Eli Lilly and Company (LLY) Earnings Call Transcript & Summary

Good afternoon. I'm Chris Schott from JPMorgan. And it's my pleasure to be hosting this session with Eli Lilly today. From Lilly, we have the company's Chairman and CEO, Dave Ricks. Dave, thanks for joining us for the fireside again this year. It was obviously a very busy year for Lilly, again, in 2019. Seems like 2020 is setting up to be an important one for the company. Before we dig into this -- the specific topics on the fireside, do you want to make some opening remarks, and we'll...

Yes, absolutely. Thanks for having us again, and I want to thank my team here in the room. We had a strong year last year, and it's due to their hard work. Maybe just to frame before we get into this, we just had our guidance call on December '19 for 2020. And it ends a period of remarkable progress for the company. As we exited a series of patent expiries in 2015, we set out a series of goals and communicated those externally, and 2020 is the end point for that period, so it may be appropriate just to pause and reflect on that. The first was to grow the company on the top line. We had sort of a [ nadir ] of revenue, and we were -- had a number of promising Phase III and recently approved assets. There is a disconnect between investor expectations and our own for what we could do, and we set a goal to grow the company at a 5% compound growth rate from 2015 through the end of the decade. If we normalize for Elanco which we subsequently spun out of the company, we've actually raised that from 6%. And then performance itself will end up being at least 1 point higher than that, 7% CAGR during that period of time. We set a goal to launch 20 new products in 10 years. Some of which were in our horizon at that time, some of which were not, but it was an ambitious goal for R&D productivity. As we sit here today, we've launched 11 and have at least 3 more under review at the FDA, well on our way to achieving that 20 in 10 goal and a remarkable period of R&D productivity for the company. Finally, we set goals to improve our operating margins as we left a patent expiry period, like many of our peers have gone through a similar thing. We had a lot of infrastructure. We either needed to grow through or rationalize, and we undertook a robust program to do both, really growing our operating margins by more than 1,000 basis points from that point today. Our goal is to get to 31% operating margins next year to give us the latitude, both to reinvest in the business and reward shareholders who've come with us. Since that time, we grew the dividend, raised it 15% 2x in a row, bought back shares and made a number of strategic acquisitions. And I think as we stand here looking at the next decade, we're both proud of what we achieved. I think the company is in a substantially better place, but even more excited about the future ahead with promising assets in Phase III like tirzepatide or LOXO-292 selpercatinib. And even the early-stage pipeline, which hopefully, we can get into. There's really never been a more exciting time to work at Lilly, and we're really proud of what we achieved and excited for the next decade ahead. So with that frame, we'll jump to your questions.

Okay, great. Maybe starting out on diabetes. This is an important driver for your business. It's also been a controversial market, and I think access and pricing seems to be a constant conversation here. Along those lines, I feel like that for investors, there's this perception that diabetes -- since it's competitive, is a challenging category. So can you maybe just talk about where is the Street getting that wrong and how you're thinking about diabetes as a category?

Yes, good question. We field probably a disproportionate number of questions in investor meetings about diabetes pricing, and it does seem like there is price pressure. It is strange that at the same time, there's so much criticism about high pricing in diabetes. In fact, we're in a deflationary period for pricing on a net basis, and we've communicated that pretty clearly through time. But it is an area where I think demystifying it could help. First of all, there have been precipitous price events in certain categories in diabetes through the years. We were part of one of those in the early part of last decade with rapid-acting insulin. These are scenarios where payers have been able to take advantage of either commoditizing a class and creating an auction environment, or a new entrant comes that changes in a category the dynamic. Mostly, this last 10 years, we've been that new entrant changing the dynamic, whether it be in DPP-4, SGLT2 or in the case of GLP. Our goal is not to deflate pricing in doing that, but rather, to prove the value of our products. Right now, as it lays out, we do see low single-digit headwinds across all diabetes categories in terms of just the negotiation process to maintain access and reimbursement, which, as of today, for our brands is exceptional, over 90% of the lives for both Jardiance and Trulicity. Insulin is more like 50%, but that's based on the bifurcated nature of that market. We see that access point is stable with a slight headwind on pricing. We don't see ahead of us one of those precipitous events. We can always be surprised by it. But that's really what's been causing some of the, I think, the surprises investors worry about. We feel good about where we are. And it's important to understand the underlying dynamics behind the categories we're in. Insulin, we see as a relatively flat marketplace on volume, whereas GLPs are growing closer to 30% right now, and SGLT2 is over 20%. So although there may be a few points swing either way on price, we're doing well on share. The most exciting part about those categories, which Lilly is overexposed to in diabetes, is the underlying class growth, really changing diabetes care for so many people.

