Novo Nordisk A/S

CSE:NOVO B

Earnings Call Transcript 2018-Q2

[Operator]

Good day, and welcome to the Q2 2018 Novo Nordisk A/S Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Lars Fruergaard Jørgensen, CEO. Please go ahead, sir.

[Lars Fruergaard Jørgensen, President & CEO]

Thank you. Welcome to this Novo Nordisk conference call regarding our performance in the first 6 months of 2018 and the outlook for the year. I'm Lars Fruergaard Jørgensen, the CEO of Novo Nordisk. With me, I have our Chief Financial Officer, Karsten Munk Knudsen; and our Chief Science Officer, Mads Krogsgaard Thomsen. Also present and available for the Q&A session are Executive Vice President and Head of Commercial Strategy and Corporate Affairs, Camilla Sylvest; and Executive Vice President and Head of International Operations, Mike Doustdar; as well as Executive Vice President and Head of Business Services & Compliance, Lars Green. Present also are our Investor Relations officers. Today's earnings release and the slides for this call are available on our website, www.novonordisk.com. The conference call is scheduled to last for 1 hour. As usual, we'll start with the presentation, as outlined on Slide 2. The Q&A session will begin in about 25 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 Slide 4. Sales growth in the first 6 months of 2018 decreased by 5% measured in Danish kroner and increased by 4% in local currencies. North America Operations sales were flat in local currencies and International Operations grew by 8%.Within International Operations, Region AAMEO grew by 15%, Region Latin America by 46% and Region China by 6%, all measured in local currencies. Sales growth was mainly driven by GLP-1 franchise with Victoza and Ozempic combined growth of 14%, accounting for 77% share growth in local currencies. Furthermore, Saxenda increased by 50% and accounted for 29% share of growth. Within research and development, sales achievements can be highlighted. We have successfully completed additional 4 Phase IIIa trials with oral semaglutide, and the label for Ozempic in the EU has been updated to reflect the updated device offering. In addition, we have updated CV label strategy for Ozempic. We have further initiated the 4 Phase IIIa STEP trials with semaglutide in obesity. And within biopharma, we have obtained positive results from a Phase II trial with somapacitan in children with growth hormone deficiency. Mads will elaborate further on key R&D milestones later on in this conference call.Turning to financials. Operating profit for the first 6 months of 2018 decreased by 8% in Danish kroner and increased by 4% in local currencies. The diluted earnings per share increased by 7% to DKK 8.66. The range for sales growth in 2018 is still expected to be 3% to 5% measured in local currencies and is now expected to be 5 percentage points lower in Danish kroner. The operating profit growth in 2018 is still expected to be 2% to 5% in local currencies and is now expected to be 7 percentage points lower in Danish kroner. Additionally, the Board of Directors has approved an interim dividend for 2018 of DKK 3 per share, which will be paid out in August 2018.Please turn to Slide 5. In the first 6 months of 2018, the overall sales growth decreased by 5% in Danish kroner and increased by 4% in local currencies. The sales growth was driven by International Operations, which grew by 8% in local currencies. Sales in North America Operations were flat in local currencies. The sales development was mainly driven by a 14% increase in GLP-1 sales. Victoza sales increased by 11%, driven by the positive impact from the expanded CV label, partly offset by a rebate adjustment related to prior periods and an early impact from the launch of Ozempic. Furthermore, Saxenda increased 30%. This was partly offset by a 7% decline in insulin sales. The decline in insulin sales were mainly driven by 11% decline in basal insulin, reflecting lower realized prices and 2017 rebate adjustments for Tresiba, partly offset by a solid volume growth. Biopharmaceutical sales in the U.S. declined by 12%, driven by declining NovoSeven sales. For Danish International Operations, the main growth contributors were Region AAMEO and Region Latin America as well as Region China. In Region AAMEO, comprising Africa, Asia, Middle East and Oceania, sales increased by 15% in local currencies. The growth was driven by a 16% increase in insulin sales, driven by solid growth in all insulin segments. Furthermore, Saxenda continues to grow, driven by strong uptake in the Middle East. In Region Latin America, sales grew by 46% in local currencies. The sales growth was driven by increasing sales of NovoSeven, reflecting the tender deliveries in the first quarter of 2018 in Brazil. Furthermore, sales were driven by Tresiba uptake in Argentina and