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

Great. Well, thanks, everybody, for joining us. I'm Terence Flynn, the U.S. pharma analyst here at Morgan Stanley. We're very pleased to be hosting Eli Lilly today. Joining us from the company is Anat Ashkenazi, the company's CFO. Thank you so much, Anat, for being here. It's great to see you in person.

Absolutely.

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Well, again, obviously, a very exciting time for Lilly here. You guys are in a pretty unique position in terms of potential number of new drug launches you have. Obviously, Mounjaro is, I think, front and center for a number of investors and for obvious reasons. But maybe before we jump into that, I just think one of the other big-picture questions we've been getting is the Inflation Reduction Act and just as we think about potential implications for both Lilly and the industry. And I know Dave has been pretty vocal about kind of the company's view there. But would just love your perspective in terms of how you think about navigating any potential impact to Lilly? And then what are the implications as you think about investing in the business on the forward in that kind of an environment?

Sure. So let's -- I would split the Inflation Reduction Act into 3 pieces. The first one is the changes that are going to be made to the ability to increase list prices or the impact of increasing list prices beyond inflation. And if that were to occur, there are penalties associated with that. I think the impact of that piece of the legislation is limited. It will have more impact on companies that take double-digit list price increases every day. To Lilly, specifically, we have not been in that situation. So for example, the last time we've increased list price on our insulin portfolio, it was in May of 2017. So we have not taken any list price increases there. And most of the rest of our portfolio, we take low single-digit list price increases a year. The highest one's around 5% [ over ] Trulicity and Verzenio. So from that perspective, I think the impact to us is limited. Impact to companies who have taken different approaches may be more significant. The second portion is associated with the changes to Part D and the Part D reform, and the fact that the out-of-pocket costs are not going to be capped at $2,000 should help people when they're at the pharmacy counter. And we're seeing abandonment rate, not insignificant necessarily, with people not being able to afford their second script. And that should help with that. That should help with patients staying on drug, adherent to their treatment as prescribed by their physician, and then as a result, seeing better health outcome and improvement in the health care system. So I think that's a good thing overall for patients. The impact to the manufacturer will be that we're moving away from the 70% in the coverage gap, and now we're going to have 10% in the initial phase and 20% in the catastrophic phase. So what's the balance there? On the one hand, we may see improved adherence potentially across multiple classes of medicines, but the coverage structure changes. It depends -- overall, it depends on the product specifically. So for products and companies that are heavier on in areas where patients go through the catastrophic phase very quickly, such as in oncology, there may be more impact as they're picking up kind of at the tail end. So there is going to be some pushes and pulls there. But overall, I think that's a good change in the system overall. The third element, which I think is the more complex one, is around negotiation. And that's the government negotiating prices for small molecule drugs. Small molecules today defined by the number of amino acids in the molecule. For small molecules, 9 years after launch, and for a large molecule, 13 years after launch. So what does that do? That's a quite significant impact to drug companies in the sense that now you may have patent protection that exceeds those 9 years obviously. But we're coming in, and we'll have to negotiate the price. And it was communicated that will be at least 75% -- or no more than 75% of the initial price. So there will be an impact there. We're looking at what that means. But the most important question that I think you had is what does that mean in terms of capital allocation decision we're going to make in the company on how we develop drugs and where do we focus. I think the concerning piece is that for small molecule, not so much for large molecule, but that kind of inequality between small molecule and large molecule could result in now a shift of companies investing more in R&D and increasing their focus on large molecule as opposed to small molecules. In areas such in oncology, where the treatment -- the development paradigm is such that you typically start with later stages of disease and then you move up in line. So as you launch the drug or as you get data, you would add indications to the product. And you see a lot of these very large products in oncology where we said they have a pipeline within a molecule. Those are for small molecules now will have an impact because they're not going to have enough runway to actually be able to make those investments and recoup those investments over time. So unfortunately, this could cause or result in a situation where company invests less in those oncology opportunities or small molecules. So we'll see how that will transpire. Obviously, there's still ongoing discussion on that. I think the idea would have been to equalize small molecule and large molecule, which would have created an opportunity for price reduction, which is what the government wanted, but in a fashion that doesn't negatively impact patients.

Okay. Great. Well, thanks for framing that. And I guess, we'll stay tuned because I know there's still a lot more details that are going to come out there. So back to Mounjaro. As I mentioned, launch is off to an extremely strong start, I think much better than all the prior GLP-1 launches. It's been pretty amazing to watch here. I know in the past, you've talked about the preparation that the organization has taken to prepare for any kind of launch scenario. So maybe just as you think about the current scenario you're in, do you still feel confident with the ability of the organization to continue to deliver product, as I know there's been some challenges for one of your competitors? And so as you think about kind of the manufacturing capacity versus the demand you're seeing, maybe just help us think about that dynamic?

