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Edited Transcript of NOVO B.CO earnings conference call or presentation 9-Aug-19 11:00am GMT

Q2 2019 Novo Nordisk A/S Earnings Call

2880 Bagsvaerd, Aug 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Novo Nordisk A/S earnings conference call or presentation Friday, August 9, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Karsten Munk Knudsen

Novo Nordisk A/S - Executive VP & CFO

* Lars Fruergaard Jørgensen

Novo Nordisk A/S - President & CEO

* Mads Krogsgaard Thomsen

Novo Nordisk A/S - Executive VP & Chief Science Officer

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Conference Call Participants

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* Carsten Lønborg Madsen

SEB, Research Division - Research Analyst

* Luisa Caroline Hector

Exane BNP Paribas, Research Division - Pharma 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

* Richard J. Parkes

Deutsche Bank AG, Research Division - Director

* Richard Vosser

JP Morgan Chase & Co, Research Division - Senior Analyst

* Sachin Jain

BofA Merrill Lynch, Research Division - MD

* Trung Chuong Huynh

Crédit Suisse AG, Research Division - Research Analyst

* Wimal Kapadia

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

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Q2 2019, Novo Nordisk AS Earnings Conference Call. (Operator Instructions) This conference is being recorded today, Friday 9 of August 2019.

I would now like to hand the conference over to your speaker today, Lars Fruergaard Jørgensen, the CEO. Please go ahead, sir.

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [2]

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Thank you very much. Welcome to this Novo Nordisk conference call regarding our performance in the first 6 months of 2019 and our performance -- sorry, our outlook for the year.

I'm Lars Fruergaard Jørgensen, the CEO of Novo Nordisk. With me I have our Chief Financial Officer, Karsten Knudsen; and our Chief Science Officer, Mads Krogsgaard Thomsen.

Today's earnings release and the slides for this call are available on our website, novonordisk.com. The call is scheduled to last for 1 hour. The presentation is structured as outlined on Slide 2, please note all sales and operating profit growth statements will be at constant exchange rates unless otherwise specified.

The Q&A session will begin in about 20 minutes. Please note that this conference call is being webcasted live, and a recording will be made available on Novo Nordisk's website.

Please turn to Slide 3. As always, I need to advise you that this call will contain forward-looking statements. Such forward-looking statements are subject to risk and uncertainty that could cause actual results to differ materially from expectations. For further information on the risk factors, please see the earnings release and the slides prepared for this presentation.

Please turn to next slide. In the first half of 2019, sales increased by 9% in Danish kroner and by 5% at constant exchange rates, driven by international operations sales growing 12% and partly offset by North America operations declining by 2%.

All therapy areas contributed to growth. The combined diabetes and obesity sales grew by 6%, while biopharm sales increased by 3%.

Within R&D, several achievements are worth mentioning. We are investigating the clinical benefits of semaglutide, and we have initiated 3 major late-stage outcomes trials with injectable semaglutide alongside a cardiovascular outcomes trial for oral semaglutide.

Since May, we have had a handful of product approvals and filings, supporting our continued efforts to ensure that our products are accessible to patients. Just to mention a few. In Japan, we have filed -- we have in July, filed oral semaglutide for treatment of type 2 diabetes and following the approval of high-dose Victoza earlier this year, the Japanese regulators have approved Xultophy in June. We have also received approval of Ryzodeg in China.

Lastly, the U.S. FDA has approved a label update with pediatric data for Victoza and the European CHMP has adopted a positive opinion for adding the pediatric indication in the EU as well. Mads will elaborate further on the key R&D milestones later in this conference call.

Turning to financials. Operating profit increased by 12% in Danish kroner and by 6% at constant exchange rates. The diluted earnings per share decreased by 3% to DKK 8.39.

For the 2019 outlook, both sales and operating profit growth are now expected in the range of 4% to 6% at constant exchange rates, and an expected positive currency impact of 3 and 5 percentage points, respectively.

In line with previous years, the Board of Directors has decided to pay out an interim dividend for 2019 of DKK 3 per share, which will be paid out in August of this year.

Please turn to Slide 5. Today, we announced a change in the executive management. Executive Vice President and Head of Business Services and Compliance, Lars Green, has decided to resign to take up an executive position outside Novo Nordisk. Lars joined Novo Nordisk in 1992 and has, during his 27 years with the company, held several positions across the global finance organization prior to his promotion to Executive Vice President in July 2017.

Following Lars' resignation, Monique Carter, who joined Novo Nordisk in November 2018, has been promoted to Executive Vice President, Head of People & Organisation and member of Novo Nordisk's Executive Management. I'd like to take this opportunity to thank Lars for his strong contribution to Novo Nordisk over many years with the company and wish him all the best of luck with his new endeavor.

Please turn to next slide. International Operations continues to deliver a solid sales performance with 12% sales growth, supported by growth across all regions and therapy areas. Adjusting for the positive impact from timing of shipments and tenders, the underlying sales growth is still in the range of 9% to 10%. The key factors supporting the growth and growth potential in International Operations are: a broad innovative product portfolio with several new product launches; strong commercial execution with a market fit approach; and the underlying demographic development.

North America operations declined 2%, driven by the 3% sales decline in the U.S. negatively impacted by inventory reductions in first quarter of 2019. Growth drivers in North America continues to be GLP-1 and obesity, growing 14% and 28%, respectively.

Please turn to Slide 7. When applying a therapy split on the 5% sales growth, we note that the trend seen in the first quarter has continued throughout the first half of this year. Insulin sales declined by 1% due to the sales decline of 15% in North America, driven by the U.S. The development reflects lower realized prices due to the higher rebate rates across the portfolio and increased coverage gap exposure as well as prior period rebate adjustments and inventory reductions in the first quarter of this year. The decline was almost fully offset by interim sales growing by 9% in international operations.

