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

Thanks for joining us. I'm Tim Anderson, the U.S. pharma and biotech analyst at Bank of America. Happy to have Lilly here on this final day of the conference. We have Lucas Montarce, who's Executive Vice President and Chief Financial Officer at the company, a role he's held since September 2024. He's been with the company a long time since 2021 in both U.S. and international roles. And we have Mike Czapar, who's Senior Vice President, Investor Relations and back in this role, we've been out of this role in the past, but you have been with Lilly for a long time as well, first joining in 2006.

So we have 30 minutes. I will jump in, of course, with a little bit of print discussion about policy matters. Some questions that we've asked all the companies that have presented. So just MFN this might have some basis in reality. To me, it feels like it's a threat. I think Trump wants to basically show the public, he wants to take -- can take drug prices lower, okay? So to me, that's the end goal here, and there's going to be a series of [indiscernible] and sticks. And MFN is a stick. But what I can't figure out is what concession the drug industry could actually make to make Trump happy and to enable him to have a political win. So anyway, that's my view is what are your views of what's going on?

Yes. Well, as many other companies have said, it's a very new topic with executive order coming last Monday and they have not provided many details on this matter. So we will see this as we get more details on how this evolves, maybe again in the direction that you said from the perspective on how we see this. First, again, we all want the same is how we make, again, the healthcare system more affordable, including pharmaceuticals and that's the intention that we have been trying on many fronts, including the part that we signed, that we have been very supportive. The insulin cap as well in the past that we did that adjustment on the insulin cap even before that it was implemented. And many of these efforts, including, by the way, also the Lilly -- Lilly Direct front that we have basically products available directly for patients to get their product out of pocket as well. So there are many of these fronts that we feel there are parts of getting in that direction. In terms of the affordability and then this type of reference into OUS pricing, we don't feel that actually the comparison versus OUS pricing is the right way to start. I think some of these actions to actually address some of the disconnections in the U.S. system, in particular, when you talk about the gross to net component -- all the companies are talking about gross to net of 50%, 60%. That's not even close to anything OUS. You don't have those intermediaries OUS. So that's in my eyes how we can start addressing that affordability objective that the administration has. We will continue to partner, I think the tone from the administration last Monday in terms of the pharmaceutical was positive, they are willing to engage on this matter through the pharma association, and we will continue to partner with them maybe stepping back being a topic that is very new, we have been, again, successful to navigate through similar situations in the past. I will see this in a way that we will continue to partner with administration to find a common ground as well. So maybe I'm more optimistic on my perspective.

Well, to me, it does seem like there is a possible goldilocks scenario, which is you squeeze out the middleman. And I know the drug industry has talked about that. You just referenced it, Kurt, from Rosch just referenced it. And that would be a way possibly to get consumers lower prices because you would take some of what the middleman is taking and put it in the pocket of patients instead. So maybe that's not a concession from the industry. That's a win from the industry. Does that have a basis in reality?

I think it does. Those concessions that you have are the PBM or the intermediaries are supposed to be representing the government and the employers in this case. And our expectation is that all those wall off rebates are passed directly to the patients, right? That's how we feel that is a good way to start reducing the patient out of pocket and start improving affordability as well. And we are supportive of those efforts. If there are other concessions that we have been doing already like the one that I mentioned on the Part D we already signed, that is coming from the industry, and we will continue to partner to find those ways to do those concessions as well on our side.

Okay. So one question we've been asking is, let's assume MFN does go through. We published a scenario a couple of days ago, and we've made arbitrary price reduction assumption across government channels, so Medicare and Medicaid and immediately heard back from clients. What about commercial, you're not assuming there's any spillover to commercial. So that's the question. If there were reduced prices from MFN in channels like Medicare, would that have a spill over to the commercial side in your opinion?

So when you think about we don't have clarity about the executive order yet. But thinking about studied on Medicare and Medicaid, we have proven over time that the firewall that we have with commercial has very limited spill over. So we still believe that is going to be the case even with this new executive order.

Yes. Okay. I have a tariff question, and it really, I think, is good CFO subject matter because it really is centered around manufacturing and moving that back into the U.S. So Lilly's made a commitment as of other companies. So it's good, it's what Trump wants. But in a way, it's kind of a trifecta of bad things for drug companies because you have upfront CapEx. And then the second piece is, and correct me if I'm wrong, likely increased future production costs because your input costs are higher in the U.S., and then you become a less tax-efficient organization because moving manufacturing in the U.S. linked to transfer pricing. So let's just take that middle piece, increase production cost. On margin guidance, you -- I think the company has talked about gross margins kind of being flattish over time. I don't think MFN was ever part of the thinking that this might actually happen and that you would move production to the U.S. But can you just talk about production cost and what that means to gross margins and how you view gross margins over time? Is it the best assumption that even with something like MFN could keep them fairly stable. Not MFN, but manufacturing back to the U.S.