Yes, that's -- it's a great point. I mean I think about Trulicity, it's really emerged as like the key growth driver of the company. You mentioned the volume growth that you're seeing. Where do we stand right now in terms of GLP-1 share as we think about -- relative to basal insulin as an example? And where do you think that can go over time?

Yes, great question. I mean most people get on to a GLP injectable primarily. Now there's an oral option after failure of the traditional small molecule orals. That -- we see that as the persistent trend for some time now and will continue going forward. If we look at the totality of patients on a first-line injection, about 1/3 are on GLP, 2/3 on basal insulin. But if we look at new patients who are entering that category, it's more like half-half. So that would predict that GLP share of that patient group will grow and perhaps grow by as much as 50% over the next couple of years. We're very optimistic about where that class can go. And of course, we believe Trulicity is extremely well positioned with really best-in-class CV data, the easiest use experience for patients. And we know type 2 diabetes is difficult to manage. People want an easy experience. And this year, 2 important events, that REWIND data becoming part of our label, which remember is both primary and secondary cardiovascular prevention -- risk prevention as well as the high dose Trulicity, both the 3 and the 4.5 doses, which will allow people to stay on Trulicity longer as they progress through their disease.

It seems like a nice runway ahead for the product.

Yes.

Competitively, it seemed like the last year, 1.5 years, there's a lot of focus on Ozempic versus Trulicity. The product grew nicely through that launch. Now it seems like the concern's on Rybelus and what's going to happen with oral sema. So just perspective, as we have an oral entering the market and what that means for Trulicity.

Well, it's early days. I think the characterization as the promise of an oral pill but with the benefits of GLP is probably overstating where that product is, it's more part of the GLP class. And I think in that, we -- what we've seen so far is probably what we'll see going forward, which is there is an uptick in the growth of people starting on GLPs, both injectables and the new oral form. And they are gaining share, to some degree, at the expense of Trulicity, but mostly at the expense of other GLPs, in particular, from that same manufacturer. So look, it's part of the environment we'll compete in. It's far from an existential threat for us. It's an important addition for doctors and patients, but Trulicity, we think, is the best-in-class solution for GLP. As I said, we've got some new events coming this year with new data and dosage. And then by the end of the year, our next-generation incretin, tirzepatide, will begin to get Phase III data, and that will be a very exciting moment. This promises to really move in a profound way, not seen before, both HbA1c efficacy as well as weight loss, which is what doctors are looking for.

It seems like tirzepatide, there's been a lot of enthusiasm around that asset. Any change in confidence at all in that program?

Yes. I'm more confident in that program.

Great to hear.

I think one would worry that -- with anyone does with any Phase III start that as you increase exposures rather dramatically -- and right now, we have thousands of patients in that program recruited already. I think there will be 7,000 in the diabetes program, and we're well on our way toward that. So every day, as you have that kind of exposure, you can uncover what is always a chance that there's some off-target side effect or something you didn't expect, and we haven't seen that. So I think we'd be more confident today. We've also been successful recruiting and getting these studies done, so the time line risk is relatively low at this point.

That's great. More broadly, I guess, as we're thinking about patient affordability, it seems like a key issue in diabetes and probably more broadly across the space. I guess when you think about what Lilly is doing and what the industry is doing, what more can be done to address this challenge across the -- within the drug industry?

Yes. And thanks for the question. I mean it is -- we spent a lot of time on this. And clearly, it is a challenge across the drug industry. It's also a challenge across the health care industry. We've worked ourselves into a spot that is difficult to get out of. We've built insurance designs that make insurance more affordable for more people but have less benefit for those that are sick. And that's particularly true with the area of pharmaceuticals where, in an area like diabetes, in many cases, transactions where diabetic patients are processing through insurance a purchase of a medicine, they're subsidizing people who are well with that purchase. So we have to get out of that situation. I think that's probably a principle many people would agree with. But it's hard to do because you're then faced with the tough math of rising premiums. In the meantime, what we need to do as manufacturers is work for our own solutions in the short term. What can we do to plug the holes where people find themselves in difficult circumstances where their deductibles or co-pays are very high? Can we help? Of course, in commercial insurance, we can do a lot and we do. In government programs, that's more difficult. We have also undertaken steps to fill the gaps where people really don't have insurance, indigent care programs. We have a Lilly Diabetes Solution Center, where if you're up to 4x the federal poverty level, you can receive free insulin and other diabetic supplies if you qualify for that program. And then we've, of course, launched the half price, authorized generic forms of our best-selling insulins to more today. With the idea that, people who find themselves particularly in a Part D setting, where their copayment is linked to list price, it literally cuts their copay in half. We still would like more of our partners in the supply chain to list and carry those products, but that's something we can do. Ultimately, reform to the insurance system, so we avoid these upside-down economics for patients. And I think more transparency throughout the drug pricing system are the path forward and we're for both those things. And we'll try to be a constructive partner with everyone else who comes to this conference to try to solve those problems.

