Lilly 3Q19 – Diabetes up 14% YOY to $2.7 billion; Trulicity up 24% YoY, 2nd billion-dollar Q, but dips sequentially 2%; Jardiance up 44% YOY to $241 million, up 4% sequentially; Enrique Conterno retires as Diabetes Head/President Lilly USA, Mike Mason Steps Up; Oral GIP/GLP-1 dual agonist in development – October 23, 2019

Below, find our thoughts, summary financial tables, Lilly’s diabetes-related pipeline, historical graphs, and Q&A from the call.

3Q19 Financial Results for Lilly’s Major Diabetes Products

Pipeline Highlights

1. Lilly Underscores GLP-1/GIP/Glucagon Tri-Agonist and Oral GLP-1 Candidates as “Phase 1 Highlights”

During prepared remarks, management highlighted two phase 1 diabetes candidate – GLP-1/GIP/glucagon tri-agonist and its oral GLP-1 – as particularly exciting early-stage potential therapies. On the tri-agonist, Mr. Daniel Skovronsky (President, Lilly Research Labs) noted excitement about this, expressing “With our next-generation injectable incretin GIP/GLP glucagon tri-agonist or GGG, we're testing the hypothesis that adding glucagon to GIP/GLP will have more metabolic activity and stimulate additional weight loss. The initial Phase 1 study studied the safety of a single injection in healthy participants and we're now studying multiple doses including dose titration. We expect this program to enter Phase 2 by late 2020 or early 2021. Just like the hurdle for tirzepatide to enter Phase 3 was a meaningful improvement over Trulicity, the bar here will be a step change over tirzepatide itself.” We’re thrilled to see this continual drive from Lilly to improve upon the latest and most effective therapies in its pipeline and are especially intrigued by potential improvements that this tri-agonist could provide over GLP-1/GIP dual agonist tirzepatide. What could a meaningful “step change” over tirzepatide look like for the tri-agonist? Could we see potential A1c reductions of >3% and weight loss of >12 kg with higher doses of GGG (as reference, phase 2b results for tirzepatide displayed unprecedented A1c lowering and weight loss effects [-2.4% A1c drop and 11.3 kg weight loss over 26 weeks at highest 15 mg dose], although amidst severe tolerability concerns). See the full tri-agonist competitive landscape here for more. Of note, Novo Nordisk, Sanofi, and Zealand are also pursuing GIP/GLP-1/glucagon tri-agonists.

• On its oral GLP-1 candidate, management disclosed that it has entered into phase 1 this year and could start phase 2 in early 2021. With the phase 1 study, management said that its “initial focus would be on pharmacokinetics, with the expectation that it should be meaningfully better than a peptide.” This is consistent with Lilly’s belief that a small molecule oral GLP-1 offers important benefits over peptide formulations. Moving ahead, it does appear that following the approval of Rybelsus (Novo Nordisk’s oral semaglutide), the next push in the oral GLP-1 field will be a shift to small molecule candidates (instead of larger peptide drugs), which might allow for cheaper manufacturing costs, better bioavailability, enhanced patient experience by eliminating fasting requirements, and ultimately lower costs for payers and patients. Many companies, including Lilly, Novo Nordisk, vTv, Pfizer, and AZ, are pursuing this path with small molecule oral GLP-1s – see the full breakdown here.

2. Oral GLP-1/GIP Dual Agonist Currently in Preclinical Stage and “Should Enter Phase 1 Next Year”

Very excitingly, Lilly also divulged it is working on a first-of-its-kind once-daily oral formulation of dual GLP-1/GIP agonists. This appears to be the first publicly shared information regarding development of peptide dual agonists for oral delivery. Preclinical experiments are currently underway and appear to be progressing nicely, with an expectation of phase 1 trial initiation in 2020. Management noted: “We're also pursuing dual GIP and GLP-1 receptor agonist peptides for oral delivery. These programs, which are designed to give this peptide like efficacy with a once a day oral peptide administration are also progressing pre-clinically and should enter phase 1 next year.” We’re thrilled to see this innovation in Lilly’s early-stage diabetes pipeline – it’s clear that the company sees a large unmet need and commercial potential for improved, innovative therapies in this space. For patients, this is a massive win to see continued commitment from Lilly in pushing the frontiers of more efficacious diabetes therapies. We’re especially curious to learn more details regarding this program: (i) is the dual GIP/GLP-1 agonist being used the same as tirzepatide, or has this peptide formulation been changed for more optimal oral delivery; (ii) is Lilly pursuing similar technology to Novo Nordisk’s SNAC carrier that is used for oral semaglutide? Or have other avenues been explored?; and (iii) how might bioavailability of an oral dual GIP/GLP-1 agonist compare with the already low bioavailability seen with oral semaglutide? Will this lead to high manufacturing costs, and therefore higher costs for patients (of course, these are questions for much further down the line).