Let me go through the different parts of the question, starting with tariffs even during the earnings call, we have been open as of the tariffs that we have in place, and we have visibility. There is limited impact to our guidance for the year, and we are absorbing that as part of the guide that we have. We have been putting a lot of actions in place to mitigate those. We have a global footprint. We can move sourcing of the products around the globe. And to your question, we are investing, since 2020, we have been investing heavily to expand our capacity and build more resiliency globally in the U.S., but also OUS as well. We did announce an expansion of our investment. We moved basically from $23 billion that we had initially since 2020 to now $50 billion. So we added another $27 billion for new manufacturing sites that we will be announcing in the future on top of the [ 6 ] that we are currently under construction. So quite a lot of investment at our manufacturing organization is really busy at these times. And that brings resiliency in both the U.S. and OUS. Now going to your second part of your question about gross margin. That resiliency in general brings also a little bit of a burden or a headwind into the gross margin line. Why? Because again, you're moving from one single source globally of products that you may be manufacturing from one place to have potentially two or three sites that will manufacture in that, that brings more flexibility, but also less efficiency from that point of view. We are planning to offset that, and we are offsetting that because we have new sites already operating, like the two in North Carolina. And through volume and efficiencies, we are offsetting that. The new lines that we are putting in place are operating at high speed, high capacity and will drive significant efficiencies comparing to the past. So we feel that we have a path to continue to offset that. The last part is, of course, again, in terms of the tax perspective. And certainly, there are tax differences so we will need to continue to assess what are those differences that we see. We see with really good eyes by the way, that is included in the reconciliation bill basically to maintain some of those tax treatment in the U.S. like [ DLT ]. So we see that with positive eyes and we'll hope to mitigate that effect. But yes, it is to expect that the tax rates could continue to grow over time.

Yes. Okay. Let's move away from those types of questions and just we'll go into obesity. So I think, in my opinion, one of the -- maybe the biggest debate at the moment is the direction of pricing in this category. And it's been going down. It often happens when volumes increase, prices go down, that's fairly common. So I have a bunch of questions that are really kind of U.S. pricing questions. So when I think about pricing over time, to me, there's three phases to it. The first phase is, call it, '25, '26, where it's essentially a duopoly. Is Lilly and Novo and no other competitors yet. And that, to me, says pricing should stay fairly stable. I would argue these are not expensive drugs for the value that they deliver. When I look at products like I don't know SKYRIZI as an example, in the I&I space priced at much higher, I think the benefits of these road offer is great. So why aren't prices -- why can't they be held stable under this duopoly scenario, at least for the next 2 years?

Yes. When -- maybe starting with the pricing trends that we are seeing, the pricing trends that we are seeing are not different to any other therapeutic area when we talk about our price guidance, we don't provide product level detail, but we do provide guidance on the pricing at a portfolio level. And that mid- to high single digit that we communicated for this year is very much consistent to the price erosion that we have seen in the past, maybe putting aside a little bit of the nuance on the PRB calculation when you launch new products, is still very steady state. So I don't feel that, again, that trend is changing all of a sudden. And I don't feel that the trend will continue to change. Our pricing strategy is a very disciplined one that I own and we will continue to be very disciplined on that. Going back to the competition, again, there are going to be more places in the future. I think it will take longer than 1 or 2 years to see that playing out. But in the meantime, we will continue to manage our part with discipline in terms of the pricing strategy that we have in place. Happy to hear your view on our pricing for the product. We feel that it's very competitive as well, and we will continue to manage that in the future as well. Our views to provide open access. Again, you may all may have heard about CVS on a smaller portion of the accounts. And our strategy has not changed to continue to provide open access and we will continue to manage pricing with discipline.

So, yes. So part of the discussion is first phase '25, '26. CVS comes up as a line of questioning. As best we can tell from doing our channel checks, the price give-up was quite negligible. This feels almost like a car move on behalf of CVS and maybe Novo. What does your intel suggest on the price erosion for them to go one of one on formulary and kick you guys off.

