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

Good afternoon, everybody. I'm Chris Schott at JPMorgan, and it's my pleasure to be hosting this fireside chat with Eli Lilly. Lilly has obviously had a tremendous few years here and very much looking forward to the discussion today. So from Lilly, we have Anat Ashkenazi, the company's CFO; as well as Dan Skovronsky, the Chief Scientific Officer. So Anat, and Dan, thanks for joining today. So I guess just to maybe open up with some opening comments about -- as we think about 2023 and Lilly's positioning heading into this year, maybe just kind of set the stage of how you're thinking about the business, and then we can obviously jump into a lot of different topics.

Sure. Thanks. First, thanks, everyone, for joining us and having an interest in hearing more about the Lilly story. So we're closing out 2022. We've shared our results through the third quarter and shortly in a few weeks, we'll share the full year result. But as we shared on our guidance call just a few weeks ago in December, we had a strong growth in 2022, our core business demonstrated robust growth, top line and bottom line. But we've also, during this period, had very meaningful progress in our pipeline, which Dan will talk about in a little bit as well as new launches. We've launched Olumiant for alopecia areata. And just 6 months ago -- a little over 6 months ago, we launched Mounjaro for type 2 diabetes, which is truly an unprecedented launch in the history of pharma. So we are well positioned for further growth in 2023. We're looking at another unprecedented year for Lilly, if we just think about the number of launches we have ahead of us. We have the potential to launch 4 new molecules with donanemab, pirtobrutinib, mirikizumab and lebrikizumab, so truly across our therapeutic areas, and then potentially launch a second indication for tirzepatide in obesity potentially as early as the end of this year or early next year. And we've shared on the call that we will be initiating a rolling submission which we have. I can confirm we have initiated that rolling submission in 2022, and we'll look to complete that submission assuming we get a positive second SURMOUNT study here early this -- or this year. So a strong year ahead of us in terms of potential launches and top line growth. It's a year of investment as well. With the success we've had in our pipeline, we're continuing to make investments in our late-stage opportunities, which Dan will cover but several new opportunities, exciting new molecules that we're going to be investing in. We're also making investments in our team through additional enhanced compensation. And you've heard us talk about the comprehensive agenda we have across our manufacturing facilities, expanding our footprint with 2 new sites in North Carolina, 1 that's going to be coming online this year, the second that we broke ground on, 2 new facilities in Indiana and another 1 in Ireland. So we truly are expanding our footprint to ensure that we can support the demand we're seeing for our portfolio over the next decade or so. We're excited about what ahead of us. 2023, top line growth for the core business should be in the mid-teens, which is incredibly strong, but we're expecting to see continued top line growth through at least the end of the decade at a rate that's probably at the high end of the industry. And with that and with continued investments in our organization, we do also expect to see margin expansion over time during that period. Maybe Dan a few words about the pipeline.

Yes. Thanks, Anat, and thanks, Chris, for hosting us. It's great to be back here in person again. It's really been a truly exciting year for Lilly, Anat mentioned that we've got 5 launches on tap for this year, which means we essentially had data readouts on all of those last year. So -- to be clear, it's the tirzepatide obesity launch, the SURMOUNT data took the most of the attention probably in terms of the data readouts for the year, but we had so many other things behind that, of course, continued progress with donanemab. That's at the FDA. Pirtobrutinib, we had additional data readouts on our BTK inhibitor, and that's at the FDA. Lebrikizumab for atopic derm, which I see as a great option, potentially a first-line biologic for atopic derm under review at the FDA. Mirikizumab, our IL-23 for ulcerative colitis, that's also under regulatory review. So all of those stand to launch. But the other thing that happened in 2022 is we gained visibility to what's next. So even though we have such a young portfolio with new launches, we already see the next generation of innovation behind that with 5 more molecules coming behind these big 5. So the next 5 are: once-weekly insulin, which I think is a really important innovation for patients with diabetes. The next-generation Alzheimer's disease drug called remternetug. We have an oral SERD for breast cancer. I think it's in a Phase III trial in adjuvant breast cancer setting. And then just last month, we announced 2 more molecules moving into Phase III for diabetes and obesity. That's our oral GLP-1, orforglipron, and our triple agonist to GGG, retatrutide for obesity. So pretty exciting time to have so many new launches and then also a full pipeline of next-gen molecules.

