Lilly 2Q19 – Diabetes up 13% YOY to $2.7 billion; Trulicity up 32% YOY to $1 billion; Jardiance grows 58% YOY to $232 million, submitted in type 1 to FDA; Detailed Q&A touches on Trulicity, drug pricing, and oral GLP-1 – July 30, 2019

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

2Q19 Financial Results for Lilly’s Major Diabetes Products

Pipeline Highlights

Tirzepatide

• Management believes that tirzepatide “has the opportunity to reset treatment expectations for patients for A1c and weight loss relative to current therapies.”  This sentiment was further emphasized during Q&A (see below), when Mr. Enrique Conterno (President of Lilly Diabetes) asserted that “tirzepatide is in a completely different ZIP code when it comes to efficacy.” As a reminder, 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.

• Management highlighted its presentation on tirzepatide’s dosing study at ADA 2019, noting that this titration data showed an improvement in tolerability with a slower dose escalation while maintaining consistent effects on blood glucose control and weight loss. Lilly is currently investigating the 5, 10, and 15 mg doses of tirzepatide for type 2 diabetes in the eight-trial phase 3 SURPASS program, which is using titration schemes informed by this dosing study and includes a superiority-powered CVOT. 

• When asked during Q&A about potential tradeoffs between tirzepatide’s tolerability vs efficacy,  Mr. Conterno noted that: “We already have an excellent in-market experiment here, because we've seen the success of GLP-1. We know that with the level of side effects of the GLP-1 class we can have significant success. We do believe that we are not going to be trading off in the case of tirzepatide, we will get the additional efficacy and we believe that we will have a comparable side effect profile to the GLP-1 class.” We’re very moved by this optimism from management on tirzepatide, especially after tolerability concerns dampened some enthusiasm of stellar phase 2b results presented at EASD 2018 and especially after listening to calls from multiple to other companies this earnings season where diabetes is clearly not an area that is vital for the company. One key question that remains to be answered: Will multi-step dose titration present a barrier to tirzepatide initiation and therapeutic dose achievement? Lilly has expressed its belief that packaging tirzepatide in the same autoinjector as Trulicity (a la IDEO, who designed this) will make initiation and titration easier than with a standard pen, and that a lower 5 mg dose itself would be an efficacious maintenance dose for most patients. As such, it would seem tirzepatide would be prescribed similarly to existing GLP-1s, though the escalation doses may present barriers or additional reasons for mistakes that may wind up prompting dosing mistakes.

• On the potential of tirzepatide in obesity and NASH: “When it comes to NASH and obesity, honestly we are betting to be best-in-class product. We're not betting to be first-in-class; we are thinking that we are going to reset the expectations of what's possible in both obesity and NASH with tirzepatide.” As a reminder, phase 3 for obesity and phase 2 for NASH for tirzepatide are set to begin this year.

Once Weekly Basal Insulin-FC

• Management highlighted its phase 2 next-gen basal insulin-FC candidate during the call, explaining that it applies the same “time extension technology” that Lilly used in Trulicity’s development to enable its once-weekly dosing. Moreover, management divulged that topline data is expected sometime next year, and that they view the candidate as having the potential to be the first weekly basal insulin. This would be an enormous innovation for the millions of patients with diabetes using basal insulins. Management has noted in the past that phase 1 data for the candidate was “remarkable” but this has not been made publicly available yet. We remain curious and hopeful about the potential of this weekly insulin in combination with Trulicity.

Automated Insulin Delivery System

• Lilly also commented on its AID system in development, confirming a potential 2021 launch. Its hybrid closed loop system (in-house pump and algorithm, Dexcom G6 iCGM) was advanced to phase 2 in 4Q18 (we aren’t actually used to hearing device pipeline advancement characterized in the same way that drug pipeline movement is), and positive results here will move the AID system into phase 3 in 2020, according to today’s call. For more on Lilly’s closed loop system in development, see our report from Lilly’s Diabetes Blogger Summit in May 2018. We note that there is a lot of enthusiasm growing for closed loop due to excitement over multiple products in development as well as multiple DIY products out – see our competitive landscape for more info.