Brazil. Sales in Region Latin America were, however, positively impacted by inflationary price effects. Sales in Region China increased by 6% in local currencies. Sales growth was largely driven by modern insulin and Victoza, partly offset by a declining human insulin sales. Please turn to Slide 6. From a product perspective, diabetes care grew by 4%, driven by Victoza and Ozempic combined growth of 14%, accounting for 77% share growth. This was driven by GLP-1 market growth and launch of Ozempic in the U.S., partly offset by a significant rebate adjustment for Victoza in Q2 2018. Insulin sale in local currencies were flat. This reflects a solid 7% insulin sales growth in International Operations, which was offset by a 7% decline in insulin sales in the U.S. Within obesity sales, Saxenda increased 50%, accounting for 29% of total sales growth. Saxenda has now been launched in 30 countries. Sales of our biopharmaceutical products declined by 1% in local currencies. This was mainly driven by declining NovoSeven sales in the U.S., partly offset by timing of the Brazilian NovoSeven tender in the first quarter of 2018 and higher Norditropin sales. Please turn to Slide 7. International Operations continued its solid growth momentum and holds a large volume potential as well as opportunities to make better treatments more available to patients. International Operations increased sales by 8% in local currencies. The sales growth was driven by a strong 7% growth in the insulin franchise, accounting for 55% -- sorry, 54% share growth. The long-acting growth segment increased by 14%, driven by 29% growth of Tresiba, reflecting increased sales in Region Europe and Region Latin America. Furthermore, sales of Xultophy doubled compared to the first 6 months of 2017, reflecting a strong uptake in several European markets. Victoza sales increased by 13% mainly due to a strong growth momentum in Region Europe and Region Latin America following the LEADER CV label update. Following the adaptation to the National Drug Reimbursement List in 2017, sales in China increased by 57%. Ozempic is soon to be launched in the first European markets following the updated EU label that reflects the updated device offering. Saxenda continues to be a solid growth driver in IO with sales increasing 133%, albeit from a low baseline. This is driven by strong uptake in region AAMEO, Region Latin America and Region Europe. Biopharma increased by 5%, mainly driven by the NovoSeven tender in Brazil in first quarter of 2018. Furthermore, NovoEight continues to perform well and increased with 32% in local currencies. Please turn to Slide 8. Since the beginning of 2018, the combined market share of Tresiba and Levemir in the U.S. has grown by around 3 percentage points to a total of around 36% of the basal market, partly due to formulary changes at CVS Part D in the beginning of the year. Tresiba has now reached a total prescription market share of around 13% and has gained around 3 percentage points year-to-date. The updated Tresiba label was launched mid-April in the U.S. to include a 40% reduction of severe hypoglycemia compared to insulin glargine U100. In addition, we have just launched a new DTC campaign in the U.S. for Tresiba. The updated label and DTC campaign are expected to support the positive market share trend for Tresiba. Please turn to Slide 9. In the U.S., GLP-1 sales increased by 14% in local currencies, driven by Victoza and Ozempic, reflecting an underlying market growth of 24%. Novo Nordisk continues to be market share leader with a combined GLP-1 volume market share of around 43% of the total GLP-1 market in the U.S. Our new-to-brand prescriptions Novo Nordisk has -- following the launch of Ozempic increased its combined market share to 46%. Ozempic has reached a new-to-brand market share of around 15%. The Ozempic launch is progressing as planned, and formulary access is now above 60% for commercial and Part D combined. And almost all sales districts are now promoting Ozempic. Furthermore, we have launched the first DTC campaign with Ozempic, highlighting the clinical benefits on HbA1c lowering and reduction of body weight. Please turn to next slide. In the U.S., formulary negotiations with managed -- sorry, with pharmacy benefit managers and managed care organizations for 2019 are progressing. Subject to the final outcome of these negotiations, average prices after rebates are expected to be lower compared to the levels in 2018 predominantly due to the basal insulin pricing and changed Medicare Part D coverage gap legislation. Market access for our key products is anticipated to remain broadly unchanged compared to 2018. However, at this stage, there's still a level of uncertainty pertaining to the formularies yet to be finalized and announced. With this, over to Mads for an update on R&D.