Great. A couple of high-level questions here. I guess, first is on the 2023 guidance. I think we're seeing a fairly significant step-up in OpEx supporting some of these growth drivers. Can you just help me understand a little bit why such a big ramp this year? And then I think some of these -- to me, I envision some of these launches, it seems like many of them are leveraging infrastructure that's already at Eli Lilly. So just maybe a little bit of color there.

Yes. So you're right, many of the launches we have are using and leveraging the existing infrastructure. We're not expanding our commercial footprint by any meaningful way. The increases we're seeing in SG&A is really coming from 2 main areas. One is the enhanced compensation, which is a onetime step-up in compensation. The second is investment in marketing efforts behind these new and upcoming launches, the preparation for tirzepatide obesity and the 4 other launches that we've mentioned. So as we think about it, we're not increasing the size of our infrastructure and footprint on the commercial side, but we're investing appropriately to be able to be very successful with these drugs. Very different on the R&D side, and that's where we're investing behind opportunities. The largest driver of R&D cost is our Phase IIIs. And as we launch these, we tend to see a ramp-up and then a decline depending on the length of these studies, as these studies accrue. So really, that's the driver behind the increase in cost in R&D.

And how do we think about the cadence of margin expansion for Lilly as we think over time, I think you've talked about some longer-term margin aspirations. Is this going to be fairly linear? Or is it kind of hockey stick to some of these products start to ramp?

So what we've said a little over a year ago when we provided kind of mid-term guidance is that we do see opportunity to expand margin as the firm grows and that revenue grow significantly. And we said mid- to high 30s is probably a reasonable range for us to aspire for in that period. That hasn't changed. When we think about you kind of go into the income statement, where is that growth coming from? In the [ COPS ] line, we expect to see hover around 80% gross margin, give or take a point. What we're seeing is as we exit the COVID antibody business or the impact on gross margin. But we have investments in our new facilities and new products, that should stay around 80%. So give -- there are kind of pushes and pulls, but that should stay there. R&D will -- the number of R&D will be depending on the opportunities. If we have great opportunities, if we find the next generation for any one of these disease states that just Dan mentioned, we will pursue them. So that could go up or down depending on the opportunity in a year. Where the leverage will come from is in the SG&A line. As you've mentioned, because we're not expanding our footprint in any meaningful way, and we're leveraging existing infrastructure and we're hyper focused on productivity, then we should see that leverage coming from that SG&A line. Over time, I expect it will not be linear. So it's not -- we can't map a direct line to that number that I've just mentioned. There could be some ups or downs. Some years are going to be stronger. Some are going to be lower depending on primarily the opportunities we see within the R&D organization.

And Dan, on the R&D front, I think you commented on the guidance call that the late-stage pipeline is one of the most promising Lilly has had in recent years. I guess I'm just trying to think about the broader R&D organization, what's able -- what's enabled you to kind of drive these high levels of innovation? Because that's something I think we've seen the industry as a whole really struggle with, and it does seem like Lilly has very much differentiated from peers on that front.