Lilly Diabetes-Related Pipeline Summary

The table below reflects the latest updates, as far as we are aware, on Lilly’s diabetes pipeline products. Items highlighted in yellow indicate changes to the pipeline in 3Q19.

Company Highlights

1. SVP and President of Lilly Diabetes Mr. Enrique Conterno Retires; Replaced by Current SVP of Connected Care and Insulin commercial development, Mr. Mike Mason

Mr.Mike Mason is a 30 year Lilly vet. CEO Mr. David Ricks highlighted the leadership change during today’s call: “I would also like to welcome Mike Mason as he assumes leadership for our diabetes business unit. Mike is a 30-year veteran with deep expertise and significant experience in our diabetes business. Mike is a patient-focused leader with a track record of delivering results for Lilly and for patients in the U.S. and Canada. Under Mike's leadership, Lilly successfully launched both Jardiance and Trulicity, in the U.S., becoming the diabetes market volume leader during his tenure. Since July 2018, Mike has led our Connected Care and Insulin Commercial and development organizations, working to leverage technology to enhance insulin delivery and improve the user experience. Importantly he has also led Lilly's efforts in building the most comprehensive suite of insulin affordability solutions in the U.S., including the Lilly Diabetes Solutions Center to support people in need of less expensive alternatives for their medicines. Mike, it's great to have you join our senior leadership team.” We salute Mr. Conterno’s for his impressive work over the past three decades at Lilly, which includes leading the company’s diabetes division since 2009. Mr. Conterno has been at the forefront of ensuring the success of revolutionary therapies such as GLP-1 Trulicity and SGLT-2 Jardiance at a crucial time period for the diabetes community. Highlights of his time as Diabetes Chief include gaining the first-ever CV indication label for a diabetes drug with Jardiance after landmark EMPA-REG OUTCOME results, supporting Trulicity’s growth to the market-leading GLP-1, ensuring growth within Lilly’s diabetes division during a time of intense pricing pressure with diabetes therapies, and much more.

• For more on Mr. Conterno, we point to this excellent profile on him from 2017 by Lilly, detailing his career path and personal philosophies. The piece, entitled “You Don’t Have to Fail to Learn” is surely worth a read! We especially appreciated Mr. Conterno’s insights on failure (“Of course, failure happens. But I prefer not to fail,” he says. “It is important for people to take a risk, but they need to understand that risk has personal and business accountability. I believe in that. My perspective is unique, most people say.”) and leadership (“A key principle of leadership is you need to have a strong sense of who you are and then you can draw from there,” he says. “To me, that’s something that I practice, but I think it makes me a much stronger leader and more of an authentic leader, as opposed to trying to fit the mold of a corporate executive.”)

Select Questions and Answers

Trulicity and GLP-1

Q: You're seeing with your price erosion with the U.S. portfolio this year. Is that a reasonable dynamic to expect in 2020 or will you see some of this pressure start to ease as we get pass to donut hole thing and some of this, kind of, one-time items with Trulicity that you mentioned?

Mr. Joshua Smiley (CFO): I think as we look into 2020, just going back to the guidance that we gave in December of last year, we were planning for sort of low single-digit net price erosion across the portfolio for the period of 2019 and 2020. I think that's what we see right now. We are going see variability in the quarters. As you mentioned, we've got donut hole and other things that are particularly I think acute in Q3 this year, but I think the net – as we look and project into 2020, I think the sort of low single-digit price decline is probably a fair place to be and that's very consistent with how we thought about 2020 goals and our productivity agenda and otherwise.

