Novo Nordisk 3Q16 – Overall diabetes and obesity portfolio up 3% as reported (5% operationally) to DKK 22.3 billion (~$3.3 billion) with negatively adjusted growth expectation for 2017; Tresiba, Victoza, and Saxenda growth drivers – October 31, 2016

Novo Nordisk provided its 3Q16 earnings in a call led by CEO Mr. Lars Sørensen – his 63rd and last (!!) quarterly update, as he will be retiring from his position at the end of this year. This report details our top highlights from the call, followed by fascinating Q&A. You can also view the webcast’s presentation slides.

Top Financial Highlights

1. Novo Nordisk’s overall diabetes and obesity portfolio grew 3% year-over-year (YOY) as reported (5% operationally) to DKK 22.3 billion ($3.3 billion). Management highlighted both Tresiba (basal insulin degludec) and Victoza (GLP-1 agonist liraglutide) as key drivers of growth, citing that Tresiba alone was responsible for 33% of the company’s overall sales growth (including non-diabetes, non-obesity products) in constant currencies – that said, overall growth was low. By our calculations, Novo Nordisk’s new-generation insulins – Tresiba, Xultophy (insulin degludec/liraglutide), and Ryzodeg (insulin degludec/insulin aspart) – accounted for the largest share of growth at 52%, while Victoza was responsible for 29% of growth.

2. Management announced a fairly substantial adjustment to financial guidance that management shared during this morning’s call – the operating profit target growth in 2016 is now 5%, down from 10% as per Novo Nordisk’s 4Q15 update. The company’s presentation slides attributed this to the challenging pricing environment in the US – more on this later. This announcement follows an adjustment in 2017 guidance in 2Q16 – the company forecasted decreases in the diabetes portfolio on the order of 2%-3% to 5%-6% for 2017.

3. Tresiba was an undisputable bright spot for the company, especially within its insulin portfolio, in 3Q16, growing 17% sequentially to DKK 1.1 billion ($159 million) and surpassing DKK 1 billion for the first time since Novo Nordisk began breaking out Tresiba sales separately in 1Q16. Year-to-date, management stated that Tresiba revenue has nearly doubled YOY (compared to the first nine months of 2015). Revenue for Novo Nordisk’s overall new generation insulin portfolio (consisting of Tresiba, Xultophy [insulin degludec/liraglutide], and Ryzodeg [insulin degludec/insulin aspart]) tripled YOY and rose 16% sequentially to DKK 1.1 billion ($171 million). We continue to hear very very positive feedback on this insulin for those lucky enough to have access to it. We continue to believe that the "real world" experience for Tresiba is far better than the RCT results show (the "placebo effect" was undoubtedly a major issue here as we believe Big Data will eventually show).

4. Pooled next-generation insulin sales – consisting of Novo Nordisk’s Tresiba, Xultophy, and Ryzodeg and Sanofi’s Toujeo (U300 insulin glargine)  more than tripled YOY and  rose 17% sequentially to $345 million from a base of $296 million in 2Q16. Tresiba maintained its 46% share of this market by value, while Toujeo held 54%, similar to the split in 2Q16.

5. It was a challenging quarter for Novo Nordisk’s modern insulins, due largely to underlying insulin market dynamics in the US particularly. The company’s modern insulin portfolio experienced a 6% YOY decline as reported (falling 4% operationally), due to Levemir’s (insulin detemir) 7% drop as reported (4% operationally) to DKK 4.3 billion ($651 million), NovoLog’s 5% drop as reported (3% operationally) to DKK 4.9 billion ($733 million), and NovoMix’s 7% drop as reported (3% operationally) to DKK 2.5 billion ($380 million). Levemir sales declined operationally in all regions except China and International Operations. The decline for NovoLog was driven solely by the US market, where sales fell 12% YOY as reported and operationally. and 41% YOY, respectively. NovoMix experienced declines in the US, Europe, and Pacific regions.

6. The basal insulin market rose 2% YOY to $2.6 billion in 3Q16, but declined 2% sequentially. Novo Nordisk captured 32% of this market by value, with Levemir holding 25% and new-generation insulins (Tresiba, Xultophy, Ryzodeg) holding 7%.

7. The overall rapid-acting insulin analog market fell 6% YOY and 5% sequentially to ~$1.5 billion in 3Q16. By value, NovoLog remains in the lead with 50% of sales in the rapid-acting insulin market. Revenue for Lilly’s Humalog (insulin lispro) was close behind with 43% of the market, and sales of Sanofi’s Apidra (insulin glulisine) accounted for 7%.

8. Victoza revenue grew 9% YOY as reported (10% in constant currencies) to DKK 5.1 billion ($765 million). Sequentially, sales rose 3% from 2Q16. Management cited underlying growth for the entire GLP-1 agonist class (which now accounts for 11% of the total diabetes market by value and volume growth has reached 30%) as a reason for this strong performance by Victoza. While Victoza remains the clear frontrunner by value and by volume, the drug’s share of the GLP-1 market continues on a slow decline (as Lilly’s Trulicity [dulaglutide] continues to make inroads). According to Novo Nordisk’s presentation slides, Victoza captured 51% of the market by volume, as measured by total prescriptions (TRx) in 3Q16, compared to 52% in 2Q16 and 54% in 1Q16.

9. Saxenda (liraglutide 3.0 mg) saw another successful quarter in 3Q16, posting DKK 418 million ($63 million) in sales, an 11% sequential increase from 2Q16. The obesity drug was responsible for 16% of the company’s overall growth (including non-diabetes, non-obesity products) in the first nine months of 2016, and management attributed modest US growth in part to Saxenda as well. Presumably it is mostly self-pay patients who are using Saxenda at present, given the price. Novo Nordisk first broke out sales for Saxenda in 1Q16. In Q&A, management acknowledged that Novo Nordisk and Saxenda are increasingly becoming the lone drivers of the obesity market in the US.