Oral GLP-1

• Lilly provided ample commentary on its strategy with oral GLP-1 during Q&A, noting that its Chugai-licensed candidate has been moved into phase 1. Lilly has in the past maintained that bioavailability of oral GLP-1 candidates remains the largest issue with pushing them into phase 1, so we’re hopeful for what this means for the candidate. On today’s call, Lilly further divulged its philosophy with the development of oral GLP-1s (and incretins more broadly), noting two key points: (i) improved bioavailability compared to current treatments – important for a more convenient patient experience (this could be interpreted as contrast to Novo Nordisk’s oral semaglutide, which involves a fasting requirement before administration that may be an additional burden to patients); and (ii) offering greater efficacy in oral products than currently available once weekly GLP-1s. Presumably it’s also cheaper to manufacture. Notably, on the first point, Lilly believes the way forward is by pursuing small molecule oral GLP-1s (rather than large peptides that get degraded in the gut, leading to low bioavailability), which was the driving motivation behind its deal with Chugai. We’re excited for phase 1 data from this candidate, especially in seeing the bioavailability metrics for the molecule. For more on the field, see the entire competitive landscape here. We’re interested to see what happens next – we note that historically, Chugai has not been the partner who brings the most success though things may be different this time.

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 2Q19.

Questions and Answers

On Trulicity

Q: I would love some perspective on Trulicity growth in the second half given the dynamics you saw in the first half. And can you help frame for us high-dose data for Trulicity in the context of tirzepatide?

Mr. Enrique Conterno (President of Lilly Diabetes and Lilly US): We are very pleased with the performance of Trulicity. We have sustained strong volume growth. We saw 41% prescription growth in the United States when we look at the second quarter of 2019 relative to the second quarter of 2018. As we look at that, our sales growth was below that. Clearly there was some price erosion. The bigger pieces of this price erosion were the high rebates that were somewhat offset by modest list price increases. And then about seven points was the incremental funding of the donut hole going from 50% to 70%. Clearly when we look at relative to Q1, we did see good continued sequential growth when we look at volume. I think importantly, I think the fundamentals of the business are very strong as we look at both class growth of about 30% and when we look at our share performance. We do have as you mentioned a significant catalyst with REWIND, and of course when it comes to the higher doses 3.0 and 4.5 milligrams for Trulicity. We are excited about the opportunities with both. When we think about tirzepatide, we think of it being in a completely different ZIP code when it comes to efficacy. That's why we utilize the words of “resetting expectations of treatment for people with type 2 diabetes,” when we look at both A1C -- so we continue to be very excited about that particular asset.

Q: There seems to be lingering investor concerns about Trulicity and GLP-1 pricing as we look out to 2020 and beyond with the launch of oral sema. Can you maybe just give your latest thoughts in terms of how you see payers reacting to new entrants in the market? And should we be anticipating a more challenging pricing environment for Trulicity going forward?

Mr. Conterno: I know we will get this question often on Trulicity and the outlook on pricing. I'm unable to provide that but I think it is important to think about the value that Trulicity is delivering today and incremental value that we can deliver as we think about REWIND, as think about the higher doses that will be launching. All of that is basically additional value to that the product we will be providing. We think we have a strong foundation with the performance of the product. I'm not going to speculate on how we'll price our product and what the potential responses from payers may be.

Q: On Trulicity, where does the Lilly diabetes team expect that Novo’s oral semaglutide source of business will come from in terms of drug classes? And when that product launches, do you think that that will lead to a slowdown in the scripts for Trulicity that will be palpable for investors or is the class growth high enough such that Trulicity may not really budge at all?

Mr. Conterno: It’s honestly very difficult to speculate given that we will need to see how Novo will price the product, what type of placement, what is the message and so forth and so on. I think what we see though just generally when we think about diabetes is that patients do tend to go to an oral first. So, right now I think the product that we basically have, we are commercializing is Jardiance, which has incredible evidence and incredible benefit. My sense is depending on how we position the product, how they price this product, that's going to be a pretty big barrier for them to overcome. I think we're extremely well-positioned with the product – we're investing well behind it, and we have a great partner Boehringer Ingelheim to make that extremely successful.

