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

I'd like to welcome Eli Lilly to the Cowen conference. Representing the company is Josh Smiley, who is the Chief Financial Officer. Let me note that next month marks the sixth year anniversary of the Cowen upgrade of Eli Lilly. And it was really an easy call because innovative, creative companies turn out to be good stocks in this industry, and Lilly has been a consistently good performer during that period. So Josh, thank you so much for spending this time with us. I had the pleasure of having dinner last night with Josh with a small group of other people. And I think I follow the company pretty closely, and I listen to everything the company says, and I try to remember what the company says. And I guess I was most impressed with the conviction that you articulated for the outlook over the next 5 years. And again, I've heard it before, but I was just impressed with your confidence in your conviction, and I just wrote down a few things, which I'll just read off. So revenue, top tier of the industry, better than the last 5 years. Volume, this -- that you're accounting on a low single-digit price decline, implying that volume will have to grow at double digits. And you're embedding within that expectation legislative impacts. No other company I follow has articulated that level of confidence over the next 5 years.

So maybe you can just dig into that a little bit more and tell us how you get from here to there.

Sure. No, thank you, Steve. I think, first, I'd look at the last 5-year period that we've come out of, and we will grow, which we gave some 5-year targets that culminated in 2020, and that period will have us growing at a compound annual growth rate normalized for taking Elanco out of the base year at 7%. And within that 7%, we've seen -- recently, we've seen net sales decline, so we're experiencing double-digit volume increases. We also have grown through a pretty significant patent expiration with Cialis. We also had Strattera a few years ago in that period. So we've had patent exposure, net pricing decline, significant volume gains. We've launched now 13 new products since 2014, so pretty much over that period. So I think the experience to date gives us good confidence for the next 5-year period. And I think as we look from 2020 to 2025, we have some things, I think, that are really working in our favor that give us some confidence. Of course, we have to execute around our views and plans, but we have limited patent exposure in the next 5 years. We've got Alimta in the U.S. And mid-2022, we'll face some generic competition for Forteo in the U.S. at some time, and we're facing that around the world. But if you'll sort of just look at our 2020 sales base, less than 10%, we think, is exposed to generic competition between 2020 and 2025. If you look then at the 13 products that we've launched since 2014, they still collectively are very much in their sort of the middle -- early to middle innings of growth, so we expect continued strong performance from that group. Today, those new products make up -- in 2020 will make up a little more than 50% of our sales. So as we take legacy products out of the base through generic competition or other things, like Cialis, I think the new products will be the growth story going forward. We do expect further launches. So I think our conviction and goals, Steve, that you mentioned, what we're really counting on is continued growth in the product classes that we're in, good performance by our brands and a few new launches that we have good visibility to. So our outlook is not contingent on sort of big binary Phase III readouts. We do expect to launch tirzepatide, which is our next-generation GLP. We'd expect to launch that over this 5-year -- next 5-year time period. We'd expect to launch mirikizumab, which is our IL-23, particularly focused in IBD. We think we can be first in ulcerative colitis and the first IL-23 to have both in ulcerative colitis and a Crohn's indication. So that's an interesting growth driver. Of course, we've added lebrikizumab from our Dermira acquisition, which we think gives us an opportunity for a potentially best-in-class product for atopic dermatitis. We'll launch later this year selpercatinib, which is the first product from our Loxo acquisition from last year. We would hope to follow that with the BTK inhibitor that we released early-phase data in December. So I think good core group of products that we can count on for continued growth, new launches and limited patent exposure is what gives us that confidence. And I think our historical performance, I think if you project that out, that allows us to make those kind of statements with some degree of confidence.

In the audience, feel free to chime in at any point, and we'll call on you. So maybe since it's Super Tuesday, it'd be an appropriate question to ask. You mentioned and you just reiterated that you're kind of factoring in this low single-digit price decline over time. And separately, you're saying that you're factoring in legislative impacts. Are the legislative impacts reflected in the low single-digit price decline? Or is there something beyond that?