[Mads Krogsgaard Thomsen, Executive VP & Chief Science Officer]

Thank you, Lars. Please turn to Slide 11. In June, we announced the headline results from PIONEER 3, the fifth Phase IIIa trial with oral semaglutide for the treatment of adults with type 2 diabetes. The global 78-week safety and efficacy trial investigated 3, 7 and 14 milligrams of oral semaglutide compared with the leading DPP-4 inhibitor, sitagliptin, in close to 2,000 people with type 2 diabetes. The trial achieved its primary and secondary objectives according to the primary statistical approach by demonstrating statistically significant and superior reductions in hemoglobin A1c and body weight with both 7 and 14 milligrams of oral semaglutide compared to sitagliptin at week 26. When applying the secondary statistical approach, i.e., assessing the on-treatment population for the full 1.5-year treatment period, people treated with 7 and 14 milligrams of oral semaglutide experienced statistically significantly greater reductions on HbA1c of 0.7% and 1.1%, respectively, compared to 0.4% with sitagliptin. Similarly, reductions in body weight from baseline were statistically significantly greater with 3, 7 and 14 milligrams of oral semaglutide at week 78, with oral semaglutide reductions of 1.9 kilo for the 3-milligram dose, 2.7 kilo for the 7-milligram dose and 3.5 kilograms for the 14-milligram dose compared to 1.1 kilogram with sitagliptin. Throughout the 78-week trial, oral semaglutide was well tolerated and with a safety profile consistent with GLP-1-based therapy. Please turn to the next slide. Across the 5 completed PIONEER trials, 1, 2, 3, 4 and 7, we've seen a consistent lowering of HbA1c for the 14-milligram dose of oral semaglutide in a range of 1.1% to 1.5% at the end of the trials. When applying the on-treatment statistical analysis, all these PIONEER trials have been statistically significantly better than the comparator, including the GLP-1 comparison against 1.8-milligram liraglutide. The glycemic improvements led to the ADA1 target -- ADA target of hemoglobin A1c being below 7% being achieved by 52% to 80% for the 14-milligram dose of oral semaglutide across the trials. For body weight, the 14-milligram dose of oral semaglutide has similarly demonstrated a consistent reduction in the range of 2.9 kilograms to 5.0 kilograms at the end of trial, reductions that were consistently statistically significantly in favor of oral semaglutide versus comparator. This body weight-lowering effect of semaglutide implies that 28% to 49% of the people treated with 14 milligrams of oral semaglutide across all the 5 trials achieved a weight loss of more than 5%. Across the trials, oral semaglutide has also shown a safe and well-tolerated profile, consistent with that of the existing GLP-1 analogues in the market. We're truly excited about these results, which collectively demonstrate that oral semaglutide-treated patients achieve statistically significantly larger reductions in HbA1c and in body weight compared with the leading agent in each of the DPP-4 inhibitor, SGLT-2 inhibitor and GLP-1 receptor agonist classes. We view this as great news for the future prospects of people living with type 2 diabetes.Please turn to the next slide. Following the EU approval of Ozempic in February, Novo Nordisk has received a positive opinion from the European Medicines Agency to update the device offering in EU. Furthermore, the European Commission has approved an update to the Xultophy label based on LEADER and DEVOTE, the 2 cardiovascular outcomes trials for Victoza and Tresiba, respectively. Following the FDA's approval of Ozempic, Novo Nordisk has engaged in a constructive dialogue with the agency focusing on minimizing the need for additional large cardiovascular outcomes trials to obtain a CV indication for Ozempic as well as the overall number of large cardiovascular outcomes trials necessary for the semaglutide molecule in different formulations and indications. Specifically, at this point in time, FDA has agreed with Novo Nordisk on a bridging strategy between Ozempic and oral semaglutide. Thus, the originally planned cardiovascular outcomes trial for Ozempic will now be replaced by a new cardiovascular outcomes trial with oral semaglutide in order to obtain a cardiovascular indication for both products. This study is expected to be initiated next year. A potential alternative scenario is to obtain a CV indication for Ozempic solely based on SUSTAIN 6 data in combination with CV outcomes data from the PIONEER 6 trial with oral semaglutide, which is expected to report before year-end. In August of this year, we completed the Ellipse trial with Victoza in children and adolescents with type 2 diabetes. Ellipse investigated the efficacy and safety of Victoza compared to placebo. The trial met its primary objective of demonstrating superiority of Victoza over placebo in lowering HbA1c after 26 weeks. We plan to submit the result from Ellipse to the FDA and the EMA in the fourth quarter of this year to obtain expansion of the indication to include children between 10 and 17 years of age and, furthermore, to obtain 6 months of pediatric trial-related patent extension. Within our obesity portfolio, we've now initiated all 4 trials in the Phase III STEP program with injectable once-weekly semaglutide 2.4 milligrams for people with obesity. The program is expected to enroll 4,500 people with obesity. All 4 trials have a duration of 68 weeks, and all are expected to be completed in 2020. We've conducted a review of our R&D portfolio, including obesity, which has led to the discontinuation of 2 Phase I obesity projects: the FGF-21 analogue and glucagon 530L, respectively. Novo Nordisk still intends to pursue clinical development of FGF21 in other metabolic conditions. The decision to discontinue these projects was made in order to balance the investment in Novo Nordisk's obesity portfolio, which still includes 2 other clinical projects with a glucagon agonism related to either co- or triple-agonistic molecules. Within our biopharm portfolio, 2 key milestones were achieved. First, Refixia was approved in Japan with a broad label; and second, we have received positive results from the Phase II trial with the once-weekly growth hormone analogue, somapacitan, for the treatment of children with growth hormone deficiency. The trial demonstrated that treatment for 26 weeks with somapacitan led to a dose-dependent increase in growth velocity, with the 2 upper doses of somapacitan providing a growth response similar to that of once-daily Norditropin. We subsequently initiated preparations for the pivotal Phase III programs in both growth hormone deficient and small for-gestational-age children.Based on the Phase II data, the Committee for Orphan Medicinal Products, COMP, in Europe, has issued a positive opinion in July this year for orphan drug designation related to somapacitan as a treatment of growth hormone deficiency in children. Please turn to the next slide. In the third quarter, we expect to submit Fiasp and Xultophy in Japan and to receive regulatory feedback from the EMA regarding the variation application for Ozempic related to inclusion of the SUSTAIN 7 data against Trulicity or dulaglutide. Additionally, we expect the results from the PIONEER 5 and 10 trials. Furthermore, we expect 2 milestones from our biopharm business. Thus, we expect the results from the first hemophilia Phase II trial with concizumab, and we also expect extension data from the somapacitan Phase III trial in adult growth hormone deficient patients. In Q4, we expect the result from PIONEER 6, 8, 9, and we plan to submit an ATP for regulatory approval in Japan. Lastly, we expect in Q4 the data from the second Phase II trial with concizumab. With that, over to Karsten for an update on the financials.