Yes. Thanks for that comment, and I agree with it. I think we're in a remarkable period of productivity for R&D. At Lilly, we're super proud of what we've accomplished, but we're also paranoid about what's next. So I highlighted the next 5 into Phase III, but we're still not satisfied, and we're still pushing in the early stages to make sure we can have a sustainable growth enterprise here. We don't take that for granted. There's a couple of things that we do at Lilly, I think, to help drive that kind of productivity and sustainability. One, and it's sort of an obvious thing, but just to say it out is we have 4 therapeutic areas, and they're all working right now. We're having innovations in diabetes, obesity metabolism. We're having innovations in oncology, neuroscience and immunology. We've never been in a position like that before. That's important, and we intend to sustain that by continuing to invest in those areas. Oftentimes with multigenerational themes like you're seeing with obesity where we have multiple agents or Alzheimer's, where we have multiple agents once we unlock some critical biology as we've done. So I think that's one way that we think about sustainability. But at the same time, as we're focused on those areas, we have to be open to what's new, and it's sort of easy to point at Lilly and say, oh, well, Lilly's in obesity and Lilly's in Alzheimer's, those are areas that are opening up right now. Well, we were in these areas for decades when they weren't open yet. And so I think at the same time, as we're focused on these areas that are working, we're always looking for what's next. What are the areas that are out of favor, largely from the pharmaceutical industry where we can break them open and be leaders as we have in these. And then the final piece I'd add to that is just an openness to different ways of making drugs. For so long, it's been small molecules in biotechnology, large molecules. And now we see the dawn of genetic medicine. And so we're investing robustly in that area, too, to make sure we're leaders in those kinds of medicines.

Great. Maybe shifting to some of the product side of things. Obviously, Mounjaro is a big focus for all of us over the last year and a pretty spectacular launch. Can you just talk about the learnings so far from the launch? I guess, has there been any surprises in terms of either where the patients are coming from or the cannibalization you're seeing elsewhere in the portfolio?

Yes. So we launched Mounjaro at the end of May. In June we started promoting the product. So we're still in the learning phase of a new launch. And -- certainly, this had been a unique launch because I don't think we've seen an uptake of this nature, just such a rapid uptake in the products, not just in diabetes, but in other disease states. So certainly a very exciting launch for us and for patients. And what we're hearing, and I'm not sure if Mike Mason, who's the Head of Lilly Diabetes is here right now, but we're hearing great feedback from patients and from prescribers who are getting experience with this product, both about the efficacy, the ease of use and the tolerability of the product. So that's encouraging. We saw it, obviously, in our clinical trials, but it's always good to see it in the real world. What surprised us? I think the uptake was incredibly impressive. And we always have a range of scenarios, but it was at the highest end of our range of scenarios as well. I would say the viral nature of kind of the marketing, not by us, but by patients of this drug is also something we have at least at Lilly really not experienced at the scale where you see patients communicate with each other about the benefit of the drug. So certainly exciting early days. We're probably going to learn more in terms of where patients are coming from, and this is a data point that we shared late 2022, is that what we saw through the end of the third quarter is that about 2/3 of patients had previous diabetes medication on board and about 1/3 did not, which means they're either newly diagnosed or something else. That's what we saw. We have to still accumulate that data and see where we are today. And then in terms of cannibalization, we always assume there will be some cannibalization of Trulicity or GLPs in general. And we -- what we saw is Trulicity held up really well. Now Trulicity had always been a product that where patients -- when patients got on Trulicity, they stayed on Trulicity for a very long time in many cases, longer than what they would be on an oral medication. So the adherence is one of the best in the industry. We know patients like Trulicity, they get the benefit. It's very easy and simple to use. And we've seen that cannibalization be very small. So the data point we shared at the latest was that about 10%, it's probably a little different now, of patients came from Trulicity. So these are patients that were on Trulicity, their disease progressed or they needed more in terms of either weight loss or A1C level control and have shifted to Mounjaro. Patients that are on Trulicity and are doing well and are well controlled will likely stay on Trulicity. And hopefully, their disease doesn't progress. But if they do and they need something else, we have that product to offer to them.

How do I think about kind of coverage of the drug. And I think we're all kind of struggling with how to think about where gross to net and when gross to net is normalized. So can you help us a little bit as we go through this year and into next, how to think about that?

