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

Great. Okay. Well, thanks for joining us. I'm Tim Anderson, the large-cap pharma and biotech analyst at Wolfe Research. And for the next 30 or 35 minutes, we'll be talking with Josh Smiley, who is Senior Vice President and the CFO for Eli Lilly. Since joining the company in 1995, he's held executive positions across finance and sales and marketing. His experience includes leading U.S. sales and marketing efforts to payers such as managed care organizations and Medicare and Medicaid. We're just going to jump straight into Q&A given the limited time.

High-level questions first, just touching on health care reform. I know what the industry wants to see happen, which is things like a lower out-of-pocket spending and that sort of thing. But my question is really trying to understand what's likely to happen as the new administration takes over? So in that sense, asking you to kind of predict the future much like we get asked to do. So maybe just starting off with the near term, there's been some chatter that we might get some news near term from Trump. Specifically, I think we have proposed rules out on the rebate rule. And then there's been some talk about maybe having some favored nation or reference pricing stuff released this week. So what are you kind of picking up as near-term potential for something like this?

Yes. No. Thanks, Tim, and thanks for having me. I think as it relates to the very near-term drug pricing and access things, we're hearing the same as you. I don't -- I've been in meeting this morning as of an hour or so ago. I don't think anything has been released, but I think we are expecting to see something on most favored nation type of approach in Part B. And again, expectations change by the hour, as you know, in this environment. I think from what we know, if this is something that's published, there's probably lots of challenges to having this actually implemented before a Biden administration [ ticket ], sort of trying to accelerate the rule-making process and comment period otherwise. So I think we'll have to see what comes out, but my sort of starting point of view is it will be difficult for that to be implemented yet this year or before the end of January. I think similarly on the rebate and of course, no one in the industry likes the MFN approach for lots of reasons. And I think, certainly, if you think about in Part B or in cancer, the impact this can have on long-term innovation is really significant. And I think there are strong and compelling arguments against that. And of course, the industry will make them. On the other side, I think on the rebate rule, as you know, we've been in favor of removing the safe harbor for rebates in Medicare Part D. I think there are lots of other people who aren't though, and I would imagine that they will look at that rule the same way we look at the MFN, and it will be subject to legal challenges and otherwise. So I think both of those, there will be noise, and we'll see what happens over the course of the next 30 to 60 days. But I think our starting point assumption is that they'll arrive pretty challenged operationally. Then I think if you move forward into 2021 and where are the priorities going to be there, again, a lot's going to happen between now and then, but I think the Biden administration team has been pretty clear and transparent in their priorities. And I think their first priorities as it relates to health care are going to be to shore up the efforts around the pandemic and shore up efforts around ACA. And I think those things is what we presume will be the immediate focus. I think from a legislative perspective, almost independent of who controls the Senate, I think we see probably a relatively narrow sort of path in '21 for drug pricing types of impacts you mentioned upfront. We like things that lead to patient access and lower out-of-pocket expenses. We think there are some things that can do that. I think we look at many of the elements that are in the Grassley-Wyden bill, and those are probably the kind of things that have some ability to get attached to bills or make it through legislation in '21, I think, much more likely than some of the bigger House Democrat bills and ideas that we've seen. So I think we head into '21 with some optimism that there can be some changes, changes that lead to benefits for patients. I'm sure there will be things that we as an industry in and of themselves don't like. I think things like caps on inflate -- caps on price increases or changes to Medicaid rebates, those kind of things, I think, are all going to be on the table. But I think there's probably room for win-wins here.

Yes. From what I can tell, it sounds like it's not going to be reference pricing in 2021. I think that may be -- despite the near-term news out of the Trump administration, there probably would be more modest changes. Tax reform, so when tax reform was enacted under Trump, your rate dropped from 20% down to 14%, one of the bigger reductions versus the Cures Act. How are you -- what are you expecting in terms of a reversal of that under the new administration?