GLP-1 sales increased 14% in North America, supported by the strong uptake of Ozempic as well as the GLP-1 sales growth in International Operations of 28%, supported by the promotional activities for Victoza and the launch of Ozempic. Our obesity franchise grew 56%, with both operating units contributing to growth. This is supported by the promotional activities and continued global rollout of Saxenda.

Biopharm sales increased 3%, driven by International Operations growing 5% and stable sales in North America operations.

Please turn to Slide 8. Over the past 12 months, Novo Nordisk has increased our global diabetes market leadership by 0.8 percentage points to 28.3%. This development reflects both the general expansion of the GLP-1 segment, which now accounts for 16.2% of the total diabetes market as well as our improved global insulin market share.

The competitive pressure in the U.S. insulin segment remains changing, which is also reflected in the sales performance. However, from a global perspective, we have a broad portfolio of innovative diabetes products and several new product launches that, combined with our market fit approach, is driving our continued relevance compared to this in the global diabetes market.

Please turn to the next slide. Ozempic has now been launched in 18 countries in Europe, and the launches are off to a solid start. The initial feedback from the launch markets in Europe has been very positive and has led to a stabilization of our market share.

Since the CV label update for Victoza and now with the launch of Ozempic, Novo Nordisk's share of growth in European launch markets has accelerated to more than 50%.

Please turn to Slide 10. In the U.S., the solid uptake of Ozempic continues and the new-to-brand prescription market share for Ozempic has now surpassed 35%, bringing Novo Nordisk's combined GLP-1 new-to-brand prescription market share above 53%, and steadily increasing the gap to competing GLP-1 products.

In the U.S., the GLP-1 market grows 30% annually, primarily driven by the once weekly GLP-1 products. Since the launch of Ozempic, 17 months ago, the decline in Novo Nordisk's total GLP-1 market share has stabilized around 45%, of which Ozempic now accounts for more than 1/3.

The GLP-1 sales in the U.S. for the first half of 2019 grew 13%, primarily driven by the continued uptake of Ozempic and partly offset by declining Victoza sales. The total sales were negatively impacted by changes in payer and channel mix and the increased coverage gap exposure, impacting average realized prices as well as an inventory reduction in the first quarter of 2019.

Please turn to Slide 11. Saxenda sales increased 56% in the first half of 2019, and the growth trend has continued since the launch of Saxenda. Novo Nordisk maintains market leadership with a global value market share of 50%. We are committed to changing obesity, which is reflected in the continued global rollout of Saxenda, where Saxenda now has been launched in 43 countries. We are investing in market development activities as well as progressing and adding to our obesity pipeline.

Please turn to Slide 12. Biopharm sales increased by 3%, driven by sales growth across all regions in International Operations, except region Europe as well as stable sales growth in North America. Despite an increasingly competitive environment within the hemophilia segment, hemophilia sales increased 5%, supported by the continued rollout of NovoEight and Refixia, which have now been launched in 49 and 14 countries, respectively.

Furthermore, the solid position of NovoSeven as hemostatic agent in critical treatments is widely recognized.

With this, over to Mads for an update on R&D.

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Mads Krogsgaard Thomsen, Novo Nordisk A/S - Executive VP & Chief Science Officer [3]

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Thank you, Lars. Please turn to Slide 13. As Lars previously alluded to, we've initiated 3 large trials for once-weekly injectable semaglutide, FOCUS, FLOW and SUSTAIN FORTE. Plus the SOUL CV outcome trial for oral semaglutide.

In more detail, in May, we initiated the 5-year FOCUS outcome trial for semaglutide 1 milligram with an expected 1,500 people enrolled in 17 countries. The objective of the trial is to assess the long-term effects of semaglutide on diabetic retinopathy in people with type 2 diabetes. And based on the long-term blood glucose benefit of semaglutide, we aim to show an improvement in eyesight after 5 years of treatment when compared to standard of care. We've also initiated the event-driven FLOW kidney trial that assesses in a hard outcome setting, the beneficial effect of semaglutide on the progression of renal impairment in type 2 diabetes patients with nephropathy. The trial is expected to enroll more than 3,000 people in 28 countries.

In June, we initiated the SUSTAIN FORTE trial for high dose semaglutide, comparing the metabolic fix and safety of 1 versus 2 milligram once weekly semaglutide. The trial is expected to enroll 1,000 people with type 2 diabetes in 10 countries. The 2-milligram dose will enable easy long-term intensification of therapy over time, while also facilitating individualized semaglutide dose selection in people with different needs.

Additionally, we've initiated the oral SOUL CV outcome trial, aiming to confirm the CV risk reduction and expand the scientific evidence base for the diabetic comorbidity benefits of oral semaglutide. The trial expects to enroll around 9,600 people in 34 countries.

Overall, these 4 trials will investigate a number of metabolic, micro and macro vascular outcomes in a total of around 15,000 people with type 2 diabetes.

Please turn to Slide 14. Several clinical and regulatory milestones have been achieved in the last quarter. Among these, I'll highlight that we filed oral semaglutide in July with the Japanese authority PMDA based on the results from the PIONEER program that included 2 Japanese trialed -- trials that showed significant oral semaglutide benefits versus the 2 leading injectable GLP-1s in Japan. Also, the U.S. FDA has granted 6 months of pediatric exclusivity driven patent extension for Victoza, which has been added to the patents listed in the Orange Book, effective as of May 1 this year.