[Karsten Munk Knudsen, Executive VP & CFO]

Thank you, Mads. Please turn to Slide 15. In the first 6 months of 2018, sales decreased by 5% in Danish kroner and increased by 4% in local currencies. The gross margin decreased by 0.5 percentage points to 84.3% measured in Danish kroner compared to first half 2017. The gross margin was negatively impacted by currencies, especially the depreciation of the U.S. dollar compared to Danish kroner, and lower realized prices in the U.S., partly offset by higher productivity and a positive product mix. Sales and distribution costs were flat in Danish kroner and increased by 8% in local currencies, reflecting a higher level of promotional activities in both North America and International Operations. R&D costs decreased by 1% in Danish kroner and increased by 2% in local currencies, reflecting higher costs for both research and development. Administration costs decreased by 3% in Danish kroner and increased by 2% in local currencies. Operating profit increased by 8% in Danish kroner and increased by 4% in local currencies. Net financial items showed a gain of DKK 1.5 billion compared with a loss of approximately DKK 1.2 billion in first half of 2017. This development reflects a gain on foreign exchange hedging involving especially the U.S. dollar versus the Danish kroner. Diluted earnings per share increased to DKK 8.66, corresponding to an increase of 7% compared to the first half of 2017. Please turn to Slide 16. Unfavorable -- in line with our Treasury policy, the most significant foreign exchange risks have been hedged primarily through foreign exchange forward contracts. The first 6 months of 2018 incurred a gain of DKK 1.5 billion compared with a loss of DKK 1.2 billion in the first 6 months of 2017. This development reflects a gain on foreign exchange hedging involving especially the U.S. dollar versus the Danish kroner. The hedging gain was partly offset by the impact from non-hedged currencies, most notably the Argentine peso as well as the cost of hedging. Please turn to Slide 17. For 2018, sales growth is still expected to be in the range of 3% to 5% measured in local currencies. This reflects expectations for continued robust performance for Victoza and Tresiba as well as a positive contribution from Ozempic, Saxenda and Xultophy. These sales drivers are expected to be countered by an impact from lower realized prices in the U.S., driven by lower prices in the basal segments. Reported sales growth is now expected to be around 5 percentage points lower than the local currency guidance. Operating profit growth measured in local currencies is still expected to be in the range of 2% to 5% growth. The expectation for operating profit growth reflects a modest increase in both S&P cost to support continued launch activities and in R&D cost to support the progress of the pipeline. Reported operating profit growth is now expected to be around 7 percentage points lower than the local currency guidance. We now expect financial items to be a gain of around DKK 0.9 billion. The updated guidance reflects the recent appreciation of the U.S. dollar compared to the Danish kroner. The effective tax rate for 2018 is now expected to be in the range of 19% to 20%. The lower effective tax rate reflects a nonrecurring change in tax provisions related to settlement of international tax cases covering multiple years. Furthermore, the effective tax rate is positively impacted by the reduced federal corporate tax rate in 2018 in the U.S. Capital expenditures are still expected to be around DKK 9.5 billion in 2018. For 2018, we still expect the free cash flow to be in the range of DKK 27 billion to DKK 32 billion. This concludes the financial updates. Now back to you, Lars.

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Karsten. Please turn to Slide 18. Sales growth in the first half of 2018 was driven by solid performance of our key innovative products, Victoza, Tresiba and Saxenda. And the launch of Ozempic is off to a good start in North America. We are encouraged about the clinical results for oral semaglutide, and we're looking forward to make the first oral GLP-1 treatment available for people with type 2 diabetes. We're now ready for the Q&A. [Operator Instructions] Operator, we're now ready to take the first questions.

[Operator]

[Operator Instructions] We will now take your first question from Martin Parkhøi from Danske Bank.

[Martin Parkhøi, Senior Equity Analyst]

Is it me?

[Lars Fruergaard Jørgensen, President & CEO]

Yes, Martin, go ahead.

[Martin Parkhøi, Senior Equity Analyst]

Okay, okay. I didn't hear. I couldn't really hear how you pronounced my name. It's Martin Parkhøi, Danske Bank. I have 2 questions, of course. First one, I guess, is to Lars. One thing which has paused a bit over the summer and still do, you are reporting that you expect still a negative basal pricing in 2019, but yet you have increased the net price -- sorry, the list price of Tresiba and Levemir twice this year and even one after the blueprint from the administration, Trump administration. And I think we have to go back to 2015 since you lift the pricing -- lifted the price of Levemir the last time. What exactly do you expect to get out of making 2 list price increases while you still see net prices going down and still -- and run the risk of what I will call a Twitter s***storm, if somebody would notice. Then second question, Victoza. You make this negative adjustment in the second quarter, which means that the first quarter was too high sales, I guess. And if we equally split the DKK 350 million on Q4 and Q1, then it's about 4% on Victoza sales in the first quarter. I remember, Karsten, that you said at the first quarter that the 20% growth shown in U.S., that was purely volume driven. Basal now I can see that adjusted scope in the first quarter was 16%. Does that mean that we actually have seen a negative net pricing development for Victoza year-on-year in the first quarter?

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Martin. We can loudly hear that it's you.

[Martin Parkhøi, Senior Equity Analyst]

That's great.

[Lars Fruergaard Jørgensen, President & CEO]

Price increase, I'll start off with that. So we all know that in the basal category, we see pricing going down. Then we have a market structure where you -- we can agree that it's not working with the gross to net, say, business model, but that is now how the market works right now. So we have to compete in the market structure as it is. And when we have to give rebates -- rebate enhancement on a yearly basis, the option we have is to work with list pricing. So this is how we compete. And when you look at the price increases we have taken and compare them over a 2-year period, they are not that different compared to what our key competing -- the products we compete up against had taken. So I think the price and list price changes are similar across the industry. And this is how the market works right now, and then we have to play along there. When you look at then the political situation, we, like others, are in dialogue with the administration. And I think there is an understanding that pricing in the insulin space is actually going down, so -- and we've been talking about this for a couple of years. We are committed to participate in changing the market structure, but we cannot do this on our own. And as long as the market is as it is, we have to compete the way we can, and that involves also, from time to time, considering what the list price will be. But again, I think we are in line with what the others have been doing when you look at our historical perspective. Karsten then to the Victoza adjustments.

