Novo Nordisk A/S

CSE:NOVO B

Earnings Call Transcript 2022-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Q3 2022 Novo Nordisk AS Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, CEO, Lars Fregard Jorgensen. Please go ahead.

[Lars Jørgensen, executive]

Thank you, operator. Welcome to the Novo Nordisk Earnings call for the first 9 months of 2022 and the outlook for the year. My name is Lars Borgard Jorgensen, and I'm the CEO of Novo Nordisk. With me today, I have Executive Vice President and Head of Commercial Strategy and Corporate Affairs, Camilla Sylvest, Executive Vice President and Head of North America Operations, Doug Langa, Executive Vice President and Head of Development, Martin Holst Lange, and finally, Chief Financial Officer, Karsten Knudsen. All of us will be available for the Q&A session. Today's announcement and the slides for this call are available on our website, novonordisk.com. Please note that the call will be webcasted live and a recording will be made on our website as well. Call is scheduled to last for 1 hour.

Please turn to the next slide. The presentation is structured as outlined on Slide 2. Please note that all sales and operating statements will be at constant exchange rates unless otherwise specified. The Q&A session will begin in about 25 minutes. Please turn to Slide 3. As always, I need to advise you that this call will contain forward-looking statements. These are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For further information on the risk factors, please see the company now for the first 9 months of 2022 and the slides prepared for this presentation. Please turn to the next slide. In the first 9 months of 2022, we delivered double-digit sales and operating profit growth, which has enabled us to raise our outlook for the full year. I would like to start this call by going through the performance highlights across our rations before handing over to my colleagues.

We continue to make progress across all dimensions of purpose and sustainability. Our carbon emissions decreased by 18% compared to the first 9 months of 2019, and we continue to reach even more patients compared to the same period last year. Within our aspiration of being a sustainable employer, we expanded the number of women in senior leadership positions to 38% compared to 36% by the end of September 2021. Within R&D, we are pleased with the encouraging Phase II data with CagriSema in type 2 diabetes as well as the successful completion of the pivotal Phase III program for once weekly insulin icodec. Both support our aspiration of further raising the innovation bar for diabetes treatments. Martin will come back to this and our overall R&D milestones later in this call.

In the first 9 months of 2022, we delivered double-digit sales growth, reflecting solid commercial execution across geographies and our therapy areas. While both operating units contributed to sales growth, we saw a particular strong sales growth in North America, driven by accelerated demand for our G1 treatments. This has enabled us to increase the outlook for the year. Camilla will go through the details for therapy area later. Lastly, Karsten will go through the financial details, but I'm very pleased with the sales growth of 16% and operating profit growth of 14% in the first 9 months of 2022. With that, I'll now give the word to Camilla for an update on commercial execution.

[Camilla Sylvest, executive]

Thank you, Lars, and please turn to the next slide. As Lars mentioned, our 16% sales growth in the first 9 months of 2022 was driven by both operating units with North American operations growing by 22% and international operations growing 11%. Our GLP-1 sales increased in driven by North America, growing 39% and international operations growing 55%. Insulin sales decreased by 11%, driven by a 7% decline in international operations and a 20% sales decline in North America operations. The U.S. insulin sales declined by 22%, driven by lower realized prices and a decline in volume. Insulin sales and international operations were impacted by the implementation and volume-based procurement in China from May 22 as well as lower sales in EMEA. Obesity care sales grew 75% overall. In International Operations, Saxenda sales grew 73% and in North America operations, obesity care sales grew 77%. In the U.S., obesity care sales grew 81%. Rare disease sales grew 2%, driven by a 4% sales increase in international operations, offset by a 3% decline in North America operations.

Please turn to Slide 6. Our 14% sales growth within diabetes care is faster than all diabetes market. That means we have improved our market share by 1.7 percentage points to 31.6%. We continue to be on track to reach 1/3 of the diabetes value market by 2025. This increase primarily reflects GLP-1 market growth as well as share gains in both operating units and please turn to the next slide.

