Novo Nordisk 4Q18 – 6% operational growth to $14.9B for D/O in 2018, +7% in 4Q18; Ozempic beats guidance w/ $283M for year; Growth from Tresiba, Xultophy, GLP-1; Oral semaglutide decision in 3Q19 – February 1, 2019

Novo Nordisk provided its 4Q18 update this morning in a call led by CEO Mr. Lars Jørgensen (earnings presentation, webcast, roadshow presentation). Below, you’ll find updates on the company’s diabetes-related pipeline and commercial products, followed by diabetes-related Q&A from the call.

2018 Financial Results for Novo Nordisk’s Major Diabetes and Obesity Products

4Q18 Financial Results for Novo Nordisk’s Major Diabetes and Obesity Products

Pipeline Highlights

1. Novo Nordisk to Use Priority Review Voucher for Oral Semaglutide; 3Q19 FDA Decision Expected on 1Q19 Submission

Oral semaglutide and the recently completed phase 3 PIONEER program were major discussion points on the call, with CSO Dr. Mads Thomsen announcing that the candidate is “almost ready for NDA submission” and that the company will use a priority review voucher. Novo Nordisk obtained this voucher in November 2018. It will shorten the FDA review period for oral semaglutide to six months, from the usual 10-12. Dr. Thomsen confirmed that Novo Nordisk is on track to file an oral semaglutide NDA by the end of 1Q19; an FDA decision is anticipated in 3Q19. If there was any question in our minds that Novo Nordisk is extremely committed to commercializing oral semaglutide, that’s now been put to rest. That said, Mr. Jørgensen cautioned during Q&A that even if oral semaglutide approval goes smoothly and US launch occurs swiftly, it will take the company time to build up reimbursement for the product. Access for Ozempic (injectable semaglutide) climbed especially quickly following its February 2018 US launch, but management isn’t counting on the same for oral sema. Payer negotiations will rest on Novo Nordisk’s pricing strategy for the first-to-market oral GLP-1 agonist, and right now it’s anybody’s guess as to what that will be. Mr. Jørgensen remained tight-lipped about oral semaglutide pricing even when pressed during Q&A, stating that “it’s information of a competitive nature, and it’s not serving our investors well to be open on that.” As we understand it, the bioavailability of oral semaglutide isn’t optimal (Lilly management has been critical of this in the past when defending its own slower-pace development of oral GLP-1s, and we suspect it’s one reason that Novo Nordisk has begun investigating a next-gen oral GLP-1 – to improve bioavailability and/or offer even better efficacy). Lower bioavailability would translate to higher COGS, and Mr. Jørgensen did name this as one (but only one!) factor in decisions around oral semaglutide pricing. A phase 1 trial of the company’s next-gen oral GLP-1 agonist (OG2023SC) wrapped in early December 2018. Investors were curious for any early details about the results – Dr. Thomsen could offer very few (he noted that it will take some time before the database is locked and analysis is conducted), though he did mention the possibility for lower COGS. We’ll be keeping a close eye on this new oral GLP-1 candidate, even as oral semaglutide approaches regulatory desks.

• Oral semaglutide will be submitted to the EMA and Japan in 2Q19 and 3Q19, respectively (slide 15).

• Dr. Thomsen reviewed topline data from the PIONEER 6 CVOT, which offers strong evidence of oral semaglutide’s CV safety. He emphasized significant risk reduction for CV death (51%) and all-cause death (41%); although no confidence intervals or p-values were provided in today’s presentation (slide 13), the topline data release reported a hazard ratio of 0.49 (p=0.03) for CV mortality and a hazard ratio of 0.51 (p=0.008) for all-cause mortality. The hazard ratio for the primary outcome, three-point MACE, was 0.79 favoring oral semaglutide over placebo, though this did not meet the threshold for statistical significance. Similarly, there were non-significant effects on non-fatal stroke (HR=0.74, NS) and non-fatal MI (HR=1.18, NS). We don’t consider the trend in favor of placebo on non-fatal MI to be a worrisome signal, though we anticipate more discussion around this when full PIONEER 6 results are announced (hopefully at ADA 2019 in San Francisco). Dr. Thomsen summarized the impressive findings on 14 mg oral sema from the overall PIONEER program, which are detailed on the slide below. (This is similar to a slide shown during Novo Nordisk’s 3Q18 update, now with information from PIONEER 6 and PIONEER 9 included.)

• In light of PIONEER 6 data, the question now is how Novo Nordisk will go about securing CV indications in the US for Ozempic and oral semaglutide. The dynamics around CV indications are in flux: FDA hosted an Advisory Committee in October to revisit the original 2008 CVOT guidance, and Novo Nordisk management has previously outlined a goal to use SUSTAIN 6 and PIONEER 6 data to support a CV label update for Ozempic. To our knowledge, a post-market CVOT for oral semaglutide is still on the docket, but the post-market SOUL CVOT for Ozempic has been canceled. Dr. Thomsen was vague about next steps for semaglutide CVOTs during today’s call. That said, he mentioned something else that piqued our excitement – Novo Nordisk is focused on obtaining renal indications for both injectable and oral semaglutide as well, and is in the midst of “bridging” primary endpoints to hopefully “crisscross between Ozempic and oral semaglutide for renal data too.”