Yes. So you're right. We're excited to see the launch -- the initial days of launch of Mounjaro, initial several months. And I'm sure everyone is looking at the script data, and it's really encouraging. It's a good product that addresses real patients' needs. So that's fantastic. As we're thinking about where is it versus our supply situation and what we plan for, we plan for a launch of the drug well before the drug even read to the Phase III data. We have to because it takes years to build capacity certainly for a molecule like tirzepatide and a monoclonal -- and a parental site where you need device assembly, et cetera. We've announced the -- a new site in North Carolina in 2018, so well before we had the data, but we knew we had a robust -- potentially robust incretin portfolio. That site has -- is going to be going online next year. And by the end of 2023, we will substantially increase the capacity we have to support the incretin portfolio where we are today. We're going to be almost doubling the overall capacity versus where we are today. So we feel good about where we are. We're making all the right investments. We've announced we're going to be starting a second facility in North Carolina, so that should help even bring more capacity online in several years. But we're doing -- we're taking actions across our manufacturing site to increase the supply capacity. We're confident with where we are today in terms of our ability to supply the Mounjaro launch in the U.S. Obviously, as demand continues to grow and as we see competitive situation in terms of other products in the GLP market, then we'll have to make a decision on how do we roll out the global launch outside the U.S. as well.

Yes. Okay. What -- I guess the other question is just thinking about access reimbursement. I imagine you and the team are spending a lot of time on that front. Obviously, you're in a different position now for the launch of Mounjaro versus when you came to market with Trulicity, where you were further behind the competition. So maybe just help us think about some of the puts and takes as you guys look to build that access from kind of -- I think you're at 20% now on the forward?

Yes. So you're right. Trulicity was the fifth GLP to market, and we were able to build robust access, and obviously, it's a leading product now. With Mounjaro, we have just over 20% access, which we've communicated on the Q2 call, and we'll potentially provide update as we continue to grow access. We're in these discussions on a regular basis on adding Mounjaro to formularies. These discussions are progressing as we expected. And we're very disciplined in these discussions in terms of how we negotiate prices or discounts and rebates. We believe in the value that our product brings to patients. So we'll continue to articulate that and ensure that any contract we sign is commensurate with that.

Yes. And is there -- given the profile of the drug, I mean, you have pretty impressive data. You have head-to-head data. Is there any reason to think you wouldn't end up in a more favorable gross-to-net position relative to Trulicity?

Well, we don't -- we -- you have the -- you've seen the list price. We don't comment on the specific net prices for any of our products. But we do look at what is the additional value this drug provides to the marketplace when we decide on these contracts.

Okay. And I know you've said in the past that we should continue to focus on scripts, not sales, as kind of the way to benchmark the launch. And so, again, as you mentioned, we've been tracking that, others have been tracking that. But maybe help us think about that kind of when should we start to focus on -- like when is the right part to start saying, okay, we've filed the scripts, but now it's transitioning over to the sales and starting to think about that as more '23 should be our focus?

So I would say, as you look at this quarter and probably through the end of the year, this underlying script data should provide a good indication for just the launch uptake. But given that we do have a co-pay card or a patient assistant program that's pretty significant, you'll see somewhat of a disconnect between what you would expect to see from a script data perspective and the actual revenue for the product. As we gain more access next year and then we expect to have significant access by the end of next year, you'll see that translate to improved net prices, and as a result, impact to revenue. But we'll probably communicate more with quarters to come.

Okay. Understood. And I guess maybe just a follow-up on the ex U.S. side. So it sounds there more it's going to be a kind of market-by-market approach that you guys are going to take based on kind of underlying dynamics for Trulicity and Ozempic. Or are there any geographies that maybe you're focused more on or less on? Or just how are you approaching that? Because, again, it sounds like there are maybe a few more moving pieces than there are in the U.S.

So what we do outside the U.S. for any launch, we look -- obviously, the regulatory process may be such that a launch will occur after the U.S. launch and not at the same time. But there's also the reimbursement process, and we want to make sure these drugs can be reimbursed appropriately. So we take these 2 consideration into account as well as our supply situation. We want to be able to launch in a market knowing that we can supply the patients' need in that specific market. So we'll evaluate that on a market-by-market basis.

Okay. Understood. The other, obviously, important indication for the drug is the obesity indication. I know you guys have been in communication with the FDA regarding the early filing. Do you have any update on that in terms of where that stands at this point?