Related to this, FDA has now approved the use of Victoza as an adjunct to diet and exercise for improvement of glycemic control in type 2 diabetic children and adolescents age 10 or above. Likewise, CHMP has recommended Victoza for the same population in the EU. Following endorsement by the European Commission, Novo Nordisk will apply for 6 months of pediatric patent extension to the Victoza SPC.

Within Biopharm, the European Commission has approved our extended half-life in AGP with the brand name Esperoct for the treatment of patients aged 12 years and above with hemophilia A, both for prophylaxis and on-demand treatment as well as for coverage during surgical procedures.

In terms of clinical updates, Novo Nordisk in May successfully completed the Phase II trial with the combination of the immunomodulator anti-IL-21 and liraglutide in people with newly diagnosed type 1 diabetes. The primary objective was to evaluate beta cell function after 54 weeks of treatment, followed by a 26 weeks' observation period without treatment. The trial demonstrated statistically significantly improved beta cell function as measured by C-peptide levels in the combination treatment arm compared to placebo.

Furthermore, there was an improvement in glycemic parameters and a reduction in the use of insulin at the end of the 54 weeks' period. There were no safety or tolerability concerns observed during the trial, and we're now evaluating next steps together with the regulatory authorities.

In obesity, the single and multiple ascending dose Phase I trial has been initiated with LA-GDF15, a long-acting version of human Growth Differentiation Factor 15, formerly known as MIC-1. GDF15 is a stress-induced cytokine with centrally mediated appetite-regulating properties that lead to weight loss in animal models.

In biopharm, we've initiated the global Phase III trial, REAL 4, for somapacitan in growth hormone-deficient children. The trial will enroll approximately 200 children and measure growth velocity for 1 year, followed by a 3-year extension period.

Lastly, within other serious chronic diseases, we've initiated a Phase II proof-of-concept study, combining subcutaneous semaglutide with Gilead or cilofexor and firsocostat compounds for the treatment of patients with nonalcoholic steatohepatitis.

Please turn to Slide 15. In the third quarter, we expect to receive FDA action on oral semaglutide for the treatment of type 2 diabetes. Within Biopharm, we intend to submit somapacitan for the adult growth hormone deficiency indication with the U.S. and European regulators based on the REAL 1 and 2 Phase III trials.

Finally, towards the end of the year, we expect feedback from the Japanese regulators for Esperoct, as well as to submit Esperoct with the Chinese regulators. And finally, to initiate the Phase III program for the cross-segment hemophilia compound concizumab.

With this, over to Karsten for an update on the financials.

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Karsten Munk Knudsen, Novo Nordisk A/S - Executive VP & CFO [4]

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Thank you, Mads. On Slide 16, we present the financial results of the first half of 2019. As previously mentioned, sales increased by 9% in Danish kroner and by 5% at constant exchange rates to DKK 59.3 billion.

The gross margin of 83.9%, declined 0.4 percentage points compared to 2018, reflecting a negative impact from lower prices in the U.S.A. and growth of lower-margin products, partly countered by a 0.6 percentage point positive currency impact.

Sales and distribution costs increased by 7% in Danish kroner and by 4% at constant exchange rates, reflecting resource allocations for growth markets and promotional activities for Victoza and Saxenda, as well as launch activities for Ozempic in International Operations and promotional activities for Ozempic and Saxenda in the U.S.A.

R&D costs declined by 6% in Danish kroner and by 7% at constant exchange rates, impacted by the reversal of write-downs on clinical prelaunch inventory for oral semaglutide reported in connection with the financial results for the first quarter of 2019.

Adjusted for the reversal of write-downs, R&D costs were broadly unchanged, reflecting the completion of the PIONEER program for oral semaglutide and the head-to-head study between Tresiba and insulin glargine U300, offset by the initiation of the obesity trials STEP and SELECT. Administration costs increased 3% in Danish kroner and 2% at constant exchange rates.

Operating profit increased by 12% in Danish kroner and by 6% at constant exchange rates. Net financial items showed a loss of DKK 2.3 billion compared with a gain of DKK 1.5 billion in 2018, driven by foreign exchange hedging losses, primarily due to the U.S. dollar having on average traded higher against the Danish kroner in the first half of 2019 compared to the first half of 2018.

Diluted earnings per share decreased by 3% to DKK 8.39.

Please turn to Slide 17 for the financial outlook. The solid financial performance in the first 6 months has led us to adjust our full year outlook.

For 2019, we now expect sales growth to be between 4% and 6% measured at constant exchange rates. The guidance reflects the expectation for a robust performance for the GLP-1 and obesity franchises as well as a new generation insulin portfolio.

Also reflected in the guidance is the intensifying competition within diabetes and Biopharm, as well as continued pricing pressure within the Diabetes segment, especially in the U.S.A. The guidance includes the funding of the Medicare Part D coverage gap with an expected negative impact of approximately DKK 2 billion.

Reported sales growth is still expected to be around 3 percentage points higher than at constant exchange rates. Operating profit growth is now expected to be between 4% and 6%, reflecting the sales growth outlook and continued focus on cost control.

Operating profit growth is negatively impacted by the funding of the coverage cap, while the costs for the priority review voucher expense in the fourth quarter of 2018 impact positively. Reported operating profit growth is still expected to be 5 percentage points higher than at constant exchange rates.

Net financial items is now expected to be a loss of approximately DKK 3.5 billion, reflecting losses associated with foreign exchange hedging contracts mainly related to the U.S. dollar.

The effective tax rate is still expected to be between 20% and 22%, a potential impact on the effective tax rate from the Swiss tax reform is not included until the legislative process in Canton, Zurich has been finalized.

Capital expenditure is still expected to be around DKK 9 billion. We now expect the free cash flow to be DKK 30 million to DKK 34 billion.

With this, over to you, Lars.