Yes, yes. Just pivoting a little bit the oncology franchise, can you elaborate a little bit more on the new structure that you rolled out late last year and where you stand in terms of the pipeline repositioning because I know it's been a big focus of yours over the last few years?

Absolutely. Well, we've been working hard on oncology since I came into this role, and we're very pleased to have acquired Loxo Oncology. With that came assets like selpercatinib, the RET inhibitor, like the BTK inhibitor, LOXO-305. And so we're quite pleased with the assets we acquired. I would say we're at least as pleased with the talent we acquired. And of course, competing in oncology is -- it takes speed and focus and a strong technical base. And I think that it's clear that small companies have, in many ways, outcompeted large ones in -- particularly in early-phase oncology development. So we're really pleased that the leadership of Loxo, led by Josh Bilenker, has chosen to stay with Lilly and really lead our early-stage oncology efforts, applying those same biotech principles but with the scale and resources of something like Lilly. We'll try not to get in their way, at the same time, be there when they need resources to raise money and acquire new assets, et cetera. We're really excited about this new construct. It's been discussed a lot. I'm not sure too many people have executed it. But the idea of biotech inside pharma, so we're giving that a shot. We call it Loxo at Lilly.

Yes, it will be great to see how that evolves. When you look at the oncology pipeline, do you feel that you have enough assets at this point to really be competitive in the market over time?

I think we'll be competitive. I don't feel like we have enough assets. So we're excited about what we're working on, as I said, we've talked about selpercatinib. Of course, Verzenio's been a successful launch. We have many data readouts coming still as that development program unfolds. We talked about 3 Phase I programs, which have just started Phase I dosing in 2019. I mentioned the BTK inhibitor, LOXO-305, our own KRAS G12C program, which has started in Phase I as well as an oral SERD but we would like more as well and are acquisitive in that way, but also working hard in our own labs to accelerate progress on high conviction targets that can really kill tumors. That's -- we can do a better job, and I think we're -- the team is very focused on that.

When you think about external -- accessing internal assets, particularly in oncology, where it seems like we've had some pretty lofty valuations. How do you think about balancing risk versus, I guess, the asset prices we're seeing in the market? Because it seems like there are some really interesting technologies out there. I guess the question we always struggle with is can you create a lot of value acquiring them at the prices that they might cost?

Yes. I mean we think a lot about that problem, and it's obviously multifactorial. In oncology, it may be slightly different from other fields because of the way oncology development works and the difficulty of comparative development. So speed and execution and the opportunity to move and be first obviously has a premium when valuing those assets. And if you believe you have both that skill but also the asset has that potential, that's something that weighs on our valuation. Additionally, of course, market size is an important factor. And what's the chance that an initial indication could be expandable to other populations with the right investment program behind it. And of course, the biggest thing is the probability of technical success and whether the targets going to demonstrate tumor-killing activity. And that's really where the scientific taste matters most and having great scientists as we do at Lilly advise us on, on that point.

So there's some opportunities still to create some value with?

There's always opportunities. Yes.

Just broadening out the capital deployment discussion. I guess the second or third year in a row, you've announced the deal ahead of our conference. So we like that trend. Just help us think a bit about the priorities right now as we think about earlier stage versus later stage transactions, maybe portfolio of assets versus single-product companies.

Yes. Well, I hate to be categorical about it. I think what we've said is that we're interested in mostly bolt-on activities that add to our clinical phase or even late preclinical phase portfolio. Lilly is in, I think, a unique position amongst our pharma peers. We have a relatively diversified source of revenue. We are in the early phase of a growth period. This is all about building value. We don't have a strategic box to check here. This is about finding great assets that fit with what we know how to do in our 5 core therapeutic areas. That said, there's an availability question, which is, where are the assets? And here, you would say, "Well, more than half are in oncology. A good portion are in immunology. Although we love diabetes and neuroscience, there are just fewer venture-backed ideas in that space. Most -- probably all of them, come talk to us anyway." So the number of transactable deals are clearly higher in oncology, that's probably where most of our deals will be through time. But the other areas are of strong interest as well. And then the question is how do you create value? How do you add value? And here, it's been -- the farther along things are, the harder that equation gets unless asset prices are really depressed, and I don't think they're really depressed right now. But the acquisition of Dermira is a good example. Lebrikizumab is an asset we liked, it's starting Phase III. We think we can augment that and add value in the clinical development phase. And of course, with the global footprint in dermatology, we can add value in the commercial phase. So that's how you get to the premium. Each case is a little bit different. We're interested in ideas across the pipeline, probably a little less interested in marketed assets, and certainly, less interested in scaled companies.

Okay, great. On the pipeline, it seems like we've got another wave of late-stage readouts kind of approaching for you over the next 12 to 18 months. I know we talked earlier about tirzepatide. What else in the pipeline are you excited about? And what else should we be focused on?