So the initial agreement we had with the FDA on the SURMOUNT program, which is our obesity program for tirzepatide is to complete the 4 studies. In these studies, you saw the first readout of SURMOUNT-1, which had really outstanding data, and then the following studies will come next year. So that's our current plan, and we're progressing towards the completion of these studies. Now given that we saw the strength of the data and the robust data set we have, just the number of patient exposure on the entire SURPASS program as well, we felt that it was the right thing to do is to approach the FDA and engage in these conversations on that possibility. We don't comment on the back and forth with the FDA. But if there's anything material, then we'll announce it obviously.

Okay. And I think you've said the latest would be an update by the 3Q call. Is that still the timing?

We'll see when that is. If it's earlier or later, we'll make that decision at that time.

Okay. Understood. I guess, as we think about building that obesity market, obviously, you've done a tremendous job in diabetes. You've known that market for decades. Obesity, a newer market for the company. So maybe just help us think about the preparation you're doing right now to, number one, I guess, prepare for an early launch; and then number 2, to think about the long-term drivers here that are going to matter to make this a commercial success.

Yes. You're right. We have strong presence in diabetes. And obviously, we know the market well and physician -- prescribers know us, payers. So we're well positioned in that marketplace. The overlap in terms of patients between the obese population in the U.S. and the diabetes population is about 15%, 20%. So we do have some inroad into that marketplace already that will help with kind of the start of that program. But what we will do once we near the potential launch as we look at how do we market this drug, who do we call on, what are the type of physicians. We obviously don't communicate about what their sales force would look like. What educational information would we need to provide into that marketplace? I think the -- one of the key areas of focus would be to shift the conversation on obesity from just a weight loss conversation to actually improving health for patients who live with obesity. It is a chronic condition, and we need to shift the conversation for people to actually start thinking about obesity as a medical condition. It reminds me, and I wasn't at Lilly back then, but the conversation around Prozac and depression. I believe when Prozac was launched, even depression wasn't discussed as much it is today. Everyone feels comfortable talking about depression. It's acceptable and everyone understands it's a medical condition. Back then, there were some -- people may have thought about it differently. And we've started that market and you look at where we are today. So we'll try to do something, not the exact same. It's a different indication, obviously. But similar in terms of educating the marketplace and patients. So this is not just physicians. It's not just payers. It's also patients knowing that they should feel comfortable talking to their physician about a medical condition they have.

And are you already having some of the payer conversations now? Like are you able to have those because in your context of diabetes reimbursement because you already have some SURMOUNT-1 data? Are you having preliminary conversations that can help you address -- I know you've already started a pretty big clinical program beyond just the original 4 SURMOUNT studies. But are those conversations further informing how you're thinking about the market?

No. It's too preliminary to have any negotiations. Obviously, we don't have an approved drug nor have we completed the 4 set of studies.

Okay. Understood. I guess one of the other questions is the 2 brands versus 1 brand question. We've got that a lot. I think prior to the approval in diabetes continue to be a focus, same device, same doses. So it seems to me like the more likely scenario is a single brand. Any perspective on how you guys are thinking about that? I know you're not going to give commentary on pricing, et cetera, but just from the branding perspective.

Yes. Let me share because we can't share any decisions on whether it's a single brand or 2 brands. But let me maybe provide a little bit of color on how a company would think of whether or not a single brand versus 2 brands. And we actually have within Lilly example of doing both. We had a product where we had 2 brands for the same molecule and the other one where it's same molecule, single brand. So you start with patient preferences and you want to do market research to understand where the patients are and what their perception will be of having -- on being on the same molecule, same brand or 2 different brands. A good example of that, and I just talked about Prozac, so I'm going to use that again. We have beyond the depression indication, indication for PMDD at that time. And these are for women. And when we did the market research, we found that women did not want to be at that point associated with the depression indication. So it was launched under a different brand name called Sarafem. A different example is Cialis where we have it for erectile dysfunction and BPH, it's the same brand name. So you want to understand patient preferences. There are benefits to having a single brand associated with marketing efficiencies. We just create a very large brand, has brand recognition associated with one name. Cialis is a well-known name, I think, for many people. So there are benefits there, but you have to understand what the pros and cons. And I know -- I often get the question from a payer perspective, it's about to have 1 brand versus 2 brands. Payers can control utilization if they wanted to. The tools exist. But we'll take all of these into consideration when we make a decision on tirzepatide for obesity versus a type-2 diabetes indication.