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [5]

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Thank you, Karsten. Please turn to Slide 18. We are pleased with the sales growth in the first half of 2019, which is driven by all regions in International Operations. The launch of Ozempic is expanding the GLP-1 market, and we are encouraged by the market reception in both North America and Europe.

With the initiation of 4 major late-stage clinical trials, we continue to investigate the clinical benefits of semaglutide across multiple indications. The solid financial performance in the first half of 2019 has enabled us to raise our outlook for the full year.

We're now ready for the Q&A, where I kindly ask you to limit yourself to 2 questions. Operator, we're now ready to take the first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is coming from the line of Richard Vosser from JPMorgan.

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Richard Vosser, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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Two questions, please. First of all, could you update us on the progress of your formulary discussions for 2020? And the pricing environment, I suppose, for both insulin and GLP-1s in the U.S. in 2020, that will be very useful.

And then secondly, as we go into 2020, perhaps you could help us with the impact from changes to the coverage gap for that year or coming forward in 2020. I believe there are changes that could impact both Novo and patients. What should we expect there?

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [3]

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Thank you, Richard. So I cannot really tell you much about the formulary discussions for 2020. Those are ongoing. And we cannot share the details of that. We do not know yet fully how that will play out. And guidance for 2020 will be included in our full year accounts.

You're right that with regards the coverage gap for 2020. When the Affordable Care Act was passed, a part of that was a temporary limiting of the threshold for when patients would enter this catastrophic threshold and that was for 2014 until 2019. So unless this is changed, when we come into 2020, patients will be in a situation where they're catastrophic, the coverage kicks in at an amount that is 1,500 higher than what they see this year. So this means that patients will actually have less coverage. So in a world where there's a lot of talk about improved patient affordability. We actually have a situation where those who are on Medicare here will actually be hit by an extra bill.

The impact on us is, of course, that as we pick up 70% of the drug cost, while they are in the donut hole, this will also have an impact on us. And we anticipate that this will be a magnitude of 1% of global sales. Thank you, Richard.

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Operator [4]

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The next question is coming from the line of Martin Parkhøi from Danske Bank.

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Martin Parkhøi, Danske Bank Markets Equity Research - Senior Equity Analyst [5]

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Yes. Martin Parkhøi from Danske Bank. Two questions. First, on the biopharmaceutical franchise, which actually do quite well here in the second quarter. And I would ask specifically on NovoSeven. I, of course, completely understand that you stick to your previous communication of 50% of NovoSeven being a risk. But one thing is being a risk and another thing is actually becoming a reality. So has the risk decreased? And maybe you can speak to why is NovoSeven actually holding up so quite well right now?

And then the second question is just regarding to your guidance. You're lifting the range for sales and only narrowing the range for EBIT, which, of course, indicates that you will use more money to invest. Where will you -- where should we expect these investments actually to be made?

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [6]

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Yes. Thank you, Martin. And maybe, Mads, you can talk a bit to what we hear from the clinical setting in terms of how NovoSeven is being used. And then Karsten can talk a little bit through our operating profit guidance for the second half. But first, you, Mads?

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Mads Krogsgaard Thomsen, Novo Nordisk A/S - Executive VP & Chief Science Officer [7]

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Yes. Martin, I should start by recapping what led us to this up to 50% loss of NovoSeven sales risk that we predicted actually years back. That was the fact that we added together the aggregated indications where a bypassing agent like HEMLIBRA -- an antibody like HEMLIBRA, would be able to supersede NovoSeven. And that means that among all inhibitor patients for prophylactic treatment. But when that is said, the on-demand treatment would still be covered by a classic agent like NovoSeven or fiber. What we've learned since then is that fiber cannot be used, it's contraindicated, and NovoSeven is used on every breakthrough beat in HEMLIBRA treated patients. And that basically means that probably we are having more NovoSeven sales per HEMLIBRA patient that we would have predicted in those days where we were not aware of the black box or the contraindication against the fiber. And you can see that on fiber sales going down substantially.

Also, hemophilia -- acquired hemophilia is an area that we were only immaturely picking up at that point in time. I think we have now gotten diagnosis rates, whether it's pregnant women or cancer patients to acquire hemophilia and that need treatment with NovoSeven. That is occurring to a higher extent than it did when we made these predictions. So that is helping us also.

And then, of course, there's the usual surgical cover that NovoSeven is typically used for. So the totality of that does not necessarily make us change the outlook at this point in time, but it is true that the trend is better than we could have predicted at that point in time, driven by these factors.

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [8]

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Thank you, Mads. And Karsten on second half operating profit.

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Karsten Munk Knudsen, Novo Nordisk A/S - Executive VP & CFO [9]

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Yes. So we have updated our guidance. And we've done that based on a very strong performance in the first half, especially based on the sales performance in International Operations, growing 12%. So that has enabled us to guide between 4% and 6%, both on sales and operating profit. So the way you should look at this is that we are raising the midpoint of our sales guidance with 1.5 percentage point and the midpoint of operating profit with 1 percentage point. And that was a split with it based on the investment opportunities we have. And those opportunities, they are partly as we disclosed, the clinical trials we're starting in the second half in R&D as well as the commercial opportunities, both in driving Ozempic in the U.S. and other launch countries, as well as our obesity business, and then finally, prelaunch activities for oral semaglutide.

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [10]

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Thank you, Karsten. And thank you, Martin for those 2 questions.

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Operator [11]

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The next question is coming from the line of Sachin Jain from Bank of America.

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Sachin Jain, BofA Merrill Lynch, Research Division - MD [12]

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Just 2 questions. One, just a follow up, that's the last one, on incremental SG&A for the next few quarters. You mentioned Ozempic in obesity, but just a bit more detail around oral sema in terms of additional reps and DTC requirements, I guess, particularly into next year?

