrastructure at that time point ex-U. S.?

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [50]

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Thanks for the question, Jo. I'll start and then pass it over to Jacob to talk a bit further. I think that, first of all, the rollout ex-U. S. will come a bit later. We'll submit in Canada in Q1; Europe towards the end of the year. So we'll see the European rollout probably in '22 and beyond. And we probably will have the need for some additional infrastructure given that Abilify Maintena is still growing strong as is Brintellix. But we'll evaluate. I think you can count on this company to be very disciplined in evaluating what's needed and taking as much use of the resources we have in all our markets as possible. And Jacob, I'll ask if you have any further comments.

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Jacob Tolstrup, H. Lundbeck A/S - EVP of Commercial Operations [51]

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Yes. Absolutely correct. And so I think we can say for now that we expect sort of a limited increase. And I think you also mentioned Rexulti as an example. Rexulti, we are launching in Europe without any additional head count, utilizing the infrastructure that we already have. And then you're right that in Japan and China, we've been built up. But those sort of things that have happened during 2019, and we're not planning to expand more in 2020. So I think for epti right now, it is further out as Deborah said. So '22 and beyond, but we expect a relatively limited increase.

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Jo Walton, Crédit Suisse AG, Research Division - MD [52]

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And could I just also ask your epti dosing frequency is every quarter. How do doctors feel about that? As I understand it, they really only look to see their patients every 6 months or so. Are they happy to see a patient and then say come back, and it's sort of 2 times as often as they would normally see them versus -- clearly, it's much easier to give them a prescription and say go away and do home administration every 6 months and come back 6 months later. Is that seen as a [block] that once a quarter dosing?

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Peter Anastasiou, H. Lundbeck A/S - EVP of North America [53]

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Yes. The short answer is no. It's not a [block] at all. I'll give you the physician perspective and then I'll give you the patient perspective from our research and certainly advisory boards and that sort of thing. The physician perspective is actually in our research that these headache clinics, which is going to be most of our focus at the beginning, typically see their patients every 3 months. So it fits quite nicely with the frequency that they're seeing their patients already. They do administer other therapies once every 3 months, like BOTOX for migraine. So that's not an issue at all quite frankly. It fits quite nicely with their treatment practice.

From the patient perspective, we have consistently learned that the most important thing to a patient is relief. These migraines are extremely debilitating, painful and really hurt their quality of life. So for them, there is no concern about an IV. In fact, what we also see is that there's a lot of confusion and apprehension among patients with injecting themselves with a subcutaneous treatment. They worry about, are they doing it right? Have they created any kind of issue? They actually prefer physician-administered therapies in general. And a 30-minute infusion for a patient who could be sitting there and simultaneously be on their phone or watching TV or reading a magazine and doing that once every quarter, is actually quite attractive from a patient perspective.

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Deborah Dunsire, H. Lundbeck A/S - President & CEO [54]

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I think just the last thing to amplify on that is that don't lose sight of the degree to which these migraines are happening. This is the prevention group of patients, who are experiencing in the episodic 4 to 14 migraine days a month. And in the chronic migraine, it's 14 to 28 migraine days a month. These are patients whose lives are extremely impacted by migraine. So getting fast relief is above all important to them.

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Operator [55]

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We have time for a final question, and that is over to the line of Michael Novod at Nordea Markets.

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Michael Novod, Nordea Markets, Research Division - Director of Healthcare, Healthcare Analyst & Sector Coordinator [56]

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It's Michael. Just 2 questions. One last one for Alder -- regarding Alder. When you talk to European physicians treating migraines, they talk about [guiding us that] infusion equipment availability may not be that great in Europe. It's obviously not a problem at all in the U.S. Do you hear anything about or have experienced around bottlenecks in Europe regarding infusion equipment? And then secondly, to Trintellix and the Japanese launch, it seems like Takeda was raising the expectations near-term to Trintellix in near mid-term, expecting stronger growth. That, we think, related to the Japanese launch or the other factors where you know that they are more positive on Trintellix going forward?

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Jacob Tolstrup, H. Lundbeck A/S - EVP of Commercial Operations [57]

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So on Alder, obviously it's a little bit of a time away, but the assessment that we have in this current point is principally you're correct, Michael, in the sense that this is more of a hospital-based looking out for Europe as a whole. It's also important to remember that there are different market dynamics in the different markets in Europe. So a country like Germany is obviously very different to some of the other markets. But you're right in the sense that it is more hospital-based. I don't think we see that as any big limiting in factor, but it is more hospital-based than it would be, for instance, compared to the U.S.

Then on Japan, maybe I should touch upon that briefly also. So we have -- of course, we have the approval for Trintellix. We are awaiting price that we hope to get here in November. And then we will be seeing the first sale of Trintellix in Japan, end of November, in December. We -- together with Takeda, we have what we believe a quite we're quite hopeful of a very good launch in Japan, where I think we have a very good partner. And the physician interaction that we've had so far since the approval seems like very good appreciation of the product and willingness to try the product.

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

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Yes, just finishing off, Michael. I think on the epti in Europe, remember again it's these chronic migraine patients, these patients who are very, very impacted. So they -- being seen in a hospital-based setting is not as much of a challenge. With respect to Trintellix and the bullishness you're hearing from our partner, we observed that too, not only based on an expected good launch in Japan but also a very strong continued growth in the rest of the world based on the profile of the drug and its benefit for patients.

So I think with that, we'll finish up, and thank you for all of your interest in Lundbeck.