[Karsten Munk Knudsen, Executive VP & CFO]

Yes. So the challenge in the U.S. in terms of gross to net is that we have a huge lag in terms of between when we ship our products out and when we get the rebate claims. And hence, a quite significant uncertainty about the exact rebates we're going to pay depending on what channels our products are utilized in. So unfortunately, even though we tried really hard, it's impossible to get this totally perfect in terms of the realized channel mix and rebates. So this is basically Victoza volume materializing in other channels than what we had anticipated. So as to the true-up, then you should see the majority of the true-up relating to 2017 and not equally split between the quarters, first of all. Then in terms of your question regarding the growth drivers, then the simple math around the -- our U.S. GLP-1 business in terms of growth drivers is the market growth is around 25%. Then we're losing on an MAT basis. We're losing market share that corresponds to roughly a 10% decline in volume. So you deduct the 10% from the 25% market growth, and then you have a base growth rate around the 15% mark, which, of course, can fluctuate between quarters depending on supply chain and so on, which also means that we do still see neutral GLP-1 pricing. And then in terms of margins, then it's important to note that, as you've seen then, we launched Ozempic, so the negative margin impact that we have seen historically has now plateaued. So now we're seeing stable margin since Q2 after the launch of Ozempic, and now we are growing with the markets.

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Karsten. Of course, it's annoying when we have these true-ups to work with because it takes a lot of the thunder away from what I think is an underlying very strong commercial performance for our GLP-1 franchise. At least, we are very confident and optimistic about what we see in the market right now. Thank you, Martin.

[Operator]

We will now take our next question from Jo Walton from Crédit Suisse.

[Jo Walton, Managing Director]

Two questions, please. On gross margins, given the decline in NovoSeven, could you please tell us a little bit more about the dynamics in why the gross margin remained so strong? And secondly, looking forward at Ozempic in the U.S., you say you've got about 60% market access. Is that enough to not annoy some doctors if you go and promote, they write the script? That means that almost 1 in 2 of them will be rejected. You do have 90% or 80%-plus acceptance for Victoza. Do we -- should we imagine that as you are now starting that very active promotion for Ozempic, do you think that 60% will quickly rise to something -- 80%-plus before the end of the year?

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Jo. I'll start with Ozempic, and then Karsten can chip in on gross margin. So we're very pleased with the access we have achieved in the U.S., and we have explained in the past that we look at it at a territory-by-territory level. So we go into what we call strike mode and promote Ozempic when access is strong in a territory. So there are still a few pockets in the U.S. where we do not have access. And there, we keep focusing on Victoza. So I do not believe we have a big issue as the one you allude to where physicians get frustrated about not being able to prescribe another product because they're not being detailed with Ozempic unless they have access. And then you talked to future access. We, of course, expect that we will gradually expand the access level. I cannot tell you what it will be as we exit the year. Of course, we're glad to see in the recent formulary update from Express Scripts that on their exclusion list, they actually decided to tell they have included Ozempic. So I think that's a strong sign that also with Express Scripts, we have a -- we will be having a strong GLP-1 business. Karsten, on the strong development in gross margins despite lower NovoSeven sales.

[Karsten Munk Knudsen, Executive VP & CFO]

Yes. So what we're looking at in terms of our gross margin for the first half, if we back out the currency impacts, then we're looking at a gross margin improvement to the tune of 50 basis points. And the dynamic in terms of price and mix remain the same as we've seen in prior quarters in the sense that price from especially U.S. basal pricing is negative, and then that's offset by a positive mix effect. And the mix effect is a function of, as you state, lower NovoSeven sales, which is a negative mix impact, but that is more than outweighed by the fact that we have significant growth on Victoza as a key growth driver in the first half with an above gross margin rate, as well as Saxenda, which has a similar gross margin. So net-net, the GLP-1-based business is driving the positive volume/mix impact. Then on top of that, what we're seeing in the first half is a very solid productivity contribution from manufacturing, both in terms of high capacity utilization and lower scrap levels than what we saw last year.

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Karsten, and thank you, Jo, for those 2 questions.

[Operator]

We will now take our next question from Simon Baker from Exane.

[Simon P. Baker, Analyst]

Two, please. Firstly, on U.S. GLP-1 marketing. You indicated that you have essentially switched marketing effort from Victoza to Ozempic. Some people this morning have commented that they, as a result, would have expected Ozempic to do better with that intensified activity. But I was wondering about looking at it from the other side and the fact that Victoza, when adjusted for the rebate effect, has done remarkably well in the absence of that promotion. So my question is, how promotion sensitive is the GLP-1 category in the U.S.? How does that influence the -- your thoughts on the Ozempic launch and, going forward, the launch for oral semaglutide? And then the second question, just a quick one. I noticed for the second quarter that U.S. or North American human insulin sales growth was particularly strong. I wonder if you could give us a little bit of color on why that was.

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Simon. Camilla, can you talk a bit to the U.S. GLP-1 sales and marketing tactics?

