Novo Nordisk A/S (NOVOB) Earnings Call Transcript & Summary

Welcome to Novo Nordisk A/S conference call. [Operator Instructions] Today, I'm pleased to present President and CEO, Lars Fruergaard Jørgensen. Please go ahead with your meeting.

Thank you very much, and welcome to this conference call regarding our updated outlook for 2020. We have just finalized our third quarter results, and that has led to a revision of our outlook for the year. And according to the disclosure rules, we have to get that updated outlook announced to the market as soon as possible. That's why we have called for this meeting today. With me, I have our CFO, Karsten Munk Knudsen, and we have scheduled up to 30 minutes for this call. We'll start by showing a few slides to explain the change and then we have a Q&A session. I'd like to remind you that we will have the full detailed Q3 announcement on 30th of October. Hence, we would like today to focus on the updated outlook and the high-level numbers. Please turn to Slide 2, which contains the usual forward-looking statements. And I have to remind you that risk and uncertainties might cause the actual results to differ materially from our expectations discussed today. Please turn to Slide 3. 2020 has so far been a very unusual year. You recall that we grew 14% in the first quarter, 0% in the second quarter and now 7% in the third quarter, leading to a year-to-date growth of 7%, both in sales and operating profit. We are pleased with the solid underlying performance that we've seen throughout the year, but we also see that there is a need for lifting our guidance on the -- based on the underlying performance and a lower level of anticipated COVID-19 impact seen in Q3 and expected in Q4. That's why we now increase our guidance to 5% to 8% both on sales and operating profit, which is 2 percentage point higher on sales and 3 percentage point higher on operating profit compared to what we guided at our August meeting after the second quarter. This is a relative wide range compared to what we have in this time of the year. But bear in mind, the quarterly growth pattern I just mentioned, this is an unusual and more volatile year than we have, I think, realized, at least I can recall in Novo Nordisk. Hence, we operate with a slightly broader range than we normally would do. With that, I'll hand over to Karsten for a bit more elaborate review of our performance and the COVID-19 impact.

Thank you, Lars. Please turn to Slide 5. Oh, sorry, to Slide 4. So the sales growth, as Lars alluded to, 7% in the third quarter and 7% on a year-to-date basis. This level of sales growth is in line with what we also realized in the first half of the year and in line with our prior commentary around an underlying sales growth to the tune of 6% to 7% at constant exchange rates. Our sales growth, in terms of key drivers, continues to be driven by our GLP-1 business from solid underlying market growth as well as continued market share gains. In terms of our regional performance, then as in the first half of 2020, then the key regional growth driver continues to be international operations. And we continue to see the same underlying growth trends in both international operations and North America operations, as seen in the first half of this year. The key driver for our change to our outlook for the year is lower-than-anticipated COVID-19 impacts. To go through the key components of our COVID-19 impacts, let me take each of the building blocks. First of all, as you recall, in the first quarter, we saw a significant COVID-related stocking to the tune of DKK 2 billion. Of that, DKK 500 million reversed in the second quarter of this year related to wholesaler inventories, leaving an estimated DKK 1.5 billion at a patient level inventories. Looking at the third quarter, we have seen very limited impact from patient level destocking in this quarter. However, it's important to bear in mind that the -- that we don't have very, very solid data points because this is basically estimated based on script trends. Our second component is U.S. unemployment. So as we discussed in conjunction with the second quarter, then the U.S. unemployment, at that point in time above 10%, results in a negative channel mix and a lower average realized price for our U.S. business. And what we now see, based on available market data in the U.S., is that the level of unemployment is now below 8%. And hence, one should anticipate that the negative channel mix, which we -- back at Q2, estimated to a 3% annualized impact to our U.S. sales negative, is now lower. We estimate to the tune of 2 percentage point at the annualized at this point in time. In terms of underlying patient trends, then the TRx developments we've seen in the third quarter is stronger than what we anticipated back in conjunction with the second quarter, so the conversion from the NBRx impacts that continue to be negatively impacted from COVID-19, so negative impact on new patient starts. The translation of that into TRx has been less than what we anticipated, so that is also a key driver of our change in outlook. Net-net, when we combine all our COVID-19 impacts, then we are estimating to the tune of a negative impact on our global group sales around 1 percentage point on a year-to-date basis. All this leads to an operating profit growth of 7 percentage point in local exchange rates in the first 9 months of the year and in the third quarter also. The third quarter 7% growth rates, of course, comes at the basis of a somewhat easy comparator linked to asset impairments in the third quarter of '19. And it's important to note that in the third quarter of 2020, we are expensing a priority review voucher since we have informed the FDA that we intend to use that voucher in conjunction with the -- with our filing of Semaglutide 2.4 for obesity, which we plan to file around the turn of the year. With that, I will hand it back to you, Lars.