2. Once-Weekly Basal Insulin/Semaglutide Fixed-Ratio Molecule Added to Phase 1; Management Highlights Potential for Very High Efficacy with Best-in-Class Semaglutide

Once-weekly basal insulin LAI287 advanced into phase 2 in 4Q18, while Novo Nordisk also launched a phase 1 investigation of LAIsema – what would be a once-weekly basal insulin/GLP-1 combination therapy. We’re very excited about both these candidates and particularly the latter, given the incredible efficacy seen in clinical trials of daily basal/GLP-1 combos (Novo Nordisk’s own Xultophy and Sanofi’s Soliqua). What’s more, Dr. Thomsen outlined his ambition that all the benefits of semaglutide monotherapy (i.e. powerful glucose-lowering, weight loss, and potential CV/renal protection) will carry over to the fixed-ratio combination. To be sure, real-world uptake of these fixed-ratio products has been underwhelming to-date – a salient point raised by one investor during Q&A. We’re hopeful that by the time LAIsema reaches the market (and this is assuming all goes well in phase 1, phase 2, and phase 3), the commercial barriers affecting the fixed-ratio class are sorted out. These include low reimbursement, low provider familiarity with the concept of a fixed-ratio drug and HCP reluctance to prescribe combination therapy in diabetes, and restrictive labels in the US that require patients to first fail on basal insulin or GLP-1 monotherapy before taking the fixed-ratio combination. During Q&A, Dr. Thomsen underscored that restrictive labeling is only a challenge in the US. He pointed to strong Xultophy (insulin degludec/liraglutide) uptake in European countries like France, where it is indicated as a first injectable and where it has secured reimbursement. This has been a recurring refrain from Novo Nordisk management in defending Xultophy, but we note that the US is the largest market by far for diabetes and fixed-ratio combination products will have to gain traction here. To this end, we’re eager to hear a concrete plan from Novo Nordisk when it comes to increasing use of basal insulin/GLP-1 combos stateside, especially now that the company is developing a once-weekly version.

• The phase 1 trial of LAIsema (n=60) is assessing pharmacokinetics vs. semaglutide and vs. LAI287. The study is using a crossover design, where each participant will receive the three treatments for five weeks in random order, and is expected to complete in September 2019 per ClinicalTrials.gov. Most endpoints are related to PK profile, though a secondary endpoint will look at frequency of hypoglycemia. To be clear, LAIsema remains early-stage and while we’re excited by the prospect of a once-weekly basal/GLP-1 combo (that includes the most potent GLP-1 agonist, no less), this candidate faces a long clinical development road ahead. As of this writing, the phase 2 study of LAI287 alone is not posted on ClinicalTrials.gov.

3. Spotlight on New Partnerships: Embark (Obesity) and Staten (High Triglycerides)

Management mentioned several recent R&D partnerships on the call, including one with Embark Biotech to develop therapies for obesity that specifically increase energy expenditure and one with Staten Biotech focused on hypertriglyceridemia. Per its agreement with Embark, Novo Nordisk will provide research support (monetary amount undisclosed) and retains the option to license exclusive worldwide rights for any promising candidates. We’re curious for more scientific specifics: What therapeutic targets are Embark/Novo Nordisk most interested in? How will these new additions to the obesity competitive landscape differentiate themselves, and what new problem can they solve in weight loss and weight maintenance? It’s notable to see Novo Nordisk’s broad commitment to obesity care, through market-leading Saxenda (liraglutide 3.0 mg), late-stage candidates (semaglutide in phase 3), early-stage candidates (six in phase 1), and even preclinical candidates in collaboration with Embark. You can find these and other candidates from Novo Nordisk’s clinical-stage pipeline summarized in the table below.

Novo Nordisk Diabetes/Obesity Pipeline Summary

The table below reflects the latest updates, as far as we are aware, on Novo Nordisk’s diabetes/obesity pipeline products. Items highlighted in yellow indicate notable changes to the pipeline in 4Q18.

Financial Highlights

1. Overall Diabetes/Obesity Portfolio Flat on the Year at $15 Billion, 8% YOY in 4Q18 to $3.8 Billion; GLP-1s Drive; 34.5% Profit Margin Continues Questionable Upward Trend Alongside Local Minimum 18.9% Tax Rate, All-time High (68% of Gross US Sales) Rebates/Discounts

Novo Nordisk’s total diabetes and obesity portfolio grew a modest 1% (+6% operationally) to $14.9 billion (DKK 94 billion) in 2018, from $14.3 billion (DKK 93 billion) in 2017. By our calculation, this growth was driven by Ozempic (25%), Saxenda (18%), Victoza (16%), Xultophy (12%), Tresiba (10%), Fiasp (8%), “other diabetes” (oral products, needles, and GlucaGen HypoKit; 7%), and Ryzodeg (3%). Altogether, Novo Nordisk’s four GLP-1-containing products (Victoza, Ozempic, Saxenda, and Xultophy) accounted for 71% of the company’s growth but only ~34% of total revenue. Surely, this speaks to the incredible strength of liraglutide and semaglutide, as well as Novo Nordisk’s certain leadership in the GLP-1 agonist class. Indeed, Novo Nordisk remains the leading player in the diabetes industry, as the company now holds ~28% of the total diabetes market (slide 19) and ~46% of the global insulin (page 8) and global GLP-1 markets (page 9). By geography, North American sales accounted for 22% of growth, which we consider a solid showing given the extent of pricing pressure in the US. Europe comprised 11% of growth, AAMEO 26%, China 16%, Latin America 20%, and Japan & Korea -2%. According to the financial report, slight losses in the final region were driven by mandatory price reductions for NovoMix and NovoLog, after both products reached the 15-year price protection limit on April 1, 2018.

For 4Q18, Novo Nordisk’s total profile grew a more substantial 8% YOY (7% operationally) to $3.8 billion (DKK 24.9 billion) from $3.7 billion (DKK 23.1 billion) in 4Q17 and 7% sequentially from $3.6 billion (DKK 23.4 billion) in 3Q18. However, growth drivers were slightly more insulin-heavy, including: Ozempic (35%), Saxenda (19%), Tresiba (11%), NovoLog (9%), Fiasp (7%), Victoza (7%), other diabetes (5%), and Ryzodeg (1%).