No. So what we've said is we're expecting low single-digit net price declines in the U.S. over that 2020 to 2025 period, and that encompasses a couple of things. The first would be just the ongoing pricing dynamics in the competitive classes that we're in, so GLPs and IL-17s, CGRPs, et cetera. We're in classes where we feel really good about our product performance, but there's certainly price competition, so we factored that in. But that's probably -- we still give ourselves a point or 2, I think, in our thinking around legislative impacts. So I think if you look over the last few years, we've had impacts as a function of legislative changes in Part D. And we saw the expansion of the doughnut hole funding from 50% to 70%, and we quantify that as approximately a $200 million downside impact in 2019. In 2020, we have the out-of-pocket cliff, basically. So the patients in Part D will spend a longer period of time in their out-of-pocket piece, and that's -- we quantify that as something like $100 million. So I think as you look going forward, the sort of impacts on the hundred -- multi-hundred million dollar types of downside sort of are covered in our thinking. When we look at the kind of things that could drive that, those would be the, I'd say, the incremental downside that we all look at and talk about, whether it's IPI demonstration projects, some kind of inflationary cap in government programs, changes to the Medicaid AMP calculation or removing the cap there. Those kind of things, I think, fit into our thinking about net price declines. Of course, if there was something more, and I think probably the -- collectively, the Senate Finance Committee bill, which we don't necessarily think will pass, but if you look at those as sort of representative of things that are more likely to happen in some form or fashion, they fit into that pricing decline. What doesn't fit, of course, would be some kind of direct government negotiation, broadly in Part D. I think that's -- you've seen the feedback from pharma and other things. That's sort of -- that's a reset item. But I think the things that we think are more likely and more probable are built into our thinking.

Okay. So you mentioned the low single-digit price decline in the U.S. Can you share with us the expectation for prices in Europe as well as emerging markets?

Low single digits. I mean the difference, I think, what we see outside the U.S. is we've been experiencing low single-digit price declines sort of on a cumulative basis for a long time. I think on a -- in any given year, there may be some slightly different impacts. Japan, of course, goes through biannual price cuts. So we'll see -- every other year, you see a more dramatic effect in Japan, followed by more stability. In Europe, it's more just general, a few points of price decline. We see that every year. China for us will be a little bit different this year. We've seen pretty good price. We don't sell a lot of legacy products, so we're not involved in a lot of the government tenders or bids. But one of our fastest-growing products in China right now is Tyvyt, which is a PD-1 for the China market. Only it did win placement on the NRDL last year. So this year, we'll see the effect of significant price declines in that product in exchange, of course, for significant volume gains. But I think if you put all that together, Steve, I'd say, overall, net single-digit price declines outside the U.S. are sort of the way we think of things. We don't see seismic changes in that pattern.

You mentioned China just now, and the company issued a statement this morning basically saying it's well protected in China. Just curious, why was that statement issued today? And what was the genesis of it?

I think our biggest -- we make insulin, of course, right? And we wanted to make sure that we had a public statement being clear to patients who are worried about insulin that we don't make insulin in China or none of the API comes from China. We feel very good about our global supply chain. That was the primary goal was to ensure patients and health care professionals that insulin availability around the world is, we think, strong, protected and robust. That was the purpose there. And I don't -- based on shipping patterns and other things, I don't think we see a lot of stockpiling, but we're starting to hear, we're getting those kind of questions in public forums. We thought it made more sense to just have a clear public statement to that effect.

This is a completely unfair question, but do you know if your insulin competitors are more dependent on the China market for production?

I don't want to speak for them. So I think it's an unfair question.

It's unfair.

Here's what I would say. I'm sure they will look and make their own -- they might be hearing the same thing, so I would expect some kind of comments probably. But I think the thing that is probably -- and this is more broadly than just insulin is, as we all know, there's -- the supply chains in pharma are pretty global and interdependent. We feel good about our supply chain overall, not just for insulin. We don't source any API from China for any of our products. We have a manufacturing plant in China that does packaging for Chinese -- for the Chinese market. But I think for every company there, if you're -- there could be a plastic part of a pen that is sourced from a supplier who sources that plastic from somebody in China. So I'd be really reluctant just to, in any way, speak on anybody else's behalf. What we do know is, for us, we feel as confident as we could be at this point about insulin supply.

Okay. Questions from the audience? Yes?

Can you summarize what the insulin prices have been in the last 5 years? And what you anticipate you will do in the next 5?

Yes. So the question is insulin prices in the last 5 years and expectations for the next 5.