Top Pipeline Highlights

10. On the pipeline front, in disappointing news, Novo Nordisk announced the discontinuation of development for its phase 2 oral insulin candidate OI338GT (NN1953). We’re surprised by this decision given the large investments Novo Nordisk has made in advancing oral peptide delivery – we’re curious how this decision may impact the $1.8 billion investment in the Clayton, NC manufacturing plant for GLP-1 agonist and insulin products.

11. The company has updated its R&D strategy to “apply an even higher innovation threshold.” As such, it will focus on (i) developing adjacent indications with high unmet need for its existing products (such as obesity for semaglutide); (ii) developing new diabetes medicines with “distinct differentiation or disruptive potential”; and (iii) developing drugs for new disease indications related to but distinct from diabetes and glucose regulation. We’re very excited to see several areas of high unmet need included under this last umbrella: prediabetes, cardiovascular disease, NASH, nephropathy, type 1 diabetes intervention, and type 1 diabetes stem cell therapies.

12. Novo Nordisk highlighted the impressive 26% reduction in three-point MACE (cardiovascular death, non-fatal MI, and non-fatal stroke) and particularly the 39% reduction in non-fatal stroke, observed in the SUSTAIN 6 cardiovascular outcomes trial (CVOT) for phase 3 once-weekly injectable GLP-1 agonist semaglutide, presented at EASD 2016.

13. Management also addressed the worrisome 76% increase in retinopathy observed in the trial, sharing that a mediation analysis attributes the imbalance to precipitous, large reductions in A1c over a short period of time and suggesting that the finding will not be a significant barrier to approval.

14. Novo Nordisk briefly highlighted the ongoing progress of the phase 3 PIONEER program for oral semaglutide: five of the 10 total trials in the program have begun recruitment, which is proceeding on schedule.

15. Management did not provide any specific updates on the timeline for resubmission of faster-acting insulin aspart. Notably, in Q&A, management acknowledged that the company is not expecting faster-acting insulin aspart to be a major driver of growth; rather, Novo Nordisk developed the product mainly as a defensive measure to protect its share of the rapid-acting insulin analog market.

16. Though not specifically disclosed at this point, the company also noted that its early-stage pipeline would also face a number of additional adjustments to meet this higher innovation threshold.

Table 1: 3Q16 Financial Results for Major Diabetes and Obesity Products

Financial Highlights

1. Diabetes/Obesity Portfolio: Modest 3% YOY Growth Overall

Novo Nordisk’s overall diabetes and obesity portfolio grew 3% year-over-year (YOY) as reported and 5% operationally to DKK 22.3 billion ($3.3 billion). Sequentially, sales rose 2% from a base of DKK 21.8 billion ($3.3 billion) in 2Q16. Management highlighted Tresiba (basal insulin degludec) and Victoza (GLP-1 agonist liraglutide) as key drivers of growth globally, across all markets. Tresiba alone was responsible for 33% of the company’s overall YOY sales growth (including non-diabetes, non-obesity products) for the first nine months of 2016 compared to the first nine months of 2015. By our calculations, new-generation insulins – Tresiba, Xultophy (insulin degludec/liraglutide), and Ryzodeg (insulin degludec/insulin aspart) – accounted for the largest share of growth at 52% in 3Q16, while Victoza was responsible for 29%. That said, the company’s Q3 can be characterized as modestly successful – Novo Nordisk was reporting double-digit growth between ~20-25% throughout 2015, though the recent earnings match closely what we heard in 2Q16, when management reported 2% YOY growth (7% operationally). During the 3Q16 call, however, management was more candid about the smaller magnitude of growth and the impact it may have on the company, such as the need to lay-off ~1,000 employees due to “intensified competition and pressure in the US.”

Figure 1: Total Diabetes/Obesity Sales (1Q12-3Q16)

Table 2: Whole-Company Sales and Growth by Geography (First nine months of 2016)

2. Updated 2016 Financial Guidance: 5% Growth, Rather Than 10% as Previously Expected

Not to be overlooked is the fairly substantial adjustment to financial guidance that management shared – operating profit target growth for 2016 is now 5%, down from 10% as per Novo Nordisk’s 4Q15 update. A 50% cut in target growth is not insignificant and is further indication of how challenging the diabetes field has become even for leaders with decades of experience and robust portfolios of clinically differentiated products. Management attributed this change also to the challenging pricing environment in the US (by far Novo Nordisk’s largest commercial market), especially as it pertains to insulin. Indeed, the company’s insulin products apart from Tresiba took the greatest hit in 3Q16, facing the largest YOY decreases. An interesting Wall Street Journal article published in time with Novo Nordisk’s and Sanofi’s 3Q16 update draws attention to divergence between these two insulin giants: Novo Nordisk’s shares were down 14% in Friday morning’s trading while Sanofi’s surged up 7%. The article explains this in terms of each company’s expectations – Sanofi acknowledged the potential for its insulin franchise to dwindle somewhat in 2016, while Novo Nordisk had high hopes that Tresiba would keep its insulin business soaring and is now facing a more challenging US environment than anticipated.