In international operations, diabetes care sales increased by 9% in the first 9 months of '22, driven by GLP-1 sales that grew by 55%. Novo Nordisk remains the market leader in international operations with a GLP-1 value market share of [Technical Difficulty]. This is driven by share gains across geographies. Ozempic continues to expand its GLP-1 market share leadership in international operations with a 41.3% market share. While the GLP-1 class is growing more than 40%, TLP1 penetration remains low at around 4% of total diabetes globally. And with that, I will hand over to Doug.

[Douglas Langa, executive]

Thank you for that update, Camila. Please turn to the next slide. The U.S. GLP-1 market volume grew by more than 40%, comparing the third quarter of 2022 to the third quarter of 2021 with once-weekly injectable GLP-1s and Rybelsus as the main drivers. The recent competitor launch in the GLP-1 has supported the continued acceleration in market growth from an NBRx perspective as well as all-time high levels for our portfolio of GLP-1 products during Q3. Measured on total prescriptions, Novo Nordisk has maintained its market leadership with a 52.4% market share. Additionally, Ozempic continues to be the market leader with a 38.7% TRx market share. Rybelsus continues to grow and has now been launched in 43 countries. In the first 9 months of 2022, it was the second largest contributor to growth in Novo Nordisk after Ozempic.

Please go to the next slide. Obesity care sales increased by 75% with 77% growth in North American operations and 73% in international operations. Furthermore, the global obesity market expansion continues with the volume growth of the global branded obesity market of more than 60%. We continue to be encouraged by the performance of Saxenda in international operations. Region EMEA is a key growth driver with 96% growth in the first 9 months of 2022. Specifically, the growth continues to be particularly strong in countries that have some level of reimbursement, such as the U.K., Norway and Israel. In the U.S., Obesity care sales grew by 81%, with both Wegovi and Saxenda contributing to growth.

Following the previously announced Wegovi supply issues in the U.S., our focus remains to continue continuity of care to the patients that have already initiated treatment. In line with expectations, this has negatively impacted Wegovi prescription trends. Positively, Saxenda prescription trends have accelerated and continue to be at all-time high levels. Regarding Wegovi supply, we expect to make all doses of Wegovi available in the U.S. in December, we plan to initiate broad commercial activities in the beginning of 2023. Now back over to Camilla for an update on rare disease.

[Camilla Sylvest, executive]

Thank you, Doug. Next slide, please. Our rare disease sales increased by 2% in the first 9 months of 2022. This was driven by a 4% sales growth in international operations, offset by a 3% decline in North America operations. Rare blood disorders grew by 6%, driven by NovoSeven as well as the launch products, Esperoct and Refixia. Specifically, hemophilia A products grew by 6%, hemophilia B sales by 9% and NovoSeven by 6%. Rare endocrine disorder sales declined by 6%, the declining sales were driven by international operations decreasing 2% and by North America operations decreasing by 13%. The sales were negatively impacted by lower realized prices in the U.S. And now over to you, Martin, for an update on R&D.

[Martin Lange, executive]

Thank you, Camilla. Please turn to Slide 11. In August, we shared the exciting data from the Phase II trial of CagriSema in people with type 2 diabetes. I would like to briefly walk through these results. This was a 32-week trial that investigated the efficacy and safety of a fixed dose combination of CagriSema compared to the individual components of semaglutide 2.4 milligram and cagrilintide 2.4 milligram. All products were administered once weekly. The trial included 92 people with type 2 diabetes and overweight and people were equally randomized among the 3 treatment arms. In the trial, the mean baseline A1c was 8.4%, and the mean baseline body weight was 106 kilograms.

After 32 weeks of treatment, people treated with CagriSema achieved a numerically higher A1c reduction of 2.18 percentage points compared to a reduction of 1.79 percentage points for people treated with semaglutide and 0.93 percentage points for people treated with cageletide alone. People treated with CagriSema had a numerically higher volume weight reduction of 15.6% compared to a reduction of 5.1% for people treated with semaglutide and 8.1% for people treated with cageletide alone. In the trial, cacosema appeared to have a safe and well-tolerated profile. Overall, these results indicate that cacosema reduces blood sugar more than the 2 monocomponents alone, and the weightloss seen in the trial confirms the substantial weight lowering potential of cacosema. Based on the results, we had to initiate a programme for people with type 2 diabetes during the course of 2023.