Novo Nordisk D/O Worldwide Financial Results – Past Five Quarters

• Novo Nordisk’s net profit margin came out to a very high 34.5% for 2018 (page 18), continuing an upward trend: 29.8% in 2014, 32.3% in 2015, 33.9% in 2016, and 34.1% in 2017 (see graph below). Effective tax rate in 2018 was a strikingly low 18.9% – just under the predicted 19%-20% – due to a non-recurring change in tax provisions related to settlement of international tax cases covering multiple years, as well as the reduced federal corporate tax rate in the US. Previous tax rates were 19.8% in 2015, 20.7% in 2016, and 21.7% in 2017.

• Rebates and discounts given to private and public payers totaled 68% of gross US sales across the portfolio in 2018 – sharply up from 64% in 2017, 59% in 2016, 56% in 2015, and 48% in 2014. Doubtless, this is reflective of sustained pricing pressure, particularly in insulin. However, the administration’s newest drug pricing proposal takes aim at these rebates, particularly on the PBM/insurer side, prompting support from the drug industry lobby, PHRMA.

• Mr. Jørgensen noted that severance costs related to the 1,300 layoffs in the second half of 2018 and the expense of the priority review voucher for oral semaglutide negatively impacted operating profit. Even after adjusting for these costs, Novo’s operating profit growth for 2018 was 6% – just over the 4%-5% guidance put out in 3Q18. Another 2%-5% of sales growth is expected in 2019, and more layoffs are expected to mitigate the impact from coverage gap increases (i.e., the Medicare “Donut Hole”) according to Mr. Jørgensen in 3Q18.

2. Victoza Climbs 5% YOY to $3.8 Billion in 2018, Pushed Forward by CV Indication and Underlying GLP-1 Class Growth

Victoza (liraglutide) sales rose 5% YOY as reported (+9% operationally) to $3.8 billion (DKK 24.3 billion) in 2018, from a base of $3.6 billion (DKK 23.2 billion) in 2017. Sales of the once-daily GLP-1 were strong in 4Q18, rising 3% YOY and 6% sequentially to $996 million (DKK 6.5 billion), from $1 billion and $951 million in 4Q17 and 3Q18, respectively. Management maintained that Victoza is a continued driver of growth for the company and an important asset in its ever-expanding GLP-1 portfolio. Notably, Victoza drove 17% of growth in Novo Nordisk’s diabetes/obesity portfolio overall in 2018, while capturing 30% of total revenue. Looking at 4Q18 specifically, the product drove 7% of portfolio growth and reflected 26% of total revenue. See below for a tabular breakdown of Victoza’s recent financial performance:

Victoza Worldwide Financial Results – Past Five Quarters

Victoza 4Q18 Geographic Financial Results

Management reiterated competing forces impacting Victoza’s growth. There’s a sustained tailwind from its recent CV indication, which is somewhat counteracted by fierce competition from Lilly’s once-weekly Trulicity (dulaglutide). Moreover, at least some Victoza sales are being cannibalized by newly-launched Ozempic (semaglutide once-weekly). Management emphasized the lift provided by Victoza’s CV indication (approved in August 2017), and we imagine this indication will continue to buoy the franchise in coming quarters. Nonetheless, Trulicity’s probable label update to reflect positive results from its REWIND CVOT will certainly challenge Victoza here (though we’re still waiting on full REWIND results, expected at ADA 2019 in San Francisco). We noted in 3Q18 that Trulicity had for the first time overtaken Victoza in terms of US GLP-1 volume market share (43% vs. 38%), and this trend persisted in 4Q18 with heightened separation (45% vs. 35%). To be sure, much of this decline in Victoza market share is directly attributable to Ozempic’s successful launch, since management has been explicit about transitioning its sales force from the first-gen over to the second-gen GLP-1. We expand on this below in our Ozempic highlight.

• Quarterly total US prescriptions of GLP-1s rose 27% YOY in 4Q18 to cross the 3 million mark for the first time. Total quarterly US prescriptions of GLP-1 continue to climb steadily, highlighting the underlying class growth that lifts all individual products in the class. We fully expect this number to rise into the foreseeable future, especially with innovation abound in the class and multiple tailwinds pushing the class forward (e.g. Trulicity’s probable CV indication, Intarcia’s ITCA 650 potential approval, Ozempic’s continued launch, oral semaglutide’s upcoming launch, and Lilly’s GLP-1/GIP dual agonist looming). We should note that Victoza’s patent expiry is also expected around 2022 or 2023; Teva Pharmaceuticals has already filed an ANDA for generic liraglutide with FDA. Novo Nordisk’s GLP-1 business isn’t in immediate danger given Ozempic’s launch and hopeful approval of oral semaglutide, but the first generic GLP-1 should definitely influence prescription volume for the class – and we’re excited about that.

• Novo Nordisk broke out intriguing data on GLP-1 market dynamics showing a significant increase in global GLP-1 share of the total diabetes market: 11.8% in November 2017 vs. 14.5% in November 2018. This jump was even more pronounced in North America, where the increase was from 13.9% to 17.1%. Management highlighted that Novo Nordisk continues to be the leader in the GLP-1 market, with a 46% global market share (down slightly from 50% in November 2017). Novo Nordisk’s commitment to GLP-1 therapies could not be more clear – from Victoza to Ozempic to Saxenda to oral semaglutide (and even a new phase 1 oral GLP-1), the company has made repeated and significant investments in GLP-1-based treatments, with impressive results to-date. Broadly speaking, we’re thrilled to see this sustained underlying class growth for the highly innovative GLP-1 class as a whole.