3. Tresiba: 17% Sequential Growth to DKK 1.1 Billion ($159 Million)

Tresiba was an undisputable bright spot for the company in 3Q16 (especially within its insulin portfolio), growing 17% sequentially to DKK 1.1 billion ($159 million). This marks the first time the next-generation basal insulin has surpassed DKK 1 billion since Novo Nordisk began breaking out Tresiba sales separately in 1Q16. Year-to-date, management shared that Tresiba revenue has nearly doubled YOY (compared to the first nine months of 2015). According to the company’s presentation slides, the product is now launched in 47 countries with good penetration and similar reimbursement to insulin glargine – in the US, ~75% of commercial and Medicare Part D plans offer coverage. Tresiba’s total market share by volume (as measured by share of total prescriptions, or TRx) reached 4% in 3Q16, while share of new-to-brand prescriptions (NBRx) reached 12%. Management interpreted this as a signal for sustained future growth, and cited positive data from the SWITCH 1 and SWITCH 2 trials presented recently at EASD 2016 showing Tresiba’s superiority to Sanofi’s Lantus (insulin glargine) in terms of a lower frequency of hypoglycemia. Management also highlighted its September 2016 filing of a supplemental application with the FDA to add the SWITCH data to the Tresiba label, which we expect could enhance Tresiba’s value proposition with payers and catalyze further upswing in prescriptions and sales. We see a hypoglycemia benefit as an important feature of next-generation basal insulin analogs and we’d hope to see an evidence-based benefit displayed on a drug label to enhance awareness among busy patients and providers. Management once again highlighted that 80% of Tresiba volume has been prescriptions for the U200 formulation, which illustrates the growing demand for a more concentrated basal insulin as the number of patients with higher insulin requirements is on the rise.

• Management reiterated that DEVOTE cardiovascular outcomes trial (CVOT) results for Tresiba will be available by the end of the year – so close! The trial completed in September 2016, according to ClinialTrials.gov. In a major blow, the FDA originally required DEVOTE as a pre-approval trial for Tresiba in its initial Complete Response Letter (CRL) for the product, way back in 2013. Its approval was finally enabled by firewalled interim results from DEVOTE – to preserve trial integrity, only a small team within Novo Nordisk had access to the interim data. We’re so eager to (finally!) see these results from this – we assume they will be reassuring neutral given the FDA approval and we expect the Novo Nordisk team is relieved to soon put this story to rest.
• Revenue for Novo Nordisk’s entire new-generation insulin portfolio, which encompasses Tresiba, Xultophy (insulin degludec/liraglutide), and Ryzodeg (insulin degludec/insulin aspart), tripled YOY and rose 16% sequentially to DKK 1.1 billion ($171 million). This growth comes against a fairly tough comparison, as new-generation insulin sales more than doubled YOY in 1Q and 2Q16 as well, and indeed, management emphasized that strong performance from these products offset the sluggish sales of NovoLog, NovoMix, and Levemir (particularly in the US). Xultophy is currently marketed in six countries and Novo Nordisk’s earnings announcement shared that launch activities are progressing on track. The FDA decision for Xultophy was pushed back three months to December 2016, but management stated optimistically that approval is fully expected by end of year. Right now, Xultophy and Sanofi’s iGlarLixi (insulin glargine/lixisenatide) are neck-and-neck to be the first-to-market basal insulin/GLP-1 agonist combination in the US – a decision on Sanofi’s product is expected in November 2016.

Figure 2: New-Generation Insulin Sales (1Q14-3Q16)

4. Pooled Analysis: Next-Generation Basal Insulins Tresiba + Toujeo

Pooled next-generation basal insulin sales – taking into account Tresiba along with Sanofi’s Toujeo (U300 insulin glargine) – more than tripled YOY and rose 17% sequentially to $345 million from a base of $296 million in 2Q16. Tresiba maintained its 46% share of the worldwide market by value, while Toujeo held 54%, similar to the split in 2Q16. In terms of new-to-brand prescription share (NBRx) in the US specifically, Toujeo remains slightly ahead of Tresiba, with 14% and 12% NBRx, respectively. This gap has been closing over successive quarters, however (11% vs. 15% in 2Q16; 8% vs. 16% in 1Q16), and it’s remarkable how quickly Tresiba has narrowed this gap considering that Toujeo launched in the US a full year ahead of Tresiba, which hit US pharmacies in late January 2016. Both insulins have received very positive feedback from what we have heard – we look forward to hearing more on this from Richard Wood, the CEO of dQ&A (reach him here if you’d like the news directly). In  terms of total prescriptions (TRx), Tresiba holds 4% of the basal insulin market while, according to Sanofi’s 3Q16 update (gleaned from IMS data), Toujeo holds 6.6% of the market. We’ve heard strong commentary from diabetes thought leaders endorsing the flatter PK/PD profile of Tresiba, which offers flexible dosing to patients. We’re also very curious to see what happens to this next-generation insulin market in 2017 given CVS Health’s decision to exclude Toujeo from its formulary – we expect this could have a definitive and noticeable impact on new prescriptions, total prescriptions, and sales, perhaps pushing the needle toward Novo Nordisk’s product. UnitedHealthcare chose to exclude both Toujeo and Tresiba from its 2017 formulary – we’ve been increasingly wondering how patients will be able to access the new basal insulin as, with these decisions, these new products look increasingly out of reach for the average patient. That is extremely upsetting from a patient perspective since patients seem to be doing so much better on them. We look forward to seeing more “Big Data” on them, and more CGM data, which should be able to show important outcomes beyond A1c.

