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

Hi, I'm Louise Chen, the large-cap biopharma analyst here at Cantor. Thank you for joining us today for a virtual fireside chat with Eli Lilly. Lilly is one of the top-performing pharma companies in the sector with a robust portfolio of fast-growing products and a pipeline of first-in-class and/or best-in-class drugs. We think the company's earnings profile continues to look favorable when compared to those of its peers. Its margin expansion profile represents one of the strongest in the pharma industry, with a potential for mid-teens EPS growth. Lilly is entering a period of earnings growth, unencumbered by large loss of exclusivities and bolstered by multiple pipeline readouts of its first-in-class and/or best-in-class compounds. Therefore, we are thrilled to have with us today, CFO, Josh Smiley, to talk about the business.

Josh, it's hard to believe that we're heading into the fourth quarter of the year very soon. Although there is still a lot of uncertainty given the upcoming U.S. presidential election and in light of the COVID-19 pandemic, what is your current outlook for 2021 and some likely scenarios that you think could play out? And how could these impact your business?

Sure. No, thanks, Louise, and thanks for inviting me. It's great to be here. I think as we think about 2021, we're first focused on the second half of this year and really looking at how health care utilization trends are picking back up. Our belief is, and we're seeing this in the data so far, is that through the second half of this year, in the U.S., we'll see health care utilization return to pre-pandemic levels. I think right now, across our therapeutic areas, we're somewhere in the range of about 90%. So -- and that continues to increase. So I think we're looking for good momentum to end this year and head into next year. I think for us, for 2021, of course, and I think part of your question was the political backdrop that we're thinking about, but from an underlying business perspective, I think 2021 is a pretty exciting year for us. Our new products that we've launched since 2014 continue to grow. They make up more than 50% of our sales base now. We've got very limited patent or generic competition exposure in 2021. So we're looking forward to certainly double-digit volume growth. We do see a continuation of the pricing environment that we see in the U.S. today, which is basically low to mid-single-digit net price erosion. That's mostly a function of the competitive classes that we're in, things like GLP in diabetes or the immunology classes. So I think we know formulary status for next year. We're pretty much done with that. And I think we see great opportunities across the portfolio, 90-plus-percent type of formulary access at similar types of pricing erosion to what we see this year. I think the things, though, on top of that would be what happens politically. And as we think of scenarios there, of course, we need to be prepared for any combination of Republican/Democrat congressional approaches and administration approaches. So I think really, what we continue to focus on, and we think this will transcend party dominance or affiliation, is changes in the system that make sure that patients get the benefits of the pricing that I just talked about. And I think what we see in many cases is that there's a lot of inefficiencies in the system. Patients at the pharmacy counter, in many cases, aren't getting the full benefits of the discounts we offer to payers or for even to government programs. So we're focused on those reforms. I think the things that we've seen recently like the executive orders that have come out, particularly the one around the most-favored nation piece, I think from a policy perspective, those are really, really bad. And we'll -- as you'd see, we'll be clear about educating legislators and the public about how bad those are. I think realistically, as we think about 2021, we don't see those as major impacts. I think they're going to be very difficult to implement. And we're really focused on sort of the underlying business, which, again, I'd say is probably in the range for the U.S. of mid- to -- low to mid-single-digit price erosion. But our volume opportunities are so significant, I think, that, that seems like a reasonable and a sort of a solid approach to '21.

COVID-19 vaccines and treatments take center stage in health care discussions. And there's been a growing view that antibodies may be more effective and safer than some of the early vaccines we have seen data for thus far. So can you talk about your Ang-2 mAb collaboration with AbCellera and Junshi? Where are you in development? What can we -- when can we expect to see more data? And how do these fit into the treatment paradigm if they are approved?

Sure. We've had, I think, an exciting week from a clinical perspective. At the beginning of the week, we released data on Olumiant, an antiviral -- an immunosuppressant in our portfolio but used in hospitalized patients in -- on top of remdesivir. And in that Phase III study, we saw that combining Olumiant with remdesivir led to an improvement in how fast patients recovered and how fast they got out of the hospital. So 1-day improvement in that study. I think the good thing here is Olumiant is a -- it's a small molecule. We've got plenty of supply. It's already approved around the world. So we're working on an emergency use authorization there. And if that comes through in the U.S. or in other regulatory environments around the world, it should be relatively easy to access and add to help patients who actually end up in the hospital. I think then yesterday, we released interim data from our antibody approach. This is the antibody that we partnered with AbCellera on, where really what the goal here is to try to keep patients who've been diagnosed with COVID out of the hospital. And the interim data to us was very encouraging. We were measuring viral load as a primary end point, and we've tested 3 doses, and it was a viral load at day 11 after diagnosis or after -- and what we saw there was 1 of the 3 doses hit the primary end point. I think what we learned, though, is that's probably not a great test. I think what we all know now versus June is most patients by day 11 clear virus on their own, don't get very sick. But in our study, close to 7% of the patients on the placebo arm did end up in the hospital. Those who are on the -- our antibody, only about 1.7% ended up in the hospital. So we see that as a meaningful -- a very meaningful difference. And with it -- that was an interim result. We've let the study continue, but we see a really -- we thought that was a very good proof-of-concept, and we're very focused on getting manufacturing capacity available in the event that we're able to get an emergency use authorization for the antibodies. And we think -- certainly, as we think about between now and the end of next year, we think that's going to be a pretty meaningful opportunity for helping against COVID. Even if the vaccines progress as fast as possible, we know there's going to be supply and logistics issues there. So there are going to be lots of people who don't get vaccinated. And if we can prevent hospitalizations through the use of antibodies, we think that's a really important step.