Victoza Sales (1Q12-4Q18)

3. Ozempic Exceeds Expectations with $283 Million in 2018; Passes Victoza in NBRx; CV Indication Dialogue with FDA Ongoing

Ozempic continued its impressive performance through the end of 2018. Full year revenue totaled $283 million (DKK 1.8 billion), exceeding management’s guidance of DKK 1 billion in the first year. These sales even smashed through management’s updated guidance given in 3Q18 of ~$240 million, signaling continued strong uptake of the novel once-weekly GLP-1 therapy. Ozempic reflected <2% of Novo Nordisk’s total diabetes/obesity revenue for 2018, but drove a remarkable 25% of portfolio growth. In 4Q18, Ozempic sales grew 84% sequentially to $152 million (DKK 0.9 billion), from a base of $84 million in 3Q18.

Ozempic Worldwide Financial Results – Since 1Q18 Launch

• Management highlighted that Ozempic has launched in 11 countries across North America and Europe, with the initial feedback of these launches being “encouraging.” Notably, Ozempic is now outpacing Victoza in terms of new-to-brand prescriptions in the US (26% vs. 23%), and we fully expect this trend to continue. Formulary coverage for Ozempic is now at 80%, up from the “more than two-thirds” mark reported in 3Q18. Ozempic’s success has been even more pronounced in Canada, where it boasts 51% of new-to-brand prescriptions (compared to 31% for Victoza). In European markets, where Ozempic has launched more recently, the once-weekly GLP-1 is claiming 10% of new-to-brand prescriptions, compared to 72% for the well-entrenched Victoza. As expected, in each of these markets Ozempic’s increase in NBRx has been directly coupled with nearly-proportional decreases in Victoza’s respective market share.

• On this note, Novo Nordisk provided granularity on how each of these agents is bringing in patients who have not used a GLP-1 before (slide 75 in the investor roadshow presentation). Approximately 93% of new patients to Victoza are using a GLP-1 for the first time, while only 72% of those starting on Ozempic are new to the GLP-1 class – further evidence of Ozempic cannibalizing Victoza’s prescription volume (as planned). Management also repeated the slide below outlining how Ozempic and oral semaglutide will replace Victoza as GLP-1 market leaders in preparation for Victoza’s impending patent expiry.

•  “Constructive dialogue” continues with FDA over the potential to obtain a CV indication for Ozempic based on data from SUSTAIN 6 and PIONEER 6. These discussions with the agency began in August 2018, when Novo Nordisk scratched plans for the post-market SOUL CVOT for Ozempic in favor of a post-market CVOT for oral semaglutide. In 2Q18, management laid out a “best-case” scenario for this dialogue with FDA, in which PIONEER 6 would show superiority of oral semaglutide vs. placebo, and therefore FDA would likely accept amalgamated data from SUSTAIN 6 and PIONEER 6 to support a significant CV benefit with both injectable and oral semaglutide. Notably, oral semaglutide did not meet the statistical threshold for CV superiority in PIONEER 6, although there was a strong trend in that direction (significant ~50% risk reduction for CV death and all-cause mortality) – so Novo Nordisk will have to pivot from the “best-case” scenario. We’re curious to see how FDA interprets this pooled data now; we found management’s comments on the topic to be rather vague today, making us all the more eager to ultimately hear what FDA says.

4. Tresiba Maintains Blockbuster Status with $1.3 Billion in 2018 (+10% YOY), Drives 10% Portfolio Growth; Head-to-Head Results vs. Toujeo Expected 2Q19; Levemir Further Declines

Next-gen basal insulin Tresiba (degludec) brought in $1.3 billion (DKK 8 billion) in 2018, growing 10% YOY (15% operationally), from $1.1 billion (DKK 7.3 billion) in 2017. While accounting for 9% of total revenue, the product drove 10% of overall diabetes/obesity portfolio growth in 2018. Collectively, Novo Nordisk’s new-generation insulin portfolio (comprised of Tresiba, Xultophy, Ryzodeg, and Fiasp) drove a solid 33% of portfolio growth, despite reflecting only 12% of revenue. In 4Q18, Tresiba sales surged 16% YOY to $332 million (DKK 2.2 billion) from $302 million (DKK 1.9 billion) in 4Q17, while remaining flat sequentially against a tough 3Q18 comparison, when revenue grew 23% YOY and 11% sequentially to $335 million (DKK 2.2 billion). Similar to the full year, Tresiba drove 11% of diabetes/obesity portfolio growth while accounting for 9% of total revenue in 4Q18.

Tresiba Worldwide Financial Results – Past Five Quarters

Tresiba 4Q18 Geographic Financial Results

Tresiba Sales (1Q16-4Q18)

Tresiba’s flat quarter sequentially resulted from a modest decrease in North America (-1%) balanced by a modest increase in the rest of the world (+5%). Tresiba saw double-digit YOY growth in both geographies, to the tune of 17% and 14%, respectively (see table below). The small drop in US sales in 4Q18 may be due to increasingly seen pricing pressure. In fact, Novo Nordisk returned 68% of revenue to the supply chain in 2018, predominantly to PBMs/payers in the form of rebates – for more detail, see the company’s just-published Annual Report. Management confirmed that a majority of the pricing pressure they’re up against occurs in the insulin category, and Tresiba is no exception, despite offering better safety and efficacy than first-generation insulin analogs. Hammering this point home, Novo Nordisk’s presentation (slide 9 and below) highlighted that Tresiba has continued consistent volume gains; the next-gen accumulated ~15% of US TRx since launch at a steady rate of ~5% per year, similar to the trend of Lilly/BI’s Basaglar (biosimilar insulin glargine) and ahead of Sanofi’s next-gen Toujeo (insulin glargine U300). Basal insulin prescription volume seems to be rising at a pace that exceeds sales growth, and to be sure, manufacturers’ realized prize on insulin is getting squeezed.