Thank you, Karsten, and we're now ready to start the Q&A session. Please bear in mind that this Q&A will be on the high-level numbers in relation to our updated outlook, whereas the details about Q3 performance, we'll kindly delay for our October 30 call. So thank you for respecting that. Operator, we're now ready for the first set of questions.

[Operator Instructions] The first question comes from the line of Wimal Kapadia from Bernstein.

Wimal Kapadia from Bernstein. So could you just give a little bit more quantification on the drivers of the upgrade from the COVID impact? So here, you flagged underlying trends versus stocking versus unemployment, so a little bit more color in terms of quantification will be great. I'm just curious to hear how much of the upgrade is actually driven by slower destocking at the patient level. And if that ultimately means we will see greater destocking in 2021, so more of just a shift out further than you anticipated. And then the second part, just with respect to the benefit the greater wholesaler stocking you flagged in the release. Should we expect a reversal of that relatively soon, like we did between 1Q and 2Q this year? So that's the first question. And then second question is just, I'm curious on the GLP-1s. When I look at the trends, the U.S. actually looks quite challenging with only modest volume growth versus the EU with early 3Q data suggests quite a strong recovery. So is that a fair reflection of what you've seen in 3Q?

So thank you, Wimal. I'll just answer quickly on the GLP-1 because we're not going to a lot of detail, and then Karsten can get back to some of the data points. So we see a continued strong volume performance, both in the EU and U.S., and we are pleased overall with our GLP-1 performance, but we'd like to go into those details when we get to our end of October meeting. And Karsten, on both stocking and unemployment and, say, patient stocking reversal, whether that carries into '21 or not?

Yes. Thank you, Wimal, for your questions. So on the patient level destocking, this is, of course, highly speculative because that depends on both the insurance designs and individual patient behavior. So what we're seeing is simply that we see less patient level destocking. When we're looking at the overall script trends, we see a little, but not significant, which means that either the patients will continue with a higher level of inventory. That could be, for instance, if you move from a monthly benefit design in the U.S. to a 3-month script basis, then potentially, you would stay on a 3-month script basis. And as a consequence, we will not see a full reversal of the DKK 1.5 billion patient level inventories. So our take is that we'll continue to see some slight patient level destocking, but potentially, we will not see the full DKK 1.5 billion destocking. As to the wholesaler comment in Q3, this is not COVID-related. This is purely a U.S. wholesaler who took -- who closed the quarter with a few days higher inventory levels than normal. What we normally see is that such inventory increase reverses early on in the coming quarter. But of course, how the fourth quarter ends in terms of wholesale inventory levels, we have no insight into at this point in time.

The next question comes from the line of Trung Huynh from Crédit Suisse.

One on FX, firstly. Just what's your expected currency impact on the reported results for 2020 and 3Q? So at 2Q, your guidance was for 2% negative impact on sales, minus 3% on operating profits and a DKK 1.2 billion net finance charge largely related to hedging. But we know that FX has moved a lot now since 2Q. So how are you thinking about this? How can this be mitigated on the net finance chart line? Any clarity here would be welcome. And then your previous forecasts assumed a margin decline as the company invests in launches, but your new guidance does not. Does this reflect SG&A savings from lower traveling, marketing? Or has there been a positive mix shift in the portfolio?

Thank you, Trung. Karsten, first on FX. Then I'll talk a bit to S&D spend.

Yes. Thanks for the question, Trung. What we see on FX is, as you allude to, that the Danish kroner has been strong against the U.S. dollar in the third quarter compared to also when we did our guidance in August. So our estimate is that the 2% and 3% you allude to on currency impacts on sales and OP will increase to the tune of 1 percentage point each, so to 3% and 4% negative impact on underlying sales. As to net financials, we'll get back to that in conjunction with our third quarter results, our full set.

Thank you, Karsten. Some high-level comments on our spend. We have our reps back in the field, and most of them are starting to have good face-to-face contacts. You might have noticed that we have started D2C in the U.S., so spending is up because of that. It's correct that we have less travel, like everybody else, but that's countered by higher distribution costs as it's more expensive to distribute our products right now with the current logistic patterns we see. So we see, say, a reversal to a more normal spend level. Thank you, Trung.