Q: Just elaborating a little bit more on Trulicity, in terms of access and price dynamics in 2020. The pricing commentary in the prepared remarks is very helpful. I guess, with the approval though of oral sema are you seeing a more difficult payer environment here than the past, or any signs that payers are more aggressively managing the GLP-1 category?

Mr. Enrique Conterno: When it comes to Trulicity coverage, we have unprecedented access. We are right now in the mid-90s from a coverage perspective, which is outstanding. And we are projecting that into next year. It is too early for us to be able to say exactly how the discussions of oral sema are going with the payers. Of course, we'll learn more. They basically get further into some of those discussions.

Q: On GLP-1 and tirzepatide franchise broadly: My question is, what's the median duration on therapy real world on Trulicity currently? And I asked about it relative to the 20-week titration being employed in Phase 3. And I'm also curious, is there any observations to date from blinded bases in the ongoing titration regimen?

Mr. Conterno: So the -- when we look at Trulicity adherence, we -- and I think we've shared this before, we tend to see better adherence with Trulicity than with the other product. One of the things that we measure is refill rates. So we measure the second refill rate, the fourth refill rates. Trulicity tends to have better adherence than the GLP-1 class, it intends to have better adherence than insulin, but also better adherence than orals, which is sometimes difficult to believe but it's – the value proposition is that simplicity. Now it's a complicated question where we look at medium duration of therapy, because we do lose so many patients in the first fill and in the second fill across all of the diabetes therapy. Just to give you a sense by the fourth fill, we are basically – Trulicity is basically in the 60s. What we basically see though is for patients that have stayed after the first year; we tend to lose about one-third those patients every year going forward after that. So that gives you a certain sense of what is the adherence of Trulicity as you are thinking about modern diabetes.

Q: First off, for the diabetes market. Enrique, can you just help us understand the mix of payers? How that might be changing from a Trulicity perspective in terms of the next incremental script gain? And then, similarly, where is Trulicity gaining the most traction incrementally amongst physicians? Is it now really the growth driver growing beyond the endocrinologist market and pushing into the primary care physician portion of the market? The reason that I asked that is because, I think, the mix of payers is really important relative to the incremental acquisition cost for each script, considering the competition from an oral drug, obviously, moving and seeking to penetrate the primary care market.

Mr. Conterno: Trulicity continues to grow across all payers, so whether it's commercial or Part D. Of course, as we've highlighted, we had disproportionate growth in the VA and DoD and other types of payers that are – that tend to be lower priced. But as we look at the future, we do continue to expect growth for the product across all of the different payers. When it comes to Endo vis-à-vis primary care, we do see the class continue to grow across all segments. And in particular Trulicity has been growing quite a bit when it comes to reaching more primary care physicians. So a big part of the growth is just having more primary care physicians try new – try GLP-1 and start using and adopting this important class, because of the simplicity of Trulicity it is an ideal product for that.

Q: On net pricing in relation to Trulicity. We estimate that about 25% of Trulicity is Part D based by volume. I'm obviously coming from a point of view of trying to work out the contribution of the additional donut hole impact versus other factors. If you confirm how close we are to where it is that would be very helpful.

Mr. Smiley: I think on Trulicity, your estimates are good. About 30% of Trulicity right now is in Medicare Part D. We see that probably as pretty stable going forward. And as we mentioned we're – we see the pricing environment on a contracted basis as being pretty stable as we head into 2020 as well.

Policy and Pricing

Q: Just wondering your latest thoughts on the ongoing policy discussions in DC, potential outcomes and impact to your business?

Mr. David Ricks: I wish I could provide a clear answer on the probable outcome of the policy debates and why shouldn't I think it's really unclear other than we probably know that the House Bill will probably pass the house completely on partisan lines and then we'll see from there. There are, of course, a number of initiatives in the various Senate committees that the industry is for and Lilly is certainly for if a version of those came together and passed both chambers in general that would be I think a modest positive for us. We see reform to Part D's an important discussion that should happen, providing an out-of-pocket cap to seniors is an important benefit. And any changes that can positively adapt the donut hole math and other pieces of the benefit, which we're talking about even in this call that are helpful for products that are more that are more commonly used for conditions like diabetes. So we track that closely. We're very engaged in this whole discussion. Of course probably given the environment in Washington, the most probable thing is there isn't really legislation happening for some time. But we – it's important to note to investors we're promoting changes in particular the Part D benefit and affordability measures that can impact the pocketbook at the pharmacy counter without throwing out the baby with the bathwater and wholesale change to the U.S. system, which obviously be hugely damaging to the business model.