Next slide, please. ONWARD 5 was a 52-week efficacy and safety trial in once-weekly insulin icodec to once-daily basal insulin. This was either insulin degludec or insulin glargine. The trial included 1,085 insulin using people with type 2 diabetes. The primary objective of the trial was to demonstrate noninferiority of insulin degludec compared to once daily basal insulin analogs in reducing A1c at 52 weeks. ONWARDS 5 included a dose guide app as well as real-world evidence such as substantial [indiscernible] visits compared to the other ONWARDS trials. Altogether, we believe that this design will increase understanding and the dialogue of how insulin icodec can make a difference for patients in an actual clinical practice setting. This trial was a treat-to-target trial, and it achieved its primary endpoint by demonstrating non-inferiority in reducing hemoglobin A1c at week 52 with insulin icodec as compared to once daily basal insulin analogs.

From an overall baseline A1C of 8.9%, once weekly insulin icodec achieved a superior reduction in estimated A1c of 1.68% compared to 1.31% for once-daily insulin [indiscernible] with an estimated treatment difference of 0.38 percentage points. In addition, we are seeing a rate of severe and clinically significant hypoglycemia. In the trial, once-weekly insulin icodec appeared to have a safe and well-tolerated profile. In conclusion, we're very pleased to share the positive results from the ONWARD 5 trial. These results confirm the data in the previously reported ONWARDS program. A result highlights that insulin icodec has the potential to be an ideal start insulin for people with type 2 diabetes as well as a very attractive option in combination with meal-time insulin as shown in August 4, thus covering the full spectrum of type 2 diabetes. We expect to be filing for regulatory approval of once weekly insulin icodec in the EU and in China during the first half of 2023.

Please turn to the next slide. In September, we completed the 24-week main part of the Phase III trial with concizumab called EXPLORE 8 in people with hemophilia A or hemophilia B without inhibitors. The trial met its primary endpoint confirm superiority of concizumab prophylaxis treatment compared to neoprophylaxics treatment in reducing the annual bleed rate in both hemophilia A and hemophilia B patients without inhibitors. The secondary confirmatory endpoint of demonstrating nonperioty of concizumab prophylaxis as compared to previous prophylaxis factor treatment in reducing the ABR was not met. In the trial, concizumab appeared to have a safe and well-tolerated profile with no thromboebotic events reported after the treatment restart following the treatment pose. Based on the results of EXPLORE 8 we are assessing further development activities and timing of regulatory submissions in people without inhibitors.

Now staying within rare disease, I'm very excited to share that treatment has been initiated in the first MMAE Phase IIIa trial in hemophilia. This is called Frontier 2. Based on the results we saw in Phase 1 and 2, we have very high expectations for the trial and the difference that MMAE can make for patients with hemophilia in managing their disease. Furthermore, we have submitted nedosiran for regulatory approval in the U.S. for the treatment of primary hyperoxaluria. Nedosiran was part of the Dicerna Pharmaceuticals acquisition we made back in 2021. Within other serious chronic diseases, we have completed a 12-week Phase II trial with oral PCSK9 in 267 people with ASCVD or risk of ASCVD. The trial [indiscernible] by demonstrating superiority versus placebo in lowering low-density lipoprotein cholesterol and appear to have a safe and well-tolerated profile. However, due to commercial and portfolio considerations, the development of oral PCSK9 will be terminated.

Now let's turn to the other high-level R&D milestones that I did not cover in the previous slides. Within diabetes, we have initiated a Phase I trial with once weekly oral semaglutide as well as a Phase II trial with higher doses of Ozempic in the third quarter of this year. The latter is a 49 week trial, investigating the efficacy and tolerability of 8 and 16 milligram of Ozempic, respectively. The trial is expected to enroll around 240 people with type-2 diabetes. Further, in the first half of 2023, we expect results from the currently ongoing Phase III trial will oral semaglutide 25 milligram and 15 milligram, respectively.