These things always take a little bit of time because there's lagging coverage versus what you see in the financial results. So we've recently shared that in Q4, we gained about 50% access in the U.S. There is a lag to that. So I would not use, if you're thinking gross to net, 50% as the gross to net ratios by any means. And also important to remember is we have -- we launched the product with a co-pay card, the patient assistance program, at $25. And patients that are on that co-pay card are going to be grandfathered through the conclusion of their card, which is mid-2023 or end of 2023 depending on their coverage. So for those patients, obviously, the gross to net looks very different. As we continue to gain access and we shift more patients to their covered program as opposed to a co-pay card, you'll see improved in that gross to net rates and further monetization of scripts. So that's what we're expecting to see overall. We did announce we made a few changes to our co-pay card program at the back end of 2022. So the effect of this financially we'll see in 2023. We're seeing the impact on NBRx we saw a few weeks ago. But the change in design was the change in the co-pay card assistance amount to patients who are getting the program. So we've increased that amount. We expected to see a drop in new prescription as a result of that, which we are. But overall, we're not expecting to see a financial impact over time as we're getting more patients into the covered program.

And maybe pivoting over to the obesity market as we think about kind of later this year and into next. Just high-level thoughts of how you see this market building up over time? Is that kind of it seems like perceptions have changed about what exactly we need here, kind of what the demand is going to look like. So just maybe just high level, how do you think about that indication?

Yes. Let me start and then maybe Dan can make a few comments. So certainly, a very large market. Over 100 million patients in the U.S. are obese and about 650 million patients globally. So it's a global issue really across almost every market you look at. So the tremendous opportunity for us to come in with a drug that can offer a long-term solution for patients. But -- how does this -- how do we build this market? There's a product now in the marketplace that offers a solution to patients. Hopefully, by the time we submit and we get to market either at the end of the year or early next year with a new product. And what we're doing is we're also building kind of the wall of evidence behind this product. We know that there's a benefit of just reducing the weight for some. There are huge benefits associated with this. We all know the risk associated with being obese, but we're going to also demonstrate beyond just our obesity studies. We're going to demonstrate that in hard outcome studies in multiple indications, including obstructive sleep apnea, heart failure, kidney disease and additional indications that we're going to be -- that we -- or studying for Mounjaro, for tirzepatide. So we're going to have a wall of evidence to share with the medical community and with payers that hopefully will advance this field even further. We know that there's demand out there from everything we're hearing and from our conversations externally. One important piece of legislation to watch for is the TROA Act, which could open up -- if this is passed, could open up the opportunity for additional patients to get on the drug and get reimbursed. So hopefully, that will progress as well.

Just to add that we started our rolling submission to the FDA for the obesity indication. We said we'll complete that when we get the SURMOUNT-2, so the next Phase III trial, which should be in the beginning of this year and then look forward to being able to launch it in obesity. As Anat was saying, we really see this as a chronic medical condition. And so what we'd like to do over time is generate more and more evidence that obesity is a disease with severe medical consequences. And that disease can be treated and those adverse medical consequences can be prevented. And we have a number of outcome trials now designed to prove just that. We'll be at this for a while, but really excited about the benefit we can have for public health by reversing obesity.

And it seems like this could potentially be a significant cash pay market here. So talk about -- I guess how are you thinking about the cash pay? And how does Lilly prepare for that market that may exist until we get some of these outcome studies and reimbursement comes into place?

So we still have much to learn in terms of what this market will look like in terms of reimbursement. We obviously are not having these negotiations just yet. We need to file for approval and then have these conversations with payers. Hopefully, this will get covered and reimbursed. I think there could be interest from large employers to have this available for their employee population. Again, if TROA passes, that's another step in that direction. So we'll see where patients are going to come from and what we would need to do to make sure the patient can actually get access to this medication.

Another question I get often is how do you think about duration of therapy here? So what's your data suggesting in terms of how long the patients have to be on these drugs? And do you think the paradigm actually evolves over time that maybe different drugs are needed, depending on where you are in your kind of weight loss journey?