And then secondly, for Mads, on SUSTAIN FORTE. I wonder if you can just talk about the profile for 2-milligram sema. I think when we'd last discussed the profile, we were discussing the 2.4. But I think it's still consistent to think about an A1c delta versus standard sema of 0.3 to 0.4 A1c and a target weight loss of 10% to 11%. I wonder if you could just confirm that.

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [13]

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So Mads, do you want to start with that question?

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Mads Krogsgaard Thomsen, Novo Nordisk A/S - Executive VP & Chief Science Officer [14]

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Yes, I can do that. And Sachin, what we've come to realize is that the basis for the SUSTAIN FORTE is that the beta cell, the classic effect of stimulating beta cell insulin secretion may well be close to being maxed out already at the 1-milligram dose, but we've come to realize that the dose response curve for the weight loss effect of semaglutide is uniquely continuing up until the range of 2.8 milligrams per week. And you know that from the Phase II data that we've released in the Lancet in that regard. And there you can actually see that there are rather significant filters, weight benefits of adopting of a dose from around 1 to 2 milligram.

So I think your prediction is spot on, we do expect to see a really significant weight loss benefit. Unlike other big GLP-1 molecules that had failed to have a continuous slope on the dose response curve for weight loss. We do expect to see that ongoing, at least up to the level of this 2 milligrams, as we've seen previously.

That then would drive a whole body insulin sensitivity increase by the reduced adiposity, and that means that even though the beta cell is neither making nor -- more nor less insulin molecules, each one of them will work better and create a secondary benefit on HbA1c, which will be, I do believe, clinically meaningfully reduced to the extent that you alluded to.

So I can only confirm what you're saying, but of course, now we need the data. And the recruitment is going well, so you'll get them next year.

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [15]

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So, Sachin, in terms of increased SG&A and also looking into 2020, I cannot get into details on that. We do the full year guidance when we release the annual accounts. We also have the Capital Markets Day coming up, where we'll be a bit more explicit in terms of our strategy of oral semaglutide.

But bear in mind that DTC, for instance, we cannot do that for the first 6 months after approval. Overall, tactics around oral semaglutide will be similar to what we have deployed when we launched Victoza in terms of focus and deploying our commercial efforts in a kind of strike-type setup. So that's what I can share for now.

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Operator [16]

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The next question is coming from the line of Richard Parkes from Deutsche Bank.

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Richard J. Parkes, Deutsche Bank AG, Research Division - Director [17]

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First one, I just wondered if you could talk through what you would expect from impact from the proposed U.S. pricing reform bill that's been proposed by the Senate Finance Committee. I'm wondering if the DKK 2 billion negative impact you've seen this year from a 20% increase in the donut hole funding obligation is a good guide to the relative benefit that you might see if that obligation was eliminated based on new legislation? And if that's not the case, what other factors should we be considering that might offset that?

The second question, I just wondered, given your discussion -- discussions you've had with payers -- approval for oral sema, maybe you could update us on your views over the likely time it will take to ensure market access. Obviously, you need to find a balance in the price point now. So I wonder how that might affect the time it takes to negotiate access versus your experience with Ozempic?

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [18]

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Thank you, Richard. Let me try to give the U.S. health care reform and policy setting some perspective. We have seen over the summer, a number of proposals being made, and we've also seen proposals being pulled back. And every time a proposal is being made, it starts a political discussion where amendments are being proposed.

So we cannot really go into a detailed assessment of each and every proposal because they change as fast as they are made. So we will -- when something is approved, we'll promptly relate to that and explain what it looks like.

A general comment, a lot of these proposals starts with an eye to actually support patient affordability, and they fail because they turn out to have a negative budget impact on the governmental budget situation. So it's a very, very challenging situation to execute something that helps patients, which we believe is where focus should be. So there are a lot of moving parts here, so we cannot go into explaining all of them as they evolve.

In terms of time of market access, right now where we do not have approval by the FDA, we cannot go into specific contracting discussions. So the discussions we have in the U.S. are, say, medical-type discussions, where we are making sure that payers have a good insight within the profile of the product, and those are being conducted as we speak, and we believe they're going very well.

We do not know yet how the actual contracting will play out. We have used the priority review voucher to have time to do this in an orderly fashion, while we continue the positive momentum based on Ozempic. And we believe that's a good position to be in.

So we are confident on the product profile and also that we can obtain access to have a meaningful launch when we get to that.

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Operator [19]

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The next question is coming from the line of Michael Novod from Nordea Markets.

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Michael Novod, Nordea Markets, Research Division - Director of Healthcare, Healthcare Analyst & Sector Coordinator [20]

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It's Michael Novod from Nordea Markets. One question to the announced ICER review of oral sema. We've seen the draft scope and also seen the final scope document analysis plan. How comfortable do you feel with this, say, the scope of analysis and also the comparators that they're looking at and the data package? And will you be, say, delivering and supplying data also for the ICER review due in September?

And then secondly, maybe if you could just elaborate a bit on this Swiss tax reform, if I heard you right, whether -- what kind of impacts there would be just for housekeeping?

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [21]

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Thank you, Michael. Mads, on the ICER review on, say, the health economics?

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Mads Krogsgaard Thomsen, Novo Nordisk A/S - Executive VP & Chief Science Officer [22]

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Yes. Obviously, Michael, we've had our own health economic outcome research plan instigated or implemented throughout the clinical trials. So we have our own model, where we use the validated well-established Swiss-based core model, where big landmark study data from UKPDS and other trials are included to predict long-term outcomes and costs associated also with the micro and macrovascular complications of a given drug over a population period of many, many years. And that is coming out really positively also versus comparator drugs.

