Novo Nordisk A/S

CSE:NOVO B

Earnings Call Transcript 2017-Q4

[Operator]

Good day, and welcome to the Q4 2017 Novo Nordisk A/S Earnings Conference Call. Today's conference is being recorded.And at this time, I'd like to turn the conference over to Lars Fruergaard Jørgensen. Please go ahead, sir.

[Lars Fruergaard Jørgensen, President & CEO]

Welcome to this Novo Nordisk Conference Call regarding our performance for 2017 and the outlook for 2018. I'm Lars Fruergaard Jørgensen, the CEO of Novo Nordisk. With me, I have our Chief Financial Officer, Jesper Brandgaard; 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; as well as Executive Vice President and Head of Business Services and Compliance, Lars Green. Furthermore, and available for Q&A are Executive Vice President and Head of International Operations, Mike Doustdar, and Senior Vice President and Head of Corporate Finance, Karsten Munk Knudsen, who as of 15th of February will assume the role as Executive Vice President and Chief Financial Officer. Present are also our Investor Relations officers.Today's earnings release and the slides for this call are available on our website, novonordisk.com. The conference call is scheduled to last 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 webcast live, and a replay will be made available on Novo Nordisk website.Please turn to Slide 3. As always, we need to advise you that this call will contain forward-looking statements. Such forward-looking statements are subject to risks 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 in 2017 grew by 2% measured in local currencies and were unchanged in Danish kroner. International Operations grew by 5% in local currencies, whereas sales in North America Operations were broadly unchanged in local currencies compared to 2016. Sales growth came from diabetes care and obesity, with the main growth drivers being Tresiba growing 85% and Victoza growing 18% in local currencies.Turning to the R&D events. In December, Ozempic was approved in the U.S. In Europe, a positive CHMP opinion was issued recommending marketing authorization of Ozempic. By mid-2018, we plan to initiate a cardiovascular outcome study called SOUL for Ozempic.Within obesity, the Phase IIIa program for semaglutide in people with obesity called STEP will be initiated in 2018. Furthermore, for semaglutide in obesity, we will initiate a large cardiovascular outcome study called SELECT.Turning to financials. The operating profit for 2017 grew by 5% measured in local currencies and by 1% in Danish kroner. The diluted earnings per share increased by 3% to DKK 15.39. At the end of the general meeting, the Board of Directors will post a final dividend of DKK 4.85 for 2017 per share. Moreover, the Board of Directors intends to initiate a new share of repurchase program of up to DKK 14 billion, which will be executed during the coming 12 months.With regards to the 2018 outlook, sales growth is expected to be 2% to 5% measured in local currencies with an expected negative currency impact of 7 percentage point. The range for operating profit growth is expected to be 1% to 5% measured in local currencies, however, negatively impacted by currencies of 10 percentage points, primarily reflecting the significant depreciation of the U.S. dollar versus the Danish kroner.Please turn to Slide 5. I'd like to highlight 2 changes to the leadership of Novo Nordisk. The Chairman of the Board, Göran Ando, has decided not to seek reelection for the Annual General Meeting in March 2018. The Board of Directors has consequently decided to propose current member of the Board of Directors, Helge Lund, to be elected as Chairman of the Board. Helge Lund has in total been a member of the Board of Directors for 2 years and has extensive management experience recently as CEO of BG Group in United Kingdom and as CEO for Statoil in Norway.Furthermore, as per 15 February 2018, Karsten Munk Knudsen, currently Senior Vice President of Corporate Finance, will succeed Jesper Brandgaard as Chief Financial Officer. Jesper Brandgaard will continue as Executive Vice President responsible for Biopharma and Legal Affairs. Karsten Munk Knudsen started his career in Novo Nordisk in 1999 and has held finance positions of growing size and complexity throughout the Novo Nordisk value chain. From 2010 to 2014, he was Corporate Vice President responsible for finance and IT in the U.S. In 2014, he was appointed Vice President -- Senior Vice President responsible for Corporate Finance in Novo Nordisk.On this call, I would also like to thank Jesper. You're handing over finance functions which is in excellent shape. And for Karsten, we have a new CFO who has learned from the best. I know that Jesper has meant a lot for the investment community for the last 17 years. And thanks to him, we're known for our open and honest communication. I hope you welcome Karsten, who are already familiar for -- a familiar face for most of you and who will represent the continuity of our finance functions.Please turn to next slide. In 2017, the overall sales growth was 2.3% in local currencies and unchanged in Danish kroner. This is in line with the latest guidance provided in connection with the announcement for the first 9 months of 2017 in November. The sales growth was primarily derived from International Operations, which grew by 5% in local currencies, while North America Operations sales were broadly unchanged in local currencies compared to 2016. Within International Operations, all regions contributed to growth. Sales in Region AAMEO, comprising Africa, Asia, Middle East and Oceania, increased by 8% in local currencies. The sales growth was largely driven by modern insulin Victoza and Saxenda, partly countered by lower biopharma and human insulin sales.In region