5. Modern Insulins: Down 6% YOY for Second Consecutive Quarter

It was a challenging quarter for Novo Nordisk’s modern insulin portfolio (consisting of Levemir [insulin detemir], NovoLog [insulin aspart], and NovoMix). The company’s modern insulin portfolio experienced a 6% YOY decline as reported (4% operationally), due to Levemir’s 7% drop as reported (4% operationally) to DKK 4.3 billion ($651 million), NovoLog’s 5% drop (3% operationally) to DKK 4.9 billion ($733 million), and NovoMix’s 7% drop (3% operationally) to DKK 2.5 billion ($380 million). Levemir sales declined in all regions except China (down 7% YOY as reported in the US, 11% in Europe, 8% in region Pacific, 6% in international operations, but up 36% in China), but the decline for NovoLog and NovoMix was driven by the US market, where sales fell 12% and 41% YOY as reported (12% and 40% operationally), respectively. Reported revenue for NovoLog and NovoMix actually increased 7% and 5% YOY ex-US, respectively. These challenges underscore management’s overarching message that Novo Nordisk, like many diabetes companies, is facing a very tough pricing environment in the US, particularly surrounding insulin. Levemir, NovoLog, and NovoMix off-set the strong performance by Tresiba in 3Q16, contributing to the merely modestly sales growth globally and in the US, specifically. The declines in the modern insulin portfolio were also from a much higher base than Tresiba’s growth. On a more positive note, management shared that modern insulin revenue rose 20% in China, which was the primary driver of 11% operational growth in the region. But again, commentary circled back to insulin’s success in China and international operations being overshadowed by sluggish sales in the US.

6. Pooled Analysis: Basal Insulin Market

The basal insulin market rose 2% YOY to $2.6 billion in 3Q16, but declined 2% sequentially. This whole class growth occurs against an easy comparison, as basal insulin sales fell 9% YOY in 3Q15, 2% YOY in 1Q16, and remained flat in 2Q16. We’re disappointed, but not surprised, to once again see underwhelming growth for basal insulins, especially given the promising value of next-generation products Tresiba and Toujeo, both of which boast longer-acting PK/PD profiles and greater patient convenience. Without question, competitive pricing in the US is a major obstacle – one that needs to be addressed. One potential push forward is the excitement brewing over GLP-1 agonist/basal insulin combinations, including both Novo Nordisk’s Xultophy (insulin degludec/liraglutide) and Sanofi’s iGlarLixi (insulin glargine/lixisenatide), which could bolster sales for both drug classes, although the possibility remains that these more advanced combination products will usurp basal insulin sales further. This is something to watch closely for in 2017, as Xultophy and iGlarLixi will both (hopefully) be FDA-approved by year-end.

• Novo Nordisk captured 32% of the basal insulin market by value, with Levemir holding 25% and new-generation insulins (Tresiba, Xultophy, Ryzodeg) holding 7%. Meanwhile, Sanofi maintained the large majority (67%) of the basal insulin market by value: Lantus (insulin glargine U100) remains the frontrunner with 60%, while next-gen product Toujeo (insulin glargine U300) held 7% (a marginally greater share of the overall basal insulin market compared to Tresiba). Lilly’s biosimilar insulin glargine Basaglar captured ~1%, although we anticipate Lilly’s share of this market will increase markedly once Basaglar is launched in the US on December 15, 2016, especially given its exclusive formulary status for CVS Health and UnitedHealthcare. Novo Nordisk’s 3Q16 presentation slides displayed each basal insulin product’s share of new-to-brand prescriptions (NBRx) in the US as well: (i) Lantus leads with 46%, followed by (ii) Levemir with 19%, (iii) Toujeo with 14%, and (iv) Tresiba with 12%.

Figure 3: Basal Insulin Market (1Q06-3Q16)

7. Pooled Analysis: Rapid-Acting Insulin Market

The overall rapid-acting insulin analog market fell 6% YOY and 5% sequentially to ~$1.5 billion in 3Q16. By value, NovoLog remains in the lead with 50% of sales in the rapid-acting insulin market. Revenue for Lilly’s Humalog (insulin lispro) was close behind with 43% of the market, and sales of Sanofi’s Apidra (insulin glulisine) accounted for 7%. MannKind’s inhaled insulin Afrezza (formerly partnered with Sanofi) has not reported sales since 4Q15, so it is not included in these calculations. Given its flat $2 million sales throughout 2015, it likely had a negligible impact on whole-market trends.

Figure 4: Total Rapid-Acting Insulin Market Sales (1Q06-3Q16)

• The rapid-acting insulin market has been slowing in recent quarters due to competition from the increasing popularity of the GLP-1 agonist class as an option for basal insulin therapy intensification and the growing use of SGLT-2 inhibitors to address postprandial excursions. Indeed, all three major rapid-acting insulin products experienced modest to negative growth in 3Q16: Humalog fell 9%, NovoLog fell 3%, and Apidra grew by 7% YOY as reported. Time will tell whether this trend continues; we look forward to learning whether the launch of new products like Novo Nordisk’s faster-acting insulin aspart, Lilly/Adocia’s BioChaperone Lispro, and Sanofi’s biosimilar insulin lispro can revitalize the rapid-acting insulin market in future quarters, though based on data at ADA 2016 it appears that these upcoming products offer only modest improvements over current rapid-acting insulin analogs.
• The decline in the rapid-acting insulin market is largely driven by declining sales in the challenging US market. All three major rapid-acting insulin products universally experienced falling revenues in the US: as reported YOY, NovoRapid fell 12% to ~$396 million, Humalog fell 14% to $379 million, and Apidra fell 6% to ~$36 million. Rapid-acting insulin was one of the first areas within diabetes to confront the threat of exclusive formularies and their price eroded rapidly as a result. That said, Lilly management optimistically suggested in its 3Q16 update that it’s unlikely to see further switches between exclusive formularies, and thus we may be able to expect a slowing of price erosion.