Q: I'd like to come back to 2020 and contracting in diabetes. I know you were asked this earlier, but you didn't give much of an answer. The stock's down 5% today [closed down 2.2%] on a beat and raised [guidance], I think that reflects concerns about whether you can hit your operating margin guidance in 2020, the outlook for diabetes. So specifically on diabetes, you're in this window of kind of having an idea of where your coverage is going to be for Trulicity and Jardiance in terms of net live gains or lost and what the price concessions are. So can you just hopefully give us a little more detail on how we should be thinking about Trulicity specifically and Jardiance as well, going into 2020, because there have been changes in the competitive dynamics there?

Mr. Smiley: As we said in the opening, I think if you look at Trulicity and Cymbalta, things that we see in Q3 that we say are concentrated in that quarter, we feel good, as Enrique mentioned, feel very good about the access that we have now and the access we project into 2020. And as we said, you should think about Trulicity at a modest year-over-year price decline, which is really just the function of modest price increases. And we like the price and the value that GLP have in the U.S. today, so we'll do everything we can to preserve that. And we feel confident as we head into 2020 that that's a very manageable dynamic.

Q: My question here is when you first gave your 2020 revenue outlook or your long-term revenue guidance, what did you assume for Skyrizi and oral semaglutide, and how have those launches proceeded relative to your expectations there?

Mr. Ricks: Of course, we set the 2020 guidance in the middle of 2016. So many of the products we're facing competition from et cetera today, we're a twinkle in the eye of the investors back then and including some of our own launches at that time. We set the guidance, because we thought there was a distance between what – the people who do your work and the company thought about the long-term prospects, not line-by-line, but looking at a portfolio of opportunities that existed in front of us. Of course our ability to predict any one competitive situation or a product uptick for Lilly is not perfect. But at that time, we did project that we would launch 10 medicines by the end of 2019 in the first five years of that period and that – because of the profound nature of those opportunities, we were confident we would find a way to grow the company, at that point the pharma business 6%, Elanco a bit slower. We've actually raised that to 7% and I think are closing in on achieving that goal despite the fact that probably how we predicted we get there isn't the same way we have. But I think that was the nature of the exercise back then. And I think we successfully closed the gap in understanding in terms of what the opportunity for the company to grow was during that time. So we're proud of that achievement. If we look at the competitive threats we face across our big products of course they're there. I would just point out as well though that Trulicity volume growth in the U.S. was over 40% in Q3. That's in the face of 1.5 years of Ozempic. And that Taltz volume growth was substantial as well in the face of the [indiscernible] and Tremfya uptake. And in both those cases, it's important to understand that there is far more growth opportunity left in the classes we're participating in than share erosion threat to our eyes. A final comment on all these, because I know there's lot of interest in the Q3 pricing dynamics on Taltz and Trulicity. Most of those effects were determined early in 2018 and are now manifesting themselves in Q3 of 2019 whether it be the donut hole, law change, which affect both of them, the rates we contracted on in the commercial mergers that occurred in the payer space or the contracting in the case of Trulicity. And what we knew where lower-priced segments, but a good volume and of course the margin are highly productive for us to make sure patients in VA, DoD those segments can reach our products.

Enrique Conterno Retirement

Q: Dave, for investors who choose to be skeptical, this quarter has provided things to point to. So, you explained Trulicity and Taltz, but Basaglar and Alimta also fell short. The beat was tax rate driven as was the 2019 guidance raise. Enrique is departing at a not ideal time. So, why should we be confident that the weaknesses are temporary?