Insulin net prices, so the price that we receive from our customers is from 2014 to 2019 has declined. We published this in our integrated report every year. We haven't published the 2020 for 2019, but I can tell you that net prices declined that year as well. The challenge, though, is that patients in the U.S. -- and outside the U.S., the prices have declined on a net basis every year in almost, I would say, every market, although we don't get that specific. But I think that I'm sure the question is directed at what we hear and see here in the U.S. So it's net declines. The challenge, though, is that patients in the U.S. are increasingly exposed to not the price that their plan sponsor is getting, but some -- but a list price, which has increased, of course, since 2014. So that is why we launched Insulin Lispro this year, which is a 50% list price reduction from the core forms of Humalog. We have programs for anybody who's in commercial insurance that ensures at the pharmacy counter, they never pay more than $95 for -- as a copay. Again, what we see is patients could be in high deductible plans or have some kind of coinsurance factor that is pegged to list price, not the price that we actually receive from their sponsors. So we're very much in favor of ways to reset the system in the U.S. that ensures that patients are getting at least access to the price that their insurance company is or their employer is. And as I say, that, over the last few years, has come a real divergent trend. The -- part of the reason we launched Insulin Lispro on the 50%-off list product is in Medicare Part D, we can't provide the kind of assistance that we provide to commercial or uninsured patients. It's prohibited by law. So we've made that product available. And so that if a patient comes in and they're in their out-of-pocket phase of their program, their Medicare Part D program, they can be offered a product that, in most cases, would be 50% less than what they would have paid otherwise.

Other questions from the audience? Another point that kind of really resonated with me during our dinner last night was, okay, your portfolio is broad-based, and you have a lot of growth assets. But the fact that Trulicity is likely to be the dominant feature of Lilly for many, many years to come. So maybe you could talk about that. And let me ask another unfair question. Do you think that Trulicity could be north of a $10 billion product someday?

So first, I think on Trulicity, current performance, we're very pleased. What we look at is for the injectable GLP category sort of the leading indicator we look at in terms of growth and future prospects are as diabetic patients progress through treatment and move from an oral option to an injectable, which pretty much all type 2 diabetes patients will do at some point, what we look at is are they getting a GLP instead of a basal insulin. I think the data is pretty clear that with a GLP, you're going to get cardiovascular protection. You're going to lose weight. You're going to feel better. And ultimately, patients will end up on basal insulin. So I think the data is pretty clear that for the vast, vast majority of patients, they should go from orals to injectable GLP than on to insulin. Right now, in new prescription data, only about half of the first injection decisions or treatment is for an injectable GLP. If you translate that into total prescriptions, it's still only about 1/3. So sort of total market size, we see something like 2/3. The market should be double or 2x or 3x the size of what it is today. And I think that is what is driving the growth in the segment, which we're seeing something like around 30% growth on a year-over-year basis in the total market. Now when we look at Trulicity, Trulicity, we think, is a great product, and it's a market-leading product within the injectable GLP space. It's a once-a-week injection. Patients don't see the needle, don't feel the needle, and it's gotten really great adherence. In fact, we do a lot of value-based contracting with payers in the U.S., where we guarantee Trulicity patient adherence relative to not just other injectable GLPs, but branded oral medications. And Trulicity wins there if you measure second refill or fourth refill or any particular measure along that continuum that the payers want to go at risk with us on. So we've been able to maintain and, in fact, grow share even in the face of good competitive launches, like Ozempic from Novo. So we're in the 45% to 46% share in the segment. Now we'd expect this segment to continue to grow at 30% or something, 20-plus percent per year. And given Trulicity's patient experience and continued data flow, we got REWIND into the label just a few weeks ago. So that's the cardiovascular indication for both secondary and primary prevention patients. So we think that Trulicity will hold up well from a market share perspective. I think, Steve, to your question about can it be a $10 billion product, we certainly see $10 billion of opportunity for Lilly in the GLP space. I think though what we're excited about from the long-term perspective is not just the Trulicity as a foundational treatment, but to follow on with tirzepatide, which is our next-generation GIP/GLP product that, if in Phase III, we're able to replicate the Phase II data with a good dosing regimen, provides much better weight loss and much better HbA1c reductions than the current GLP. So I think for the segment itself, we certainly have aspirations in the kind of range you're thinking about. It may come as some combination of Trulicity and tirzepatide.

Questions from the audience? So we're going to get the first Phase III readout of tirzepatide later this year. Just paint for us, when we see the data, what would be the best-case scenario, efficacy, safety, right?