Europe, sales increased by around 4% in local currencies. Sales were driven by Xultophy and the continued penetration of Tresiba. This was partly offset by declining revenue sales, reflecting the continued rollout of Tresiba.Region China grew by around 6% in local currencies. The sales growth were driven by a continued growth in modern insulin sales, which was partly offset by declining human insulin sales. Sales growth in Latin America of around 7% measured in local currencies was driven by Saxenda, Tresiba and modern insulin, partly offset by the timing of tenders for human insulin and NovoSeven. Moreover, sales was positively impacted by 9 percentage points due to price effects in countries with high inflation.In North America, operation sales were driven by Victoza and Tresiba due to underlying volume growth in both GJP-1 segment and the basal insulin segment as well as market share gains for Tresiba. This was countered by lower revenue sales and lowered realized prices for basal insulin. In line with expectations, sales in North America Operations were negatively impacted by approximately 4 percentage due to the launch of generic version of Vagifem and nonrecurring rebate adjustments in 2016 related to Norditropin.Please turn to Slide 7. From a product perspective, sales growth in 2017 was derived from the diabetes care and obesity franchise but negatively impacted by a decline in the biopharma service. In 2017, sales of Tresiba reached DKK 7.3 billion and has since achieved blockbuster status. Meanwhile, sales of Levemir declined by 15% in local currencies, partly due to the continued rollout of Tresiba. Sales of Xultophy reached DKK 729 million in 2017 compared with DKK 207 million in 2016. Xultophy is currently marketed in 18 countries.Victoza sales increased by 18% in local currencies, driven by the U.S. where Victoza grew by 22% in local currencies. This reflects an underlying prescription volume growth of the GLP-1 class and the positive impact from higher realized prices. Furthermore, sales is perceived to be positively impacted by the updated product label, reflecting the reduced risk of major cardiovascular events.Sales of Saxenda increased by 64% in local currencies and reached DKK 2.6 billion. With that, Saxenda has reached a global market leadership position within obesity treatment with a value market share of 37%. Saxenda has now been launched in 25 countries.Sales of biopharmaceutical products declined by 16% measured in local currencies. This was mainly driven by declining Norditropin sales and a negative impact on Vagifem sales due to the launch of generic version in the United States, whereas sales of hemophilia grew by 2% in local currencies.Please turn to Slide 8. Tresiba has now been launched in 62 countries with a positive uptake in countries with the same level of reimbursement as insulin glargine U100. In countries where Tresiba has subsequently -- in countries where Tresiba and, subsequently, Xultophy has been launched, Xultophy has continued -- contributed to continued growth in market share gain in the basal insulin segment. As an example, Tresiba has obtained a market share of 28% in Switzerland, and when combining Tresiba and Xultophy, the total value market share is 59% in the basal insulin segment. In France, Xultophy has reached a value market share of 14% in the basal insulin segment since the commercial launch in January 2017.Lastly, Xultophy was launched in the U.S. in May 2017, and the rollout is progressing as planned.Please turn to Slide 9. Since the beginning of 2017, the combined volume market share of Tresiba and Levemir in the U.S. has increased to a total of 34%, with Tresiba having grown by approximately 5 percentage points. With that, the ambition to reach 10% Tresiba volume market share in 2017 was successfully achieved.Tresiba has now reached a total volume share of 10.7%. This is driven by a strong penetration in the commercial channel, while the performance in the Medicare Part D segment has been modest so far. The formulary changes in the Part D segment as of January 2018 for competing basal insulin products have provided Tresiba with an opportunity for further growth in its market share.Please turn to Slide 10. Victoza sales increased by 18% in local currencies, mainly driven by the U.S. In the U.S., Victoza sales increase by 22% in local currencies, with the primary driver being the underlying growth in the U.S. GLP-1 market. In the fourth quarter of 2017, sales have also been positively impacted by the updated product label, reflecting the reduced risk of major cardiovascular events.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 December last year, once-weekly Ozempic was approved in the U.S. and the positive CHMP opinion was issued in Europe, recommending market authorization. Both the U.S. and the EU label reflect that Ozempic has demonstrated clinically meaningful and statistically significant reductions in hemoglobin A1c as well as statistically significant reductions in body weight versus the multitude of comparators.In the United States, Ozempic is approved for use in 2 therapeutic doses, the 0.5 and 1 milligram, and will be launched in the Ozempic pen, the latest generation of prefilled device. Ozempic has demonstrated a safe and well-tolerated typical GLP-1 class profile across the SUSTAIN program, with the most common adverse event being mild to moderate nausea, which diminished over time.In the U.S., wording around retinopathy was similar to insulin products added in the warnings and precaution section of the label. Cardiovascular results from SUSTAIN 6 with the number and percent of MACE events for the Ozempic and placebo groups are included in the clinical section.In Europe, CHMP incorporates all key SUSTAIN trial results, including cardiovascular