Mr. Ricks: Thanks for synthesizing the barricades so effectively there. We, of course, have an answer to all of those things. And I – honestly, I don't think there's been more interesting or exciting time to be in this company -- or more optimistic time. And we went to many of those reasons today. We have broad portfolio of products that are new in their lifecycle with Cialis behind us, remembering that Cialis is a six-point growth headwind over the last four quarters. That's ending now coupled with the one-time price effects which we went through today which we believe are substantially one-time either a step down on big mergers with our payers or the one-year effect of the donut hole which falls disproportionately on companies like Lilly who have retail-oriented products. And then we look ahead in diabetes. I have to be honest. I think the diabetes pipeline, the growth opportunities we have with Jardiance, with Trulicity, with tirzepatide have never been stronger for the company. So, I'll let Enrique answer the question on his timing, but I think he is leaving on top and there's another level to get to in Lilly Diabetes. That's certainly how I feel. I think the -- of course, every category we're in, we've talked about we compete with companies, some of them bigger than ours, some of them more focused, because we have more opportunities than the average company out there. And that doesn't mean that every quarter or every line item we're going to nail our goals. So, I think we're honest with ourselves about that. But we have more than half a dozen products that could scale on a significant way. And given our base of pharma revenue, I think that continues to offer a unique situation. And then you couple that with margin expansion, which we're convicted on as per the prior question, and given our placement in the lead table there, certainly we have upside on that one as the top line scales. I can't think of a better place to work in this industry to be honest. We've got a great opportunity ahead.

Mr. Conterno: Look, I'm set to be leaving and retiring from Lilly. I'm very proud, I think, of the business that we've built in diabetes. As good as I feel about building that business together with all my colleagues I feel even stronger about the bright future the diabetes has and Lilly has ahead. Just as I think about Trulicity and Jardiance, great momentum, leadership type brands, but with important catalysts when it comes to Trulicity and REWIND and the higher doses. And when it comes to Jardiance, of course, heart failure and CKD on top of the huge opportunity in type 2 diabetes. And I continue to feel very bullish about what tirzepatide could do on both, the efficacy and the tolerability profile. So very exciting time for us in diabetes overall and I couldn't be more excited about the future of Lilly in diabetes.

Jardiance

Q: On Jardiance, you have a couple of trials reading out over the next few years, the EMPEROR trials and heart failure, how are you thinking about that opportunity? Are those trials meant to bolster the profile of Jardiance in the diabetes market? Or do you actually view the heart failure opportunities as an individual standalone opportunity? And if so, could you help us understand if this could be a blockbuster opportunity by itself? And then associated with that wondering if the six-minute function tests are viable by themselves?

Mr. Conterno: So, we do see heart failure for Jardiance as a significant opportunity for us. And you described it as a blockbuster status type of potential and I think that's right. Clearly, we do have a lot of opportunity for Jardiance in type 2 diabetes so heart failure is on top of the blockbuster opportunity in type 2 diabetes. We do have, when it comes to the six-minute walk test, we have a read out later this year. You asked whether we believe that data would be file-able with the FDA and we believe so. We believe that we can get the data on our label. Clearly, the outcome studies are also critical for us and they will be coming at the end of next year and then for health test in early 2021.

Financial Highlights

1. Overall Diabetes Portfolio Climbs +14% YOY to $2.7 Billion

Lilly’s diabetes portfolio experienced another robust quarter of +14% YOY growth to $2.7 billion, compared to +39% YOY to $2.4 billion in 3Q18. Sequentially, the portfolio dipped 2% against -8% in 2Q19. Management highlighted GLP-1 Trulicity and SGLT-2 inhibitor Jardiance as drivers of overall volume growth, and both products currently lead their respective drug class markets. Talk of Trulicity’s tough quarter (-2% sequentially) dominated much of today’s call (the drug was mentioned a staggering 52 times on the call), centered on recent price decline of ~20%. Though we acknowledge that growth in lower net price segments, including the VA and DOD, generates some unfavorable pricing dynamics, we see this increased access as a huge win for patients and the company overall. Management however seemed bullish that negative pricing forces affecting Trulicity will peter out in coming quarters and cited the “underlying U.S. net price decline of roughly 5%” as being more representative of subsequent numbers. Overall, growth for the quarter was driven by Trulicity (56%), followed by Jardiance (21%), Basaglar (18%), and Tradjenta (6%). The launch of nasal glucagon Baqsimi ($6 million in revenue on its first quarter on the market) will also further boost Lilly’s overall diabetes portfolio moving forward. By product, Trulicity accounted for 38% of total portfolio revenue, Humalog 24%, Humulin 12%, Basaglar 10%, Jardiance 9%, Tradjenta 6%, and Glucagon 2%.