I think some of this is probably a function of Senate control and what's able to get done. I think our view on the near term is probably the most practical approach to raise revenue would be to try to raise the corporate rate, not try comprehensive reform. So I think our view would be -- there's a -- the most likely scenario is, given all the other priorities and given where the Senate may end up, that we don't see much progress on tax -- progress or regress, however you want to sort of classify that in '21. But to the extent that there is a change, I think the most likely scenario that we're looking at right now is the sort of structure stays the same and the reference rate moves up. You and I talked about this earlier. I think pre-tax reform, I think corporate entities were arguing for a 25% rate as something that would become more competitive with the rest of the world. We went down lower than that, of course. So 25% may be a good reference point to think about just an underlying rate increase. There are lots of reasons to argue against that. I think in the last 3 years, you continue to see not just the U.S. but other countries around the world reduce rates. So the competitive dynamic, if it was 25%, maybe it's 23% now or something. But again, I think our view would be there may be some underlying rate increases, but not comprehensive reform. I think if there's comprehensive reform, of course, we would argue for things that would incentivize U.S. manufacturing, continue to incentivize R&D in the U.S. So I think there are lots of things that could be, again, win-wins if you're in a total reform scenario. We just don't think that's very likely in the near term.

As we start to think about 2021 and beyond, in terms of the COVID impact, one of the questions I got for you is, how does that permanently reshape operational spending beyond just the pandemic phase. So one company I talked to recently thought it would be in the mid- to high hundreds of millions of permanent savings. I think that's pretty much all out of SG&A, although we didn't get into that point. But what is Lilly thinking about that? And have you guys quantified?

Yes. I think there's -- we're starting to quantify it. And of course, as we think about 2021, we have sort of a blended, still pandemic and then maybe more normal operations towards the second half of the year. But I think there is a piece that, for sure, is a permanent savings. And that's related to all of the things that go into business, travel and meetings. I think we all have learned that you can be very effective in virtual settings. There always are going to be opportunities and needs to be face-to-face for key meetings. But probably for every 10 that we did in-person in the past, I would imagine we're down to 5 or less of those kind of events on a permanent basis going forward, even without the concerns of a pandemic. For us, you just do those kind of ratios, and you are looking at probably $100 million or more of just permanent underlying savings. I think we see some savings on the R&D side as well in running much more of our trials in a digital and virtual fashion. So I think there's probably $100 million or so of permanent savings in that regard as well. So I guess I'm answering your question not differently than maybe others you've talked about. It's a real and meaningful ongoing savings. I think some of the things we've learned during the pandemic are we need to put some of those savings back into better digital tools to work with physicians on. I think we've reinforced that sales -- person-to-person sales rep calls are important, and they're meaningful for physicians. Physicians want them, reps want them, not in every case, of course. But we can supplement and make our rep interactions more effective if we've got good digital tools. We're learning. All of us are learning how to do that this year more than we thought we would have had to, but I think we see a benefit going forward of enhanced and supplemental digital tools, GoToMeeting types of approaches with physicians. And some of that will require investment, but I think that pays off in terms of the effectiveness of a sales rep anywhere around the world. If we do this well, should be a little bit better than it was pre-pandemic.

I want to ask about your therapeutic antibody that you have that has received EUA in the U.S. And what the impact of this is? And really kind of thinking about the commercial opportunity, as it relates to vaccines, obviously, in the news today, and over the last few days have been high levels of vaccine efficacy across the Pfizer, BioNTech program, across the Moderna program. And highly likely we're going to get more vaccines as well. So I would imagine that inversely correlates with what the opportunity set is for a therapeutic antibody. But can you kind of talk about how you're seeing the contribution from the antibody in 2021 and beyond? And then also just kind of the operational cost behind the antibody? It's not something I'm sure you'll advertise. We won't see DTC ads and that sort of thing. So what are the costs behind that program?