On the Pipeline

Q: Could you talk about Lilly's evaluation of oral GLP-1's as a potential pipeline product opportunity?

Dr. Daniel Skovronsky (CSO, Lilly): Thanks for your question on oral incretins – that's obviously an area of interest for us. Maybe speaking generally about our strategy here, we want to be able to offer oral incretin therapy that meets sort of one of two criteria. First, it could have a significantly improved bioavailability versus what's currently under development. And that's important because that will translate to more convenient experience per patient – more convenient dosing with more reliable efficacy. The other option is to offer greater efficacy in an oral product than the currently available once weekly GLP-1s. So, we're pursuing those two tactics with different approaches. So, to get something that has high bioavailability, you need to move to small molecules. And so here we have our program that just moved into phase 1 this quarter that we call the GLP-1 NPA or non-peptide agonist. That is the product that was invented by Chugai, and we partnered with them on that. So, we're excited to see phase 1 data from that. We'll quickly learn what kind of bioavailability we get and that will determine how we pursue the project. The other avenue – getting better efficacy than currently available injectables – really relies on next-generation incretins. So, these are bispecific molecules like our tirzepatide, GIP and GLP agonism, where we are seeking to get the peptide to become orally bioavailable. And we have a number of approaches to accomplish that and look forward to moving those programs into the clinic soon.

Q: For tirzepatide, what level of GI side-effects is considered acceptable by physicians?

Mr. Conterno: We already have an excellent in-market experiment here, because we've seen the success of GLP-1. So, we know that with the level of side-effects of the GLP-1 class we can have significant success. We do believe that we are not going to be trading off in the case of tirzepatide. We will get the additional efficacy, and we believe that we will have a comparable side effect profile to the GLP-1 class.

Q: On your NASH and obesity product, how do you plan to differentiate it from others in development or those that have failed?

Mr. Conterno: When it comes to NASH and obesity, honestly, we are betting to have a best-in-class product. We're not betting to be first-in-class; we are thinking that we are going to reset the expectations of what's possible in both obesity and NASH with tirzepatide.

Q: Absent the reporting of Phase 3 data, do you think we'll learn anything in the next 12 months to 18 months as it pertains to the diarrhea side effects and whether it's a GIP driven side effect?

Mr. Conterno: My sense is I'm sure that we're going to be waiting for the phase 3 trials to understand what the dose titration actually delivers when it comes to tolerability. And as we mentioned, we feel very comfortable given the modeling, given the studies that we've done, that we're going to have a product that has unsurpassed efficacy resetting expectations for A1c and weight loss and at the same time is tolerant and comparable to GLP-1s.

On Policy

Q: I read the blog post with a lot of interest on Medicaid max rebate caps. What’s the dollar impact if that cap is raised to 125%? And what's the dollar impact if there is no cap at all?

Mr. Dave Ricks (CEO, Lilly): As I said, any version of Medicaid MCAP lift, we think is a regressive policy. It punishes companies by forcing us to underwrite state Medicaid, actually giving rebate in excess of our list price. But policy issues aside, I think you're asking what the exposure of the company is. As I said, this almost exclusively impacts our insulin portfolio across the Lilly medicines. And we are in the low teens in terms of total volume for Medicaid as a percent of those businesses. So that would be the theoretical cap on the impact of those businesses, 25% of that is a smaller number related to insulin and insulin related to the total of the company. So, it's a concerning policy because of the nature of it. The absolute financial impact for the company is capped in a way by the volume in Medicaid. And the 25% with the phase in is certainly a better version of a bad policy. In any case, we have a case for leaving the Medicaid MCAP at 100%.

Q: If we take the inflation cap – I think that will happen with Medicare Part D – is it possible that that could lay concern about rising insurance premiums to allow rebate reform to research as part of the proposal?