Yes, it's hard to speculate about that. And again, over the next quarters, we will see more of those details coming either on one side or the other side. So we will have more information to -- maybe put some additional thoughts into this speculation at this time. We feel that, again, as I said, a strategy for us is Open Access. The view from CVS on this deal, it was to go 1 on 1. We feel that it's not the best thing for the physicians and patients that is to have a choice for them to decide what is the best drug. By the way, you may see that tracking on the data in IQVIA that 3 out of 4 new patients are studying with our drug. So when you give that choice to the physicians, the physicians are making a decision that is our brand and the one that they choose. Our -- still our strategy, I mentioned to you yesterday, [indiscernible] is putting the competition aside, the largest opportunity in this space is to continue to expand the market. When you think about in the U.S. that your level of penetration is 3% and there is 100 million potential patients in the U.S. There is a white space that you can continue to grow significantly. And it's not a matter of a few percentage points of us versus Novo but a significant growth of opportunity. And it's great to have another plane in the marketplace to continue to drive that patient mobilization as well. So I will encourage again all of you to think about it from that perspective, that there is a quiet opportunity, wide opportunity to continue to grow. That's also on the OUS side, even bigger, right? You're talking about 900 million patients globally. The percentage of penetration is even lower. And we just launched, right? Again, I mentioned during the earnings call, 40 countries, but the vast majority of those countries has maybe 2, 3, 4 months in the market. So there is a good opportunity to continue to drive significant growth and penetrate the class, including with the competitor as well.

Can you quantify what losing CVS means either in terms of current scripts today that are [indiscernible] bound or number of lives that will be lost by that decision?

Yes. We mentioned that basically less than half of the total lives. And in terms just to give you a data point, it's roughly a couple of hundred thousand patients that will be impacted. That's assuming completely unmitigated, meaning that you know that patients can go through an exception process, and we assume that many patients will do so, we're starting to receive a lot of calls from patients and employers complaining about this situation. By the way, many of them were before on the previous brand as well. So they were on Wegovy, more than 20% were on Wegovy switching to our brand. it's hard to believe that those patients will need to be forced now to move back. So -- and we don't see those products the same right? Again, the physicians are seen that and also in the [ SORMAN-5 ] study clearly showcasing the difference almost 50% more weight reduction that you see with our brand versus Wegovy, right? So we don't see the same way both clinically and also in terms of physician preference at this time. So that's maybe the data point that I can give you maybe as a reference because you said, well, a couple of hundred thousand could be a lot. Just last month of March, if you look at the IQVIA data, we grew more than 200,000 TRx, right? So just in 1 month. So going back to my point about market growth, that's where we need to focus our attention, and that's where we are focusing our aviation to continue to drive that growth.

Yes. Okay. So I described pricing in 3 phases. Phase 1, we just covered Phase I, in my opinion, is 2027 when Sema IRA pricing kicks up. We're going to get a decision on this price or an announcement by the government of [indiscernible] supposedly negotiated price by November 30 at the latest. So how do you think this is going to play out? That's something that comes up a lot. So we already know that the discounts on this category off of list are quite high, north of 50%, at least for big purchasers. Let's say that whatever the price is that gets negotiated talk about how this is likely or not likely to spill over to Lilly, once those prices get implemented in 2027.

Yes. First of all, we have always factored that in our models. It's worth to remind everybody that Medicare is a small portion of our business. For the incretin class in type 2 diabetes, as you know, Medicare is not covering for obesity. So it's a small portion of the lives that are impacted or the price that is impacted there. And the spillover, as I mentioned at the beginning, we feel that we can manage that through the firewall that we have with commercial as well. So think about it, more impact on the medicare body is a small portion of the business, and then that we will continue to manage with discipline in the commercial front.

And then the last phase is 2028 onwards when we start to get a flood of new entrants coming into the category, they'll all be desperate to gain share, the only lever they'll likely be able to pull as the price lever. And that will force some sort of minor concessions out of the incumbent. That's what history would say. So how are you viewing price erosion from that period onward?

Yes. I would say the price erosion. We continue to see it in a continuation of what we have seen in the last few years. There are going to be different variables. This year, for example, you have a little bit more of party, less so on competition. In the future will be more competition, and we will have other variables as well playing out there, by the way, OUS pricing as well by then usually relatively flat in out-of-pocket and it's relatively flat even for reimbursement as well. So there are ups and downs in terms of the price erosion that you will see. A few things in addition to how to think about the competition as well, there's quite a lot of investment that the competition will need to do from the manufacturing perspective, from the commercialization perspective, and we have already built a large footprint. So even that price flexibility that you mentioned that the competitors will have they will need to also think about how they manage their gross margin, how they manage their levels, and they will start with a small piece of share, right? So it will be thinking about from the gross margin perspective, they will have less flexibility to adjust their prices significantly down to where the prices will be at that time.