Next question comes from the line of Peter Verdult from Citi.

Pete Verdult, Citi. Most of the questions relating to the update have been asked. So apologies, Lars, if I'm a little bit left field here. But just in terms of thinking about the timing and upcoming data, ClinicalTrials.gov seem to suggest that SUSTAIN FORTE should be around the corner. I know you said Q4, but wondering whether you could give us any -- whether we can expect that data with the Q3 results? And then at Q2, you made it clear to the market that you were not privy to the ELAD data that's coming on Friday, November 6, at CTAD. Just wanted to get a confirmation if that is still the case or whether anything's changed there in terms of being privy to that data?

Thank you, Pete. Sorry to be a party spoiler here. We really have to refrain from going into those because we want to make sure that we focus on the updated outlook today. And then in a few weeks, we'll meet and we'll make sure we go through all the details in terms of how the business is performing, including our clinical trial. So sorry for being a bit boring on not going into those aspects. So...

That's fair. That's fair.

The next question comes from the line of Martin Parkhøi from Danske Bank.

Martin from Danske Bank, and I'm sure this is on the updated outlook. I just wanted to ask again regarding this patient level destocking. Because I noticed that after Q2, you said that there had been no patient level destocking, but your main competitor, Lilly, said that actually -- or they have seen that all the destocking seen in Q1, both on wholesale level and on patient level, was actually reversed in the second quarter. So is there a possibility that Lilly is actually right, that it has been reversed? So there is a scenario where you actually are overly conservative, and there could be no patient level destocking left at all? And then secondly, just a 7% growth, we know that you have these aspirations, you call it, of 6% to 10% growth on the -- in IO. And I think the short-term indication in U.S. is 0 to slightly single -- positive single digit. Why is it, it has changed in the guidance? Is it more than 10% or above the range for IO?

Thank you, Martin, and fair challenge. So I'll quickly hand that over to Karsten.

Thanks, Lars, and thanks, Martin, for the question. So of course, I cannot comment on what Lilly sees and how they reach their data. You should ask them. But again, it's important to note, and it's fairly straightforward to tease out from the data in Q1. So if you look at the March spike in TRx, and you basically compare the spike with the underlying trends, it was fairly straightforward to tease out that there was an inventory build of DKK 2 billion. And then we have very good data on what's the wholesaler built out of that because there, we have quite a lot of transparency. So that leaves DKK 1.5 billion in increased patient level inventories. And so we're very confident with that. But as I said before, then the speed and magnitude of destocking become -- in terms of patient level inventories becomes very hard to tease out because you can already get that from the TRxs that we get from, say, IQVIA, for example. And we are talking around a very small number out of big number of TRx. So really teasing that out is mathematically very complicated. But as I said earlier on in my intro, then our estimations at this point is that we've seen very -- we've seen no patient level destocking in Q2. We've seen limited patient level destocking in Q3. And then it's speculative to what extent and what speed the patient level destocking will take place in the coming quarters.

Thank you, Karsten. And on the 7% growth, we'll not go into the detailed regional split. But you can assume that it's, say, a continued trend of -- or what we have seen in the first quarters. So a very, very stable underlying solid performance in our business. Thank you, Martin.

The next question comes from the line of Richard Vosser from JPMorgan.

First question, just obviously, the upper end of the range of your guidance implies quite an acceleration of growth in the fourth quarter, maybe up to double-digit to 11%. So just if you could give us some idea of what are the underlying assumptions behind the top end of the guidance range? How we might think about those being achieved? And then just back on this -- back on the wholesaler stocking. You mentioned a couple of days. It'd be useful if you could quantify that in actual DKK for the third quarter? And then finally, just thinking back to this patient level stocking. Is it possible that we've actually got higher compliance levels at the patient level, which actually means they're using up more drug than potentially in the past? And have you got any data on that?

Yes. Thank you, Richard. So in terms of our guidance range, as Lars said in the beginning, then we are running with an unusually broad guidance range for the fourth quarter at this point in time. And this is a function of the volatility we've seen so far this year. So I think that's where you should take it, more so than any kind of indications that will end in either part of the outer spectra. So what you normally see in terms of major changes to our business, apart from the continued underlying performance, is, of course, the stocking that we've seen, especially in the first quarter of this year, should we have any major stocking event again. And then we're looking at basically a rebid adjustments in the U.S. being another major moving factor. But the -- but it's important to reiterate that these are the outer points that we're looking at. And it, of course, mathematically, takes a lot to get there with only 3 months left. Then for the wholesaler, to give you a specific number for the U.S. wholesale increase, then we're looking at to the tune of a benefit of slightly less than 1% to group sales in the third quarter.