• Novo Nordisk management once again mentioned the April 2018 rollout of a new DTC campaign highlighting Tresiba’s 

  updated label based off of DEVOTE data indicating its hypoglycemia benefit when compared to Lantus. They named this as a driving factor for the product’s upward volume trajectory, and it’s certainly wonderful news if patients/providers are hearing about an insulin that reduces hypoglycemia risk and asking for it – we think this is more likely for some providers and believe there is much more potential for this (and also for Sanofi’s Toujeo, relatively speaking, though it does not have this label at this time). Indeed, Novo Nordisk has staffed an unbranded booth at several recent diabetes conferences with the intent to raise awareness of hypoglycemia management in general – this is so important and we hope to see more patient- and provider-facing education on hypo. Also contributing to Tresiba’s volume gains is strong coverage: Tresiba formulary access is above 80% for US patients covered by commercial plans or Medicare Part D. Tresiba’s preferred status on the Medicare Part D formulary over Sanofi’s Toujeo and Lantus in 2018 was a major tailwind for Novo Nordisk and another headwind for Sanofi.

• Results from a phase 3b head-to-head trial (n=1,609) of Tresiba vs. Sanofi’s Toujeo (insulin glargine U300) are projected for 2Q19. Primary completion of the study is slated for early February, according to ClinicalTrials.gov. We’ll be very interested to hear whether these findings differ from those of the BRIGHT study (Sanofi’s equivalent trial, n=929), which were recently published in Diabetes Care. In summary, BRIGHT found a statistically significant decrease in incidence of hypoglycemia <70 mg/dl (OR=0.74, 95% CI: 0.57-0.97, p=0.03) and hypoglycemia <54 mg/dl (OR=0.63, 95% CI: 0.40-0.99, p=0.044) with Toujeo vs. Tresiba during the first 12 weeks of the study – the “titration period.” However, there was no significant difference in hypoglycemia rate during the latter 12 weeks of the study – the “maintenance period.” The overt implication from these data was that Toujeo conferred a 26% risk reduction for hypoglycemia when compared to Tresiba, although the marginal p-values (0.03 and 0.044), the transient benefit, and the lack of a difference in fasting SMPG and A1c left the field less than convinced that Toujeo is truly superior to Tresiba on hypoglycemia specifically or as a basal insulin generally. For our part, we believe that both of these advanced basal insulins are leaps and bounds above what came before them. Expanding the whole category of next-gen basals seems much more important to us than repeat head-to-head trials using two drugs that have already proven tremendous efficacy independently (especially when you consider how many patients are struggling to afford any insulin at all, let alone an advanced long-acting product). Nevertheless, there is understandably some scientific intrigue in such comparisons, and we hope that BRIGHT and Novo Nordisk’s upcoming readout provide insights that help clinicians identify the right drug for the right patient at the right time.

• Sales of Tresiba’s predecessor Levemir (insulin degludec) decreased 21% YOY (17% operationally) in 2018 to $1.8 billion (DKK 11.2 billion) from $2.2 billion (DKK 14.1 billion) in 2017. By comparison, 4Q18 was one of the stronger quarters of the year; Levemir sales grew 11% sequentially to $434 million (DKK 2.8 billion) and dropped 15% YOY (16% operationally). Volume fell across geographies as well. US pricing pressure has certainly contributed to Levemir’s freefall (slides 52, 56, 59, and 63). That said, US TRx was estimated at 21.3% at the end of 2018, bringing Novo Nordisk’s total basal insulin share to 36.3% by volume – a 9% increase since Tresiba’s launch. In other words, Tresiba’s volume gains are more than compensating for Levemir’s losses.

5. Xultophy More Than Doubles in Second Full Year of Sales; Numerous Barriers (Reimbursement, Label Restrictions) Stymy US Growth but Exemplify Potentially High Ceiling

Xultophy (insulin degludec/liraglutide) sales more than doubled YOY reaching $255 million (DKK 1.6 billion) in 2018, up 121% (126% operationally) from $112 million (DKK 729 million) in 2017. This was a relatively easy comparison, as 2018 marks the product’s second full year on the market and 2017 sales were low (Novo Nordisk was still building payer coverage – this is still the case, though to a lesser extent). 4Q18 was the most modest of the year, as Xultophy sales were flat sequentially at $69 million (DKK 0.5 billion) and climbed 69% YOY (68% operationally) from $43 million (DKK 0.3 billion) in 4Q17. For context, revenue from the fixed-ratio combination more than tripled YOY in 1Q18 (+26% sequentially), more than doubled YOY in 2Q18 (+13% sequentially), and more than doubled YOY again in 3Q18 (+16% sequentially). From a portfolio perspective, the product is faring better – Xultophy drove 12% of growth for the year and 7% for the quarter despite accounting for only 2% of revenue. Xultophy is still early in its launch cycle, and we expect further sales/volume growth going forward in 2019; that said, the hurdles to fixed-ratio combination therapy in the US are well-known by now (restrictive labeling from FDA, HCP reluctance and fear of side-effects, etc.), and Novo Nordisk will have to make concerted efforts to stimulate the business. On today’s call, management did emphasize that uptake in 4Q18, particularly in EU markets where the label is less restrictive (more on this below), helped parlay losses in basal insulin due to pricing pressure.