data from SUSTAIN 6 in the Ozempic label, similarly to the LEADER data in the Victoza label. The Ozempic European label, hence, includes the 26% risk reduction of MACE as well as Kaplan-Meier plots. The wording around retinopathy in the EU label is similar to the U.S., and we have, as part of the EU approval, committed to conduct a launch on diabetic retinopathy outcome study, which we'll power to enable documentation of a potential long-term benefit of Ozempic on retinopathy. The EU Commission approval is expected during the first quarter.Finally, related to semaglutide in the SUSTAIN program, we're happy to note that the SUSTAIN 7 comparative trial versus dulaglutide has been published today in The Lancet D&E.Please turn to the next slide. Following the approval of Ozempic, we plan to initiate a large global cardiovascular outcome study, termed SOUL. The study will enroll around 13,000 people with type 2 diabetes and establish CV disease or chronic kidney disease. It is a superiority trial designed to confirm the findings in SUSTAIN 6 by showing a significant reduction in the number of major adverse cardiovascular events in people treated with Ozempic compared to placebo, both in addition to standard of care. The trial is expected to be initiated midyear.Please turn to the next slide. Following the positive Phase II obesity data with semaglutide, we are initiating an extensive Phase IIIa program called STEP. Around 4,500 people, fulfilling agency requirements for enrollment in obesity trials, will be included in the program consisting of 4 clinical trials with a duration of 6 to 8 weeks and expected to be completed in 2020. In addition, we plan to initiate a large cardiovascular outcome study named SELECT in approximately 17,500 people with obesity. The aim of SELECT is twofold. Since we both seek to establish semaglutide as a cardioprotective agent in the nondiabetic population, and furthermore, to demonstrate for the first time ever that pharmacotherapy improves long-term outcomes in obese patients in a landmark study.Please turn to Slide 14. In September of last year, the onset 5 Phase IIIb trial Fiasp in people with type 1 diabetes was completed. The trial objective was to confirm the effect of continuous subcutaneous insulin infusion treatment with Fiasp in terms of glycemic control and compared to NovoRapid. In the study, Fiasp was confirmed to be noninferior to NovoRapid with regard to change from baseline in hemoglobin A1c, and the safety profile of the 2 products was similar.Earlier this year, the DUAL II Japan Phase IIIa trial with Xultophy was completed. The trial successfully achieved its objective by demonstrating that treatment with Xultophy was superior to Tresiba with regards to lowering of HbA1c with an A1c reduction of almost 2% to an end-of-trial hemoglobin A1c of 6.7%. Furthermore, from a mean baseline body weight of 74.7 kilograms, people treated with Xultophy experienced a weight loss of 0.7 kilos compared with a weight gain of 0.7 kilos for people treated with Tresiba, corresponding to a statistically significant treatment difference of 1.4 kilograms in favor of Xultophy. We plan to submit a New Drug Application for Xultophy to the Japanese authorities in the second half of this year.In Japan, we additionally submitted a supplemental application for inclusion of the data from the DEVOTE trial in the label for Tresiba. Furthermore, in November of last year, a Variation application was submitted to the EU authorities to include data from the LEADER and DEVOTE cardiovascular outcomes trials in the Xultophy label.In December, we completed the Phase IIIb trial with Japanese people with type 2 diabetes in adequately controlled on once-daily Victoza 0.9 milligram and escalated to 1.8 milligram. Upon completion of the trial, HbA1c was statistically significantly lower with Victoza 1.8 milligram compared to the low dose.In December 2017, we submitted an update of the Saxenda label based on LEADER data to the FDA as an efficacy supplement for Saxenda. The submission was based on the results from the LEADER trial.Finally, we've now completed recruitment of people with hemophilia A for the explorer 5 trial with concizumab intended for prevention of bleeding episodes after subcutaneous administration. The explorer 5 is a global open-label trial, including 30 people with hemophilia A, and the trial objective is to demonstrate proof-of-concept. That is to say that concizumab is efficacious in preventing bleeding episodes. Explorer 5 is expected to report in the third quarter of this year.Please turn to Slide 15. By the end of the first quarter, we expect to receive regulatory feedback from the FDA regarding the inclusion of hypoglycemic data from SWITCH and DEVOTE in the label for Tresiba in the U.S. We also expect to complete the Japanese DUAL I within the first quarter, enabling a submission of Xultophy to PMDA in the third quarter of this year. Furthermore, regulatory approval of Ozempic in Europe and Japan is expected during the first quarter of this year. Similarly, in the first quarter, we expect the first results from the large Phase IIIa program for oral semaglutide. PIONEER 1 is a monotherapy trial where oral semaglutide is tested versus placebo in treatment-naïve type 2 diabetes patients. The remaining PIONEER trials for oral semaglutide are all expected to report throughout 2018, followed by NDA submission next year.We additionally expect both LAI287, our once-weekly ultra long-acting basal insulin and G530 for obesity, the glucagon analogue, to complete their Phase I programs within the first quarter of 2018.Finally, in the first quarter, the regulatory submission of the ATP in the EU and the U.S. is expected.And with this, I'll hand over to Jesper for an update on the financials.