Okay. Let's shift to a different part of this discussion, which is the cash pay channel. So Lilly and Novo now are doing something that really is kind of unprecedented in the space, which is patients as basically buying product straight from the manufacturer essentially, your program is Lilly Direct. Is this cash pay channel just a short-term patch until access by employers and payers steps up substantially? Or do you think the cash pay channel is going to be a really meaningful chunk of the business going forward? Novo put out a figure, I think they said that they thought it could be as much as 50% of the total market that goes through a cash pay channel. That would seem to imply not a rosy view of what payer coverage is going to be, if you could really get to 50%, because that's still essentially $6,000 to stay out of pocket, roughly. So how are you guys viewing the cash pay channel, the direction of it and the intention of it near term and long term?

Yes. First of all, we created Lilly Direct before we tap into this class with the Oct set down product in there. So -- and the approach here is to, as I mentioned, to have a way to remove the patient friction and have products in the market we have [ emgality ]. We have insulins in that segment as well that patients that they have no coverage that will have access as well to their products, or if they have access to have a platform that they can get the product delivered to their homes directly. Thinking about the increasing and what Novo stated, we are very happy about the progress that we see since we launched, [indiscernible], we started launching with 2.5 and 5 milligrams on that. Then we added a couple of months ago, the 7.5 and 10 milligrams, and you see the progression on number of TRx moving from basically a couple of thousand in the first months to more than 100,000 TRx. So we are seeing a very nice progression of growth of that segment. As I said, there is quite a big opportunity to tap in that segment. But we always think about the access as kind of the way to think about the size of the cash segment as well. And we mentioned about employer opting being basically roughly in the high 50s at this time. So there is quite a lot of space to continue to grow don't expect that to grow significantly by its gradually growth. We move from high 40s last year to high 50s this year. So we continue to see progress on employer team, but there is still quite a lot of space there, then I talk about Medicare not being covered for obesity. So there is a space over there. And the option for those patients that they are not covered is to go to this cash solution. So the size will depend a lot on our policy on how much we can penetrate also with the access. If the access is there, I have a hard time to believe that a patient that will get the product for $25 that will go to cash for $350, right? So though I'm happy still to hear that your thoughts that is a very convenient price still from the cost perspective, everybody will seek basically that coverage.

Yes. Okay. Let's talk about the ex U.S. opportunity with all of these products, it's another source of debate, the size in the U.S. of the opportunity versus what could unfold in the rest of the world. So Q1 Mounjaro, and Mounjaro, you have the same brand whether it's obesity or diabetes internationally. Smash consensus estimates a very handsome beat in Q1. And it just really drives home that question about what is the size of the commercial offering. So one of the questions I have is, in these international markets, what do you think are going to be the really big markets, really big regions. And if you could wrap China into that discussion as part of it.

Yes. Big opportunity or U.S., and we are in very early days. As I already mentioned, we launch in 40 countries as of the last quarter, but many of those markets have maybe 2 or 3 months that we launch in the marketplace. I talked about the size of the opportunity. You are talking about basically 900 million patients that will benefit from these drugs OUS. And we are basically talking about 1 to 2 percentage points of penetration depending on the country. So quite a broad opportunity that we have ahead. We are very pleased with the uptake that we've seen in the first quarter. We're launching some of the markets that you just alluded, I was in two of those launches. We're launching China, India and Mexico in the first quarter, big countries, and they are off to a good start at this time. Thinking about the size and where it's a major opportunity, maybe nowadays some of the countries, you can see in the revenue like the U.K., some of the Middle East countries, because they were in the first wave of launches, rightly so, they are driving more revenue. But you always need to think about this class in terms of the volume of the size of the population, right? I'm thinking about the size of the opportunity as well and then the incidence of overweight and obesity. And of course, countries like China, India, Mexico in terms of volumes are large countries that will drive significant growth as well. You need to combine that, of course, with the purchasing power to be able to afford these products that are out of pocket in most of these countries. So -- just a few data points. In the case of China, you're talking about roughly 180 million potential patients that could benefit India is close to 140 million. And then Mexico and Brazil, we are talking about roughly 50 million patients as well. So quite a lot of untapped opportunities. We didn't talk about type 2 diabetes. You mentioned the second indication as well. In many of these countries, both Trulicity and Ozempic are covered for type 2 diabetes and like in every country of this, you have a process since you launched the product until the product is reimbursed. So I expect to see also a significant growth taking place when those products get reimbursement in each one of these countries.