Table 3: Novo Nordisk Insulin Market Share

8. Victoza: 9% YOY Growth Driven by Underlying Growth in GLP-1 Agonist Class

Victoza revenue was up 9% YOY as reported (10% in constant currencies) to DKK 5.1 billion ($765 million). Sequentially, sales rose 3% from 2Q16. By geography, US sales totaled DKK 3.6 billion ($547 million), sales in Europe totaled DKK 810 million ($121 million), sales in the Pacific totaled DKK 290 million ($43 million), sales in China totaled DKK 70 million ($10 million), and sales in international operations totaled DKK 287 million ($43 million). Victoza experienced growth in all regions except Europe, which saw a 7% YOY decline as reported (4% in constant currencies), with the highest magnitude of growth in international operations (up 41% as reported, 46% in constant currencies). Victoza contributed 29% of overall diabetes and obesity portfolio growth as reported in 3Q16, and Novo Nordisk’s presentation slides further attributed a 33% share of total company growth for the first nine months of 2016 to the GLP-1 agonist. We had hoped to see greater YOY growth for Victoza (9% is the lowest quarterly YOY increase for 2016, below 10% in 2Q16 and 16% in 1Q16) given the cardioprotective benefits shown in the LEADER trial, presented in full at ADA 2016 with three weeks left in Q2. Of course we also understand that getting positive CV data on the Victoza label could be an essential step in spreading awareness of the potential cardioprotection – to that end, we were excited to hear earlier this week that Novo Nordisk filed a Supplemental New Drug Application with the FDA for inclusion of LEADER data on the drug label. This regulatory submission was also highlighted during the call.

Figure 5: Victoza Sales (1Q12-3Q16)

• Management cited underlying GLP-1 agonist class growth as a reason for Victoza’s continued strong performance in recent years. According to management, GLP-1 agonist agents now account for 11% of the total diabetes market by value and for 30% of all diabetes drug prescriptions. Our earnings round-up for the first half of 2016 also highlights this tremendous class growth, and shows that Victoza has been losing market share to Lilly’s Trulicity (dulaglutide), which continues to make inroads in 3Q16. While Victoza remains the clear frontrunner by value and by volume, the drug’s share of the GLP-1 market continues on a slow decline. Novo Nordisk’s presentation slides showed that Victoza captured 51% of the US market by volume (in terms of total prescriptions [TRx]) in 3Q16, compared to 52% in 2Q16 and 54% in 1Q16. Trulicity’s trajectory contrasts sharply – Lilly’s GLP-1 agonist captured 22% of the US market by volume in 3Q16, up from 20% in 2Q16 and 16% in 1Q16.

Table 4: GLP-1 Agonist Market Share

9. Saxenda: Up 11% Sequentially to DKK 418 Million ($63 Million)

Saxenda (liraglutide 3.0 mg) saw another successful quarter in 3Q16, posting DKK 418 million ($63 million) in sales, an 11% sequential increase from 2Q16. The obesity drug was responsible for 16% of the company’s overall growth (including non-diabetes, non-obesity products) in the first nine months of 2016, and management attributed modest US growth in part to Saxenda as well. As a component of other diabetes/obesity products, Saxenda contributed to a 20% share of growth for the company’s overall diabetes and obesity portfolio in 3Q16. While sequential growth of the obesity therapy was lower than 2Q16 (55% revenue increase from a base of DKK 243 million or $36 million in 1Q16), this was a very challenging comparison. In addition, management underscored the seasonality of sales data for Saxenda, explaining that market development tends to be stronger in the earlier part of the year with a slight tapering in 3Q and 4Q16. We look forward to have a better picture of Saxenda’s performance with more consecutive quarters of reported sales, as Novo Nordisk only just began breaking out Saxenda sales in 1Q16.

• During Q&A, management acknowledged that Novo Nordisk and Saxenda are increasingly becoming the sole drivers of the obesity drug market in the US – excluding Saxenda, obesity drug sales declined 13% YOY in 1Q16 and 20% YOY in 2Q16, reflecting the tough commercial challenges these agents face. Novo Nordisk’s roadshow presentation slides note that Saxenda now accounts for 49% of the obesity market by value. By volume, Saxenda achieved 18% TRx share of the US obesity market, which still puts it behind the other three major obesity pharmacotherapies: Orexigen’s Contrave (naltrexone/bupropion extended-release, 55%), Vivus’ Qsymia (phentermine/topiramate extended-release, 39%), and Arena/Eisai’s Belviq (lorcaserin, 35%). This disparity in market share by value and by volume underscores the high cost of Saxenda – since it’s not well-reimbursed, we assume that most patients on the medication are self-pay. Novo Nordisk noted that, while many of its competitors have pulled back on their promotional efforts, the company is committed to growing the long-term prospects of this field.

Pipeline Highlights

10. Discontinuation of Oral Insulin

Disappointingly, Novo Nordisk has elected to discontinue development of its phase 2 oral insulin candidate OI338GT (NN1953). The discontinuation of the oral insulin candidate is a consequence of the higher innovation threshold cited in the new R&D priorities, according to management. This decision follows management’s 2Q16 characterization of the phase 2a results for OI338GT as “generally encouraging” – the trial (n=50) demonstrated a 2.5 mmol/l (45 mg/dl) fasting plasma glucose reduction with both the oral insulin OI338GT and the Lantus comparator after eight weeks of treatment. That said, management acknowledged at the time that value proposition of the oral insulin was less clear than that of oral semaglutide, noting that the less potent oral formulation of insulin required much more peptide to reach sufficient bioavailability and that the target patient profile and positioning of oral insulin relative to injectable insulin and oral semaglutide was less clear. Oral insulin as a whole is a much more complex proposition than oral GLP-1 agonists, given the narrower therapeutic range of insulin and challenges related to dosing, titration, and hypoglycemia. That said, we’ve long felt that Novo Nordisk was the most likely contender to be successful in the oral insulin arena and this discontinuation decision is certainly a blow for the field. Novo Nordisk has invested greatly in becoming a leader in the oral peptide field – its $1.8 billion GLP-1 and insulin manufacturing plant in Clayton, NC one manifestation of this – and we remain hopeful that Novo Nordisk will maintain its leadership in this area, albeit perhaps not with insulin at this time. Biocon is the other main contender in this field; it reiterated in its 3Q16 update that it expects to initiate phase 2/3 trials for oral insulin Insulin Tregopil in type 2 diabetes in the next year. Oramed also recently reported full results from its phase 2 trial of its oral insulin ORMD-0801, but the company has not been historically confidence-inspiring. See our insulin competitive landscape for more.