[Jesper Brandgaard]

Thank you, Mads. Please turn to Slide 16. In 2017, sales increased by 2% in local currencies and was unchanged in measured in Danish kroner. The gross margin was 84.2% measured in Danish kroner, slightly lower than the level in 2016. The decline in gross margin reflects a negative currency impact of 0.3 percentage points. In addition, the gross margin was negatively impacted by lower realized prices in the U.S., which was offset by a positive contribution from product mix due to higher Victoza and Tresiba sales.Sales and distribution cost increased by 2% in local currencies and were unchanged in Danish kroner. This development reflects increased sales force and promotional costs in Region AAMEO and Region Latin America as well as increased costs related to legal cases. This was partly offset by reduced manning in the U.S. and broad cost control initiatives.Research and development costs decreased by 3 percentage point in local currencies and by 4 percentage point in Danish kroner. The decline reflects discontinuation of a nonbroad research projects following the updated R&D strategy announced in October 2016 leading to lower research costs.Administration cost declined by 3% in local currencies and by 4% measured in Danish kroner. The lower administrative costs are reflecting general cost control initiatives.Operating profit increased by 5% in local currencies and by 1% in Danish kroner. Net financial items showed a loss of DKK 286 million compared with a loss of DKK 634 million in 2016. This development reflects a loss for the full year 2017 on foreign exchange hedging -- sorry, on foreign exchange forward contracts hedging the U.S. dollar and Chinese yuan due to the interest differential versus the Danish kroner.Diluted earnings per share increased to DKK 15.39, corresponding to an increase of 3% measured in Danish kroner.Please turn to Slide 17. The recent development in currencies impact Novo Nordisk results reported in Danish kroner for 2017. However, in line with our treasury policy, the most significant foreign exchange risk have been hit primarily through foreign exchange forward contracts. Since mid-2017, we've seen a significant depreciation of the U.S. dollar versus the euro and the Danish kroner and most other key invoicing currencies. As a consequence, reported operating profit in 2017 is negatively impacted by 4 percentage point. The currency impact for 2018 is reflected in our outlook for the year, which I will turn to now.Please turn to Slide 18. For 2018, sales growth is expected to be in the range of 2% to 5% measured in local currencies. This reflect expectations for robust performance for the portfolio of new generation insulins and for the GLP-1 portfolio now comprising both Victoza and Ozempic as well as a solid contribution from our obesity product, Saxenda. Sales growth is expected to be partly countered by intensifying global competition both within diabetes care and biopharmaceuticals, especially within the hemophilia inhibitor segment as well as continued pricing pressure within diabetes care, especially in the U.S.Given the significant depreciation for the U.S. dollar and related currencies versus the Danish kroner, reported sales growth is expected to be around 7 percentage point lower than the local currency level.Operating profit growth is expected to be in the range of 1% to 5% growth measured in local currencies. The expectations for operating profit growth reflects the outlook for sales as well as a planned increase in the sales and distribution cost to support the launch of Ozempic. Reported operating profit is expected to be 10 percentage point lower, also reflecting the significant depreciation of the U.S. dollar and related currencies versus the Danish kroner. We expect financial items to reflect a net income around DKK 2.5 billion. The current expectations reflect gains associated with foreign exchange hedging contracts, mainly related to the U.S. dollar and Japanese yen versus the Danish kroner, partly offset by losses on nonhedged currencies. The effective tax rate for 2018 is expected to be in the range of 20% to 22%, positively impacted by the reduced federal corporate tax rate in 2018 in the U.S.Capital expenditure is expected to be around DKK 9.5 billion in 2018. The investments are primarily driven by the construction of an active pharmaceutical ingredient production facility in Clayton, North Carolina. This ongoing investment is in total estimated to be around USD 2 billion and is expected to be completed in 2020. Furthermore, depreciation, amortization and impairment losses are expected to be DKK 3 billion. For 2018, we expect the free cash flow to be in the range between DKK 27 billion to DKK 32 billion.Please turn to the next slide. During the coming 12 months, we will be executing a new share repurchase program for 2018 of up to DKK 14 billion. The total program may be reduced in size if significant product in-licensing or bolt-on opportunities arise in 2018. Do also note that our majority shareholders of Novo Holdings A/S, a wholly owned subsidiary of the Novo Nordisk foundation, has informed us that they intend to participate in the share repurchase program in 2018 and that they currently intend to maintain their share of ownership at around 28% of Novo Nordisk capital. The proposed total dividends for 2017 increases by 3% to DKK 7.85, including the interim dividend of DKK 3 paid in August 2017. The total payout ratio of 50.4% is in line with our pharma peer group payout ratio of around 50%.So this concludes my 70 quarterly financial update to the market. Now back to you, Lars.

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Jesper. What a performance. Please turn to Slide 20. I'm pleased that we delivered on our plan for 2017, and we are continuing to build a platform for sustainable growth. The approval of Ozempic in the U.S. was the culmination of a year in which we achieved important product approvals and label updates. In 2018, we will focus on the global launch of Ozempic and pursue the full value potential of our strong portfolio in what continues to be a competitive environment.We're now ready for the Q&A. [Operator Instructions] Operator, we're now ready to take the first question.

[Operator]

[Operator Instructions] We will now take our first question from Peter Verdult from Citi.

[Peter Verdult, Director]

Peter Verdult, Citi. Two questions. Now kicking off, Jesper, on your 70th quarterly call, maybe you can talk a little bit about tax. Previous guidance on sensitivity to U.S. tax reform suggested that the group tax rate would go down to around 20%. You're giving a range of 20% to 22%. I'm just hoping you could discuss some of the offsetting factors at play. And then secondly, Lars, I realize discussing potential price points for oral sema is a little premature ahead of actually seeing the Phase III data, but there is a healthy debate on this important topic taking place in the market, some believing you could price at current OAD versus GLP-1 price point. So it seemed a little inconsistent with the messaging you've given to date, including the recent CMD. So wondering if you could clarify your thoughts on what is possible and what is not if the PIONEER program delivers the clinical profile you expect.

[Lars Fruergaard Jørgensen, President & CEO]

Jesper, on tax?

[Jesper Brandgaard]

Yes. Thanks, Peter. Well, the range we've given of 20% to 22% is indicating that we anticipate a bit over 1 percentage point in positive tax impact from the lowered U.S. corporate tax rate. So that's pretty much in line with the 21.7% we had in 2017, so not really any significant changes. However, do bear in mind that the gradual reduction of the overall share of our turnover that arises from the biopharma franchise have a tendency to up the average weighted tax rate for Novo Nordisk. And if you add those 2 components, you get very close to the midpoint of the range that we presented.

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Jesper. And on price point for oral sema, I do understand that there is an interest in discussing this and understanding it a bit better. But as you say yourself, we need to see the clinical data. And also from a competitive point of view, it's not really in our interest to be very specific on what price point we are going with. We're taking a long-term view on this. We're trying to optimize the formulations. And what we guided at the Capital Markets Day is that we see GLP-1 like pricing, and that's what we can say for now. Thank you very much.

[Operator]

We will now take our next question from Vincent Meunier from Morgan Stanley.

[Vincent Meunier, Research Analyst]

Vincent Meunier from Morgan Stanley. The first question is on the capital allocation. I mean, can you talk about your M&A priorities after Ablynx and particularly in the context of Jesper taking the lead in biopharm? And I'm wondering, are you still looking for deals in the low single-digits billion dollar range? Or would you consider bigger targets given your comment on the buyback? The second question is on the insulin's pricing environment. I mean, your performance has been quite strong for the GLP-1 part of the business, but insulins continue to be under pressure and it's now chronic. Do you think that it's coming to an end? And if it's irreversible, would you consider a bigger restructuring of the U.S. insulin unit?