Okay. No, that's great perspective. I was hoping you'd have only one example because then we can figure out which way you're leaning. So in this scenario where, again, Mounjaro ends up being one of the most successful drugs in the pharma industry, significant margin expansion opportunity here. How do you -- how does that change how you think about capital deployment in that scenario? Because obviously, it's a great luxury to have. But also, I can imagine, can be challenging because you've got to think about your internal R&D budget, scaling that across the business, but then also how to factor in external opportunity. So as you think about weighing that scenario, I know you guys do a lot of the planning decisions and you're thinking about that probably right now. So maybe help us think about the puts and takes of the situation that, that creates for the company.

Yes. So if Mounjaro is successful, and it's a very large drug, then -- and it sits on existing infrastructure. Obviously, there are going to be marketing investments to continue to promote the drug. But it should provide opportunity for continued margin expansion from an SG&A perspective. From a capital allocation perspective, it does not change our overall priorities, right? So our priorities are, first and foremost, invest back in the business, which is our internal R&D engine, supplemented with external innovation, our launches and commercial portfolio and our manufacturing footprint. We want to make sure we invest appropriately to drive the volume growth, and its volume growth, not price growth, but the volume growth that we see opportunity for in our business, and that we have the right supply chain and manufacturing capacity to support that launch. So that's kind of the first area of priority. And then we'll look at the share buyback and dividend. We've increased dividend 15% for several years in a row. So we'll continue -- we'll look at what can we support as an organization. You're right, we're looking at a diverse set of scenarios, we always do, in terms of -- product can range from very high to very low. And I will tell you, it's really difficult in this business to precisely predict the revenue growth and exact curve for any single product. But if you have a portfolio, it's much easier. We actually do a really good job internally predicting the portfolio and where it's heading. So we're able to balance that from a capital allocation perspective, but the priorities remain unchanged though.

Yes. Okay. Does it put more pressure on Lilly to do another Loxo type deal at that point, again, under the scenario where Mounjaro is extremely successful? Or is it irrespective of that? Is it not really linked to that?

So I would say if you look at not just Mounjaro, but the current cohort of products, we call them key growth products in our quarterly calls, they're already growing double digit and represents over 2/3 of our total business. So those products are going to grow. Most of them are not exposed to any patent expiry in the next 3 to 5 years with the exception of Trulicity in 2027, but we already have the next best product right behind it. So that product -- that set of product is growing. And then we have not just Mounjaro, but potentially additional other products that we're going to be launching here in the next 18, 24 months. So we do see significant opportunity for growth. We said we expect to be one of the fastest-growing companies in the industry. And as such, you would expect -- we said by 2030. And as such, you would expect that by end of the decade, we'll be a larger company than what we're today, which means we need to have an R&D organization that's able to deliver an output that exceeds where we are today, whether it's in number of molecules that's coming out of the pipeline every year or in value. Ideally, for us, it's both. How we will achieve it, we're investing heavily in our internal R&D. That has always been our focus, but we will supplement externally. I don't know that we're pressured. I think right now, it's not -- we don't have the need to do something, but we're interested in looking at business development opportunities. And they will be primarily -- we're looking at early stage where we can bring something in and actually add value from our own R&D experience and organization, but it could be another Loxo-sized opportunity. If we find it, we'll pursue it. If it sits in our kind of -- within our core therapeutic areas or sits on existing infrastructure, it makes sense for us to do, then we will pursue it.

Yes. Okay. Great. Maybe just I wanted to shift gears to another franchise that sometimes gets overlooked given all the focus on Mounjaro, just Verzenio. I think that's another place where you guys have significant commercial momentum, especially in the adjuvant setting now. So maybe just help us think about the drivers there. And then there is a potential competitor coming into that market. Again, it depends on their data. But how do you think about positioning in that kind of a market?

Right. So we've launched Verzenio early on in the metastatic breast cancer indication. We were not the first to market at that point, but we had good data. And what we saw is, obviously, when there is an entrenched product in the marketplace, that makes it a little more challenging from a commercial perspective. But as physician got -- oncologists got to experience the use of the drug and saw the impact on patients, they were becoming Verzenio prescribers. So they would prescribe more, and we saw the uptick there. Obviously, the adjuvant indication gave another boost to the drug, and we saw it in the TRx data. It's a little difficult in oncology because the data is not as robust as some other disease states to parse out what's coming from where, but we are seeing an uptake associated with that. And it's exciting. It's exciting for women with breast cancer, obviously. It provides meaningful benefit. It's good if there's -- additional options for patients is a good thing. Depending on when they come in, you obviously need to think about is there a product already in the marketplace that has positioned itself and that physicians are comfortable prescribing. But we're very excited about what we're seeing with Verzenio.

