Welcome to the Q4 2015 Novo Nordisk A/S Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Lars Rebien Sorensen, CEO. Please go ahead, sir.

Thank you and welcome to this Novo Nordisk conference call regarding our performance in 2015 and outlook for 2016. I'm Lars Rebien Sorensen, the CEO of Novo Nordisk. With me I have our Chief Financial Officer, Jesper Brandgaard, Mads Krogsgaard Thomsen, our Chief Science Officer. Also present and available for the Q&A sessions are Executive Vice President China, Pacific and Marketing, Jakob Riis and Lars Fruergaard Joergensen, Executive Vice President Corporate Development and Vice Chair of our Operations Committee. Present are also our investor relations officers. Today's earnings release and the slides for this call are available on our website novonordisk.com. The conference call is scheduled to last one hour. As usual, we'll start with the presentation as outlined on slide number 2. The Q&A session will begin in about 30 minutes. Please note, as mentioned, that the conference call is being webcast live and a replay will be made available on Novo Nordisk website. Turn to slide number 3. As always, I need to advice you that this call will contain forward-looking statements. Such forward looking statements are subject to risks and uncertainties that could cause the actual result to differ materially from expectations. For further information on the risk factors, please see the arranged release and the slides prepared for this presentation. Turn to slide number 4. Sales growth in 2015 was 22% Danish krone and 8% measured in local currencies. The growth was primarily driven by North America and international operations. Sales growth was realized within both diabetes care and biopharmaceuticals, with the largest contributions coming from Victoza and Levemir. Rollout of our new generation insulins, especially Tresiba is progressing well. And Tresiba has now been launched in the United States. Within R&D, we announced the positive results from the SWITCH 2 trials last week which are…

Thank you, Lars. Please turn to the next slide. Last week, we announced the headline results from the SWITCH 2 trial. The first of two 64 week randomness double blind crossover treat to target trials comparing the safety and efficacy of Tresiba and insulin glargine with the brand name Lantus. Both insulins were randomized one to one to morning or evening dosing using vials. The main purpose of the trial was, under rigorous blinded conditions, to further document the hypoglycemia benefits of Tresiba compared to insulin glargine in type 2 diabetes. As a prerequisite for the subsequent hypoglycemia comparisons, the trial should -- and did -- show non-inferiority in HbA1c reduction of Tresiba compared to insulin glargine. The trial met its primary endpoint in that Tresiba showed a statistically significant 30% reduction in severe or blood glucose confirmed symptomatic hypoglycemia in the maintenance period. Further, the confirmatory secondary endpoint of severe or blood glucose confirmed symptomatic nocturnal hypoglycemia episodes in the maintenance period showed a 42% reduction with Tresiba compared to insulin glargine. Another confirmatory secondary endpoint regarding the proportion of subjects experiencing severe hypoglycemia during the maintenance period did not reach statistical significance despite a 46% reduction in the event rate. However, throughout the entire 64 week treatment period, a 51% statistically significant reduction in severe hypoglycemia rate was observed for Tresiba when compared to insulin glargine. Furthermore, on a general note, the symptomatic hypoglycemia [indiscernible] rates reported in SWITCH 2 clearly indicate that hypoglycemia remains a significant clinical problem in the management of type 2 diabetes. Finally Tresiba appeared to have a safe and well-tolerated profile and adverse events were comparable in the two treatment arms. Having demonstrated the superior hypoglycemia profile of Tresiba in type 2 diabetes, we now look forward to evaluating results from the SWITCH…