Lilly Diabetes Worldwide Financial Results – Past Five Quarters

Lilly Diabetes – 3Q19 Geographic Results

2. Trulicity Up 24% YOY to >$1 Billion; Dips Sequentially -2% for Second Time Since Launch; Likely Still Leads US GLP-1 TRx w/ 45% SOM

GLP-1 agonist Trulicity (dulaglutide) sales rose 24% YOY to remain over the $1 billion mark but experienced a 2% sequential decline from 2Q19. Regardless, Trulicity was cited as one of Lilly’s current and expected future key growth drivers, with total worldwide sales up 24%. Growth was sustained outside the US, with revenue up 50% YOY and 8% sequentially attributed to volume growth. Moving forward, effects from positive REWIND CVOT results (along with a likely EU CV label expansion – a positive CHMP opinion was granted earlier this year) should serve as an important tailwind for the franchise.

• Despite increases in volume (+42%) and demand in the US, Trulicity’s revenue only grew 17% YOY in the US, likely due to unfavorable pricing dynamics. According to Lilly, this was due to lower realized prices from higher contracted rebates, changes in the segment mix, and increased coverage gap funding requirements in Medicare Part D plans. Management shared more details during Q&A, emphasizing that an increase in access accelerated volume growth in lower price segments – this is a huge win for patients that were not accessing Trulicity before, but will understandably drive down net realized prices for Lilly. These factors attributed to a 20% price decreased compared to 3Q18; looking forward, management expects that Medicare Part D donut hole impacts will decrease next quarter, and that a 5% price decline is more representative for future quarters.

• Management highlighted also highlighted CHMP’s positive opinion for a CV label expansion in the EU. The decision was based upon positive REWIND CVOT results. As a reminder, at ADA 2019, REWIND revealed that treatment with Trulicity conferred a significant 12% risk reduction in 3-point MACE  (HR=0.88, 95% CI: 0.79-0.99; p=0.026). As of now, the European Commission has approved an update to the Trulicity label and indication to include REWIND data along with CHMP’s positive opinion. Management did not explicitly mention positive results from the AWARD-11 study on higher doses of Trulicity (3 mg and 3.5 mg), and we have no update on their 2Q19 announcement to submit a regulatory decision on the matter in late 2019. However, they did share plans for a new trial investigating dulaglutide in children and adolescents with type 2 diabetes, AWARD-PEDS. Trial completion is expected in early 2022. Following a similar approval for Victoza in pediatrics in 2019, we’re excited to see more potential treatment options for this population with a large unmet need.

• Trulicity is most likely still at the top in terms of US GLP-1 prescription volume with 45% share of market. We’ll have to wait until Novo Nordisk reports next week for confirmation; however, it’s likely that Trulicity is still leading second-place Victoza in terms of US SOM. According to statements given during Q&A, access to Trulicity is in the mid-90s (Mr. Conterno characterized this as “unprecedented access”) with about 60% patient adherence. Interestingly, Mr. Conterno also shared that Trulicity “tends to have better adherence than the GLP-1 class, it tends to have better adherence than insulin, but also better adherence than orals, which is sometimes difficult to believe but it's – the value proposition is that simplicity.” On this point, we were glad to hear management speak on Trulicity’s continued expansion into primary care practices – we see immense potential in earlier use of Trulicity given its ease of use and once-weekly dosing.

Trulicity Sales (4Q14-3Q19)