[Camilla Sylvest]

Yes. So it's been very important for us to make sure we have ensured access for Ozempic before we shift our marketing efforts to Ozempic. Having said that, as you -- we just heard, above 60% now. We feel that's the right time to make sure that all districts -- almost all districts are in what we call the strike mode, as we just discussed. We do see and do expect, of course, that we will continue and accelerate our uptake on Ozempic, but we stay with our guidance that we've given earlier in the year about DKK 1 billion, and we expect to land above that. In terms of the impact on Victoza, as Karsten alluded to before, there has been indeed impact on Victoza, and we do expect that putting all our promotional efforts, including the new DTC campaign on Ozempic, will mean that we will have a net benefit on the GLP-1 segment in terms of total market share, as you can already begin to see in the last few weeks and months.

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Camilla. And Karsten, on North American human insulin.

[Karsten Munk Knudsen, Executive VP & CFO]

Yes. So North American human insulin, that is not a core of our marketing strategy right now. There are bigger priorities in the U.S., so you should not be carried away with the quarterly fluctuations. What we're looking at in the quarter is basically some shipments and channel mix movements in the second quarter. So it is simply a seasonality and nothing more than that.

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Karsten, and thank you, Simon, for those questions.

[Operator]

We will now take our next question from Florent Cespedes from Societe Generale.

[Florent Cespedes, Senior Equity Analyst]

Two quick ones. First, on the cardiovascular outcomes studies behind Ozempic and oral sema, could you give us a little bit more color on that? What could be the design of the oral sema trial? Some color or time frame. And how confident are you to receive a cardiovascular claim based on the prespecified but prospective analysis on cardiac safety studies? And have you discussed these with the European authorities? Are they as open as the U.S. ones? So that's my first question. Second one, easy one, on oral sema. What do you intend to present at the [ ESD ] this year? If you could give a little bit more color on that, that will be great.

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Florent. I'll take those -- well, 2 questions. So to you, Mads?

[Mads Krogsgaard Thomsen, Executive VP & Chief Science Officer]

Yes. So the easy part is the European subpart of your first question. Inasmuch as the European Commission and the CHMP are already including case-by-case data from the cardiovascular outcomes trials with all the data you can imagine, from the MACE endpoints, Kaplan-Meier plots and so on. So it is mostly an American discussion, and the discussion has evolved, as I explained, to the tune that the FDA recognized that SUSTAIN 6 being a short trial with only slightly more than 3,000 patients nonetheless created a quite significant and robust MACE reduction despite the trial size and duration. And this has led the agency to say that if such findings can be confirmed be it with oral semaglutide, that will then basically mean that we can bridge between the 2 formulations, injectable Ozempic and oral semaglutide, and use the data for achieving a cardiovascular indication. And this, we are speaking, of course, a secondary prevention also for Ozempic. There's the upside scenario where PIONEER 6 reads out before Christmas time with data that are strong enough for the FDA to already accept a SUSTAIN 6-like labeling in the Ozempic package insert just based on the amalgamated data from SUSTAIN and PIONEER 6 trials. But that is what I would consider an upside case. In general, you can say I think we are moving into a scenario where the agency is looking at also the clinical relevance of data. And nobody would belittle the fact that the SUSTAIN 6 data are highly clinical, relevant in the magnitude, but they also have to be reproducible, and that reproducibility will occur either via the oral SOUL trial or, if we are extremely lucky, the PIONEER 6 trial. So that is the thinking of the FDA. And then in obesity, we have decided to conduct a big CVOT with 70,000 patients for SELECT study, and that we're basically doing because we believe it's serves a dual purpose and the other purpose being to create a yardstick in pharmacotherapy of obesity to demonstrate that chronic therapy in obese patients may actually prolong their lives and significantly improve their heart outcomes.

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Mads. And thank you, Florent, for that question. I'm sorry, what...

[Florent Cespedes, Senior Equity Analyst]

And just what -- at...

[Lars Fruergaard Jørgensen, President & CEO]

Yes, what was on ESD?

[Florent Cespedes, Senior Equity Analyst]

Yes, what was on ESD?

[Mads Krogsgaard Thomsen, Executive VP & Chief Science Officer]

ESD, yes. What I can reveal is that there will actually be a dedicated symposium to the field and that, that is already in the draft program. You can look it up to the oral GLP-1 space, whether it's Tuesday or Wednesday late in the afternoon, I've simply forgotten, but it's one of those days. What will be specifically -- I mean, it is academic investigators, professors at the highest level who would be -- and clinical investigators who would be presenting these data and not Novo Nordisk colleagues. So I can't really comment, but I will be excited to see what is presented.

[Lars Fruergaard Jørgensen, President & CEO]

Okay, thank you very much, Mads. Let me remind you that we have Mike Doustdar here, and we actually have great performance in International Operations this half year. So if there are any questions for Mike, please bring them forward.

[Operator]

We will now take our next question from Carsten Madsen from SEB.

[Carsten Lønborg Madsen, Research Analyst]

Just a little bit nitty-gritty here. When you talk about the pricing and access in '19, you say that the lower prices is predominantly driven by basal insulins. How about GLP-1, any the impact there? And could you also maybe try to be a little bit more helpful when it comes to actual pricing levels for '19 even though everything is not negotiated yet, just to give us a sense of the direction whether the price pressure for basal insulins will be similar, worse or less worse than what we expect for '18? And then another one. Also, when it comes to the first 6 months, you have secured a 4% local currency revenue growth despite all these rather significant rebate reversals. Are there anything we should be particular observant on when it comes to H2 in terms of one-offs that you already now know of? Otherwise, it seems like that second part of the year should be able to do better than the first part of the year.