11. New R&D Strategy: “Higher Innovation Threshold” and Expansion into Diabetes-Adjacent Indications

The company has updated its R&D strategy to “apply an even higher innovation threshold.” As such, it will focus on (i) developing adjacent indications with high unmet need for its existing products (such as obesity for semaglutide); (ii) developing new diabetes medicines with “distinct differentiation or disruptive potential”; and (iii) developing drugs for new disease indications related to but distinct from diabetes and glucose regulation. We’re very excited to see several areas of high unmet need included under this last umbrella: prediabetes, cardiovascular disease, NASH, nephropathy, type 1 diabetes intervention, and type 1 diabetes stem cell therapies. We see the decision to focus on indications beyond glucose management as confirmation of the growing recognition that new drugs in the modern diabetes era must offer benefits beyond glucose lowering. We’re especially intrigued to see Novo Nordisk potentially expand into prediabetes – Saxenda previously demonstrated an impressive ~80% reduction in risk of developing type 2 diabetes in the three-year SCALE trial extension and we’re curious to see if the company will pursue a prediabetes indication for Saxenda or for either the injectable or oral semaglutide formulation (injectable semaglutide is already in a phase 2 trial for obesity). J&J announced in its 3Q16 update that it plans to initiate a CVOT for SGLT-2 inhibitor Invokana (canagliflozin) in a prediabetes population – we would love to see a similar move for Novo Nordisk’s portfolio and wonder if the planned post-marketing CVOT for injectable semaglutide might also include patients with prediabetes.

12. Once-weekly Injectable Semaglutide: SUSTAIN 6 Wins and Concerns

Novo Nordisk highlighted the impressive 26% reduction in three-point MACE (cardiovascular death, non-fatal MI, and non-fatal stroke) and particularly the 39% reduction in non-fatal stroke, observed in the SUSTAIN 6 cardiovascular outcomes trial (CVOT) for phase 3 once-weekly injectable GLP-1 agonist semaglutide, presented at EASD 2016. Management underscored the unexpected nature of these positive findings, given the small size of the trial, and confirmed that the company plans to initiate a large-scale cardiovascular superiority trial “as soon as possible after approval.” The company also confirmed that it plans to submit semaglutide to regulatory authorities by the end of the year – based on this timeline, we expect the GLP-1 agonist will likely be approved in late 2017 for an early 2018 launch and the larger CVOT will be initiated in 2018. Management also shared that it expects to assess additional outcomes such as those related to diabetic kidney disease as well.

13. Management Addresses Increased Risk of Retinopathy Observed in SUSTAIN 6

Management also addressed the worrisome 76% increase in retinopathy observed in the semaglutide-treated arms of SUSTAIN 6. Novo Nordisk shared topline results from a mediation analysis that found the increased risk of retinopathy is attributed to a subgroup of patients with high baseline A1c and resultant large, precipitous reductions in A1c (of ~2%) in a short period of time (around three to four months). Overall, management reiterated that increased retinopathy is a known potential consequence of rapid A1c reduction and suggested that the finding will not be a significant barrier to approval, emphasizing that the company will have discussions with the FDA on this finding prior to submission. Chief Scientific Officer Dr. Mads Thomsen acknowledged that semaglutide will likely have post-marketing requirements related to this signal, which Novo Nordisk is fully prepared for, and suggested that perhaps semaglutide’s label will include a warning to titrate more conservatively in patients with active retinopathy. He pointed out that a less aggressive titration for these patients is similar to the slower insulin titration commonly employed for insulin.

14. Oral Semaglutide: Phase 3 Progress

Novo Nordisk briefly highlighted the ongoing progress of the phase 3 PIONEER program for oral semaglutide: five of the 10 total trials in the program have begun recruitment, which is proceeding on schedule. The remaining trials are expected to initiate in the next few months. See below for an overview of the large and ambitious PIONEER program.

Table 5: PIONEER phase 3 trial program for oral semaglutide

15. Faster-Acting Insulin Aspart: No Timeline Updates Following Complete Response Letter

Management did not provide any specific updates on the timeline for resubmission of faster-acting insulin aspart. The company received a Complete Response Letter (CRL) from the FDA for the product in October and cited questions regarding the immunogenicity and pharmacology assay used as the reason for the decision. Management reiterated that Novo Nordisk is reviewing the contents of the letter and will work closely with the FDA to address these points, but provided no further specific updates. Notably, in Q&A, management acknowledged that the company is not expecting faster-acting insulin aspart to be a major driver of growth; rather, Novo Nordisk developed the product mainly as a defensive measure to protect its share of the rapid-acting insulin analog market. The company also pointed out that, even with the delay, faster-acting insulin aspart will likely launch before any other next-generation rapid-acting insulin competitors – the next-closest to market candidate in the competitive landscape is Lilly/Adocia’s Ultra-Rapid BioChaperone Lispro.