US TRx SOM and Market Volume

Trulicity Worldwide Financial Results – Past Five Quarters

Trulicity ­– 3Q19 Geographic Results

3. Jardiance Up 44% YOY to $241 Million; Continues to Lead US TRx at 54%; FDA AdComm on Type 1 Slated for Mid-November

SGLT-2 inhibitor Jardiance (empagliflozin) revenue rose 44% YOY to $241 million against a tough comparison of +31% YOY growth to $167 million in 3Q18. This number only takes Lilly’s portion of the BI-partnered product into account, however, and we assume that Lilly collects 33% of total Jardiance sales (based on figures from a 2015 BI update), giving $723 million total Jardiance revenue in 3Q19. Sequential sales showed a weaker quarter for the franchise, with a 2% drop compared to +8% growth in 2Q19. Jardiance continues to lead the SGLT-2 inhibitor market at 54% of US TRx, down from 56% last quarter. According to Slide 13 of today’s presentation, overall SGLT-2 inhibitor class growth is accelerating with 15% growth in total prescriptions since 3Q18. US sales remained stagnant sequentially at -1% to $141 million, but displayed an impressive +35% YOY, which management attributed to increased demand. OUS sales, driven by increased volume but dampened by the unfavorable impact of foreign exchange rates, are quickly catching up to US numbers, coming in at +60% YOY and +12% sequentially to $100 million. Overall, Jardiance is one of Lilly’s headline drugs, and sales have remained strong since being added back to the CVS formulary for 2019 after being excluded in favor of J&J’s Invokana in 2018 (giving access to ~25 million patients).

• During Q&A, Mr. Conterno expressed enthusiasm toward Jardiance’s potential growth in the heart failure and CKD fields. Mr. Conterno noted that results from the EMPERIAL trials, six-minute walk tests in both HFrEF and HFpEF (~300 patients each), are expected to read out later this year. Importantly, he believes the data will be fileable with the FDA for a potential indication. We’re curious to see if data from EMPERIAL-PRESERVED will be released alongside EMPERIAL-REDUCED. If filed with the FDA, EMPERIAL-PRESERVED would be the first HFpEF data under regulatory review for an SGLT-2. Looking further ahead, Mr. Conterno stated that the larger (n=6,976 total) EMPEROR-Reduced HF outcome trial is expected to complete at the “end of next year” (pushed back from June 2020), while EMPEROR-Preserved is still slated for early 2021. EMPA-KIDNEY, examining empagliflozin’s effect on patients, with or without diabetes and including type 1, with CKD, is also expected to read out in 2022.

• On the horizon, Jardiance is scheduled for an FDA Advisory Committee Meeting to discuss its usage in type 1 diabetes on November 13, 2019. The sNDA was submitted to the FDA last quarter, following the FDA’s refusal to file due to “technical reasons” in 1Q19. Presumably, DKA risk and how to address it will be the central point of discussion at this upcoming AdComm for Jardiance in type 1, along with discussions of a lower dose of empagliflozin which may attenuate this DKA risk. We’ll be curious to see how Lilly/BI approach the topic (especially compared to Sanofi/Lexicon’s presentation for Zynquista’s AdComm), and whether or not distinctions in BMI will be brought into the conversation.

Lilly’s Worldwide Jardiance Revenue – Past Five Quarters

Lilly’s Jardiance – 3Q19 Geographic Results 

Lilly’s Jardiance Sales (3Q14-3Q19)

4. Baqsimi Officially Enters Lilly’s Diabetes Portfolio with $6 Million in Sales in First Quarter on Market

For the first time, Lilly broke out sales for newly approved and launched Baqsimi (nasal glucagon), with the product bringing in $6 million in sales since its July launch. Notably, Baqsimi has shown strong commercial uptake in the US, holding 33% of all new to brand prescriptions. Lilly expects Baqsimi to grow the overall glucagon market and become a key contributor to revenue growth in 4Q19 and beyond given its innovative, easy-to-use design. Also of note, Baqsimi has recently received a positive CHMP opinion for EMA approval in the treatment of severe hypoglycemia in adults, teens, and children age four and up. An official EMA approval is expected in the coming weeks, which should set Baqsimi up for a European launch in early 2020.

• In terms of market potential, we see broad opportunity for Baqsimi and other next-gen glucagon products to experience commercial success. Lilly’s glucagon grossed $150 million in 2018, and we estimate Novo Nordisk’s GlucaGen sales to be in a similar range, although they do not officially release these results. In the past, Xeris has officially estimated US market potential for its Gvoke HypoPen (recently approved in September 2019) at $2 billion annually based on current glucagon kit prices and a patient population of 3.5 million – this would assume the patient population is buying 2-3 glucagon kits/year. On the other hand, Zealand estimates a >$700 million market by 2025, a less ambitious estimate that still represents more than doubling from the current base of $300 million/year (a number Zealand has supplied). Regardless, it’s clear that there’s major demand for this innovation in diabetes care, and that numerous patients could benefit from nasal glucagon, along with broader education on glucagon use as a hypoglycemia treatment. Looking ahead, we hope to see manufacturers and other stakeholders leverage these innovations within the class to promote broader uptake and education within the diabetes community. On this front, we note that Baqsimi is currently marketed at the same price as its current glucagon injection at $280.80/pack,