Thank you, Mads. Please turn to slide 16. In 2015, sales increased by 22% measured in Danish krone and by 8% in local currencies to DKK108 billion. The reported gross margin improved by 140 basis points to 85.0%. This reflects a positive currency impact of 150 basis point as well as a positive impact from the product mix, primarily due to increased sales of Victoza and modern insulin. This is countered by ramp-up cost for new manufacturing facilities. Sales and distribution costs increased by 22% in Danish krone and by 9% in local currencies, to DKK28.3 billion. The increase is driven by launch costs related to Saxenda and NovoEight as well as the preparation for the Tresiba launch in the U.S. Research and development costs decreased by one percentage point in Danish krone and decreased by six percentage points in local currencies to DKK13.6 billion. The decline in cost reflects the discontinuation of activities within inflammatory disorders in September 2014. Adjusting for the one-off cost, R&D cost increased by 8% in local currencies. The underlying increase reflects the progression of the late-stage diabetes care portfolio and is primarily driven by the DEVOTE trial and the SUSTAIN program. Other operating income net was DKK3.5 billion, compared to DKK770 million in 2014. The increase is driven by the non-recurring proceeds from the initial public offering of NNIT of around DKK2.4 billion as well as a non-recurring income related to the out-licensing of assets intended for inflammatory disorders of around DKK450 million. Operating profit increased by 43% in Danish krone and by 21% in local currencies, to DKK49 billion. Adjusted for the income related to the partial NNIT divestment and out-licensing income from the divestment of inflammation assets, the growth in operating profit was 13% in local currencies. Net financials showed a net…

Thank you very much Jesper. Turn to slide number 22. In summary we are very pleased with the performance in 2015 and the achievements of our four long-term financial targets. Our key products continue to perform well, and we look forward to 2016 being an important year in which we will continue to focus on the global launch of Tresiba. We are encouraged by the recent SUSTAIN 2 data further demonstrating the ability to reduce the risk of hypoglycemia from people with Type 2 diabetes on basal insulin therapy. We are now ready to take the first question and answers. And I would kindly ask you, due to all participants being able to participate, to restrain yourself to two questions please. Operator, we are now ready to take the first questions.

[Operator Instructions]. We can now take our first question from Sachin Jain from Bank of America Merrill Lynch. Please go ahead.

It's Sachin Jain from Bank of America. Just two questions, firstly not a surprise on the long-term targets. You've given some color on the double-digit diabetes growth within those, but I wondered if you could touch on some of the other key variables that you see that influence that outlook, perhaps NovoSeven outlook with competition coming, when you expect an inflection from China. And then a bit more color on the SG&A expansion, if that line was to grow in line with sales for the next four to five years at an additional of DKK1.5 billion of absolute spend is that about right and where do you deploy that? And the second question is on LEADER with that data coming in March. I understand it's been said there was a non-inferiority study for regulators but there is obviously some discussion around you showing a CV benefit there. What are the commercial implications for you if you were to show a CB benefit versus not showing a benefit given the MPREG data out there? Thank you.

I'll defer the first question on some of the other variables to Jesper Brandgaard, then I'll ask Jakib Riis to comment on when he expects we'll see some acceleration of our business in China. Then I'll come back to comment on the SG&A evolution going forward, and then Mads Krogsgaard will be speculating on what the pro or con for CV benefits of Victoza in the LEADER study. Jesper?

Yes, on the launch of financial targets it's clear that the franchise within the biopharm space will be challenged by potential new entrants coming into the space within hemophilia. On the other hand we have the opportunity of rolling out Novoeight which is fairing so far pretty well. And we have the opportunity of also rolling out N9-GP assuming that we will be able to obtain approval there. Overall, I do not see biopharm to be a major contributor to growth in a four to five year horizon. However, we will continue to see a very solid growth coming from our growth hormone franchise. In terms of the selling and distribution cost it is correct that we are assuming that it will grow in line with our growth in sales and hence a relative increase. So your basis assumption there is right. I don't know Lars if you want to comment on where we are going to spend it.

Yes, I'll revert to this but I think we do actually here need to add also the fact that Vagifem [ph] is going off patent and there will be a drag on that, we'll have basically a patent cliff for that in 2017 which will be factored into this as well. But, Jakib let's turn to China first and see when do you expect to see some reacceleration of our growth in China?