Finally, with [indiscernible], we are very excited to have initiated the first trial called Redefine 1 for CagriSema. REDEFINE-1 is a 68-week trial, comparing the efficacy and safety of once-weekly CagriSema with semaglutide 2.4 milligram, cagrilintide 2.4 milligram and placebo. The trial is expected to enroll approximately 3,400 people with obesity or overweight and commodities and is the first pivotal trial in the redefined person. Further, during the first half of 2023, we expect results from the Phase IIIa trial with oral semaglutide 50 milligram as well as the Phase I/II trial results from the ongoing file with PYY. Altogether, we are looking very much forward to an exciting period with clinical trial initiations as well as results across other areas. With that, over to you, Karsten.

[Karsten Knudsen, executive]

Thank you, Martin. Please turn to the next slide. In the first 9 months of 2022, our sales grew by 26% in Danish kroner and 16% at constant exchange rates, driven by both our operating units. The gross margin increased to 84.3% to 83.0% in 2021, driven by a positive product mix due to increased GLP-1 sales, a positive currency impact of 0.9 percentage points and productivity improvements. These effects are countered by lower realized prices in the U.S. and China. Sales and distribution costs increased by 28% in Danish kroner and 19% at constant exchange rates. The increase is driven by launch activities and promotional spend for Rybelsis and Ozempic as well as market development activities for obesity. The cost increase is reflecting low activity levels in 2021 due to COVID-19 as well as higher distribution costs.

Research and development costs increased by 31% in Danish kroner and 26% at constant exchange rates. The increase is driven by higher clinical activity levels within other serious current diseases and GL1 as well as the operating costs and amortizations related to the acquisition of Dicerna Pharmaceuticals in the fourth quarter of 2021. Administration costs increased by 9% in Danish kroner and 5% at constant exchange rates.

Operating profit increased by 28% in Danish kroner and by 14% at constant exchange rates. Net financial items for 2022 showed a loss of around DKK 5 billion compared to a gain of around DKK 1 billion in 2021. This mainly relates to losses following the appreciation of the U.S. dollar as reflected in the favorable currency impact in operating profit. The effective tax rate for the first 9 months of 2022 was 20.5% compared to 19.8% in 2021. Net profit increased by 14% and diluted earnings per share increased by 15% to DKK 18.42. Free cash flow was DKK 62.5 billion compared to DKK 52.3 billion in '21. The cash conversion in the first 9 months of 2022 is positively impacted by timing of repaid payments in the U.S., including provisions related to the revised 340B distribution policy. Income under the 340B program has been partially recognized. We'll continue 2022 with a solid growth momentum and now expect the sales growth to be between 14% and 17% at constant exchange rates.

This is based on a number of assumptions as described in the company announcement. The raised guidance reflects expectations for sales growth in both International Operations and North America operations and across therapy areas, but mainly driven by diabetes and obesity care. The updated guidance is based on the expectation that all the [indiscernible] strengths are available in the U.S. towards the end of the year. The outlook reflects that we expect continued periodic supply constraints and related drug shortage notifications. This is driven by higher-than-expected volume growth for GLP-1-based products such as Ozempic, and temporary capacity limitations at some manufacturing sites. We are gradually increasing our supply capacity and expect this to be sufficient to support a potential continuation of the current sales growth trajectory.

We now expect that operating profit will grow between 13% and 15% at constant exchange rates. This primarily reflects the sales growth outlook and continued investments in current and future growth drivers. We are also allocating additional resources to both early and late-stage R&D pipeline activities. As mentioned before, our acquisition of Dicerna Pharmaceuticals is negatively impacting operating profit growth by around 2 percentage points due to higher operating costs and amortization of intangible assets. Given the current exchange rates, most notably strengthening of the U.S. dollar, we expect a positive currency impact for 2022.