So I think the efficacy data from Phase II, I think, was compelling to everyone. HbA1c reductions is much more significant than Trulicity or Ozempic today. And -- but weight loss, I think, is at the highest dose for Trulicity. We were seeing something close to 12 kilograms of -- an average of 12 kilograms of weight loss in the Phase II trial, so 25 pounds, patients losing 10% or more of their body weight. I think that's pretty astounding. And you look at the medical benefits that are associated with that kind of weight loss, I think that's -- that could be a step change in treatment. So what we did see in the Phase II -- the core Phase II study was gastrointestinal adverse events and dropouts in the trial as patients got up to the 15 milligram, which is where you see the very significant weight loss. We did another dosing trial in Phase II, where we stepped patients up to 15 milligrams more slowly. We saw, in that case, then much more comparable adverse events and dropout rates to dulaglutide in our Phase III programs. In the Phase III trial, we even have a slower step-up in dosing. So what -- the main thing, I think what you would -- what we should expect to see would be similar kind of HbA1c and weight loss reductions to what we saw in Phase II, which, again, would be a significant change versus the current marketed products for GLPs with very low discontinuation rates in Phase III, very low being somewhere in the less than 5% for patients who are getting to the 15 milligram and adverse events, like nausea and diarrhea, that are comparable to GLPs that are on the market today. I think what investors are focused on, I think, primarily, is that sort of dropout rate and adverse event rate. Based on the Phase II studies we've done around dosing and our own modeling, we've got -- we think this is the right step-up. So basically, what we have is patients over a 4-week period just stepping up in 2.5 milligram increments to get to 15 milligrams. In the real-world setting, we think that's commercially viable because all it is, is just you get the exact same pen, it just has a different dose of Trulicity in it. So we think that's not a -- it's not the complexities that come with titration and other things that patients have in other diabetes treatments.

Questions from the audience? What will be the next news that we hear on your Q week basal insulin?

The end of Phase II if we -- I think you'll either -- you'll see that we'll make a decision if we think the data is good to move into Phase III. That probably would be the first information that you'll see in here. That, of course, would be followed by some presentation at a medical meeting, ADA or otherwise. But we're in Phase II right now. I think that could be -- if we're able to develop robust once-a-week basal insulin, I think that's an important innovation for patients. Know we would have a very high bar to move in into Phase III. I mean it's got to be equivalent to -- at least to the kind of daily benefits that you see from Lantus or Basaglar.

I should know this, but is that a 2020 event, the Phase II decision point?

I mean I think that's what we said publicly when the timing is…

[indiscernible]

Okay. So the data would be presented this year. Okay.

Yes, yes.

Questions from the audience? Another point that struck me last evening is the fact that you have 2 novel mechanisms in Alzheimer's reading out next year.

Right.

So maybe you could just talk about each of those and why Lilly is excited about them.

Sure. Of course, we're cautious in Alzheimer's given our history. We've invested well over $2 billion in learning about Alzheimer's and in clinical studies and otherwise. Where we are now is we have a drug called donanemab in Phase II testing. It's N3pG. It used to show up as in our charts. It's a plaque-clearing antibody. What we know from Phase I and preclinical work, it clears plaque faster and in a more profound way than aducanumab, but it works in a somewhat comparable way. But we're doing a real Phase II study that will read out, as -- Steve, as you mentioned, in early 2021. So placebo arm and an active arm that will measure a decent size, about 140 patients in each arm will measure efficacy, so cognitive end points in Phase II. So the way -- the reason I think we're excited, beyond the sort of attributes of the molecule and the belief that if clearing beta amyloid does actually have some impact on progression of Alzheimer's disease, part of the other reason we're excited is this is a real Phase II study. And we haven't been able to -- we haven't done those before. So I think the data that we'll see in 2021 will give us the kind of confidence that we have in other Phase II settings, like diabetes, do we have a drug or not. So we'll see a readout on that one. And again, I'd say the thing that's probably the takeaway for us is we think it's a powerful antibody against -- that it will reduce amyloid plaque. We still don't know if that's the thing that you need to do to -- the primary thing you need to do to impact the progression of Alzheimer's disease. To the extent that it is, we think we have a drug that's -- a drug and a Phase II that's a really good test. We also have an anti-tau antibody in Phase II that will read out a little bit later in 2021, similarly designed trial, placebo-controlled, about 140- or 150-patient arm. And I would say the same thing here. We think it's a good antibody against tau. And if actually addressing the tau tangles is a more potent way to reduce progression of Alzheimer's, again, we think we have a really good test here. I think the patients have been selected well. So we use all of our capabilities around patient imaging. And Avid, the company we acquired many years ago that does this to select for patients who have -- we know have Alzheimer's have beta amyloid, but limited tau tangle, so that you sort of have an opportunity to intervene at this point. So again, we think it's -- we won't know until we see the data, but we think it's a really good test of the tau hypothesis with a good drug and a good study.