Part of the reason for the suppression of growth we are experiencing now in China is also the pricing reform that's ongoing and the impact of that is not yet seen to a large extent. So we'd expect this to unfold here in 2016 but also into 2017. So that's one indicator that we probably need to go through that before we see, could potentially see a return. We see good volume growth. We also need to reposition ourselves vis-a-vis our position in the basal segment. And we filed Tresiba last year in August. So you could also say before we get that approved and into the market the impact of this will not be visible. So, I wouldn't want to predict an exact timing of it, but I give an indication that we are probably going to see suppressed growth here for -- in 2016 and potentially also into 2017.

Then back to the SG&A, yes it is our anticipation that we will be growing SG&A in line with the exception of perhaps the administration part there will still be a little bit of leverage as we've got a global footprint there. But it is primarily in my consideration that we may need to expand our sales force in the United States. I'd like to draw your attention to the fact that we have, of course, currently employed our full sales force, almost entirely full sales force on Tresiba. We are still supporting Victoza which is a successful brand. We will be, hopefully be in a position to launch Salsify [ph] later this year. We are also hoping for a faster aspart to be approved. We have Ryzodeg on the shelf to be launched at an appropriate point in time. And we would like to continue to push Victoza in the U.S. to create the strongest possible platform for when we launch semaglutide. So I think there will be requirements for further adjustments of our sales force, and this could be both in certain markets outside the U.S. but also in U.S. markets. And we'll have the traditional expansion of our international organization in the emerging markets. And Mads, some speculation on CV plus/minus for LEADER and Victoza.

Yes I think from a purely biological perspective there is no doubt that what we have seen so far is that in earlier stage diabetes and indeed in obesity and pre-diabetes we have, albeit the numbers are very small, seen a hazard ratio that has consistently been to the left of one i.e. below one for Victoza. However when that is said the patients being studied here are significantly more eposcharotic [ph] they are above 60 and so on and so forth, and are more reminiscent of the population that we saw in the empirical study. Now what is that per population? That is a population where many of them have emerging heart failure. Many of them have had heart attacks previously. And that basically means that the effect of MPT Flozin which is basically reduction of volume overload that occurs in such patients is something that is not necessarily likely to happen in an earlier stage population. Whereas the way we believe GLP-1 may work if it works at all in a long-term study like LEADER is one that is more basically into the pathophysiology of the vessel wall disease. And by that I mean that the earlier we treat the more effect we would expect to see in terms of benefit on cardiovascular performance. So my and Jaeger Bryson, everyone's argument would be that if we can see something in LEADER that would be a rationale for up-streams more use of liraglutide, which we have to bear in mind is today is very often as third or even sometimes fourth line of treatment.

We can now take our next question from Peter Verdult from Citi. Please go ahead.

It's Pete Verdult here from Citi. Just two questions, Tresiba and then back to financial targets. Just on Tresiba can you give us any early data on formal reactions that you've achieved in the commercial and the Part D setting? I realize Part D is going to be more challenging but any data points you can point to there or are you going to save that for the capital markets day next week? And then what the latest update is regarding Tresiba in Germany. And then Jesper back to the long-term targets, lots of discussion with investors this morning about it. I'm not going to ask you to go line by line through every assumption, but I do want to better understand the philosophy here. At the capital markets day you were clearly aspiring or you laid out your aspirations to maintain double-digit top line growth. We know that 2016/2017 are going to be huge investment years and that U.S. pricing dynamics are going to be more challenging. That said your product mix longer term is going to improve. You've got four CV studies rolling out this year you've got the [indiscernible] phase 3 programs all rolling out. So put together it does seem to me that over the long term if you're growing -- if you get anywhere near your aspirational revenue targets, there is going to be scope for further margin expansion. So I'm just wondering given the current U.S. political backdrop on drug pricing is there some sensitivity about communicating that to the market, or am I missing something?

I am not aware Peter that we have a capital markets day next week.

Meet management yes.

Okay, alright.

My apologies.

It's the Boston meeting you are referring to.

Yes that's [indiscernible].