Xultophy Worldwide Financial Results – Past Five Quarters

Xultophy Sales (1Q17-4Q18)

Altogether, we view this as an underwhelming performance for a new product with such a promising clinical profile in terms of: (i) glucose-lowering; (ii) milder side-effects (less hypoglycemia, potential weight loss, and less GI discomfort); and (iii) greater patient convenience/lower injection burden. That said, in light of the multitude of barriers standing in the way of this class, Xultophy’s growth to-date could (and perhaps should) be viewed optimistically. These barriers include: (i) the class doesn’t have an established place in treatment algorithms or everyday clinical practice; (ii) some prescribers continue to view GLP-1 agonists as a “pre-insulin” therapy, making fixed combinations of the two seemingly illogical (according to Newcastle’s Prof. Philip Home); (iii) the US labels for both Xultophy and Sanofi’s Soliqua currently require patients to already be on basal insulin or the specific GLP-1 included in the combo before starting the fixed-ratio injection – Dr. Vivian Fonseca strongly advocated to change this at ADA 2018; and (iv) low reimbursement. One investor on the call fixated on the third of these, asking for management’s perspective on the restrictive US label. CSO Dr. Mads Thomsen assured that uptake is increasing in all regions, though it is quickest in the EU where there are no label restrictions (i.e. Xultophy can be prescribed as a first injectable for type 2 diabetes), particularly in France. Dr. Thomsen further explained that Xultophy is a “preferred product” in France, which to our knowledge means that the fixed-ratio combo secured reimbursement while Tresiba (insulin degludec monotherapy) did not. Thus, while we’re happy to acknowledge the markets where Xultophy is gaining traction, these “successes” are sometimes at the expense of strong Tresiba uptake, and we ultimately believe that much work remains to be done in getting HCPs everywhere to understand the merits to fixed-ratio combination treatment. Also worth noting is that management stated in 3Q18 that they do not expect shifts (i.e. gains) in volumes to come from contracting changes, raising some question as to how Novo Nordisk aims to drive greater uptake of Xultophy. We are hoping for faster growth of Xultophy moving forward and we believe the class has incredible potential – we’d like to see this happen faster and we believe further investment by Novo Nordisk would have a high ROI.

6. Mealtime Insulin: Fiasp Climbs 26% Sequentially, Totals $93 Million in 2018 Sales; NovoLog Falls 6% YOY to ~$3.0 Billion

Revenue from next-gen mealtime insulin Fiasp (faster acting insulin aspart) totaled $32 million in 4Q18, up 26% sequentially from 3Q18, when Fiasp rose 20% sequentially to $26 million. In 2018 as a whole – Fiasp’s first full year on the market – the ultra-rapid acting insulin totaled $93 million in revenue. We’re glad to see a small rebound from a slightly disappointing 3Q18, in which Fiasp only grew 20% sequentially. Nonetheless, we can’t help but hope for a more impressive growth trajectory for the product, especially given how early in its launch cycle Fiasp still is. As a reminder, Fiasp was first launched in spring 2017 in Canada and then Europe, and only launched in the US in 2018. Still, we remain bullish on Fiasp’s potential as a growth driver for Novo Nordisk: Despite accounting for <1% of Novo Nordisk’s total diabetes/obesity portfolio, Fiasp did drive 8% of the portfolio’s growth in 2018. Whether Novo Nordisk management shares this sentiment is still uncertain; once again, continuing a historical trend, Fiasp was not mentioned during today’s earnings call. In its financial materials, Novo Nordisk did highlight that Fiasp has now been launched in 25 countries, up from the 24 noted in the company’s 3Q18 update. Importantly, thought leaders have historically been split over Fiasp’s added value vs. current mealtime options: Some feel the advantages it brings over NovoLog as merely marginal, while others have identified a unique potential for it in closed loop systems due to the molecule’s faster PK/PD profile. For our part, we remain optimistic about the potential Fiasp can have in improving patient quality of life; very notably, market research firm dQ&A conducted a survey in spring 2017 that found 23% of respondents taking rapid-acting insulin (n=2,312) said they would “definitely” switch to Fiasp if it was suggested by their doctor and reimbursement was similar to their current mealtime insulin. An additional 55% said they would “likely” switch. Seeing as Fiasp is priced at parity to NovoLog in most major markets (including the US), we see ample opportunity for this efficacious agent to shine brighter.

Fiasp Worldwide Financial Results – Past Five Quarters

• NovoLog slightly dipped in 2018, falling 6% YOY to $2.96 billion from a base of $3.08 billion in 2017. In 4Q18, NovoLog rose 6% YOY to $740 million from a base of $735 million in 4Q17. Sequentially, sales rose 9% from $692 million in 3Q18. Management once again noted pricing headwinds as a key factor in NovoLog’s performance, leading to lower realized prices. A 13% sequential uptick in North American sales is particularly notable in light of more serious pricing pressures typically attributed to this market.

NovoLog 4Q18 Geographic Financial Results

NovoLog Sales (1Q12-4Q18)

7. Saxenda Soars to $610 million on the year (+51% YOY) Despite Slowing Obesity Market Growth; 58% of Branded Anti-obesity Market in US, 4% of Volume; Obesity Education Paves Way for “Future Anchor” Semaglutide

Superstar obesity therapy Saxenda (liraglutide 3.0 mg) flourished in 2018, surging 51% YOY (60% operationally) to $610 million (DKK 3.9 billion) from $394 million (DKK 2.6 billion) in 2017 – with no signs of slowing. Notably, 4Q18 was the product’s strongest of the year, as Saxenda climbed to $188 million (DKK 1.2 billion) – up 76% YOY (from $112 million in 4Q17) and 25% sequentially (from $154 million in 3Q18). With this impressive performance, Saxenda drove 18% of total portfolio growth in 2018 and 19% in 4Q18 while accounting for only 5% of sales in each timeframe, by our calculation. Very notably, Saxenda now has 45% of the global anti-obesity market by value, according to CEO Mr. Lars Fruergaard Jørgensen.