[Lars Fruergaard Jørgensen, President & CEO]

So thank you, Carsten. And let me try to start on the pricing and Karsten can chip in. So we're right that we expect lower pricing in 2019 derived primarily in the basal category and due to the coverage gap. So if you look at that wording, that's exactly what we put in except for the coverage gap last year. So that also means that we do not see a significant changed pricing situation in other areas. So that's, I think, the simple version. With regards to growth, you're right that despite all these adjustments, which, as I mentioned, were quite annoying, the 4% growth is actually quite nice. So we have an underlying business in the U.S. that's growing. We take market share with Tresiba. We are coming back in GLP-1. So we have an underlying growth in U.S. of around 3%. And as I mentioned, we're growing 8% in International Operations. So the comparator challenge we had was a Q2 challenge. So I cannot -- I don't have any kind of second half one-offs that will reflect all we know. So I think that that's the high level. Karsten, do you have any additional?

[Karsten Munk Knudsen, Executive VP & CFO]

Yes. So in terms of sales phasing, then you can say that we're actually tracking very nicely compared to our guidance range in the first half. And you're right that we -- as we both have been now saying, we do have both some tough comps from last year in the second quarter in terms of Tresiba and then the Victoza rebate adjustment. At the same time, we have to the tune of a DKK 300 million tailwind from the NovoSeven shipment in Brazil in the first quarter, which is not recurring in the second half of the year. And then you should also be aware that -- and you see the very solid growth in AAMEO in the first half. And growth in AAMEO is very sensitive to tender shipments, so you cannot expect AAMEO to be growing 15% in the second half of the year there. And then, of course, you're aware of the flip side, the NovoLog rebate adjustment in Q4 '17, which will make the second half easier. So overall, we are tracking on par with our guidance to be between 3% and 5% local currency sales growth for the year.

[Lars Fruergaard Jørgensen, President & CEO]

And Carsten, I think you also asked to what levels of pressure 1 year over the other, and we cannot comment in detail on it, but -- because we don't guide on that specificity level. But when we say that we are overall unchanged access, I think you can take that as a signal that we see an overall stable market, of course noting all the changes that's ongoing. But -- so we see a relatively stable market and a growing opportunity in GLP-1 to go out and significantly grow with the market and take share. I think that's what has the highest bearing for future growth. Thank you, Carsten.

[Operator]

We will now take our next question from Sachin Jain of Bank of America Merrill Lynch.

[Sachin Jain, Managing Director]

Sachin Jain from Bank of America. A few questions. Firstly, just back to GLP-1 pricing in '19. My apologies coming back to this but to just avoid any confusion, can I have a fair commentary to the last question as roughly neutral pricing for GLP-1 into '19? And just to check if -- is your commentary neutral price in each channel? Or does it include further channel mix changes that we could anticipate into '19? And a second question is on full year '19 sort of EBIT growth as a follow-on to commentary you made on the last 1Q call. Could you clarify the ability for cost cuts to offset the Part D pressure and have EBIT growth for next year consistent with the midterm outlook?

[Lars Fruergaard Jørgensen, President & CEO]

Yes, thank you, Sachin. So if I start on the EBIT growth. It's too for early for us to start guiding on '19, so I'll not get into specifics there. But it's clear that we are working on optimizing how we run our business to partly mitigate the impact from the coverage gap increase but, as importantly, to make sure that we can fuel the investments in the opportunities we have. We have just launched the DTC campaign in the U.S. You might have seen it. And it is a market that responds to promotional pressure. So we're going to invest in our business, but, of course, we are going to be quite prudent on cost. And I think there's a lot of talk about layoffs, et cetera. We're not, as you have seen, announcing a bit -- big layoff round today, but we are going to make a number of changes that, in a number of areas, will lead to less people. And when we are a year from now, I expect that there'll be less people than we are today. But it's too early for us to guide on EBIT growth for '19. Karsten, on -- once again on GLP-1 pricing.

[Karsten Munk Knudsen, Executive VP & CFO]

Yes. So our commentary around 2019 pricing is, first of all, this is average pricing across channels. So channel mix is included in this comment to your question. In terms of GLP-1 pricing for '19, then we intensely phrased it this way, saying predominantly basal insulin and [ DUAL II ] and thereby saying that we do not expect any significant price decreases on our other product groups, including GLP-1 and short-acting insulin. And by obtaining this, we, of course, get a very strong commercial access for our products to continue to drive share both in GLP-1 and in the basal segments.

[Sachin Jain, Managing Director]

Got it. And I apologize for a follow-on, but I'm being asked, so I will ask. What's your boundary for significant?

[Karsten Munk Knudsen, Executive VP & CFO]

Yes, we have not defined specific boundaries to state publicly. But it is a -- we have process that are across of our grouping. So when -- I can tell you that when we look at predominantly, then we're significantly above 50% impact that we're explaining.

[Lars Fruergaard Jørgensen, President & CEO]

And thank you. I think the whole week -- the whole reason why we stopped giving specific guiding -- guidance on price develop is that when you look at our business, it's a function of channel mix, list price, rebate level and, of course, the access we have. And we are very pleased with the broad access we have for all channels. We see a positive NBRx development for GLP-1. We see an underlying strong market growth in GLP-1. I think that's the key driver of what we believe would be a strong GLP-1 performance when we look at 2019. Thank you, Sachin.