Yes. It could be the latter. I think in terms of duration of therapy, we don't know yet, having not launched it in obesity yet. But I think there are several data points we can look at that make us feel pretty optimistic here. First is just the patient experience with the injectable device. So the once-a-week injection is the same type of experience that we've seen with Trulicity and we're seeing with Mounjaro here in type 2 diabetes is very highly tolerated by patients. In fact, for Trulicity where we have more data, this is of all classes of diabetes medications orals or injectables, this one has the single highest patient adherence. So that speaks to the patient experience. I think that's good for obesity, and these are probably going to be a large number of patients that haven't had a previous injectable. So having that good patient experience would be important. The second point here is this is a chronic disease. It's not going away on its own, and we want to manage it like a chronic disease, which means patients should be educated by their physicians and understand that this is going to be a long duration therapy. And then finally, this is a disease where the patient experience is so integral to the mechanism of action in the treatment. People feel less hunger. People lose weight, which they can readily observe and our data suggests that like every other medication, when you stop taking it, you stop getting the benefits of the medication. So I think it's natural that people will experiment despite education and efforts to recommend they stay on the drug. People might come off the drug once they've lost some weight. And as they lose the benefit of the drug and they start to feel that appetite, the hunger again, start to be -- see their weight come back, I think that will be a strong incentive to come back on the drug. So we're excited to see what we can get for -- in terms of length of therapy.

On the pipeline assets, and you've got an oral GLP that you're moving into Phase III. Just talk a little about the profile that you're seeing emerge there. And I guess, what role do you kind of see the oral playing versus the injectables?

Yes. This is a really exciting molecule. It's a true small molecule. So it should have the dosing convenience of really any other small molecule, meaning no food or fasting restrictions once a day. But on the efficacy side, we think this can deliver similar efficacy to that which can be achieved with really high dose injected GLP-1. So we're getting injectable like efficacy, but in an easy-to-use pill. It probably won't be quite as good as tirzepatide, which is 2 types of incretins, GLP and GIP, but really as good as the GLP-1 monotherapies can get. That's really exciting. I think there will be some patients who are new to the class and prefer to start with an oral perhaps or even stay on an oral. I think we also just see the magnitude of the challenge in obesity. Anat was saying the numbers, 100 million Americans, this is a once-a-week injectable is tirzepatide. So multiply that by 52, that's 5 billion devices to make. And around the world, we're going to have 1 billion people with obesity. So it's not a market that can, I think, ever be addressed by -- purely by injectables. So it's really important to have an oral there and super excited to have that go to Phase III.

And then maybe on GGG. I guess one of the questions I get here is like what does this, I guess, bring beyond what you already have with Mounjaro. Like is this incremental weight loss kind of needed for as many patients? Or how do you think about that?

Yes. And so I think at one level, the first benefit that we're expecting and we commented on December call is a step change in efficacy from tirzepatide meaning additional weight loss. Some patients won't need that. For many patients, the efficacy from tirzepatide may be enough to normalize their BMI. But even in our clinical trials, about half of the patients probably didn't achieve their ultimate BMI goal. They didn't get to normal body weight. And so particularly for people who might have longer standing or higher levels of obesity, GGG could be a good alternative. In addition, we're starting to see some other metabolic benefits that we commented on, for example, really profound effects on liver health. So there could be different segments of the obesity population depending on their comorbidities for whom tirzepatide is better or GGG or maybe, as I said, the oral.

Excellent. The other, I think, topic we've heard at this conference is just seems like this market is obviously huge. Your competitors want to get in there as well. How do you think about -- the market's been, I think, on the GLP side, mostly on duopoly. Do you envision, if we're looking 5 or 10 years down the road, it's still a duopoly? Or do you think this ends up being a lot more competitive and that we end up seeing maybe a bit more fragmented market share with some of the newer entrants who are targeting it?

I can start from the science and then Anat will comment on the commercial situation. Look, I think this is natural in the industry that when someone paves the way and shows a breakthrough in a given area, then everyone else wants to follow. I don't think it's a great way to run the business. We try not to do that at Lilly. It's better to be the one who breaks open the science. But at the same time, we don't rest on our laurels. We continue to innovate. So alone, we'll have multiple incretins in the market and probably segmenting for different patients, as I commented earlier. But it is a big opportunity. We're talking about changing society and medical practice here and -- so probably welcome competitors to help us make those changes in society.