Okay. So we'll probably have an opportunity to discuss Tresiba also at that occasion. Early days are that it looks good. We have achieved the planned formulary access in the commercial markets. And we have slightly earlier than anticipated received some access also in Part D. So I think if you look at it from that perspective we are slightly ahead of our expectation when it comes to formulary access. And then we may have a chance to talk about this next week in Boston, if there are new information emerging. Tresiba, Germany, our negotiations did not pan out unfortunately. We had small hopes I'd have to say based on an opening by the German authorities to revisit the pricing discussion. But at the end of the day they came back with basically the same offer that we were offered initially, hence basically we would have had to accept the pricing based on human insulin. And this was not really something that we could accept. And therefore, we have started the ceasing of the distribution and helping the authorities and the medics to transfer patients to the best of our ability and no harm for them. So Jesper, long-term financial targets and looking at the very strong pipeline we have that surely will give some opportunities for mix changes, how you see this going forward.

I think first I think you find some very meaningful guidance on this overall pricing impact in the U.S. which is clearly an uncertain effect that weighs in on the outlook. But if you look to 2015 and become very concrete then you could say in 2015 we basically had no effect from prices on our average gross margin. And the impact also from U.S. was flat. What we did see was a positive mix impact having an impact to the tune of 30 basis points positive on our gross margin. However that was largely offset by a ramp up cost in our production bringing additional capacity on stream within diabetes care. I think that is the right way to think about the next couple of years. I think we will see a roughly unchanged gross margin as we continue to invest in bringing on new production capacity and production capacity for the new variants that we are going to launch over the next couple of years. I do believe that we will continue to see a mix impact. And we are not anticipating near term overall any significant positive pricing impact. If you look to our accounts that will be released on the annual report if you look to that on Monday you will actually see that the rebate percentage of our U.S. sales have gone up to 56%. And that to me is a sign that whereas list prices may be adjusted the majority of them are actually being offset by increased rebate level, so overall not anticipating any very significant impact. In terms of the key growth drivers in the long-term outlook, as I alluded to before, it has to be driven by our diabetes care franchise. Yes, it is correct that it could accelerate further if…

A lot of moving parts all ending up in a projection now for the next three to five year horizon, 10% operating profit growth based on basically top line growth. So next question please.

We can now take our next question from Michael Novod from Nordea. Please go ahead.

It's Michael from Nordea. Two questions, one is to the current Victoza trend. You also mentioned you yourself you had to give slightly higher rebates in Q4 in the U.S.. Is that because you do see some impact from payers trying to play you off against Lilly on Trulicity. And also what is happening in the European franchise? Are there any trends we should be aware of, or is it just [indiscernible] swings we see on Victoza? And then secondly on the projections of solid growth continuing in growth hormone, maybe you could outline a bit of the moving parts here and also see or comment on how you see the Versartis product against your once a week growth hormone. Thank you very much.

This is Lars Rebien here. Yes, the numbers in Q4 were weak in particular in the United States. And this is of course what we continuously try to notify the markets, be a little bit cautious about reading too much into quarterly numbers because we did do a rebate adjustment for Victoza in the U.S. relating to sales from previous quarters in the U.S.. So that negatively impacted the Q4 numbers to make them weaker than they in reality are. No major changes in Europe, strong performance of our franchise in Europe and no major impact from competing products. Mads, growth hormone how do you see the long-term competitive with long-acting growth hormone ours versus Versartis.

Yes, I think as you may know from the most recent evolution one of the other, you can say, companies in the field have had to kind of pull the plug on that project. And some of the reasons seem to be related to [indiscernible]. And I do note that when it comes to Versartis they have recorded a couple of cases at least of neutralizing antibodies, which is something that we have not seen for Somapacitan or NN8640 and are hoping not to see at all. So far we have not seen it. Another thing is that injection site reactions are at the level of Norditropin with somapacitan and there I do bear in mind that Versartis have seen injection site reactions also with some frequency for that product. So in as much as they are timeline wise ahead of Novo Nordisk I remain confident in our product in that it seems to deliver a performance like once daily with the same [indiscernible] profile albeit it through once weekly subcut injections.

