Lilly 2015 Financial Guidance – Continued focus on diabetes in challenging environment; Positive payer discussions for Trulicity – January 7, 2015

Executive Highlights

  • Lilly confirmed diabetes as one of its four core commercial areas and included it in a list of five therapeutic areas that will benefit from a company-wide R&D refocusing.
  • The company acknowledged challenges from single-source formularies, competition, and the Affordable Care Act, noting that Novo Nordisk appears to have made gains in the rapid-acting insulin market following its Express Scripts contract loss one year ago.
  • Management spoke enthusiastically about the newly-launched once-weekly GLP-1 agonist Trulicity, sharing that payer discussions are going very well so far. We also think the ease of use (easy to teach and learn) will make a major difference in preferences of HCPs.

Lilly provided its 2015 financial guidance today in a call led by CEO Mr. John Lechleiter. The company did not provide specific financial guidance for its diabetes portfolio, but the call and associated press release still featured plenty of insight into the company’s strategy for developing its new and existing diabetes products in the coming year and beyond. Read on below for our top highlights from the call, followed by a transcript of diabetes-related Q&A.

1. Lilly listed diabetes as a continued core commercial area and focus therapeutic area for R&D following a broader R&D “refocusing.”

2. Management discussed the continued shift towards single-source formularies and the increase in price pressure, sharing that the mealtime insulin pendulum may have swung slightly in Novo Nordisk’s favor recently following Lilly’s Express Scripts win a year ago.

3. The presentation slide deck included an overview of expected pipeline milestones for 2015; there were no surprises, but the lineup for the year promises to continue the positive momentum from 2014, when the company experienced so many regulatory wins (see below).

4. Management suggested that Jardiance (empagliflozin) stands a “decent chance” of demonstrating cardioprotection but that, based on available data so far, GLP-1 agonists likely have the highest chance of showing a benefit. We thought it was pretty notable they said as much as this; we don’t think the way that FDA advised companies to design CVOTs is making it particularly likely the cardioprotection will be shown.

5. A Markman Hearing for Sanofi’s insulin glargine patent lawsuit was held in December, with a court date now set for late September 2015. We’re eager to hear more about this.   

Top Five Highlights

1. Lilly reaffirmed its commitment to diabetes as both a core commercial and R&D focus. The commercial focus on diabetes (one of four featured core business areas) is not surprising given the company’s wave of approvals in 2014, including the once-weekly GLP-1 agonist Trulicity (dulaglutide), the BI-partnered SGLT-2 inhibitor Jardiance (empagliflozin), the biosimilar insulin glargine Abasaglar/Basaglar (approved in Europe and “tentatively” approved in the US) and the Humalog U200 KwikPen (in Europe). With the opportunity to launch up to four new molecular entities in diabetes in the next few years, management stated that Lilly is poised to offer a more complete range of medicines than any of its competitors across both oral and injectable drug categories. Specifically, we believe Trulicity and Jardiance will add the most value in 2015, with new basal insulins helping drive growth in 2016 and beyond.

  • To preserve R&D productivity while improving fiscal discipline, Lilly is focusing its R&D efforts on five therapeutic areas, including diabetes. The other areas listed were oncology, neurodegeneration, immunology, and pain. Management shared during prepared remarks that Lilly is looking to reduce R&D’s percentage of revenue down from today’s ~23% to 18%-20% by 2020. This was a bit depressing to hear. The refocusing on a narrower set of disease areas – perhaps along with growing sales – gives us reason to hope that this does not represent bad news for diabetes R&D. However, the slide on the R&D refocusing suggested room for increased access to external innovation, meaning that the shape of Lilly’s diabetes R&D operation may change even if overall spend does not.
  • It does not appear that Lilly is looking to make investments in additional diabetes sales force or insulin manufacturing capacity in 2015. One slide of the presentation stated that the company’s approach (along with partner BI) will be to leverage its existing sales footprint and infrastructure, while the press release forecasted greater utilization of existing capacity in areas including insulin.
  • In terms of geography, Lilly will maintain its historical emphasis on the US while shifting focus towards China and selected emerging markets. Pricing pressures in Europe make it a much more challenging market with less promise, at least for the time being. For expansion into new emerging markets, the company is open to local partnerships.