Mr. Ricks: I think you're talking about Part D CPI cap as it relates to the impact on the rebate reform score. Look, the Senate finance package was sort of the leading integrated package we've seen; it generates a huge amount of savings to the government most of which does not go back to the patient. This is our primary issue with it. Even reform within Part D that is on the table, the proposal pretty much pays for itself, maybe generates a little bit of surplus actually. So, the question we're posing to policy-makers is how do we reinvest that? Yes, premium stability. Premiums are already extremely low in Part D and have been stable for years, but more importantly, direct relief at the pharmacy counter – more relief than this package delivers with various proposals. One of those is as you indicate is to go back to the idea of passing through some or all of negotiated discounts with seniors and indexing their copayments, their deductible to net pricing not list. I think pretty much everyone who's close to this thinks this is a good idea, as you point out that issues in the score. Now, if we confine it to Part D and make it in connection with the rest of the finance committee package, I think there's a huge potential to achieve all those goals. One could also look at phases, phasing it in or even partial rebate pass through stepping up through time. So, all these ideas are ideas we've had as pharma that we are actively pushing on and maybe the main thing about all this is although this package got a lot of ink, we're far from the finish line here. And there will be a lot of discussion, probably with policies we really don't like and somebody like better like the one you're suggesting. And we'll do our best to try to shape this into something workable that addresses the fundamental issue which is out-of-pocket cost for the people who use innovative medicines.

Q: Dave you mentioned that out-of-pocket costs for people who use innovative medicines are a challenge. But could you talk about what the industry is doing if anything with respect to such costs outside of Part D, because the government's actions will likely only apply to Part D? That's where the government can affect drugs. And the industry has major public relations problem with the majority of the population that is outside of Medicare that struggles with out-of-pocket costs. So, is the industry doing anything; i.e., with the Chamber of Commerce or with major employer groups to try to change the dynamic of the out-of-pocket cost challenge? And one final thing, I'll just make a statement, which is that it does seem that the industry has not been able to overcome the unfair treatment of drug coverage, i.e., the facts that people pay too much out-of-pocket relative to the out-of-pocket costs for other healthcare utilizations such as physician visits, hospital visits, et cetera.

Mr. Ricks: A lot in there, but I think in general we agree. We need to improve rhetoric around the industry. We're working hard to do that. But mostly we need to improve the experience of patients at the pharmacy counter. You correctly point out that a lot of discussion is about government programs, but for Lilly business more than half of our business in the US is commercially reimbursed and what are we doing there? That is an area of increasing focus for us and I think there is probably four things that I will point to that we're both doing and ramping up.

• The first is how we design and implement our own healthcare coverage. As a healthcare company, I think we can begin to shape the market by our own purchasing behavior. I think we have here one of the most progressive policies for our own employees as it relates to drug coverage, including coverage on products like insulin and the way the deductible gets funded et cetera. These are all physicians having years of experience doing it.

• We're in a position to recommend to our peer companies as well as to insurance providers best practices. As you know probably recently there was an IRS ruling that is quite an important maybe subtle thing that allows for the first-time clarity around the question of whether medicines can be classified as a preventative treatment under HRA, HSA designs, and high-deductible plans. And the answer from IRS is yes, they can. So we'll use that as I think a new point to help those that are purchasing insurance products in the commercial market that they can design plans that are first out of coverage, zero out-of-pocket for important essential medicines and particular in diabetes for us, but also other categories as well that affect millions of people.

• Thirdly, a value-based pricing is something Lilly is taking a leading position on. Although it's been stubborn in government segments, we're making enormous strides in commercial markets. And while this doesn't directly translate to out-of-pocket costs at the pharmacy counter, I think it does allow us to both demonstrate the value of our medicines and share the risk and benefit of those medicines with self-insured employers. We are having a lot of success with this and I think it does begin to shift the discussion pretty dramatically around medicines as a costs versus medicines as a solution. And that's important.

• Finally, there are state-based efforts that are seeking to regulate the commercial marketplace. I think you'll see pharma and Lilly increasingly active in those debates, Colorado being one of them that's out there. And as the playing field shifts from a federal debate during an election year where let's be honest very little will probably happen, the states may be a center for action in 2020 and will be ready to engage and advocate for policies that help patients with innovative medicines there. So, a lot in my answer, but you point out a good thing here which is commercial market matters for a lot of companies including Lilly and we need to address those inefficiencies as well.