Saxenda Worldwide Financial Results – Past Five Quarters

Saxenda Sales (1Q16-4Q18)

Saxenda growth is ubiquitous across geographies. Operational growth for the full year of 2018 came to 39% for North America, 136% for region AAMEO, 73% for Latin America, 104% for Europe (see figure below). Notably, Saxenda has now launched in 41 countries (see chart below for value share in some of the biggest), with a “number of new launches expected to continue growth,” according to EVP of Commercial Strategy & Corporate Affairs Ms. Camilla Sylvest.

Saxenda 4Q18 Geographic Financial Results

• Management reaffirmed their commitment to Saxenda as a growth driver moving forward. Despite controlling 58% of the branded anti-obesity market in the US, Saxenda’s TRx volume share in the US is only 4% (see below), meaning there is “significant untapped potential” for the product according to Ms. Sylvest. While this discrepancy is massive and brings to mind questions on pricing, we do note that Saxenda generally requires prior authorization despite broad commercial formulary market access in the US (according to the company’s 4Q18 financial report), perhaps contributing to relatively low volume share. Ms. Sylvest also shared that the obesity market (unspecified geography) has been slightly declining “recently,” even against Saxenda’s growth. To this end, Novo plans to continue penetration efforts aimed at: (i) promoting recognition of obesity as a chronic disease, (ii) educating HCPs on obesity management, and (iii) promoting patient engagement with Saxenda through programs that support sustained weight loss (i.e., SaxendaCare). Notably, these educational efforts – which were reflected in higher sales and development costs (page 11) – are also paving the way for semaglutide for obesity, which Dr. Thomsen called the “future anchor drug in obesity.” For context, there has been much hype in the obesity community about semaglutide. A higher 2.4 mg dose of injectable semaglutide is currently in phase 3 for obesity in the four-trial STEP program, which includes a trial of patients with type 2 diabetes and is accompanied by the SELECT CVOT – the first obesity CVOT powered for superiority, launched in 3Q18.

Diabetes-Related Questions and Answers

On GLP-1 Agonists: Oral Sema, Ozempic, Victoza, & OG2023SC

Q: Can you offer more color on the oral sema timelines, specifically when you think you’ll be fully to the market with promotion? I remember it was roughly three months for Ozempic to launch, and then five-six months before promotion. How should we think about oral sema in comparison to that?

Mr. Lars Jørgensen (CEO, Novo Nordisk): Obviously things are a little different now that we’re using the priority voucher. We have guided that we expect to submit by the turn of the coming quarter, and that we’re looking at a six-month review window. When you launch, there’s no access on day one. So we need to do contracting with our customers (payers), and that’s something that takes time in the US market. We’re not going to guide in terms of when we expect that to be completed or when we expect to be in the market.

Q: I know that disclosing prices is off the table, but can you just give some variables that you’re considering as you think about price? Consensus seems to gravitate to roughly $10-$12 per day, based on recent commentary that this price would give quick access. Historically, you’ve been happy to price lower in order to build penetration for the long term. What about your existing GLP-1 business – is that a variable that you think will play into your oral sema pricing decision?

Mr. Jørgensen: We have consistently said for the last few quarters that we don’t want to openly discuss price. It’s information of a competitive nature, and it’s not serving our investors well to be open on that. As for the critical variables, it’s all about clinical differentiation of the product. It’s also about the competitive situation in diabetes, and about COGS related to that. So these are the elements we are factoring together. We’re forming our view of what pricing should be, but we’d like to keep that close to us for the time being. Thanks for your understanding on that.

Q: When should we have a final decision from the FDA regarding cardiovascular safety labeling for Ozempic?

Dr. Mads Thomsen (CSO, Novo Nordisk): As you can recall from the investor event we held at the ADA meeting last June, we did talk to the agency about SUSTAIN 6 being fully worthy for their consideration. We discussed with FDA that these data can apply to oral semaglutide as well, because we’re dealing with the same molecule regardless of route of administration. It is on this premise that we believe the PIONEER 6 results really strengthen the case for semaglutide’s cardioprotective properties, such that we would seek to get a cardiovascular indication, and those reviews typically take 10 months.

Q: Can you provide more clarity on the potential for getting a CV label on Ozempic and maybe even oral semaglutide?

Dr. Thomsen: We’ve taken a deep look at the SOUL trial, including the cost of the study. That of course has been the subject of our discussion with FDA about re-issuing the SUSTAIN 6 data. These are studies that support our ambition to have a legal label update for Ozempic first, and then oral semaglutide. The agency has accepted that we also bridge primary endpoints from our diabetic nephropathy study of Ozempic, the idea being that we can crisscross between Ozempic and oral semaglutide for CV as well as renal data.

Q: Will you file for a CV label when you submit the oral semaglutide NDA?

Dr. Thomsen: It is our intention to leverage very strong and robust data that emerge from SUSTAIN 6 and PIONEER 6 in the best way, and that in principle goes for both Ozempic and oral.

Q: I see that a new trial for your lower-cost oral GLP-1 has been completed. It looks like there’s potential for lower COGS compared to the oral semaglutide formulation. Can you share some detail on the outcome of that trial and next steps?

Dr. Thomsen: The trial has completed, but there’s work to be done before you can lock the database and do analysis and so on. We’ll update you during our Q1 roadshow presentation about what’s going on with that oral GLP-1. What I will say is that if you have a known ingredient here that’s like semaglutide, as long as you can achieve bioequivalence, then you can in principle do one confirmatory trial and yes, that would presumably be at a lower COGS. But let’s talk more about it when we have some data.

Q: How should we think about the future picture of Victoza in China?

Mr. Jørgensen: In China, Victoza revenue almost doubled against our own expectations. From quarter to quarter, you see this deviation sometimes, and it has to do with the listing of hospitals and the speed of those compared to what the plan is. I’m happy to say we now have full coverage for Victoza in China, after the National Drug List change took place at the beginning of the year. We have gone to various different regions and the hospitals to see this coverage roll out. I don’t foresee Q4 to be any indication of what happens later on.