[Lars Fruergaard Jørgensen, President & CEO]

So Jesper, you start on the capital allocation in the context of the biopharma M&A.

[Jesper Brandgaard]

Thanks, Vincent. In terms of our M&A priority, they are completely similar as what we have communicated the last 18 months or so. We have said also in connection with last year's buyback that in case we were doing significant M&A activities, we may look at the size of the repurchase program. And the tax that has been included now is exactly the same as it was a year ago, so no change in policy. In terms of magnitude of the acquisitions, I actually thought that the Ablynx attempt was pretty much in line with the size we had indicated of the USD 2 billion to USD 3 billion. I think that's still a very good guidance. I think we need to justify in the things we bring in that we can add value to our shareholders before we start doing something of a different scale. I'll also note that the focus should not solely be on acquisitions, it should just as well be on in-licensing opportunities where we share the risk and rewards with the current owner of the asset. So it will a little bit be dependent on where is the actual target that we need to -- that we would like to supplement our biopharm pipeline with that will be determining whether it's going to be an actual acquisition or whether it's going to be an in-licensing activity with a much lower capital, initial capital requirement.

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Jesper. And on insulin pricing, we see this as a new market dynamic, so there'll be a continued pressure on pricing. This is what we have baked in our guidance for '18 and also long-term financial targets. I think it's too early to speculate whether there is an end to it. We have seen that in the fast-acting category that the rebate levels bottoms out at a point of time. I think the basal dynamics is slightly different. Bear in mind that we see a very strong dynamics in the GLP-1 space. So from a mix point of view, we have a large and larger weight in the GLP-1 space where we have higher price point and also less price pressure right now. So on that, that I mentioned over time we say we get a lower exposure to insulin, but we see this as, for now, a permanent change that will lead to continued price pressure. Thank you, Vincent.

[Operator]

We will now take our next question from Chung Hsu from Crédit Suisse.

[Chung Hsu, Director and Taiwan Equity Strategist]

I have one on the financial targets and another on insulin. So the first on guidance. It doesn't look like there's much margin expansion here. You're going to conduct a big outcomes trial with Ozempic. You have the PIONEER program ongoing. You have the rollout of Ozempic and DTC advertising for the year. Can you perhaps talk about your views on the development of the gross margin SG&A and R&D going forward? And then a quick question on the insulin market. In contrast to the strong growth you're seeing with GLPs, if you have a look at the insulin prescriptions, it looks like growth has slowed significantly in the U.S. Can you perhaps talk about the dynamics you're seeing here? You previously said insulin volume could grow 3% to 4%. Is that something you still believe?

[Lars Fruergaard Jørgensen, President & CEO]

Jesper, a bit on the financial targets and guidance?

[Jesper Brandgaard]

Yes. Well, it's a correct observation that when we guide the sales with 2% to 5% growth in local currencies and the operating profit growing 1% to 5% there's not a lot of expansion of the operating margin. So -- but that's completely in line with what we also said when we updated our long-term financial target. In terms of the specific guidance for 2018, I think it will be appropriate to ask Karsten to give that guidance as you will enjoy holding him accountable to those guidance points throughout 2018. So over to you, Karsten.

[Karsten Munk Knudsen, Senior VP of Corporate Finance]

Thank you, Jesper. As you said, it's correct that there's not a lot of margin expansion built into our 2018 financial guidance. In reality, when you look at it, then the midpoint for our operating profit growth in local currencies is slightly lower than our sales growth in local currencies. So there is a slight margin erosion built into our targets. That margin erosion will come from 2 sources. One is linked to the launch of Ozempic in the U.S. so we are putting significant resources behind succeeding with our launch of Ozempic, being one. And then the other piece is when you look at other operating income. We had a nonrecurring income in the third quarter related to a licensing deal with Innate pharma in the third quarter of '17, which would not take place in 2018. So those are the 2 main factors driving down margin slightly in local currencies in 2018.

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Karsten. In terms of insulin market, the dynamics and growth, of course, this is something that's impacted by launches of new products, et cetera. But we still believe market growth in the neighborhood of 3% to 4% is realistic for U.S. markets. So we cannot be much more specific on that.

[Operator]

We will now take our next question from Michael Leuchten from UBS.

[Michael Leuchten, Co]

Michael Leuchten from UBS. Two questions, please. One, on the change in the CFO role. Obviously, we're very sad to see Jesper go. And I fully appreciate that Karsten is a very pair -- safe pair of hands to take over. But in terms of timing, I was wondering if you could comment on why now is a good time to make the change given that you do have the execution going on, you have the change of the U.S. structure and other things going on within the company? And then the second question is on the Ozempic launch. Could you please comment on your access plans/launch plans and also how and when you plan to use to SUSTAIN 7 trial in the launch given that access I believe will be limited in 2018? And also tie that into your just previous comments about the investments you're planning to put into the franchise in 2018.