Yes. So I think as we head into -- so right now, we have an EUA for our single antibody. We have a contract with the U.S. government for 300,000 doses, and that's $375 million and every intent -- every expectation that will happen this year and maybe more. I think as we head into next year, the intent would be to -- we've also submitted an EUA for our combination therapy. So I think as we head into next year, we'll have the combination therapy available, presuming we get the EUA. That's probably what we will be selling. And then I think it's going to be a function of when, how the vaccine gets rolled out. But certainly, what we're experiencing right now around the U.S. and in some other countries around the world is intense need, right? I mean there are many more patients today that would benefit from an antibody as a measure to try to help keep them from having a really bad outcome that leads to hospitalization. I think that's going to certainly persist into the first part of next year just given the timing on vaccine and distribution and otherwise. So I think it's certainly reasonable to expect that in the first half of next year, we should be providing around the world, at least, maybe not all in the U.S., like we're doing now, but around the world, probably in the tens of thousands, if not hundreds of thousands of doses per month, like we're seeing right now. That does stop at some point or significantly wind down. Our principles have been, we want to get whatever supply we have to the places that need it most. So right now, that happens to be the U.S., and the U.S. has been the first country to provide an EUA. Presuming that gets broader as we head into next year, what we'll be doing, of course, is looking to say, where are the needs the greatest. That will bump up against where the vaccine is being distributed and otherwise. So I guess a long way of saying there's a lot of moving parts. But certainly for the first half of next year, you should expect some meaningful top line contribution from the antibodies that, if everything goes well, should sort of tail off pretty significantly as we get into the end of '21. In terms of cost, you're right. In terms of SG&A, very minimal. Our approach is to provide the -- we'll go through every month and make an allocation decision to the countries that need it who have a contract with us, ship it to those countries. They will then do all the work around distribution to the end facilities and otherwise. So we don't intend to have sales reps promoting this or anything there, so really should have a very nominal impact on SG&A. R&D, we will continue to -- we'll convert the work we've done around EUA to BLA. So we've got some ongoing trials associated there. It's going to be in the few hundred million dollars next year to finish that work out. So that's probably what we're looking at in terms of OpEx. At gross margin, right now, the gross margin contribution from what we're selling is pretty good because we're paying a royalty to AbCellera who's the partner here, and we're making the antibody in our own facility in New Jersey. As we head into next year and dramatically expand capacity and if we're selling a combo antibody, we're paying a royalty then on that to both AbCellera and Junshi who's the second partner. And in some cases, then paying contract manufacturing rates to Samsung, or partnership kinds of rates to Amgen. So I think next year could be significant top line, probably a gross margin contribution that is less than our normal -- the rest of our portfolio. So you could see a little bit of a percentage hit there. But certainly, in absolute terms, it would be a profit generator. I think if you put all of that together, Tim, it kind of depends on -- so the impact on operating margin percentages in '21 probably depends on what absolute level of sales we're making in '21 and where we're making them, too. All of the established developed western countries are going to get the same price. Middle-tier countries will have a -- basically a sliding scale based on their GDP. And then countries that fit into the lower income, developing economies get a very inexpensive product. So that mix also can bring down gross margin.

You guys are scheduled to give guidance for 2021 on December 15. There's a lot of moving parts here, right? We have additional shutdowns happening. We don't know what's going to happen over the next month. Certainly don't know a whole lot about 2021. You've got this variable that we just talked about, which is sales levels of the therapeutic antibody. So how -- it seems like it would be very challenging for you to give guidance for 2021. Is it possible you're going to give your guidance with and without the antibody contribution? Or are you just going to give a wider range of guidance than normally? How are you thinking about it?