And I think it's worth adding, and correct me if I'm wrong, but this will be -- and a number of companies have taus now, but this will be the first and most robust test of this mechanism of any company.

That's our understanding at this point, yes.

Okay, okay. And on donanemab, so you talk about a robust Phase II trial. If the FDA were to lower the bar for approval of Alzheimer's drugs maybe by approving other companies' drugs, is it within the realm of possibility that Lilly would go to the FDA with the Phase II data and perhaps even suggest to the FDA that they may want to look on that application as an approvable application?

So when we designed the Phase II studies, we didn't have any particular insight to views of the FDA that had potentially emerged this year, right, or over the course of the last 6 or 9 months. So again, we designed what we thought was a great Phase II study. I think, of course, if there are opportunities for -- to think about Alzheimer's, like we think about oncology or something, we'd explore any of those opportunities. I think in any of these cases, of course, it's speculation until you see the data. If the data is compelling, we would -- we'll, of course, pursue whatever the fastest options to get drugs to patients. But at this point, we're just excited that we have a robust trial that, hopefully, will give us a meaningful readout on this mechanism.

Okay. Questions from the audience? Maybe you can talk about for both Alimta and Forteo since those are the 2 products that we will contend with patents or competition in the next 5 years. Talk about the downward slope of these assets. Is this likely to be precipitous, like our typical small molecule? Or is it likely to be more gradual? Or what will it look like?

Yes. So Alimta in the U.S. is late -- sort of late in the first half of 2022 is when we expect generic competition. We'd expect it to be precipitous. And in a precipitous decline, in this case, there are multiple companies that have approvals. And we have -- even going back now 10 years or so we have experienced with Gemzar, we'd expect that to be a rapid decline. Of course, we'll -- if there are strategies to mitigate that a little bit, we will. But in general, in our planning, we'd assume that multiple generic competitors, rapid decline in the U.S. I don't think that's the case with Forteo. Of course, there are companies now that could potentially launch a generic competitor or a biosimilar competitor to Forteo. They haven't launched yet. We expect this to be a more limited competitive situation. So I'd say, our view on Forteo is it will be somewhere between -- at some point, whenever we start to see launches and our -- could have -- or it could be this year, although it doesn't seem likely based on Teva's most recent comments as one of the leading potential competitors for Forteo. But I think what we would expect in this case is something probably between the rapid generic erosion that you see for small molecules or oncology drugs that have multiple competitors and sort of the modest sort of biosimilar erosion that we've seen in the U.S. in many, many drug classes. So somewhere in between. I think the biggest question for us, Steve, is well, by 2025, it will be -- it will take care of itself. But when are we going to start to see that competition? And that's dependent on other companies, not us.

Okay. We have time for maybe one more question. Anyone in the audience? Then I'll ask it. So glucagon is a drug that no one pays attention to, yet has been a very good performer. So just talk about the future of that product.

Sure. So Baqsimi is the next-generation glucagon that we launched last year and basically replaces the current form. So glucagon is what we use for rescue therapy for patients taking insulins. The current device requires you've got to put it together and reconstitute it. You're doing this when a patient is, in many cases, can be on the ground because they fainted or something from blood sugar. Baqsimi is a nasal -- a nasally administrated form of glucagon, so it's got the same impact once it hits the bloodstream. But it's a very elegant device. It's small. And just -- it could be just -- you just do this. It goes -- it's administered nasally. And you can do it if the patient is even -- or if the person who needs it is even passed out. So health care providers like it. It's such a great innovation versus what we had before. The opportunity to make it a commercially, really exciting drug to talk about, it's great for patients no matter what, is for more type 2 diabetic patients to carry this device. What are -- right now, somewhere less than 10% of type 2 diabetes patients are prepared for an event, so they -- meaning, they carry glucagon today, despite the fact that in any given year, somewhere between, I think, 25% and 33% of patients will have -- will experience an event that needs rescue therapy. So I think given the elegant device, the compelling need, if we can increase penetration into type 2 diabetes population, it can become a much more commercially interesting drug. But just as a leader in diabetes, I mean we're really proud of this innovation and the benefit it can bring to patients.

With that, we are out of time. I'd like to thank Josh for your time, and it certainly looks like Lilly's going to have a phenomenal next 5 years.

Thank you, thank you.

Thank you.