Our reported sales are now expected to be 10 percentage points higher than at CER and operating profit growth is now expected to be 15 percentage points higher than CER. The positive currency impact on operating profit of 50 percentage points is partly offset by a net loss on financial items. For 2022, we now expect that financial items will amount to a net loss of around DKK 6.6 billion, mainly reflecting losses associated with foreign exchange hedging contracts. Capital expenditure is still expected to be around DKK 12 billion, which mainly relates to investments in additional API production capacity at existing manufacturing sites.

Our free cash flow is now expected to be between DKK 54 billion and DKK 59 billion, reflecting the acquisition of former therapeutics. The acquisition closed in the fourth quarter of 2022. That covers the updated outlook for '22. Now back to you, Lars, for final remarks.

[Lars Jørgensen, executive]

Thank you, Karsten. Please turn to the final slide. We are very pleased with the double-digit sales growth in the first 9 months of 2022 and that we continue to reach even more patients. The strong financial performance in the first 9 months of 2022 has enabled us to raise our outlook for the full year. From an R&D perspective, we have now successfully completed the full onward program with once weekly insulin icodec, the full results underlying our commitment to further raising the innovation bar in diabetes. We look forward to submitting insulin icodec for regulatory approval in the first half of 2023. In addition, we are excited about initiating the Phase III program for cacosema obesity. This could further strengthen our portfolio of superior obesity products.

With that, we're now ready for the Q&A, where I kindly ask all participants to limit her or himself to one or maximum 2 questions. Operator, we're now ready for the first question.

[Operator]

[Operator Instructions] We will now take the first question. It comes from the line of Wimal Kapadia from Bernstein.

[Wimal Kapadia, analyst]

Actually skip, we'll go with supply, if that's okay. And start with the oral weekly semaglutide. So this sounds quite interesting. So my question really is, is this just a reformulation of Rybelsis? Will it be for diabetes and obesity? Does it use technology? What preclinical work have you seen to suggest the GI tox would be acceptable? And are you really trying to achieve injectable like outcome? So I know there's a few bits to that question, but maybe a summary of that asset would be quite helpful. And then my second question, just to Novo's comments on enough supply of Ozempic to maintain the current trajectory. I guess my question really is how much of the current trajectory is actually being driven by lack of Wegovy supply, i.e., obesity? So one of your peers yesterday Lilly suggested 1/3 of the Mondoro patients were not on diabetes medicines prior to taking the drug. So unless they're using a drug premetformin, that number is 1/3. So I guess, what is that number for Ozempic?

[Lars Jørgensen, executive]

Thank you, Wimal. First, Martin, on the exciting prospects of all weekly sema.

[Martin Lange, executive]

Yes, absolutely. So exactly right. We are very excited about this, this is an offering that is, as you rightly point out, it's based on our technology. It's a little more than a reformulation, but we do expect it to allow for a full offering of once-weekly dosing. Our intent is that this would be available potentially in both diabetes and obesity and with an efficacy and safety profile similar to that of injectables. So I think I heard you mention GI tolerability, this should be on par with what we have already seen in our subcutaneous semaglutide profiles.

[Wimal Kapadia, analyst]

An exciting opportunity underlying our all capabilities. And then Karsten, we added some caveats on potential growth and linked to supplies for next year. So can you put some comments on that?

[Karsten Knudsen, executive]

Yes. So as we put into our company announcement, then we're stating that as we gradually are expanding our supply capacity, then we expect to have enough capacity to support a potential continuation of the current sales growth trajectory. So this is nothing on Ozempic in isolation, but this is a macro statement for norms overall sales growth and supply capacity. So just to clarify that, as to source of business on Ozempic and the read across you allude to, then when we're looking at source of business on Ozempic, our estimate is that to the tune in the U.S. marketplace, to the tune of 40% of Ozempic, new Ozempic business comes from naive patients who have not received a diabetes medication before.

[Lars Jørgensen, executive]

Thank you, Karsten, and thank you, Wimal. Next question please.