Q: I was surprised to learn from someone who's well informed in this area that AARP was a key stakeholder in killing the proposed rebate reform because of their alignment with the drug industry where they supposedly get something like half their funding. My question is whether you think rebate reform could still be brought back onto the table or is that permanently off the table?

Mr. Ricks: It is true AARP was a strong opponent of rebate reform. We can all speculate why, but it's also true that majority of their revenue, I think, more than half comes from royalties from the Part D program. So, it’s easy to get cynical when you spend time in Washington. That's said, we still think it's a good idea. Is it possible to come back? Probably in some other form. I think the broad-based pulling of the anti-kickback statute gets harder because of the way the scoring happens and the politics around it, but as was mentioned earlier, inside of a Part D, benefit redesign, the idea of patients linking out-of-pocket costs to something other than list price is a good idea and there's a sliding scale. We don't have to go all the way, that could change the scoring and make it more affordable and create a model for insurance design in the commercial market and other segment. So, we're far from giving up on this idea. And as you know, given our retail portfolio like Lilly's, with big gross to net spreads, over 50% on average across our portfolio. this is the single quickest and most efficacious way to save patients money at the point of sale and restructure the incentives of the payers to work on behalf of the patients directly, versus work on behalf of all beneficiaries including non-patients which is kind of how it's set up today. So, we got a long way to go in this debate and this is an idea we haven't let go of.

Financial Highlights

1. Overall Diabetes Portfolio Grows +13% YOY to $2.7 Billion, Driven by Trulicity, Basaglar, Jardiance

In another strong quarter, Lilly’s diabetes portfolio climbed 13% YOY to $2.7 billion, against a tough comparison of 29% YOY growth to $2.4 billion in 2Q18. In today’s call, management highlighted strong, 24% YOY volume growth for the diabetes portfolio in the US, pointing to Trulicity and Jardiance as key drivers of the overall 5% pharmaceutical volume growth. Sequentially, diabetes revenue surged +8% against a fairly easy comparison of -5% to $2.5 billion in 1Q19. Growth for the quarter was driven by Trulicity (57%), followed by Basaglar (20%), Jardiance (19%), and Tradjenta (3%). By product, Trulicity accounted for 38% of total portfolio revenue, Humalog 25%, Humulin 12%, Basaglar 11%, Jardiance 8%, Tradjenta 6%, and Glucagon 1%. Geographically, US sales of $1.9 billion (+14% YOY, +10% sequentially) continue to outpace OUS sales of $860 million (+11% YOY, +6% sequentially). Pivoting to pricing, the US saw an overall 4% drop due to increased rebate in the Medicare Part D coverage funding gap requirements, primarily steered by Trulicity and Humalog. All in all, Lilly’s diabetes segment continues to grow at an impressive pace, hitting major financial milestones, such as Trulicity’s $1 billion+ quarterly revenue, as well as regulatory ones, such as FDA Fast Track designation to Jardiance for chronic heart failure and the first FDA-approved nasal glucagon.

• Management also addressed the Senate Finance Committee’s recent plan to improve drug pricing in three sections: (i) Medicare Part D redesign; (ii) removal of the 100% rebate cap in Medicaid; and (iii) capping of list prices, in order of descending likelihood. Leadership indicated that the Medicare Part D redesign would have a “neutral to positive” impact on diabetes business with immunology and oncology taking on the brunt of the burden. The company looked much less favorably on increasing the Medicaid rebate cap – currently legislated by “Penny’s Rule” – from 100% of Average Manufacturer Price (AMP) to 125%. According to management, the cap increase would only increase government kickback without passing it on to patients, as well as represent a larger headwind for Lilly vs. general industry due to their insulin business. Medicaid currently represents 10% of US Humalog and Humulin volume, so the legislation would have a “moderate negative effect” on insulin sales. Lastly, Lilly is “concerned about the price controls” that capping list prices would represent but does not see this legislation as a likely option moving forward.