And then with regard to the market situation for human growth hormone, we did extremely well in 2015 in the United States based on contract wins in the United States. We did extremely well in international markets. We might actually have done better in international markets, because we were somewhat restrained capacity-wise last year. So if I look forward to growth hormone expansion I'm looking at a year which is slightly growing less than what we did in 2015. So, more rather like 5% than the 8% that we reported for 2015, based on growth in the U.S., growth in international operations some growth in Japan and flat markets in Europe.

We can now take our next question from Michael Leuchten from Barclays. Please go ahead.

Two questions please. It's Michael Leuchten from Barclays. One, I apologize just going back to the long-term targets you make very clear your views on the gross margin and the SG&A. You didn't however touch so much on the R&D line. And I guess one way to read the long-term target is that you will also invest quite significantly in R&D. Could I just ask you to contextualize it a little bit given that you have the SUSTAIN program rolling out or off. You've got DEVOTE coming to an end. In terms of numbers of patients and trials in Phase 3 trials that is a -- I would have thought it would help you, yet you seem to suggest that your R&D budget is going up, so why and where? And then the second question just in terms of 2016 for Jesper, I appreciate you've given the DKK1.3 billion in FX hedging loss for 2016, but then there is also a FX dis-benefit in terms of top line and operating profit. There seems to be a disconnect between the two, so if you could just go through that again. I think you made a comment about that in your initial remarks but I couldn't quite catch that.

Mads Krogsgaard, how do you see the long-term expansion of R&D cost and how does the change in the large number of cardiovascular patients then relate to patient load going forward and the complexity of those trials that we embark on going forward.

Yes, and that's a really good question. Of course, your argument is Michael that with the completion of three cardiovascular trials LEADER, DEVOTE and SUSTAIN 6 and indeed the entire SUSTAIN program as such wee are coming to the end of a 25,000 patient commitment you can argue. That has to be counted by a 9,300 patient commitment in the PIONEER. And do bear in mind that this year the sheer workload associated with completing all the CV outcome trials and initiating a huge phase 3 program for semaglutide orally is keeping everybody busy including the external cost base relatively high. But one important thing to bear in mind is that in as much as we do not have the same heavy load coming from phase 2 into phase 3 the next couple of couple of years, we on the other hand have had a huge load of early market assets. Whether it's the three degludec products or whether it's the future semaglutide or PS products saxenda and what not, and all of them deserve to have fully professional and dedicated phase 3b programs and even emerging real world evidence surrounding those assets. That means that you will see a relative increase in the proportion of development costs associated with the protection and expansion of the business opportunity for these five, six, seven new products in the diabetes and metabolism studies.

This is Lars Rebien here, just to add a general comment, I think one should assume that going forward our clinical programs will be more complex in that we need to include in our global clinical program regional input to take into consideration the market access challenges we have in different markets. And also the increasing need for real world data to demonstrate the value of the drugs to get them on the market as quickly as possible. So all in all other things being equal I think it's going to expand the cost to develop new drugs. And in particular in areas like ours where the effect is only accrued over time, and therefore monitoring the benefit will require more patient years than we've had in the past. Thank you very much. Let's take the next question please.