And very quickly to clarify on Ozempic – that product is currently at 80% access, which is relatively high for our products. We’re not necessarily anticipating oral semaglutide to be as successful on the early access front.

On Long-Acting Insulin and LAIsema

Q: One question about weekly insulin and the LAIsema combo – how are you thinking about clinical differentiation over the daily preparations? We know that broader adoption of the insulin/GLP-1 combos has been hampered by primary care reluctance to use combination biologics in the treatment of diabetes, plus there’s the restrictive label. What are your thoughts here?

Dr. Thomsen: First, a small correction when it comes to the restricted label. Having to fail GLP-1 or insulin therapy is a US thing; we don’t have it in most of the other territories and countries including several European countries like France. We’ve seen very strong growth in those markets, and we’ve actually decided to have it as one of the preferred products there. So, we actually do expect quite a lot from Xultophy. And I think sales doubled this year compared to last year.

With that said, LAIsema is a once-weekly version, where you get the best of semaglutide with all the benefits inherited from that weekly GLP-1. We’ve compared LAI287 vs. degludec without seeing any major differences in terms of glucose variability or peak-to-trough values and so on. LAI287 is still up against the most-used insulin molecule named glargine U100 (Sanofi’s Lantus). The phase 2 program there is an effort to show a competitive profile of benefit/risk. Then, LAIsema is seen as an intensification option.

Q: Could you talk about the trends you’re seeing for Tresiba in the US?

Mr. Jørgensen: There’s been no particular fluctuation there. When you look, it’s quite constant uptake overall and as I mentioned, 15% market share growth over the past three years with about 5% a year. We see that as being quite stable from a US point of view.

On Drug Pricing and Policy

Q: There are HHS efforts ongoing to change provisions around rebates, and FDA has launched efforts to accelerate generic insulin. Your thoughts there?

Mr. Jørgensen: US pricing certainly has a lot of moving parts, and we understand there’s a lot of interest. What came out last night in the US in terms of moving way from rebates given to PBMs – we actually applaud the administration for bringing that forward. It’s been discussed for a long time. The current system where rebates aren’t shared with patients is a challenging environment for us to operate in. We welcome this proposal. As you know, we gave 68% in rebates – amounting to 113 billion DKK – into the supply chain last year. The allocation of those rebates can be done in a better way, providing more value for patients without being a negative for Novo Nordisk. This said, these potential changes aren’t going to change how our business is done in 2019 or even 2020. It will take a long time for the flow of money to be un-winded.

As for Scott Gottlieb’s comments related to generic insulin: As we look at the market now, it’s already highly competitive on price. So we actually feel that we’re already operating in alignment with price competition. I’m not sure that generic insulin in itself is going to sufficiently change that outlook. [Editor’s note: Lilly CEO Mr. Dave Ricks made similar comments at JPM a couple years ago, suggesting that biosimilar and generic insulins won’t be the insulin pricing solution everyone is hoping for, as insulin prices are already “on the floor.”]

Q: Could you share with us the level of non-recurring costs, the absolute numbers, which impacted Q4 and the full year? As a follow-up to that, how do you see your operating profit margin for this year as you start from a lower base? Is it fair to assume a higher margin for 2019, or with the launch of oral sema, is it fair to assume higher launch costs?

Mr. Karsten Knudsen (CFO, Novo Nordisk): Non-recurring restructuring costs for the full year 2018 were around 900 million DKK. For the fourth quarter, it was roughly 300 million DKK since we communicated 600 million DKK at the end of the third quarter. The price of review for oral semaglutide (including the priority review voucher) will actually hit around 800 million DKK. Perhaps one final note on the 2019 margin is that the Medicare coverage gap impact in the US is going to total about 2 billion DKK for us, and that goes all the way straight through for when you do your modeling.

Q: You discussed increased rebating in the US and I was wondering if you could talk a little more about that in regards to insulin. Is that still the key driver, or are we also now seeing rebates impact GLP-1?

Mr. Knudsen: As you see in our Annual Report which we published on our website this morning, the US rebate percentage is going up from 64% to 68% between 2017 and 2018. The main drivers, as we have commented before, are basically in the basal insulin space where we’ve been paying higher rebates to remain on formularies. We don’t have anything to add on the competitive situation in any of the segments. We have very solid formulary coverage for all our products going into 2019, and now Ozempic folks have around 80% unrestricted access in the US market, so we feel confident on that.

On Obesity

Q: Obesity continues to surprise on the upside. We see some sort of product acceleration in the US – could you talk about some of the key drivers behind this? What will happen when you get phase 3 data on semaglutide in obesity, say 12 or 15 months from now?

Ms. Camilla Sylvest (EVP Commercial Strategy & Corporate Affairs, Novo Nordisk): Generally, we are tracking in line with our expectations. We are growing sales significantly, so we’re now close to 50% value market share on a global level; our volume market share is still in the range of 4%-5%. That means significant untapped potential, and we are continuing our efforts to support the market in terms of education on obesity as a disease. We also have activities to try to ensure reimbursement in different countries for obesity pharmacotherapy. That is a process that will take time. But we are continuing along this road. In international operations this year, we should expect a number of new launches that can continue some of these growth rates. When it comes to the whole market growth, that is still not very strong – and actually it has been going down slightly recently. But of course that doesn’t go for Novo Nordisk, so we keep gaining share and we are very confident about our growth in this area.

Mr. Jørgensen: And that’s why we’re doing the SELECT study, to pave the way for a more robust field of medical treatment of obesity.

--by Ann Carracher, Martin Kurian, Payal Marathe, Peter Rentzepis, and Kelly Close