[Operator]

We will now take the next question. It comes from the line of Matthew Weston from Credit Suisse.

[Matthew Weston, analyst]

Can I ask 2 questions, please? The first, coming back to Wimal and Ozempic capacity. Can I understand the cadence of capacity increases into '23, please? Is there a specific bolus coming online? Or is it very much gradual? And to try and put into perspective your comments about the current trajectory, do you believe you will have capacity to deliver consensus sales expectations for '23? And then secondly, a question about U.S. health care reform. We're getting close to the abolition of the Medicaid penalty rule cap in January 2024. Should we assume that Novo will withdraw penalty rule products from the U.S. during next year, do you have to withdraw that product in its entirety, you can't just step away from Medicaid? And if that is the case, can you redirect that volume to other markets? Or can you use the fill/finish infrastructure for GLP-1?

[Lars Jørgensen, executive]

Thank you for those questions. So on Ozempic, you shouldn't expect that it's a kind of a one-off event that triggers a step change. So it's a gradual expansion of capacity. And I'll not go in and comment on our ability to supply against consensus. We'll give our guidance for '23 at the full year. And then, Doug, on U.S. health care reform and Medicaid changes coming up, I guess that we cannot be really detailed on what our plans are, but what can you share?

[Douglas Langa, executive]

Yes. I think the question specifically was on the AMP CAP appeal going into 2024. And certainly, we're working on the potential of mitigating actions, but I wouldn't want to get into the specifics.

[Lars Jørgensen, executive]

Thank you. Next question please.

[Operator]

We will now take the next question. It comes from the line of Mike Nedelcovych from Cowen.

[Michael Nedelcovych, analyst]

So as has been mentioned, many people are now taking other incretins for weight loss while Wegovy is supply constrained. It would seem that switching these people over to Wegovy once it's available, could be complicated. And then the timing of generic Saxenda availability adds further complexity. Investors seem to be expecting the pace of sales of Wegovy once supply is available to recapitulate its initial launch trajectory. I'm wondering how you think about these factors and would you advise us to temper our expectations at all? And then my second question is, yesterday, Lilly appeared to imply that a weight loss drug with efficacy in obesity-associated conditions such as sleep apnea and heart failure might have a route to Medicare reimbursement without the passage of new legislation in the U.S. I don't believe this is Novo's view, but why is that not a reasonable assumption?

[Lars Jørgensen, executive]

So I'll start with a bit perspective on use of incretins and then maybe, Doug, you can talk a bit to what we expect when we come back to the U.S. and launch and perhaps what it takes to get an obesity product reimbursed in the public account? So you mentioned that the use of other incretins now that Wegovy is short on supply. I would actually say that the majority of uptake is on our own Saxenda. We have seen Saxenda doing really, really well, a step change in uptake as we unfortunately had to slow down the launch curve. So that really proves that the obesity market is opening up.

So before that, Wegovy, really had incredible excitement about what weight loss potential is possible. We saw a much slower uptake of Saxenda. So we are pleased with what we see and we believe that we can both in markets where we don't have Wegovy, we can sustain the growth with Saxenda. And then obviously, as we get Wegovy back towards the end of this year in the U.S. and gradually start launching outside the U.S., we expect to see a very nice uptake on that. Doug, what should people look for in terms of uptake of Wegovy when we come back? What's the broader reimbursement?

[Douglas Langa, executive]

Yes. Thank you. I think what's important to note is there remains a significant unmet medical need with obesity and that was evidenced when we launched Wegovy in 2021. I think what we can expect is a strong and stable growth and our focus is on building a long-term, sustainable business. Maybe as a reference, we could take a look at the Q1 of '22 this year, where it was assumed that few of the NBRx were using a bridge or a co-pay program. So again, when you look at that quarter, we're looking at roughly 6,000 NBRx and 25,000 TRx. Look, I think it's important to... a long-term sustainable business is what we're looking for.

[Lars Jørgensen, executive]

Great, thank you Doug.