[Lars Fruergaard Jørgensen, President & CEO]

Yes. So in terms of timing of change of CFO, I think we should all bear in mind that since May last year, Jesper has besides being the CFO, also being involved in setting the strategy for biopharma area. We have as a clear objective to return biopharma to growth and our number of the organizational upgrades, priorities in terms of our existing portfolio and also the nonorganic options we're looking at. And in parallel with this, Jesper is a very strong leader, being very focused on developing talent in his own area, and we have a very ready and capable successor. So looking at this, Jesper and I felt that he could add even more value by focusing more on the biopharma business, and we feel that Karsten is a great leader to lead financial organization forward. So I see this as a continuation of how we manage our finances. And I do acknowledge that Jesper has been a very visible individual vis-a-vis investors and leading our financials with very safe hand. But I'm glad Jesper is still on the team, and I feel very strongly that our finance organization is ready to be led under Karsten. Then in terms of Ozempic launch, I was in Chicago earlier this week to kick off the launch meeting with our U.S. team, and I can tell you, they are all fired up. And we could hardly keep them in the room because they were so eager to get out in the field, so they will be out on Monday pushing the brand in the U.S. You're right that access nowadays comes slower than we were used to, or some payers actually block access from the get-go until we have negotiated contract. And so we cannot expect the same uptake as we have expected when we, for instance, launched Victoza or even when Trulicity came to the market. So we have already secured the first contracts, so we can have the reps go out and [ detail ] and also drives sales in the U.S. market. But we have the strong position that we can keep all reps busy because they can either promote Victoza or Ozempic. So from a sales force productivity point of view, they can all go out and win and be successful. And I think that's a significant morale boost in that part of the company. And then we'll gradually be switching focus for the reps as we gain access throughout the year. So I think this can maintain a very strong momentum behind our GLP-1 performance and maintain a double-digit growth. And we believe we can achieve DKK 1 billion or more than that during 2018 in terms of driving Ozempic. And then to SUSTAIN 7, I think, Mads, we have some good news in terms of our ability to go out and talk to that.

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

Yes. Well, first of all, the good news is that the SUSTAIN 7 came out in the Lancet Diabetes & Endocrinology journal online this morning or last night, really, with all the great data that I think you've heard about before. And you can see them in great detail both on the efficacy and safety and tolerability side, so that's fairly good news. And according to the freedom of speech and so on, actually in the U.S., you are aware that our liaison -- medical liaisons are obviously able to use these reprints in a good way. I think this is together with the Phase IIIa SUSTAIN 1 to 6 program very important data sets for the choice of physicians for future administration or [indiscernible] of GLP-1 products.

[Operator]

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

[Michael Novod]

It's Michael Novod from Nordea in Copenhagen. So one question that's been made in discussion today around the prior-period adjustments. I don't know whether you could perhaps try to detail that a bit more on a product level in a kroner perspective for Q4, just to get some kind of clarity for traction in the quarter in the U.S. And in the same question, perhaps also talk a bit about the, say, the tenders in emerging markets whether there any, say, moves from one quarter to the other? And then secondly, looking at Tresiba and the Medicare Part D both of Tresiba and Levemir. So do you start to see the benefits coming from the exclusion of Sanofi under the CVS Medicare Part D. It seems like it perhaps is Basaglar that against a bit more traction from this than you guys?

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Michael. So if we take the tenders in emerging markets first, maybe, Mike, you could give a few comments on overall without getting maybe in too much details that played out?

[Maziar Mike Doustdar, Executive VP & Head of International Operations]

Though the part I could get into details is that when you're thinking about tenders then primarily you're looking at human insulin and the hemophilia business, hemophilia both on Factor VIII and Factor VII. And any given point of time, of course, depending on the various different governments and geographies' needs, then there could be some movements. Most of those movements are preplanned, however, and in very close dialogue with the various governments. And we have seen some of that also in 2017 and then '18 as usual. I cannot get into more details of that.

[Lars Fruergaard Jørgensen, President & CEO]

Thanks, Mike. In terms of the prior-period adjustment, Michael, it is a little bit frustrating that we, in the period, get a significant adjustment. However, it is particularly profound this fourth quarter for our NovoLog, NovoRapid franchise in the U.S. And that's really relating to the channel flow has in the subsequent report we got after our 1st of November announcement basically have documented that a higher proportion is flowing through lower -- or higher rebate [indiscernible], i.e. lower-value channel to us. That creates a total full year adjustment for that patent flow of DKK 500 million, which have been adjusted in Q4, but it as I said, is related to the full year 2017. Likewise, for Tresiba, there's approximately DKK 200 million in an adjustment to rebate booked in the fourth quarter relating to full year 2017. And on the other hand, we have been benefiting from a better channel flow for Victoza, DKK 200 million in opposite direction. So when you net those 2 out, it is really DKK 500 million on NovoLog which is the big movement in Q4. And it should not be looked at in Q4 alone. It should be looked as an adjustment to sales for 2017. So overall, I do believe that the full year numbers are giving an accurate and true picture of our sales both in the U.S. However, Q4 alone is hard to predict, or hard to [indiscernible], sorry.

[Lars Fruergaard Jørgensen, President & CEO]

So with regards to the Part D opportunity, CVS has executed Sanofi [indiscernible]. It's too early for us to be specific on [indiscernible] it looks promising. Obviously, the dynamics will be a bit different whether you are based converting to [indiscernible] similar molecule where you are converting to another part. We believe that they will have a fair share. It's too early to be very specific on how much [indiscernible] Thank you. I think there's a bit of noise in the background.

[Operator]

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

[Simon P. Baker, Analyst]

Firstly, just going back to Michael's question on Ozempic access. I wonder if you could give us an idea of the current covered lives for Ozempic and the opportunity for 2018. Clearly, a lot of plans particularly within Part D will be a 2019 access event, but I just wondered if you could give us an idea how much you can capture of the market in this year rather than waiting to 2019. And then secondly, going back to the guidance and the commentary on the FX impacts on operating profits. It seems that both in 2017 and implied for the 2018 guidance, there is, I think because of what you said, Jesper, on in terms of the interest rate differentials, the hedge appears to be less effective when one considers the hedging gains versus the kroner impacts on operating profit. I wondered if you could give us a little bit of color on the, if you like, the true hedging gains for 2017. And how we should think about 2018 in trying to bridge between the guidance of around DKK 2 billion, DKK 2.5 billion of net financials and the implied kroner impacts that 10 percentage point suggests?