Well, on -- there's a lot to that. But in terms of this year, late phase, we'll see 2 important readouts in our immunology portfolio, the mirikizumab UC induction data will be available as a short-term data, along with the psoriasis program. We'll see additional data behind berry and atopic dermatitis. We'll also continue to get data in diabetes. You mentioned tirzepatide, but the HFrEF program for Jardiance will also read out this year, and that's exciting. In oncology, it's always a little tougher to predict the exact moments. Those early phase, Phase I programs are moving based on enrollment. There could be readouts there. And of course, everyone's watching the Verzenio monarchE study. That's scheduled to read out in a final form in 2021.

Okay. And I know it's something we've talked about, the earlier-stage pipeline is often hard for us to evaluate. How are you feeling about the -- I guess the -- that Phase I, Phase II portfolio? And could we be seeing assets moving forward there?

Yes, I think that's an area that perhaps it doesn't get enough attention as we talk to investors. And for us, as I said, we're in a good period here to grow pretty nicely through the middle part of this decade. What about the back half? And that will really rely on our current Phase I, Phase II portfolio converting into products that differentiate and change lives. There are a lot of things we're excited about in there. I think we talked about Trulicity here and tirzepatide. There's actually a follow-on to that, the so-called GGG, so a tri-agonist of various incretin pathways. We also have an oral [GLP ] as well. Only ours is a small molecule, so it would have a more normal PK and patient experience to what we think about with an oral medication in diabetes. And then I would say also, we have a weekly basal insulin in Phase II right now that I'm pretty excited about. I think that could be an interesting product. Oncology, we spoke about those 3 Phase I assets. And in addition to that, we'll get some data pretty soon on the pegilodecakin, the Pegylated IL-10 program we brought in a few years ago. Immunology, we've taken an approach now to look at in the early phase checkpoint agonist, so the reverse of checkpoint blockers in oncology. And we have a PD-1 and several other checkpoint agonists to look at can we resolve the cycle of autoimmunity using this mechanism. So pretty interesting. So there's a lot of breaking science. We're working on new modalities preclinically. And I would say there's never been a better time to be a scientist in this industry. And hopefully, we have the best ones at Lilly.

Yes. A lot going on. Alzheimer's as a category seems to be back on the radar screen for at least the investment community. You've got the DIAN study reading out this quarter. Just talk about your -- how we should be thinking about like your confidence in that readout. How do you think about sola relative to some of your other Alzheimer's assets and just the category in general?

And before answering that directly, maybe we just take a step back. So in the December '16, we read out our EXPEDITION3 study and narrowly missed the primary end point for solanezumab there. And at that point, we decided a few things. One, we would stop spending so much time talking about this and set about running a series of experiments that would more definitively prove efficacy, given the better tools at hand at that time. And there's really maybe 4 to talk about, 2 related to sola, DIAN is one of them, but also the A4 study. I think the retrospective on EXPEDITION3 program was, was it too late or was it not enough? And we didn't know the answer to those questions. So on the not enough, we raised the dose in both A4 and DIAN. These are consortium studies in 2 different populations to 4x, the EXPEDITION3. So it's 1.6 grams in those studies. And so that's part of the answer to your question on the DIAN-TU study. And then also, A4 is the early question because it's studying preclinical -- presymptomatic Alzheimer's. We also then designed and set up 2 highly controlled Phase II studies for both our plaque-specific antibody, donanemab, and our tau antibody, zagotenemab. Those data will come early next year and mid next year, respectively. And I see -- so I think between those 4 studies, we'll have answered, I think, in a much more concrete way the questions people have. Does soluble A-beta matter? Does plaque-specific A-beta matter? And what about tau? We'll be in a better position, I think, to squarely address the questions. There are many questions about our competitors' data, I'll let them answer those. In the meantime, we've continued to invest. We're committed to the space. We like our ideas. We're still in a phase where the biology has not been proven, and we think we've got a good shot to prove many points in these programs.

And specific I said -- that DIAN-TU study, to the extent that were to show what -- but -- some efficacy, what does that actually mean in terms of that? Is that an asset you can move forward and file at that point? Or is that more just a piece of data as you lay out all these different data points that kind of...

It's fileable. It's a -- this is a pretty narrow genetic population, that would be orphan like. I think most interesting will be the scientific interest in whether soluble A-beta can slow the disease in a group that has very few options, that's a great answer. And of course, then more broadly, to sola, what would be its broader utility? If soluble A-beta matters, why not look at that and reexamine the data we had before in a broader sense? It's registration quality, so it's submittable.

Okay, great. We're just about out of time, so we'll continue the discussion across the way in the breakout. But thanks very much.

Thank you, Chris, yes.