No, no sorry I need to have the reply to the question regarding the impact from FX on 2016. And just thanks for asking that which is a little bit of a frustrating situation for 2016 as it looks currently. If we go back to 2015 we had on operating profit a positive impact of DKK7.9 billion and that was offset by a net financial loss of DKK6 billion. So in totality we had a DKK1.9 billion positive impact. And then when you look to 2016 suddenly we don't have that matching effect between the impact on operating profit and the financial items. And it has to do partly with the U.S. dollar. So we do have a positive impact on our operating profit from the U.S. dollar being at a slightly higher level in 2016 than the average level for 2015. However, that is being more than offset by lower currency levels for the CNY for the British pound and for Canadian dollar. And then in addition in the emerging markets we will be suffering, especially from a currency like the Argentinean peso where you've had a significant decline. Overall if you take that net impact from all these currencies you end up with something which is just slightly bigger than a 0.5% of negative currency, hence we guide to a minus 1% in line with our historic practice on that area. And then if we look to the other side of the currency the hedging impact included in our financials it is basically a negative impact of to the tune of DKK1.1 billion and then there are other financial items making it to DKK1.3 billion. But the hedging is a net DKK1.1 billion negative and that's predominantly an effect from U.S. dollar. And for the U.S. dollar you should actually note that the challenge we do have when we buy 12 months forward U.S. dollar that you have a higher interest level in the U.S. than you have in euro. And hence the forward rates we do get at adoption compared to the spot rate. And when you then have relative stable spot rates you end up with a slightly negative effect on hedging. So a little bit complicated the explanation. The net effect is that we expect the financial line of minus 1.3 and we do expect just above 0.5% negative impact on operating profit growth from currencies in 2016.

We can now take our last question from Jonathan Beake from Redburn. Please go ahead, sir.

Just two if I may, firstly I know you've been asked about it a lot but is there any chance you can give an explicit assumption for what you're assuming for ACE910 in your long-term guidance? And then secondly on SWITCH, is it possible if we looked at the ADA definitions of hypos would the hypoglycemia benefit be equally compelling? And also what should we make of the lack of benefit seen in the maintenance phase of the trial?

Jesper what sort of basic assumptions have you factored into our mid-term guidance and in relationship to the potential competition from ACE910. And then Mads if you just talk about the results we've seen and compare that to the guidelines whether there is an issue with the maintenance phase.

I think the best guidance I can give to the market at this point of view and actually providing guidance three years out on the potential competitive landscape is hard. What I think we want to say is that the biopharm portfolio is not anticipated to be a major contributor to growth on a three year horizon. And we have assumed that there would be additional competition entering into our core hemophilia space. So that is the basic assumption, but of course it can go in various directions.

Yes, so two elements here one on the specific maintenance period issue impact. We measured over the maintenance period as the primary and you can say confirmatory secondary endpoint and found as you know specifically significant and clinically meaningful reductions both in [indiscernible] blood glucose confirmed symptomatic hypoglycemia as well as similar measurement just for nocturnal. Now the issue with the severe in the maintenance period is not that there was not a reduction because it was actually 46% in the bit rate. However it was the numbers that were low because you're only measuring in the 16 week maintenance period. Fortunately was a pre-specified other analysis was measuring severe hypoglycemia throughout the period, and when that is done the reduction percent-wise is similar, its 51% versus 46%. But here the numbers naturally accrued are larger and a clearly statistically significant benefit in the occurrence of severe hypoglycemia then takes place. When we come to the definition of hypoglycemia as you will recall from the advisory committee the FDA actually had four major you can say points to consider for us in the construction of the new SWITCH trial. One being the timing of the dosing i.e. morning versus evening, and this we have randomized to 50/50 morning and evening for both products in a blinded way. Another being the hypos, not the level of which to measure but rather whether they were symptomatic etcetera, and here we have actually made them symptom -- only measured symptomatic 56mgs per deciliter, and moreover the severe hypoglycemic episodes were actually adjudicated by a committee not to forget. And then it's also a notion that the population was perceived to be unreasonable or not the most ideal because we had weeded out those at highest risk of hypoglycemia. This did not take place in this trial where we looked into different ways of being at risk of hypoglycemia either of having a hypo in 12 weeks, a severe hypo in 12 months, have had insulin treatment for more than five days or moderate renal insufficiency. So all of these patient sub-populations were part of the trial, so I think it's difficult to find any flaws to be quite frank. And all hypos measured are indeed symptomatic.

So ladies and gentlemen with this lecture from Mads Krogsgaard on hypoglycemia we thank you for your participation and for your questions. And we are sure that we will be meeting several of you as we will be embarking on our road show immediately. Thank you very much.