There's been some debate on the treatment effect size that you showed versus some of the competitors. Any thoughts on that?

We're just now -- this is the first clinical data from a placebo-controlled trial that's read out in the antibody approach. So I think we'll have to wait and see what the other data look like. I think this is -- again, I think our view is it's a solid proof-of-concept that using antibodies to prevent bad outcomes from the disease or worse outcomes, I think, we feel very good about that case. Of course, there are other companies who are developing things, but this -- I mean, we're super proud. This is the first study we went from first patient visit back in early June to these results. So we'll have to see how the others play out. I think our view is it will be great for multiple antibodies to be available because the big question here or constraint, Louise, is going to be supply. As you know, you can't sort of create monoclonal antibody capacity or manufacturing facilities from scratch. It takes multiple years to build them. So really, if the data continues to play out, the big thing will be how much can we or others supply. We announced this morning a partnership with Amgen around manufacturing, supply of antibodies to try to ensure that for 2021, we've got multiple millions of doses available. Again, I think we would hope and expect that other companies have antibodies available as well to try to meet the demand that we expect will be there in 2021.

Your largest and some of your fastest-growing therapeutic areas include endocrinology, oncology, immunology and neuroscience. Which of these 4 areas are you most excited about in 2021 and why?

That's a trick question, I think. I like them all, okay. I think one of the things that is -- it's an exciting time for Lilly right now because we do have sort of best-in-class or first-in-class products in each of those therapeutic areas, addressing really an important unmet clinical need. So maybe just from a proximity perspective, I'll talk a little bit about oncology. We just launched Retevmo, which is a RET inhibitor that -- it was the first product from our Loxo acquisition from last year. And I think if you look at the benefits, if you have a RET mutation and, for example, have lung cancer, the benefits from what we saw in the clinical trials are really significant. So I think the opportunity here to get that product to patients with that mutation are really significant. So that's exciting. This weekend at ESMO, we'll go through the data from Verzenio from our early breast cancer study, our monarchE study, which was stopped at the interim for -- because we hit the interim stopping points or the end points. So this is, for Verzenio, an opportunity for women who have been diagnosed and treated with early breast cancer to prevent progression to a metastatic setting. So I think that's a significant opportunity. When you look at the metastatic sort of setting, today, we're behind Pfizer or Ibrance in terms of share, but we'll be the first and only product approved in 2021 for the early breast cancer setting. We see that as really significant from a commercial perspective. So that's oncology. Certainly, in diabetes, which is our biggest -- or endocrinology, as you mentioned, our biggest business, the opportunity is to continue to grow Trulicity as the market leader in the GLP class or Jardiance as the market leader in the SGLT2 class are really exciting as we head into 2021. Both of those classes, we've got drugs that provide really significant benefits. And there's still so many more patients that would benefit from those types of therapies, 2x or 3x the size of today. So I think that's an area that certainly for 2021 we're excited about as well.

If you had to pick one pipeline project to invest in behind, what would it be: Verzenio, tirzepatide, mirikizumab or something else? And why?

Again, I would say I like them all. As a financial person, the opportunities to invest behind those kind of products and the clinical data that we have today, and it will continue to accrue over time, I think, is significant. But I think you have to look and say tirzepatide today, if we're able -- in the Phase III data, which will begin to read out in Q4 of this year, if we're able to replicate what we saw in Phase II in terms of HbA1c reductions and weight loss, we think it's a step-change opportunity for patients who -- certainly who have type 2 diabetes but also patients who have obesity -- who are obese or have NASH. So I think if we are able to replicate the clinical data, the product has good tolerability, which we believe it will, I think the opportunities here to make an impact certainly on the world for patients is significant. And financially, that's, of course, #1 in terms of where we want to put our resources.

What's your latest thinking on capital allocation? Where do you think your funds are most effectively spent and why? And how do you think about M&A large scale versus bolt-on? What areas interest you the most? And why are you less interested in gene therapy and cell therapy than some of your peers? And what would make you change your mind here?