16. Other Pipeline Updates: Undisclosed Adjustments Ahead

Though not specifically disclosed at this point, the company also noted that its early-stage pipeline would also face a number of additional adjustments to meet this higher innovation threshold. Novo Nordisk’s pipeline does not currently list any changes beyond the removal of the oral insulin. The number of phase 2 and phase 3 trials among Novo Nordisk’s development pipeline is beginning to dwindle as more late-stage products reach the regulatory submission stage and the company continues to cull its mid-stage pipeline prior to phase 3 advancement – the company also discontinued a phase 2 GLP-1/GIP dual agonist and a phase 1 oral insulin in 2Q16. On the other hand, the company’s phase 1 pipeline remains robust, with several next-generation insulin candidates and peptides for obesity. See the table below for a comprehensive overview of Novo Nordisk’s diabetes and obesity-related pipeline. Given the increasingly challenging diabetes revenue environment, we’re glad to see Novo Nordisk strategically focus its resources on truly transformative candidates that can address important unmet needs that patients with diabetes continue to face daily. Clearly, Novo Nordisk intends to remain in the diabetes and diabetes-adjacent field for the long haul and is thinking innovatively about expansion opportunities in an environment where the bar for new diabetes drugs is increasingly high.

Table 6: Novo Nordisk Diabetes and Obesity Pipeline Candidates

Table 7: Novo Nordisk Discontinued Pipeline Candidates (as of October 2016)

Questions and Answers

Q: How is the pricing environment factored into long-term guidance? What has gotten worse in 2017 relative to the positioned you outlined at the second quarter of 2016?

A: Going back to Q2, we noted a negative pricing impact on our US business – low- to mid-single digit. Now we think we’ll be at about 5% negative pricing impact, and this has been included in our update of long-term financial target. You’re absolutely correct in that we’re assuming, on a global basis, a neutral impact from prices. It’s apparent that we’ll be in the vicinity of 2.5% negative impact on prices in 2017, and from discussions we’ve had with peers in the US it’s apparent that we’ll continue to see a negative pricing pressure in subsequent years, beyond 2017. This is especially true for modern insulin. In terms of comments made in Q2, remember that in Q2 we didn’t provide any guidance on growth levels for 2017. That we provide this guidance now is completely in line with the practice we’ve had for more than a decade, providing a glimpse of where the growth is going to be for the subsequent year in connection with Q3.

Q: Can you help me understand the 10% vs. 5%? Do I think about this as a halving of your expectations, or is there a slight change in wording when you go from a “target 10%” to an “average 5% growth rate” which makes this an apples-to-oranges comparison?

A: We did say that the 10% target was an aspiration, but when we announced it, we also noted specific challenges to come for 2017. We’ve now ensured a completely transparent objective for operating profit growth. It’s the average for the period 2016 until we achieve our long-term financial targets, which we typically pursue over a four- or five-year horizon. So think of this as us making even more clear exactly what we meant.

Q: It’s clear that pricing seems to have gone from flat to decline, but I wonder if you could also comment on the mix component of your prior guidance, which I think was 2%-3%. Where are you now on the mix benefit? I think you also alluded to 8%-10% topline growth – where does that sit now? Could you touch on the level of R&D spend within the new structure?

A: In terms of the pricing outlook, you correctly understood that we anticipate a negative pricing environment, also in the subsequent year, in the range of probably 2%-3%. I don’t see a significant change in the mix development of our business. We’re continuing to see a value upgrade toward Tresiba in markets around the world. We continue to see a significant value opportunity for GLP-1, constituting an even higher proportion of overall turnover and that’ll hopefully be improved even more as we get semaglutide to market. We stated in connection with the full year that we expected operating margin to stay largely unchanged compared to the level achieved in 2015; we are currently operating at a slightly higher level. But it’s also clear that pricing pressure, especially in 2017, will exert negative pressure on our business. We expect to be able to compensate for some of that with adjustments to selling and distribution costs. We don’t see any significant changes to the R&D ratio, which is currently at 13%.

Q: Can you give a little more detail on the balance between reimbursement pressures you’re seeing across the US diabetes portfolio vs. potentially reduced expectations for the commercial potential of Tresiba, Xultophy, and faster-acting insulin aspart? I want to know if they’re both influencing changes to long-term target growth or if one is overriding the other.

A: The expectation for Tresiba remains exactly the same – we are well on track to reach 5% market share by value at the end of the first full year of commercial operation. We continue to have high hopes for our Tresiba franchise in the US, where it will be a prime growth driver. It was one-third of growth in the first nine months, and we’ll continue to invest on that. So no changes in our expectations for Tresiba. It’s a fantastic product that makes a difference for people with diabetes. As for Xultophy, the three-month delay in approval doesn’t make a significant difference. This will further focus us on Tresiba in the near-term horizon. Subsequently, we’ll focus more on Xultophy. As for faster-acting insulin aspart: All along, we’ve seen this product as an opportunity to ensure we safeguard our fast-acting insulin patients in the US, but never has a major driver of value upgrade. So, no significant changes there. It also looks like competing products in the fast-acting insulin segment will materialize somewhat later.

Q: What efforts are you making post-SUSTAIN 6 to better understand the retinopathy signal? What’s the device strategy that you intend to pursue there?

A: Be aware that in SUSTAIN 1, 2, 3, 4, and 5 there were no numerical imbalances with regard to retinopathy findings. Only in SUSTAIN 6, when we included patients with pre-existing retinopathy, did we see this signal. We’ve done a so-called mediation analysis which shows that a very precipitous drop of >2% from baseline A1c over three-four months can lead to the retinopathy complication. If you adjust for the degree of A1c drop at the beginning of the study, then there is absolutely no difference in retinopathy rate. We haven’t seen anything clinically or mechanistically to suggest that semaglutide should behave differently from any other GLP-1 agonist on safety parameters. There may well be a need for a package insert that mentions the fact that if people have active retinopathy, they shouldn’t aggressively titrate this agent – we are in good shape to discuss these things. Device-wise, over time we will definitely have a dedicated semaglutide device. What we’ll have at the beginning will likely rely on an existing device platform. We’ll provide a more detailed update on the device strategy for semaglutide as we get closer to that point.