Lilly Diabetes Worldwide Financial Results – Past Five Quarters

Lilly Diabetes – 2Q19 Geographic Results

Lilly Diabetes Overall Portfolio Sales (1Q05-2Q19)

2. Trulicity Up 32% YOY to >$1 Billion; Likely Still Top of US GLP-1 TRx; Positive REWIND and AWARD-11 Results May Encourage Further 2019 Growth

GLP-1 agonist Trulicity (dulaglutide) sales rose 32% YOY to cross the $1 billion mark in 2Q19 from $780 million in 2Q18. Relative to being neck and neck versus Humalog at this point a year ago, Trulicity is now more than $300 million ahead in revenue (and also substantially on profit). Sequentially, revenue increased 17% from 1Q19, more than recovering from a slight 5% sequential dip seen in the previous quarter. Lilly management cited Trulicity as a key growth driver of total revenue and volume growth for the company, representing ~43% of Lilly’s total 2Q19 sales and nearly 60% of all growth. Encouragingly, growth was present in both US and international markets: In the US, revenue reached $792 million, with +29% YOY growth from $612 million in 2Q18 and +19% sequential growth from $729 million in 4Q18. This growth was driven by increased demand and offset by lower prices from higher rebates, increased coverage gap funding requirements from Medicare Part D, and “changes in the segment mix.” We’re happy to see that more patients (likely on Medicare/Medicaid) are accessing Trulicity. In international markets, revenue reached $236 million, with +41% YOY from $167 million in 2Q18 and +10% sequential growth from $214 million. Here, growth was driven by increased volume and partially offset by unfavorable foreign exchange rates and lower realized prices. Regardless of these offsets, Lilly still anticipates Trulicity to be a key volume and growth driver into the rest of 2019.

• Trulicity likely maintains its position as the US leader in GLP-1 prescription volume. Trulicity currently holds over 46% share of market (slide 13) and grew 41% YOY in prescription volume. While Novo Nordisk has yet to report its second quarter earnings, it is likely that Trulicity still leads second-place Victoza as seen in 1Q19. Trulicity first overtook Victoza in volume share in 3Q18 and has steadily kept its spot at the top, even surpassing the sum of Novo Nordisk’s total GLP-1 market share (Victoza and Ozempic) since then. With higher demand in US and OUS markets, as well as strong YOY and sequential growth and investment from management for Trulicity, we are looking forward to seeing the updated market breakdown in the coming weeks, especially the combined total of Victoza and Ozempic. Encouragingly, Lilly’s data indicates that total prescriptions from the entire GLP-1 class continue to climb—up to ~260,000 in June 2019 (in terms of a 13-week rolling average), up from ~200,000 in June 2018 and ~170,000 in June 2017.

• Management highlighted REWIND trial results from ADA 2019 and noted that Trulicity is in review for a CV indication. In REWIND, Trulicity gave a 12% RRR on 3-point MACE (HR=0.88, 95% CI: 0.79-0.99) vs. placebo with safety results consistent with previous studies. During the call, management emphasized that the lower-risk population enrolled in REWIND generated data that’s more representative of diabetes patients in the general population. Notably, managed commented that they “expect the [CV indication] label to reflect the broad population studied”—could Trulicity become the first diabetes therapy with a CV indication encompassing both primary and secondary prevention populations? We’ll have to wait and see – there was no mention of when a decision for Trulicity’s CV indication is expected in Lilly’s press release or during the call.

• Management also commented on positive data from the AWARD-11 trial of higher doses of Trulicity (3 mg and 3.5 mg). Topline results released in June 2019 showed that high-dose Trulicity was superior to current dose (1.5 mg) in lowering A1c and weight with comparable safety and tolerability (slide 5). Lilly mentioned that the clinical trial will continue to evaluate longer-term safety with completion and divulged plans to submit a regulatory decision expected in late 2019.