5. Basaglar Up 31% YOY but Down 10% Sequentially to $263 Million

Basaglar (biosimilar insulin glargine) sales were up 31% YOY to $263 million from a base of $201 million in 3Q18. Sequentially, revenue decreased 10% from a base of $291 million in 2Q19, albeit against a tough comparison of +16% sequential growth that quarter. As in past quarters, Lilly cited Basaglar as a key growth product, with total sales increasing both domestically and internationally (29% in the US and 39% internationally). US revenue ($29 million, +29% YOY, -13% sequential) was driven by increased demand and higher realized prices, while OUS revenue ($39 million, +39% YOY, +4% sequential) was driven by increased volume. Lilly anticipates Basaglar to be a continued volume and revenue driver for the rest of 2019 – we’re impressed by this confidence in the franchise, especially given intense US pricing pressures for insulins. We’re curious as to how the rollout of Lilly’s authorized generic of Humalog (Insulin Lispro) may continue to impact Basaglar sales.

Basaglar Worldwide Financial Results – Past Five Quarters

Basaglar Sales (3Q15-3Q19)

US TRx SOM and Market Volume

Basaglar – 3Q19 Geographic Results

6. Humalog Decline Slows to -2% YOY, Bringing in $649 Million; No Commentary on Lower-Price Insulin Lispro

Rapid-acting insulin Humalog dipped -2% YOY (-4% sequentially) to $649 million from $665 million in 3Q18. In the US, sales fell 3% YOY (-4% sequentially) to $356 million, spurred by decreased demand and lowered realized prices. Although still in decline, Humalog sales fared slightly better than last quarter (-15% YOY; -12% sequentially), which management attributed to (i) higher contracted rebates; (ii) increased coverage gap funding requirements in Medicare Part D; and (iii) the impact of patient affordability programs, as well as decreased demand to a lesser extent. Compared to 2Q19, in which Humalog was identified as a major driver of Lilly’s overall drop in US pricing, the drug went unmentioned in prepared remarks or Q&A during the call. Internationally, sales also declined (-2% YOY, -10% sequentially), driven by the unfavorable impact of foreign exchange rates but slightly buoyed by higher realized prices. These Humalog numbers also include newly-launched Insulin Lispro (lower-price insulin, sold at 50% Humalog list price), but specific sales for the cheaper alternative were not broken out. In 2Q19, management acknowledged that so far Insulin Lispro access has been limited, for example, the product is excluded from Express Scripts’ 2019 formulary, but further updates were not provided during today’s presentation.

Humalog Worldwide Financial Results – Past Five Quarters

Humalog – 3Q19 Geographic Results

Humalog Sales (1Q11-3Q19)

7. Tradjenta Sales Increase 15% YOY to $156 Million

DPP-4 inhibitor Tradjenta (linagliptin) sales increased 15% YOY to $156 million from a base of $136 million in 3Q18. Sequentially, revenue for the DPP-4 inhibitor grew 1% from $154 million in 2Q19. Tradjenta is manufactured in partnership with BI, and we assume a 50/50 split in revenue, bringing the franchise’s total revenue for 2Q19 up to $312 million. Unlike last quarter, most of the drug’s growth was driven by international markets (+12% YOY, +7% sequential vs. +20% YOY, -7% sequential in the US), and the majority of revenue still lies OUS ($95 million OUS vs. $60 million US). Just like in 2Q19, Tradjenta was not mentioned in either Lilly’s press release or earnings call, despite full result readouts for CAROLINA having taken place at ADA 2019. Results showed non-inferiority of Tradjenta vs. the sulfonylurea glimepiride, with a hazard ratio of 0.98 (95% CI: 0.84-1.14, p<0.0001 for non-inferiority, p=0.76 for superiority) and no significant difference in 3-point MACE. Tradjenta was associated with a substantially lower risk of hypoglycemia, but this finding was not highlighted.

Tradjenta Worldwide Financial Results – Past Five Quarters

Tradjenta Sales (2Q11-3Q19)

Tradjenta – 3Q19 Geographic Results

--by Ursula Biba, Rhea Teng, Martin Kurian, and Kelly Close