The ICER uses a different approach. Two remarks. One is that ICER is not at this point in time having a direct impact, but could years forward into the future, become such a review like we have in Europe, but it is not today. But they do actually not take into account the long-term comorbidity benefits of shorter-term glycemic and weight improvements the way that the core market does. So it can easily come out with a different result than our own analysis, but the one that is more faithful to long term societal burden is, we believe, the one that we've adopted. But we'll see what comes out. It's not really going to impact our actions.

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [23]

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Thank you, Mads. And Karsten, on the Swiss tax reform?

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Karsten Munk Knudsen, Novo Nordisk A/S - Executive VP & CFO [24]

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Yes. So on the Swiss tax reform, which was adopted at the federal level in -- back in May, it still needs to be adopted in Canton Zürich. Potentially, there will be no impact on our numbers. And potentially, there will be an impact, which is an accounting impact, meaning that there is no cash impact to our cash taxes. But there could be an accounting impact that will reduce our effective tax rate and increase our deferred tax asset.

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Operator [25]

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The next question is coming from the line of Carsten Madsen from CEB (sic) [SEB].

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Carsten Lønborg Madsen, SEB, Research Division - Research Analyst [26]

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Carsten from SEB. Regarding 2020, I know you'll not give a lot of details here, but you mentioned this donut hole funding increase that could impact you. But is this the only thing you are eyeing right now in terms of sort of special situation price pressure points? Because you also -- there's also talk about the maximum rebate rule in Medicaid, which seems to be something that could fairly easily be changed to the disadvantage of you, maybe have a view on this for 2020?

And then, Mads, on the positive Phase II results you have with the anti-IL-21 and liraglutide, what's this magnitude of difference here for the patients, also in terms of insulin dose and maybe a hypo data? I think that was the problem with liraglutide alone in Taiwan was the hypo data as far as I recall.

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [27]

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Thank you, Carsten, and maybe start with the first one. So the reason why we can comment on the impact on the temporary change in the catastrophic threshold is that, that's something that was put in place years back and has been known for long. So we're quantifying what that is. No, it might be changed. I don't know, but that at least -- that's with some certainty going to change.

What else policy change there'll be? We don't know. And I think in the state finance proposals, there are some items that could potentially be beneficial to us, others that would not. And we don't think it's meaningful to go in and get into an ongoing dialogue of commenting on all of this. So I refrain from commenting on this as we speak. Mads?

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Mads Krogsgaard Thomsen, Novo Nordisk A/S - Executive VP & Chief Science Officer [28]

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Okay. So it's a really good question. Let me dial back the clock a little bit because now we're into type 1 diabetes. We're into people who within the last 20 weeks or so have encountered their autoimmune disease and been diagnosed. That also means that these are young adults, aged, I don't know, 18 to 45, I think we included. And essentially, the reason why we did and are doing these activities is that there is a belief based on the DCCT publications back in the ['90s] that those patients who are able to have preserved beta cell function as measured by stimulation of C-peptide secretion after a mixed meal or whatever, those patients in the long haul will have a lower risk of long-term complications written off between nephropathy and neuropathy. Nothing is known about the cardiovascular risk.

But the microvascular risks are going down in those patients who are able to maintain some degree of beta cell function because that will then function as a buffer to the swings in glucose during the 24-hour day and night cycle as compared to those who are not able to do that.

So we designed the anti-IL-21 antibody because our research group in Seattle saw in animal models that IL-21 is playing a role in the destruction of the islets of Langerhans and the beta cells. So by blocking it, you would actually dampen the immune system. And then by adding liraglutide, you would nurture the beta cell so that it would have a better chance of performing better while still alive.

Hence, we designed the trial with 4 arms, placebo, lira, anti-IL-21 and anti-IL-21 plus lira. 4 arms in total for 1 year with a washout period of half a year. And what we designed the study to show as a primary end point was actually preservation of the beta cell function over a full year of treatment. And lo and behold, what we saw was that only in the combo group, with anti-IL-21 combined with lira, we saw a highly significant preservation of beta cell function when compared to the placebo group, or for that matter, you could also see the anti-IL-21 alone or lira alone did not do the trick.

So it seems as if the theory was right, we are seeing reductions in insulin dose and also some benefits on glycemic parameters and a well-tolerated profile. Now what we're going to do next is, because we all realize we have an open drug designation for this because the amount of people diagnosed with type 1 diabetes in the U.S. per annum is less than 200,000. Hence, we are able to have a really constructive, I hope, dialogue with the agency, and we will have a meeting during this quarter for the path forward, and we will be able to update you maybe already at the next quarter.

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Operator [29]

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The next question is coming from the line of Luisa Hector from Exane.

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Luisa Caroline Hector, Exane BNP Paribas, Research Division - Pharma Research Analyst [30]

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I wonder whether you could give us an indication of the contribution of volume, price and donut hole to Victoza in the quarter?

And then on the oral semaglutide filing, do you have confirmation now of whether there -- an FDA advisory committee will be called or not?

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [31]

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Mads, on oral sema FDA meeting first. Any -- anything you want to add?

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Mads Krogsgaard Thomsen, Novo Nordisk A/S - Executive VP & Chief Science Officer [32]

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Not really so much. We're having a really constructive dialogue with the agency. We do believe we are on track to meeting the PDUFA action date of September 20 in case of the diabetes indication and also progress is being made on both the Ozempic and the oral semaglutide cardiovascular indications, vis-à-vis at AdCom, we have not heard that there should be one, but that is always the possibility. It's the prerogative of the agency to call for an AdCom even when they need such, but we've not heard of any trends in that direction.

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [33]

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Thank you, Mads. Karsten, what can you share on volume-price mix on Victoza or GLP-1?