[Lars Fruergaard Jørgensen, President & CEO]

Okay. Thank you, Simon. I'll start on a Ozempic access. So it's important for us to make sure that all payers, they have a good understanding of the clinical profile. We don't want to rush access where we jeopardize appreciation of what the product can do. So we will be -- we'll be patient in terms of making sure that the pulling the market and understanding of the profile is gating for the access. We are not going to give you data on where we are on access throughout the year. But as I mentioned before, we have secured the first contracts, and the reps will, in a number of states, be able to go out and sell Ozempic. So I think that's encouraging, and that's based on ensure understanding the profile of the product and having a clear preference for having that on formulary.

[Jesper Brandgaard]

And then in terms of currency impact on operating profit, I think my first comment would be that the significant negative currency impact we've had in 2017 is actually more or less alone arisen in the final quarter. So the impact in the final quarter is an impact to the tune of DKK 1.3 billion, taking it to a total full year impact on operating profit of DKK 1.8 billion. And that's, of course, coming not only -- you could say roughly 1/2 of that is coming from the U.S. dollar but also a substantial impact from the CNY, so the Chinese yuan and the Japanese yen. And then if we look to hedging for 2017, we do capture out of the impact in the U.S., we capture just below half in terms of hedging, so a gain of to the tune of DKK 200 million to DKK 300 million. The problem we have on the hedging the U.S. dollar is this interest differential. And it actually gets even worse when we look at the CNY because we are hedging that in CNH, so in offshore yuan with the higher interest level and then when the movement is not big enough, you get actually a loss both on the hedging and on the operating profit. So I'd say it's almost as big the impact on our net profits from the movement of the CNY and the hedging of the CNY. And that's also why we have decided and that was actually Karsten and I in conjunction that agreed that we've move our CNY hedging down to half the length, now only being hedged on the 6-month horizon instead of 12 months because of this deficiency in the hedging cost. But it has been a little bit painful. Most of the -- you could say the Japanese yen with the low interest environment has been completely effective and a very little loss on net profit from hedging the Japanese yen, so that really works. So the rest that is significant on operating profit is really the Argentinian peso, the Turkish lira and the Iranian whatever it's called, riyal. That's been the main currencies impacting our operating profit. Karsten, in terms of the outlook for 2018 and our hedging against them, maybe a few comments from your side?

[Karsten Munk Knudsen, Senior VP of Corporate Finance]

Yes. So in reality, it's the same mechanism as Jesper just described for 2017, just of a bigger magnitude. So the 10% negative currency impact on operating profit corresponds to the DKK 5 billion negative impact. The way we hedged is that we hedge our net currency exposure to the extent of around 80%. So we apply hedging to this 80% or some DKK 4 billion. And it's basically those DKK 4 billion you should compare our hedging -- net hedging gains of 2 -- some DKK 2.7 billion on. That spreads between the DKK 4 billion and the DKK 2.7 billion, that is a reflection of primarily the interest rate differential between the U.S. dollar or the U.S. zone and the Eurozone and then to a slight extent the fact that we are only hedging CNY through CNH on a 6-month horizon. So those are the 2 main factors explaining it. The remaining part of the negative currency impact on operating profit hinges on non-hedged currencies, which again, as Jesper said, Argentinian peso, Iranian riyal, [indiscernible] dinar et cetera.

[Lars Fruergaard Jørgensen, President & CEO]

Complicated stuff, but that's the reality.

[Operator]

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

[Richard Vosser, Senior Analyst]

Richard Vosser, JPMorgan. Just going back to the impacts on the rebate adjustments throughout the year and just thinking into 2018. So you've had a better mix for Victoza. So should we think that, that mix would continue to be some of the more commercial higher-priced patients rather than Medicare patients? Or as you grow or restart growth on Victoza, could we expect the channel to get the other way? And then just on Tresiba, as was alluded to that the part D contracts, I think, would take the mix negatively again in 2018, so just some thoughts on price and mix on Tresiba in 2018 would be useful. And then finally, just PIONEER 3 and 4, they seem to have moved earlier in the year since the Capital Markets Day. So they're now on in Q2 rather than Q3, so just thoughts of the reasons for this and when also should we expect the PIONEER 1 data.

[Lars Fruergaard Jørgensen, President & CEO]

So we should start by you, Mads, on PIONEER.

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

Yes. So it is correct, Richard, that PIONEER 3 and 4, which is a superiority versus [ newer ] D trial and the matching [indiscernible] to 1.8-milligram trial, respectively, they are now destined to be made available in the form of Q result meetings just before the end of the second quarter. So it's a minor change that pushes it forward because we're interested in having as much data as fast as possible, and we, of course, know when the last patient enter and hence also leaves the clinic again. And with regard to PIONEER 1, which is the first report, it is somewhere between now and the end of the first quarter. That's as much as we can say. But we'll keep you alert because even though it's a placebo-controlled trial in treatment-naive patients, it is, of course, an important one because it will hopefully confirm what we all of us think, namely that we have a drug that really works also in bigger populations. And then you can compare those data to what has been seen for Victoza, Trulicity and other GLP-1s in such a population.