Q: Are you seeing any trend toward a single or preferred award situation for GLP-1 agonists? Is the assumption of a single award GLP-1 built into your long-term financial projection? My understanding is that Medicare Part D has not yet switched to a single award model, but that this could happen in 2018. Would this be another point of pressure come 2018?

A: No, we haven’t seen any move toward single source contracts or exclusivity on the GLP-1 market, and we don’t anticipate this for the near-future timeframe. Negative impact from both commercial and Part D plans has been factored in.

Q: Despite pricing pressure, how do you see sales swinging back in 2018? Or is this upswing projected for 2019, 2020, etc.?

A: We’ve given guidance for 2017. We haven’t provided detailed guidance for 2018, which will have to wait until the third quarter of 2017. The growth level will likely be in the 5% vicinity.

Q: Can you discuss the competitive environment for GLP-1 in Europe? Victoza sales were down this quarter – what was the impact from the loss of Germany?

A: Yes, the European GLP-1 market is slightly more pressured than it is in the US. We haven’t lost our business in Germany, but we haven’t seen growth either, and this was due to very strong performance of competing products in the German market. We’re also influenced by pricing in Europe – there have been some pricing adjustments. Our GLP-1 business in Europe is about flat, slightly positive, whereas it’s growing significantly at around 14% in the US and it’s growing in the double-digits in International Operations and in Japan.

Q: Saxenda growth seems to have slowed in the US. Can you give us some color on formulary access and coverage for that product?

A: We’ve seen the exit of competitors in the US obesity market, which is leaving us as the main player in the US. We’re pleased with the development of Saxenda globally as well as in the US. There’s an element of seasonality in the data – we typically see stronger market development earlier in the year. We think Saxenda is developing at a satisfactory rate, we just need to build it patient-by-patient but are gladly doing so.

Q: Do you think the company is currently structured to survive and thrive in a new operating business environment? Do you have the right mindset and the right people to execute growth in a market environment that is likely to be very different from what it’s been in the past?

A: We have to acknowledge that the change in operating environment is primarily a change in the US. We saw a rebound of our Chinese business and also a very strong performance of our Japanese business. We’re growing in Europe more that we have in recent years, and we have strong momentum in international operations. So we need to focus in on the US – we have to acknowledge that we’re not fully satisfied with our US operation, where we’ve seen a decline in quarterly performance through 2016 so far. We have to drive volume in this market.  We’re confident that with significant restructuring in our US operation we will get a grip on this. Obviously, this will take a bit of time, but we have the right portfolio to play with and we believe we can do it.

Q: Why is 13%-14% of revenue the right amount of money to spend on R&D?

A: Let me give you some examples. If we look at stem cell research, we’ve had some major breakthroughs in understanding how to make cell replacement therapy possible. This is going to fill an unmet need for patients who cannot be adequately treated with today’s therapies, which will make it potentially economically viable despite the high cost. Stem cell research is very low in the innovation cycle. At the opposite end of the spectrum, we have insulin, which is very high up in the innovation space. To improve upon Tresiba after 90 years of research is increasingly difficult. GLP-1 is somewhere in between – we have really good products, but there is room to meaningfully differentiate between products, to go between injectable and oral, and so on. There are whole areas of unmet need to uncover in terms of safe therapies, including insulin sensitizers and NASH. Then there are areas like chronic kidney disease and cardiovascular medicine – it’s been possible for ages to treat these, but nothing new has happened for 15 years. These two conditions together account for two-thirds of the total societal burden of the US health economy as it relates to diabetes. If you can find something in there – be it semaglutide or another product – we’ll find ourselves in a different position along the innovation cycle than we would if we were pursuing strictly insulin. Ultimately we have to balance these various sub-portfolios by thinking about potential attrition and payback to keep our R&D-to-sales ratio in the same proximity where it is today.

Q: The elephant in the room that you haven’t really addressed is how you plan to gain market share. Can you share your thoughts on market share by volume and overall market growth rate?

A: The short, quick answer is that we see solid volume growth in the basal segment, where we have a huge share upside with Tresiba. The market has accepted this product with very good access. One of our clear objectives is basically to continue, and if possible to accelerate, this penetration of Tresiba. GLP-1 is a high-volume market, and we have to ensure that we get our share. We are the leading brand currently, and we continue to get the majority share of that volume growth. I’ll leave it at that – those are the main contributors.

Q: You don’t seem to be able to get a US first-pass approval. What are you going to do differently now to ensure that semaglutide, the Tresiba SWITCH studies, and the LEADER CV data get first-pass approval?

A: In the case of Xultophy – and Saxenda, for that matter – we were expecting first-cycle approvals and the FDA extended in these cases. Of course you have to learn from that, and one thing we’re learning is that you should leave no stone unturned at the point in time when you submit the NDA, whether it’s analytical tools, clinical trials, whatever assessment. I can promise you, when we submit semaglutide in the US and EU in the near-future, no stone will be left unturned. Everything of relevance will have been discussed at a pre-submission meeting with European and American regulators.

Mr. Lars Sørensen, closing remarks: With that, ladies and gentlemen, we would like to thank you for your interest in Novo Nordisk. I would like to personally thank you for the numerous quarterly announcements that I’ve had the opportunity of sharing with you. This was the 63rd. It has been great fun! I am going to be missing all of you, but I will be checking out as of this call. So, I wish you all very good luck and thanks for our relationship during the years.

-- by Payal Marathe, Helen Gao, and Kelly Close