[Operator]

We will now take our next question from Richard Vosser from JPMorgan.

[Richard Vosser, Senior Analyst]

Richard Vosser from JPMorgan. And just to follow up on the channel mix. Just thinking about Ozempic and its launch in the second half of this year or next year, just could you talk about how that might impact the picture in terms of channel mix for the overall GLP-1 franchise going forward? And allied to that, just I think you gave guidance previously for Ozempic of sales of above DKK 1 billion for full year '18. Perhaps you could hone in on that and give us an idea how your thinking about that now we're halfway through the year. And maybe call out any levels of stocking that are in Ozempic sales after the first or in this quarter? And then secondly, just coming back to your comments on how the market could change. Of course, the U.S. administration had their blueprint out there. Just your thoughts on whether you think that could impact the diabetes market in 2019 or whether it's beyond. And maybe some first thoughts on how you think that could affect your plans.

[Lars Fruergaard Jørgensen, President & CEO]

Thank you. If I start on the latter question on U.S. health care system and the blueprint. I think the size of the blueprint and also the complexity of all the answers submitted from all the pharmaceutical companies illustrates nicely the complexity of it. There are a lot of talks about could rebates disappear. So we actually start competing on a transparent, say, net price basis and then competing on clinical differentiation and classical competition. Like other pharmaceutical companies, we would welcome something that goes in that direction. But I also acknowledge that, that is hard to do overnight because the rebates we put into the supply chain today are used to fund various aspects of the health care system, not always in diabetes care is used to lower pricing of insurance schemes, et cetera. So it takes some adaptations. If you look at it from a specific diabetes point of view, I think this is a category that's different from some other categories in the sense that we have quite high rebate levels and we see declining pricing. So -- and I think the administration understands that there's tough competition in the insulin space, and I do not think that all the rhetoric that comes out about pricing is actually linked to that. The -- our complexity is that a number of patients have high deductible plans and co-pays, et cetera. But I'm also pleased that we have put in place affordability options, so you can actually get access to a vial of Novo Nordisk human insulin for $24, $25 a vial and bring down the daily treating cost to, say, $1 or $2. And so I see that it's a quite complex change to get implemented. I think we are competing in a way where I think we can find ways to operate also in a future where the gross-to-net model is significantly different. But it'll take time to get that to work for all the participants in the whole supply chain. And then, Karsten, maybe you could chip in on some of the overall guidance on Ozempic, the DKK 1 billion guidance inventory and also some channel mix considerations.

[Karsten Munk Knudsen, Executive VP & CFO]

Yes. So we are reconfirming what we have said during this year that we expect to realize more than DKK 1 billion in Ozempic sales in 2018. And with the DKK 260 million in the first half, we have DKK 740 million to go. And with the trajectory, this confirms that we are on track to exceed the DKK 1 billion and thereby delivering on what we have been out there guiding earlier in the year. In terms of stocking, then you don't necessarily -- or we don't necessarily have perfect stocking data across the entire supply chain in the U.S. But as a rough rule of thumb, then stocking would be somewhere between 2 and 4 weeks when you include both wholesalers and pharmacy chains. It depends a little bit on the product phasing, life cycle, seasonality and so on, but somewhere between 2 and 4 weeks of stocking. And as we said at Q1, then our initial launch and our Q1 reported numbers of around $10 billion -- $10 million was for the vast majority stocking related in terms of launch orders. Channel mix, we are normally -- we had better access in commercial, which is the case here, but we have been successful in actually getting Part D access faster than what we anticipated, and we will not be able to get to a 60% overall Ozempic access without solid Part D access at this point in time. And then the remaining challenge will come down the road.

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Karsten. thank you, Richard.

[Operator]

We will now take our last question from Michael Novod from Nordea.

[Michael Novod]

Just 2 short follow-up questions. One to [ EPILOG ]. So you say you keep, let's say, pricing rather neutral on the short-acting. Do you see, say, significant traction for [ EPILOG ] going into '19, putting pressure on your volumes in short acting? And then secondly, on Ozempic and the global rollout. Can you comment on how many markets you see launching in the next 4, 5 months for the remainder of 2018?

[Lars Fruergaard Jørgensen, President & CEO]

So if -- Camilla, address the Ozempic rollout and then I will just quickly answer that. We do not see significant pressure from EPILOG going into '19. The -- I don't think they're primarily going to play in the Medicaid segment. And this is a segment where the margins are very, very low, so no significant impact from that. And Camilla, to the global rollout?

[Camilla Sylvest]

Yes. So global rollout on Ozempic, we're continuing our rollout in Europe now. And over the next half year, we expect to roll out in a number of countries in Europe, starting now already in a few weeks from now more or less, we can say. So that means that we look forward to also making this product available in Europe. And by the way, in addition to the U.S., we've also seen a very strong launch in Canada, having a really good uptake with Ozempic being very well received. So we're very confident that the coming rollout will have a great traction as well.

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Camilla, and thank you, Michael, for that question. With this, we conclude our conference call. Thank you for participating and feel free to contact our Investor Relations officers to ask any follow-up questions you might have. Thank you, and have a good day.

[Operator]

This concludes today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.