[Jesper Brandgaard]

Thanks, Mads. And then in relation to the channel mix for Victoza, I think that the full year numbers for 2017 is a fair reflection of the channel mix we've had and the average price that we've obtained for Victoza. However, I do note that as we gradually expand Victoza, the mix is, of course, gradually getting into lower-priced channels as -- so if we do compare '17 up against '16, it is slightly lower-priced channels for Victoza and a gradual continuation, although not significant movement should be expected for '18. For Tresiba, I think you rightly point to that a gradual, higher proportion of the Tresiba volume will go through Medicare Part D, and as a consequence of that, a gradual erosion of the average prices realized. I think that is completely customary in terms of the gradual penetration of a product into the market, and we're quite satisfied with the Part D coverage we have for Tresiba.

[Lars Fruergaard Jørgensen, President & CEO]

We have time for 2 last questions.

[Operator]

We will now take our next question from Alex Arfaei from BMO Capital Markets.

[Alex Arfaei, Pharmaceuticals Analyst]

Alex Arfaei with BMO. First, regarding the large cardiovascular study with Ozempic. I'm wondering if you could provide more color, excuse me, on your strategic thinking there? Obviously, this is a big expensive study. You already have some cardiovascular data in your label. Is this because you're worried about the upcoming dulaglutide data will be more compelling than what you have? and then second, on the insulin market. As you look at the competitive landscape, how many biosimilars do you see in major markets, both for basal insulin as well mealtime insulin?

[Lars Fruergaard Jørgensen, President & CEO]

Mads, on the cardiovascular outcome trial?

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

Yes, and of course, there are 2 of those, so the rationale behind each of them is as follows. The SOUL trial is the superiority trial in the people with diabetes and established CV of kidney disease. and this is basically a trial to once and for all get the superior nature on MACE events of Semaglutide, also versus what we've seen for other compounds such as liraglutide and SGLT2s is really significant and something that should enter into all the treatment guidelines and being top-of-mind of the physician. We're including a number of endpoint, including cardiovascular mortality, all-cause mortality, onset of nephropathy, worsening of nephropathy, health economic outcome, research endpoints, patient-reported outcome questionnaires and a number of things that will create value towards payers, towards treatment guideline providers and a number of other folks. The other trial, the SELECT trial is even bigger. And do bear in mind, if the cost is actually expensed over many, many years. So even though they per se are costly, then Novo Nordisk does conduct them with own clinical research associates, which are about half price of those that you can get from CRO companies because of this, new markup. But the other trial, which is done in 17,000 patients, we consider a landmark study in that it'll be the first time ever we hope to prove that obesity is a serious medical condition where we can actually with pharmacokinetic therapeutic intervention actually provide better outcomes in terms of life expectancy and life quality vis-à-vis avoiding stroke and myocardial infarctions. This we can also help economically then justify will enhance the societal productivity and improve the reimbursement status for this devastating disease in many countries of the world that today consider it more of a lifestyle-driven disease. And obviously, it also will help prove that Semaglutide has mechanisms that are cardioprotective but are totally regardless of the glycemic status of the patient.

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Mads, for that comprehensive answer. On -- in terms of biosimilar incidents, we do not really comment on how many will make it to market and what the success of them will be. Just to make a note that already in the post of fast-acting and basal categories today, there is enough products to really play out into a quite tough competitive dynamic where players -- have payers have choice and that leads to price competition. So it's not certain that more biosimilars will change the dynamics significant. One last question, please.

[Operator]

We will now take our last question from Wimal Kapadia from Bernstein.

[Wimal Kapadia, Research Analyst]

Two, please. So at the start of the year, we saw list price rising within the basal insulins of mid-single digit. And I think this is the first time since 2015 that we've seen list price rises in the U.S. So could you just give us any comments as to what has changed in a market to give you comfort in raising list price rises within the basal market? And then secondly, on oral sema there's been lots of discussion around the dosing protocol with respect to the food and water and the G.I. tolerability of the products. What I wanted to know is, maybe this one is for Mads, how do you think about the impact on compliance of the product? I mean, if you read the literature, it seems like compliance of the injectables is lower than orals, which makes sense given that the injectable and you also have the G.I. side effect. But how do you think about the compliance of the oral sema product versus the existing orals in the longer term given that the product profile and the fact that diabetes patients tend not to follow instructions very well?

[Lars Fruergaard Jørgensen, President & CEO]

So on list price increase, I cannot go to commenting a lot on our strategy here because for competitive reasons. But we felt it was prudent to take a small list price increase in the U.S. well below what we've seen historically. So I cannot really comment on what we intend to do in the future. Mads?

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

Yes, and so here are 2 situations to consider. There's the adherence to therapy in a controlled setting such as the Phase III PIONEER trial, and there's the real world situation once we are out in the marketplace. And vis-à-vis the first of the 2, we know from the Phase II trial where 500-plus patients showed absolutely no signs of not adhering, i.e. there was superimposability between the expected dosing and exposure whether it was by the oral route or by the injection route. And since the guidance we're giving the physicians and patients is even simpler and clearer in Phase III and we're following up, I would not expect to see any adherence problems in that study. And if so, it would be very, very few patients, relatively speaking. Now in the real-world setting, I would agree with you because I know from many personal but also market research related activities that adherence to injection-based therapy tends to go down because people find excuses for why they on a particular day a particular patient don't need to inject themselves. This is not the case when you get the habit of taking a once-daily tablet like a vitamin or something. You tend to take that very serially and on an ongoing basis. So I would expect that the real-world adherence orals sema would be even better than, for instance, to a daily injection based on everything I know.

[Lars Fruergaard Jørgensen, President & CEO]

Thank you, Mads, and thank you all for dialing in and listening to us. This concludes our conference call. Thank you for participating in feel free to contact our Investor Relations and if you wish to ask further questions you might have. And then we also look forward to meet you in the coming days on roadshow. Thank you. Have a good day.

[Operator]

Thank you, ladies and gentlemen, that will conclude today's conference call, and you may now all disconnect.