Okay. Let's move to orforglipron, your oral GLP-1. We've seen the top line release, at least on the first Phase III data and lots more readouts ahead. My question is really, if we fast forward, I don't know, 5 to 10 years from now, is more orforglipron volume going to be sold in the U.S. or in the rest of the world?

You want to start with this one?

Sure. I mean just to frame everybody. So we had our first trial in diabetes that read out earlier this year, very good results consistent with our expectations. And we've got 6 more studies. So two in obesity that we'll read out and another 4 that will read out across diabetes trials, leading ultimately towards a submission in obesity in Q4 and then type 2 diabetes in the first half of '26. And so as we think about the development program, there, we've got two very approximate programs that are up and running. We started one in trucker sleep apnea. We're looking at hypertension. So obviously, a broad development pathway that we're pursuing across multiple indications both in the U.S. and globally. And so U.S. versus ex U.S., I think there's a big opportunity in both places. In the U.S., there's lots of different uses where it could be in people with lower BMI, there are still obese, it could be people in a maintenance setting. We're looking at a couple of different studies there. Ex U.S., that obviously gives you a ton of scale. As Luke mentioned, some of the markets we're just launching this year for Mounjaro. And so the ability to support launches right at regulatory approval certainly, with a huge amount of people ex U.S., $900 million that we talked about earlier, there's a lot more people ex U.S. that could potentially access to medicine. So we've got a an ambitious development plan, a big plans for multiple geographies and look forward to a lot more readouts to come this year.

Yes. Maybe the last data point that I will give you in addition to what Mike said is -- in the U.S., you are talking basically roughly 20%, 25% of patients that prefer orals versus injectables. So there is a more acceptance of injectables in the U.S. when you go to many of the OUS markets, including Japan, for example, there is completely opposite situation that the acceptance of injectable is way much lower and there is a strong preference of oral treatment as well. So that's another driver to take into consideration when we think about volumes, U.S. and OUS.

So I want to bring it back around to that question. More volume ex U.S. or U.S. over time?

Volume, I would say, or U.S. Yes, yes. Given the size of the patient population and this preference. Yes, yes.

Okay. So how is this drug most likely in the U.S. to be used as you just said, people are fine with injections. I know you guys are looking at maintenance therapy for orforglipron maybe to yourself for the needle for a while, you get way down to a certain level and you go into orphos, is that the most likely where to use the product?

Yes. Well, that's one thinking. We are assessing, as you can imagine, this extensively. We have a lot of experience both in type 2 diabetes and now in obesity as well. There are a few thoughts. Again, you mentioned maintenance being one of them. And by the way, we are running three studies for the 3 molecules from procepatide for [indiscernible] for maintenance that will inform more the practice in the future on how, again, physicians should be thinking about maintenance and the treatment as well. But still even when you start treatment as well, you need to think about that BMI levels are very different, meaning and you can see patients that could have really a BMI level that could start actually with an oral and get to the target BMI level that they want to achieve with a physician without the need to move to an injectable. Or to your point, you gave the example of saying, well, I have a higher BMI maybe I start with [ percipetide ] and when I reach a certain level, I will move to a daily oral. And then this is the preference as well, right? Again, some people will prefer to use a daily oral some others will prefer and a weekly injectable as well. So that will -- what we bring is more optionality and how that, again, space will evolve. I think it's still to be seen. I always talk about the market research when you do it they are usually wrong, right? So we take that into consideration, but they're usually wrong. And they are -- again, the practice is the one that the detects more how the practice is being taken, both in terms of preference from physicians and patients.

We are a minute over. I have one last question. It's one that I know you will only give a short answer to pricing benchmarks for orforglipron in the U.S. There's some folks out there that think you're going to come in at a really low price in the U.S. I personally think you won't. I think you'll probably price at plus or minus injectable, maybe some nominal discount. So how should we think about pricing benchmark for the oral just in the U.S.

How we think about pricing in general, and I think it will be applicable to our orforglipron promise based on the label of the product. So once we have the full level of the product both for type 2 diabetes and obesity, that will drive how we position the pricing from the strategy perspective. That's will be seen in the future once we have the product and all the label, but it's very consistent on the approach that we take on that.

Great. Okay. Well, thanks so much. We're out of time. Lucas, thank you very much. And Mike, thank you.

Thank you.