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Karsten Munk Knudsen, Novo Nordisk A/S - Executive VP & CFO [34]

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Yes, so GLP-1 in the U.S. in the second quarter, there we are seeing a market growth of some 30% and since the launch of Ozempic and full market access, then we've been growing with the market since Q2 last year. So our volumes are at the same magnitude, and we're reporting 22% in net sales realized. So we have around a 10% gap between the volumes realized and the net realized sales, which is in the price. And that price you can split predominantly in 2 equally sized pockets. One related to the donut hole. We just discussed with the donut hole legislation. And the other part related to payer and channel mix.

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Operator [35]

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Next question is coming from the line of Peter Welford from Jefferies.

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

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Just 2 quick follow-ups. Firstly, just on the FDA AdCom, given obviously, I guess, notice from the similar agency very recently at the last minute that then delayed the PDUFA date. I guess, can you give us confidence perhaps in terms of that the FDA is reviewing the 2 different NDA filings for both the type 1 diabetes -- type 2 diabetes or HbA1c and then the cardiovascular indication separately, and they're happy with concurrent filings, I guess? And equally, what sort of potential things could perhaps be up for discussion at the moment in terms of your debate so far with the FDA?

And then secondly, just with regards to Victoza, I wonder if you can give us an update on the Paragraph 4 filings? I saw there was a Mylan filed. And obviously, we know what's happened with Teva and the status there, but are there any other filers we should be aware of or anything else that is ongoing for Victoza Para 4?

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [37]

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Mads, first on the FDA process for the 2 submissions.

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Mads Krogsgaard Thomsen, Novo Nordisk A/S - Executive VP & Chief Science Officer [38]

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Yes. Well, so first of all, you are obviously aware that at the NDA meetings, one typically will notify the agency of one's submission strategy, both the use of a priority review voucher and the split of the applications such that there's a 6-month fast track application and then 2 10-month normal track applications for the cardiovascular indications for the 2 administrative groups of semaglutide.

And that was all seen as a fine and technically good step by Novo Nordisk and they have also, of course, acknowledged our submissions. And more importantly so, the agency is clearly diligently reviewing the dossiers as evidenced from the questions that are flowing to and from the company.

So I have no reason to believe anything else but the PDUFA action dates that are 6 and 10 months, respectively, after March 20, and that leads us to September 20, 2019 and January 20, 2020.

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [39]

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Thank you, Mads. And on the Victoza Mylan filing, we have quite some experience in assessing our preference situation here, and we believe we have a good position. So we'll be using the same old tactics as we have used in the Teva case because it's really not anything different from that. So it is pretty much as one would expect, I would say, and we know what to do to defend ourselves.

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Operator [40]

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The next question is coming from the line of [Robert Shaw] from [Redburn].

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Unidentified Analyst, [41]

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Two queries, if may. The first is, can you quantify what proportion of Ozempic growth is due to Victoza cannibalization?

And secondly, I'd be interested in hearing Mad's thoughts on the impact on efficacy of amino acid alpha-methylation in the GLP-1 sequence beyond position 8? If you could add some color on that.

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [42]

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Thank you, [Robert]. First, on Victoza cannibalization. When we launched Ozempic, a large part of the uptick actually came from existing GLP-1s. Over time, we have seen that it's -- majority come from addition to insulin, and we are sourcing more and more from the existing OADs. So we're down to 25% coming from existing GLP-1s. And that's kind of equally split between Victoza and Trulicity. So a relative small part.

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Mads Krogsgaard Thomsen, Novo Nordisk A/S - Executive VP & Chief Science Officer [43]

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And I must admit I didn't quite get the question. Could you repeat it, please? The one for me.

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Unidentified Analyst, [44]

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Yes. Sorry. The impact on efficacy of amino acid alpha-methylation in the GLP-1 sequence beyond position 8.

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Mads Krogsgaard Thomsen, Novo Nordisk A/S - Executive VP & Chief Science Officer [45]

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Okay. Okay. Now I got it. So we are all aware that position 7 and 8 are cleaved by dipeptidyl peptidase-4, unless you make an unnatural change such as the methylation and using Aib in position 8. That is done in the vast majority of the long-acting compounds, including semaglutide, albiglutide and dulaglutide, as I recall.

The impact on receptor binding is minuscule if present at all because it's not part of the receptor-binding motive. But the reason why potency -- so the intrinsic potency seems to be enhanced when you do this Aib substitution, but that's essentially only because even in vitro you might have peptidase-mediated degradation of the [entire] GLP-1. So you get an apparently higher affinity and potency by doing the Aib, but if you do a simple receptor binding experiment, as I recall it, there's no big difference.

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Operator [46]

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Next question is coming from the line of Trung Huynh from Crédit Suisse.

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Trung Chuong Huynh, Crédit Suisse AG, Research Division - Research Analyst [47]

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Two from me. Firstly, can you outline how much the 4 late-stage trials will cost? And how does that compare to the cost of the PIONEER studies, which has now rolled off? Should we think of the cost of these studies as a wash? Or should we think of these as significantly higher than the PIONEER program?

And then secondly, just on growth ex U.S., ex EU, we noted that it was quite strong. Lat Am grew 30% in the first half, China 12%. Can you perhaps talk about the trends in these regions? And how sustainable are these growth rates going forward?

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [48]

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So firstly, on the cost for trials compared to past trials, et cetera, we cannot go into that level of detail, unfortunately. We can say that for this year, we have had a relative low R&D spend in the first part of the year because we have rolled out of trials, and now we are ramping up. But I'll not get into details about the relative size of these.

And then to sustainability of growth in China and Lat Am, Karsten, can you share some perspectives on that?