2. Management discussed pricing pressure in diabetes in the context of broader challenges in the pharmaceutical environment. This topic came up multiple times during Q&A, which was not a surprise given the immense amount of discussion it received during Sanofi and Novo Nordisk’s 3Q14 updates. The company acknowledged that Sanofi and Novo Nordisk are “more formidable than ever” as competitors, and that the stakes are higher given the trend of narrowing single-source formularies. Lilly Diabetes head Mr. Enrique Conterno mentioned during Q&A that in this cycle – as opposed to last year with the major Express Scripts contract decisions in Lilly’s favor – Novo Nordisk appears to have made the greater gains in terms of share of covered lives via exclusive formularies. On the positive side, Mr. Conterno spoke very enthusiastically about payer discussions for Trulicity. He emphasized that payers understand the product’s value, precluding the need for the sort of price or rebate wars that have been seen in basal insulin recently, for example (we’ll see what happens on this front). As we emphasized in our report on Trulicity’s approval, and as management reiterated during Q&A, the product’s once-weekly dosing schedule and easy-to-use autoinjector device position it as one of the most user-friendly GLP-1 agonists on the market. Still – we’re pretty much getting to the point that patients in the US aren’t using the products they most want to use or the ones their HCPs wan them to use, but the ones assigned by their formularies.

  • Additional challenging environmental factors include pressure on healthcare budgets, an uncertain global economy, and changes brought on by the Affordable Care Act. Management noted during Q&A that enrollment in the ACA’s insurance exchanges appears to be somewhat slower than the government anticipated and that participation in expanded Medicaid is growing at a faster rate – this is challenging for companies because the Medicaid segment comes with higher rebating than would generally be seen in commercial plans available through the exchanges. We’re surprised this wasn’t foreseen.

3. Included in Lilly’s prepared remarks was an overview of pipeline milestones that are expected in 2015. Information in the table is in line with the company’s most recent previous guidance.

Table 1: Expected Lilly pipeline milestones for 2015

Potential phase 3 readouts

  • Jardiance CV outcomes trial for type 2 diabetes (internal and external readouts)
  • Basal insulin peglispro for type 1 and type 2 diabetes (external readout; topline data already disclosed for type 1 and type 2 diabetes)

Potential regulatory submissions

  • Basal insulin peglispro for type 1 and type 2 diabetes
  • Empagliflozin/linagliptin fixed-dose combination (Europe)

Potential regulatory actions

  • Trulicity for type 2 diabetes (Japan)
  • Empagliflozin/linagliptin FDC (US)
  • Empagliflozin/metformin IR FDC
  • Humalog U200 Kwikpen (US)

4. In response to a question on Jardiance’s chances of proving cardioprotection in its ongoing CVOT (soon to complete), Mr. Conterno suggested that GLP-1 agonists probably have the greater chance of demonstrating cardioprotection, based on publicly available data. Many eyes will be on the primary results presentation for Jardiance’s EMPA-REG OUTCOME CVOT (expected this year), which will be the first full CVOT data for an SGLT-2 inhibitor.

5. Lilly provided some thoughts and guidance for its two new/investigational basal insulins, which “fill a void” (an understatement!) in its portfolio. The biosimilar insulin glargine formulation Abasaglar/Basaglar is approved in the EU, with country-by-country launches expected to begin in mid-2015 following the expiration of Sanofi’s Lantus patents. Management shared that the Markman Hearing in Sanofi’s US glargine patent lawsuit occurred in December but did not discuss any outcomes from the hearing. The court date for the lawsuit is scheduled for late September 2015 in the District Court of Delaware. As we mention in our 2014 + 2015 Reflections piece, lawsuits by nature can be somewhat of a black box. For the time being, it appears that Lilly’s insulin glargine will be on the market in Europe well before it will be available in the US. 