Yes. I think we have to do a little bit of both. So I mean I think investors want to know what's your income statement is going to look like in '21, full stop. I think that dictates probably a little bit wider range than maybe we would normally do. But we will call out what our assumptions are around the antibody because I think there is a huge variability there, right? It could be anywhere from relatively modest contribution to certainly scenarios that are in the well north of $1 billion in sales. So we'll provide some direction there. And then we'll just have to refine that over time. I think the other pieces, though, that are -- I think that's -- everybody understands and accepts the fact that there's going to be a broad range around those. I think the harder ones are the things you pointed out at the beginning of the question, like the shutdowns, and we're still seeing in some of our therapeutic areas sort of modestly behind in new prescription trends where we were pre-pandemic. GLPs are a good example, still seeing robust growth, but it's not all the way back up to where we want it to be. So projecting into next year how those classes will grow, there's a little bit more variability there than we would like in other years. Part of our debate has been, we really like giving guidance in the middle of December. We don't usually find out much more between December and the end of January. We kind of know where we are. I think while we look at this year and say, we know much more in early January to provide better assurance to investors, I'm not sure that we will, right? I mean I think we're -- there's going to be more variability for all of us headed into '21. I think the good thing is we see a light at the end of the tunnel with vaccines, but the first half of next year is going to be tough to predict, I think, for all of us, and we are seeing shutdowns and other things. I think the one thing that is good relative to the first, whatever you want to define it as, wave or back in the first part of this year, I think even as we're seeing more significant restrictions in states here in the U.S., physicians' offices, I think physicians have figured out ways to keep their practices open and get patients in other than COVID patients where, as you remember, back in April and May, we were seeing a really significant shutdown in sort of health care utilization. We're not seeing that to the same degree. So that I think we're -- the impacts from shutdowns or restrictions is probably more moderate now than it was at the beginning of the pandemic. Again, the challenge though is we need that to translate into increased rate of acceleration in new prescription trends which we are seeing, but not yet all the way back up to where we want to be.

Okay. Let's shift to some products and some disease categories, in particular, and see how far we get into these. So diabetes, important franchise, a full 50%, 5-0, of revenues for Lilly, and you're one of the original diabetes companies in this space and have a mix of products, some mature brands, some new growth brands, small molecule drugs, large molecule drugs. A major focus of investors is tirzepatide, so kind of a dual-acting product. It's an enhancement above and beyond the current GLP-1s, which you have one of those as well, Trulicity. And there's a very closely watched event rapidly approaching, which is this investor event this Friday that you announced about 9 days ago. So kind of caught us off guard that with only 9 days notice, suddenly this event shows up, which is in close proximity to when we're supposed to be seeing the first Phase III results. So maybe you can just talk about what this event is for? Was there some change in thinking that suddenly landed this on the calendar for you guys? Or were we just late in kind of hearing about it from an investor standpoint?

Yes. I think mostly, Tim, we were late in scheduling it. We planned to do something like this. It's been in sort of our minds probably since ADA of last year. I think as we reflected on REWIND and we thought the data we released on REWIND was very predictable and in line with what we had been sort of signaling. We spent a lot of time after the fact on REWIND going back with the investment community and saying, here was the design of trial, here's why this data makes sense in this context. I think our general view there was, hey, any time we have a big readout coming up, we should probably sort of reground everybody in the program and the trial designs and all that kind of work. I think what we probably missed is the fact that scheduling -- announcing that call so close to the actual data gives people some concern that we've seen something or that we're trying to precondition. I guarantee there's none of that. None of us have seen the data. We feel the same level of confidence that we have felt through this program based on the ability to translate efficacy from Phase II, what we know about our dosing, titration. All those things are as exciting as can be without having seen the data. I think the release of the data, the Ozempic high dose data yesterday probably just gives us more excitement around the opportunity for tirzepatide as a truly redefining what GLPs can do. So I think it's our issue that we probably should have announced that in August or something, so it didn't feel like there was anything sort of going on. Our view, though, is we're going to release data beginning in December, and then we're going to have 4 or 5 other trial readouts with top line press releases over the course of the next 90 days or so. So it really just was meant as an opportunity just to remind everybody, again, here are the trials, here's when they read out, here's what the study design looks like, here's how we are doing the analytics. It should be like the most boring event ever, I hope, and I'm sorry that we raised everybody's antenna here.

So I think you may have just answered. We know there won't be Phase III data. Will there be any new content at all, maybe updated time lines that we haven't seen before, digging into the biology more than you guys have before and that sort of a thing?

I think no reveals. There's -- no, there's nothing new other than just a chance to put it all together. I guess to the extent that there's anything that's new that would be discussed would probably be in any Q&A around how does the Ozempic patient -- I mean we'll show -- we're not going to make cross-trial comparisons, as you know, but we'll show sort of the comparisons of the trial design and patient participation. So I think maybe being able to see that on a chart or something is interesting, but it's not -- no new information, no reveals, I can guarantee that.