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Karsten Munk Knudsen, Novo Nordisk A/S - Executive VP & CFO [49]

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Yes. So it's a relevant question. When we look at the 12% growth in China, then the underlying market dynamics in China are that there's a huge underlying market growth and demand for diabetes products. So the market growth is there to fuel our business.

So our insulin business is solid and we're the clear market leader in insulins. And then on top of that, our GLP-1 business, Victoza, is adding to that. So we're not guiding on individual regions for the full year, but the first half is not significantly impacted by any special items for China in terms of growth rates.

As to Lat Am, 30% growth. Lat Am has more kind of fluctuations in terms of tender timings. So the 30% is skewed artificially high in the first half compared to what one should expect for the second half. And that also links into our commentary that the 12% all IO growth is positively skewed towards the first half. And for the full year, one should more expect an underlying level towards the 9%, 10% growth.

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Trung Chuong Huynh, Crédit Suisse AG, Research Division - Research Analyst [50]

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Could I ask my first question another way? Just how confident are you in sustaining your margins with the added investments going forward?

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [51]

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I think that's a very general question. We see an opportunity right now to make sure that we back our products that we have going into the market. So it's not that meaningful to guide on margin in general because it's -- that will change over time. And -- but we have -- here, I've invited you to attend our Capital Markets Day, and we will have a full day to explain our strategy and how we're investing to fuel growth. I think that's a better setting to give a comprehensive perspective on that.

Thank you very much. I think we're having the last round of questions.

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Operator [52]

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The next question is coming from the line of Wimal Kapadia from Bernstein.

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Wimal Kapadia, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [53]

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Wimal Kapadia from Bernstein. So I appreciate you can't -- you cannot give future pricing guidance. But if I look at Ozempic realized pricing, it seems to be about 30% higher than Victoza if I look at the first half of '19 in the U.S. So I guess, the first part of the question is, is that roughly correct? And how should we -- and should I think that, that gap will close over time, i.e., Ozempic price declines will be larger than Victoza moving forward?

And then secondly, on obesity, continues to perform extremely well. And Saxenda this year is going to get close to $1 billion globally. So if sema is 2x efficacious, like we've seen from the Phase II, what are your, I guess, your internal expectations for sema in obesity? Could this be a $3 billion to $4 billion indication stand-alone. And if not, why?

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [54]

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So Karsten, will you try to shed some light around pricing with of course, understanding the limitations we have for being specific here.

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Karsten Munk Knudsen, Novo Nordisk A/S - Executive VP & CFO [55]

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So again, we had a commentary around the delta between the market growth and our volume growth and our net realized price, which was impacted by donut hole and payer-channel mix, which was a similar comment as to -- on a similar level as in Q1.

So -- and the payer-channel mix -- or here the channel mix is a reflection of when you launch a product and then you launch a product normally in -- first, to some extent noncontracted and then managed care. And then your product gets available into some other channels that could be Medicare Part D later on.

So that's why there is a channel mix element that will impact over time. We cannot quantify specifically how that is, but that's natural that you see for all products.

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [56]

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Thank you, Karsten. So on obesity, we are clearly very encouraged by Saxenda performance. Now we had a situation where it's largely an underdeveloped market. So we are becoming a bigger, bigger player in a relative small pond. We believe that, that market has to be developed, able to a large degree be based on efficacy of the next products that's coming. We are confident on sema obesity, but obviously, we need to see the profile of that product before we can decide on what we do.

We don't really have any guidance on what we see as peak sales. This is clearly an area where there will be a significant range as a function of how the market opens up, how payers are receptive to pay for it. But it's interesting to note that the growth of our obesity business is slightly different composed than what we see on traditional diabetes business, we see a significant willingness to pay out of pocket. So -- and, say, in a European setting, less so far maturity in terms of an obesity market.

So this is different. But there's no doubt that we believe there is a significant unmet need. And we see individual willingness to pay for a [pill] that actually works. And these are individuals who have been paying a lot already to deal with weight-related issues.

So we -- that's kind of what we can guide. We see it as significant opportunity, but of course, we need to see the clinical profile, and then we need to establish that market. So I think we can quickly take one very quick set of questions.

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Operator [57]

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The next question is coming from the line of Peter Sehested from Handelsbanken.

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Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [58]

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Yes, it's Peter from Handelsbanken. Thank you for sneaking me in here at the last minute. Could you just elaborate a bit on the situation in the fast-acting space. Sanofi indicating significant cuts in the price, suggesting that it's hard to penetrate these fixed contracts. Do you see any change going forward also with Sanofi and their biosimilar version of NovoLog and, particularly, seeking interchangeability on that?

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [59]

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Thank you, Peter. So it was very hard to hear you, but I think the question was related to the dynamics in the fast-acting category, whether we see any change, and then what our outlook is? So Karsten, can you share a bit on that?

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Karsten Munk Knudsen, Novo Nordisk A/S - Executive VP & CFO [60]

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Yes, So the fast-acting insulin space has been competitive for a long time with the tender like situation and exclusive formularies in the U.S. between Novo Nordisk and Eli Lilly. So the rebate percentages are already high. And it is already a competitive place.

We've seen with the launch of Admelog from Sanofi, they've had a tough time penetrating some formularies. So their main business has been in managed Medicaid. And I think what we can say is that when we look at our results for this year and then not going into any pricing guidance for the future, then we see price erosion, and we see the donut hole impact in the fast-acting space.

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Lars Fruergaard Jørgensen, Novo Nordisk A/S - President & CEO [61]

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Thank you very much. It's past 2:00 in Copenhagen. So we thank you all for your interest in Novo Nordisk. And we will hereby close the half year investor call. Thank you very much. Bye-bye.