Questions and Answers

Q: What are your general expectations for 2015 and longer term for how diabetes pricing might play out?

A: There are two dynamics that we are seeing play out. First, we see additional plans narrowing formularies as a continuing trend. Another important trend, now that we have a few years seeing this effect, is that the plans that have narrowed their formularies and made exclusive decisions regarding particular drugs are not shifting back. More specifically, in the mealtime insulin market, we did see some additional plans narrowing their formulary. This year, differently than last year, Novo got the higher share of lives going exclusive. As we think about Trulicity, I will say that our discussions are going very well. We believe that we have a product that adds significant value, and payers appreciate that value. I would say the same thing for Jardiance. There may be less differentiation between the products in that class, but we see good progress in our contracting discussions so far.

Q: You mentioned that pricing pressure has been dialed up in diabetes and respiratory over the last one to two years. Will that pressure come to other disease areas?

A: Clearly over the past five years since Obamacare and other dynamics, such as mergers, we see increasing power in the payers in the US and I have no doubt that they would like to continue exercising pressure on the pharmaceutical industry to reduce pricing. I think we see that manifest itself where there is less differentiation between products and categories so that payers can drive switching, particularly in the narrow formularies that Enrique described earlier.

Comment: I think it’s safe to say that enrollment in some of the exchanges may be a bit lower than may have originally been anticipated and hoped for by the government. We have seen a larger number of patients enrolled in Medicaid, which is a part of the business that carries very high rebates from manufacturers.

Q: Can you update us on the launch plans for the insulin glargine in Europe?

A: We expect to launch our new glargine product after the patent expiration of Lantus in Europe. In Europe we typically see a sequence of launches country-by-country, but we should expect to see that begin starting in mid-2015.

Q: What is the status of the US patent litigation for the insulin glargine product?

A: There was a Markman Hearing in December and the next step in the process will be the actual trial, which is scheduled for the latter part of September in the District Court of Delaware.

Q: Could you talk about how Trulicity is differentiated?

A: We do believe that we have a product with a unique bundle of benefits with Trulicity when we look at efficacy, the once weekly dosing, and the user-friendly profile of the product. As I showed earlier, our contracting discussions are going very well. Clearly we have to separate commercial plans from Part D, because when we think about Part D we’re really looking at 2016, but we are expecting to get access in 2015 on a large basis for this product across a number of the commercial plans. I think it’s important to note that we are making Trulicity’s value stand in our discussion. We’re not entering into a price war. We’re trying to achieve access without excluding other products. I am extremely pleased with the progress we’ve made with Trulicity.

Q: How important would you say that the novel insulin is to your overall strategy? I think out of the products that you are developing, that’s the one we’ve been most concerned about given some of the data we’ve seen publicly so far.

A: As we build our portfolio, we are present when it comes to oral agents. With Trulicity we have a GLP-1 agonist that we believe is best in class. Insulin is the foundation of a franchise, and we had a gap when it comes to basal insulin for quite some time. Both the insulin glargine and our innovative basal insulin fill this gap so I would call it very important to our overall franchise. Let’s keep in mind that everything we do in basal insulin is incremental revenue for us, and it will also strengthen our competitiveness when it comes to mealtime insulin.

Q: For Jardiance, can you share what your expectations are for the CV outcomes study? Do you think 7,000 patients will be enough to show a CV benefit or do you think it’s more likely that we will just see non-inferiority there?

A: We expect the trial to report out some time in the middle of the year. We have commented in the past that when you look at the different drug classes, given the data that we have seen that is available and some meta-analyses, it was pretty clear to us that probably GLP-1 has the best chance of achieving CV benefit; we are less confident with DPP-4 inhibitors. I do believe that the SGLT-2 inhibitor class has a decent chance of showing a CV benefit, but we really need to wait for the data.

-- by Manu Venkat and Kelly Close