Yes. And what -- and just remind us the survival data. I think monarchE, we're waiting on an updated survival data. Is that expected this year?

I don't believe we've communicated the specific timing.

Okay. The other important franchise where, again, you've got an established presence is with -- is in immunology with Taltz. And maybe speak to us about kind of the growth outlook there. But then also you have the opportunity with lebrikizumab to add another second important product. Then you have Olumiant as well, but again, it seems like that's more ex U.S. momentum. So as you think about layering in a second product here, what are the implications of that on the growth?

Yes. So it's interesting. If you looked at Lilly 10 years ago, we were not in the immunology space. And we've really built our presence in that space by Taltz, Olumiant, and now potentially, lebrikizumab coming behind it. And with Taltz gaining access in the U.S. helped us gain -- grow our positions, our market share, and have more patients on drug. The drug has tremendous outcome for patients. And the ability to achieve skin clearance quickly is really important for patients on Taltz. We talked about the access we gained last year, which was kind of a step change in terms of share in number of patients on the drug. But as physicians were getting experience now that more of their patients had access to the drug on formulary and seeing the results, they -- that expanded kind of the impact beyond just that specific formulary. So you're right, we're gaining -- we're building that presence, and we potentially will have lebrikizumab come behind it. So it is helpful when we work our structure, our business unit structure in neuroscience, immunology, oncology, diabetes does help us drive, in an efficient way, growth for specific products. It has proven to be the right strategy for us. And lebrikizumab will sit on that existing infrastructure. It also helps from a manufacturing perspective when we talk about how we build our devices and the fact that we have similar devices across not just within the same disease state, if you think about Trulicity and tirzepatide being on the same device, but also using that platform for Taltz, for Emgality and further products does give us leverage beyond just the commercial footprint.

And how about on the reimbursement side? I mean, obviously, immunology, a very competitive area. But again, does it help having that scale when you think about having multiple assets?

Well, it helps in the sense that you are negotiating with the same customer group and you have the credibility of having a very successful product on the marketplace. So once we get lebrikizumab, we'll start to negotiate and we'll see where we are. But we'll advocate for access just given the robust efficacy for the product.

Right. Okay. And one other question we've gotten recently is just given the approval of Bristol deucravacitinib, which is an oral product for psoriasis, do you think that's going to have any impact on kind of the injectable market where Taltz plays?

I think, first, different level of efficacy for a biologic versus an oral. So I view that -- and you should ask them that question as well, but I view that as competing mostly against the oral and not necessarily against the biologics.

Yes. Okay. Makes sense. I guess the other question is just on -- you touched on this a little bit, but just the philosophy around dividend growth. If I think back when Merck launched -- or had a successful launch of KEYTRUDA, they consecutively brought up the dividend and dividend growth. And so as you think about the period where many product cycles, not just Mounjaro, are going to be launching here, how are you thinking about the dividend growth outlook over a longer-term period?

So we've raised our dividend 15% now for several years in a row. And what we do when we make those decisions, we have a long-range process by which we look at the next 5 years and the next 10 years. And I try to look at what is the number we can sustain and support over a period of time and not have to go up and down in dividend. So that's our current strategy, to look at, is it 15%? Is it something different? We'll obviously communicate that when we get to that point, but something that from a growth perspective we can support over time. Generally, you think about EPS growth and then dividend growth in line generally with that growth rate. It's not precisely going to be the same number but something that we can, again, support for multiple years.

Yes. Maybe just in the last minute, donanemab, obviously, another one of the potential product cycles here. As you think about that product, what are you doing as an organization to prepare for a potential launch? Obviously, there's some reimbursement challenges because of a competitor drug. But how are you thinking about planning for that possibility of a launch in '23?

So one of the things we need to do with Alzheimer's, given that we're not active in Alzheimer's in the commercial side, obviously, we have great expertise on the R&D side, but we need to build that commercial space, is the treatment process for Alzheimer needs to improve in the U.S. Today, for patients to get diagnosed and actually treated takes about 9 months -- 8 to 9 months in the U.S. That's not -- we have to change that. Think about it in a cancer patient that comes in, immediately, a cancer team is put around that patient and a treatment algorithm is prescribed. We need to get to a place where Alzheimer's patients flow through the system much better and there's use of tools to diagnose the patients appropriately. So we're working along these lines. We're working with thought leaders and Alzheimer's centers to understand where are the patients and how can we get better education, better tools to make sure that, that flow is done in a more appropriate fashion.

Great. Well, I think we're up against time. But thank you so much, Anat. Great to see you in person. Really appreciate it.

Thanks.

Thank you.