Thank you, Karsten. And on the patient level stocking and why that's not being reversed, we don't have solid data. But of course, one can speculate that if you're locked down at home, maybe adherence to treatment is easier and patients are complying more. You could also speculate that we know that diabetes is a risk factor in case of getting COVID-19, so compliance and good glucose control might be more in fashion. We also hear stories that people being less active, gaining weight. You could speculate that leads to higher consumption. And of course, around the world, we see, maybe not a second wave, but at least an increase in number of cases, which was what led to building up the inventory in the first round. Hence, I think a lot of patients would be looking at protecting themself and keeping inventory. So these are just speculations from our side. We'll try to see if we can find some good data points for our next meeting later on in the month. And looking at the time ahead of us, I think it's fair to say that with COVID-19 and the pandemic staying still for quite some time, most likely, we would see that inventory being kept in coming quarters. And as Karsten said, we don't expect a big reversal in fourth quarter, potentially next year, but that remains to be seen. Thank you, Richard.

The next question comes from the line of Michael Novod from Nordea Markets.

Yes. It's Michael from Nordea. Just 2 questions left. Maybe you could just, also in absolute numbers, make it more precise on the actual number for the expensing of the PRV in Q3. Maybe just remind us about that. And then secondly, I know this is perhaps a bit nitty-gritty, but when you normally do the updates according to MAR, that is because you sort of are in excess of your previously guided range. And you said 3% to 6% on the top line, now you say 5% to 8%. I would assume in order to be above the sort of the market requirement, it -- is it fair to assume then it's more closer to 6% to 8% on the top line, i.e., in the clear upper end of the range?

So Karsten, on the PRV numbering?

Yes. The PRVs, specifically, DKK 600 million impacting the third quarter operating expenses. And on the disclosure regulations, so -- we're looking at 2 dimensions to that. The first piece is, when you take the midpoint of the range -- of the new range and then you look at -- is that outside the previously announced range at Q2 as one indication. And the other indication is the absolute range, how is that compared to the old range? So for instance, on operating profit, moving from 2% to 5% and then having 5% to 8%. Then you could say then we're moving the midpoint outside the old operating profit range and the new operating profit range is significantly changed outside the old range. And those 2 in combination with an expected impact on the share price, which is what we saw on our ETR share price, led us to assess that according to the disclosure, we would have to disclose it immediately. And then just one follow-up comment to Richard's questions on the range. Do bear in mind, mathematically, then just covering the 11% to get to the top end of the range, there is, of course, the rounding dimension also. So 7.51% would also be a rounded 8%, and that would take us closer to the 9% growth rate in the quarter to get there. Just to get the math. He's quite off.

Thank you, Karsten. Thank you, Michael.

Next question comes from the line of Kerry Holford from Berenberg.

I have 2, please. Just following on from the comment on patient level stocking. I wonder if you can comment on what proportion of timing you're facing in the U.S. and now on that longer 3-month rep. Is it 1 month? And how that's evolved over -- since the pandemic? And then lastly, just to check, does any of this guidance relate to any formulary negotiations to the early rebate movement ahead of 2021?

Thank you. Kerry. Karsten, first on -- do we have any data on how many patients are on 1, respectively, 3 months scripts pattern? And then I'll address the formulary negotiations afterwards.

Yes. So we have that data. I don't have the data with me. I'm happy to cover that in conjunction with our full 3 quarter release. But it's important to state that, of course, we don't have end of September data available at this point in time vis-à-vis the average script size, which would indicate whether we are -- to what extent we've moved from 1- to 3-month scripts. So we'll get back to that. Otherwise, you can get it from Investor Relations.

Thank you, Karsten. And on formulary negotiations, again, the focus for this call is our revised guidance for 2020, and there are no formulary changes that impacts that. Having said that, I think, overall, we look at a stable environment in terms of access. So with that, we close our conference call today. Thank you for the interest in Novo Nordisk, and we look forward to talking to you again when we announce our full data and commercial situation at the Q3 call on 30th of October. Thank you very much.

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.