Trulicity Sales (4Q14-2Q19)

US TRx SOM and Market Volume

Trulicity Worldwide Financial Results – Past Five Quarters

Trulicity ­– 2Q19 Geographic Results

3. Jardiance Climbs +58% YOY to $232 Million; Leads SGLT-2 Market at 53% TRx; Submitted to FDA for Type 1

SGLT-2 inhibitor Jardiance (empagliflozin) revenue jumped 58% YOY to $232 million against a difficult +43% YOY surge in 2Q18, contributing an impressive 19% share of overall diabetes portfolio growth. This 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 $696 million total Jardiance revenue in 2Q19 vs. $441 million in 2Q18. Within the diabetes portfolio, management lauded Jardiance, along with Trulicity, as the company’s key growth products and drivers of volume growth in the call. Sequentially, sales grew 14% against a tough comparison of 5% last quarter. Jardiance continues to be the SGLT-2 volume leader, with 53% of total prescriptions and +13% YOY TRx growth, as of June 2019 (see below). By geography, domestic sales posted strong numbers at 67% YOY growth (+14% sequentially) to $143 million, while OUS climbed 45% YOY (+14% sequentially) to $89 million. As a reminder, Jardiance has gained momentum since being added back to the CVS formulary for 2019 after being excluded in favor of J&J’s Invokana in 2018 (~25 million patients).

• Excitingly, management highlighted that Jardiance has been submitted to FDA for type 1 diabetes. We hope that the petition fares better than Sanofi/Lexicon’s Zynquista (sotagliflozin) and AZ’s Farxiga (dapagliflozin), which both received CRLs in March and July, respectively. Our sense is that this will depend on what sort of risk mitigation platform was submitted with the candidate, though we have little sense of what the FDA would deem worthy of approval. Of course, pursuing the lowest dose of Jardiance, which showed no elevated risk of DKA in the phase 3 EASE program, is different from the higher doses pursued with Farxiga and Zynquista, but more education (as was emphasized by Sanofi/Lexicon at sotagliflozin’s advisory committee) is another potential route. That said, it doesn’t seem that Sanofi has placed much stock in sotagliflozin’s potential, having terminated its partnership with Lexicon last week.

• In the pipeline, phase 3 studies for chronic kidney disease and chronic heart failure march forward. As a reminder, EMPA-KIDNEY began in January 2019 (expected completion in June 2022) and studies empagliflozin’s effect on patients, with or without diabetes and including type 1, with chronic kidney disease. Two smaller EMPERIAL trials (n=~300 each) investigating exercise capacity in HF both with reduced ejection fraction (HFrEF) and preserved ejection fraction (HFrEF), as well as the larger (n=6,976 total) EMPEROR-Reduced and EMPEROR-Preserved outcomes trials, are expected to complete in June 2020 and 2021, respectively.

Lilly’s Worldwide Jardiance Revenue – Past Five Quarters

Lilly’s Jardiance – 2Q19 Geographic Results 

Lilly’s Jardiance Sales (3Q14-2Q19)

4. Basaglar up 44% YOY and 16% Sequentially to $291 Million

Basaglar (biosimilar insulin glargine) sales were up 44% YOY to $291 million from a base of $202 million in 2Q18. Sequentially, revenue increased 16% from a base of $251 million in 1Q19. Lilly mentioned Basaglar as one of the key growth drivers for their diabetes portfolio, contributing to 20% of sales with growth both in and outside of the US. US revenue ($232 million, +48% YOY, +17% sequential) was driven by higher realized prices and increased demands, while international revenue ($59 million, +29% YOY, +10% sequential) was driven by increased volume and offset by unfavorable foreign exchange rates. In terms of total prescriptions in the basal insulin class, Basaglar contributed to 21% of US TRx at the end of 2Q19, with its TRx share of market increasing 6% since 2Q18. Lilly anticipates Basaglar to be a continued volume and revenue driver for the rest of 2019.

Basaglar Worldwide Financial Results – Past Five Quarters

Basaglar Sales (3Q15-2Q19)

US TRx SOM and Market Volume

Basaglar – 2Q19 Geographic Results

5. Humalog Falls 12% YOY to $678 Million; Medicare Part D Coverage Gap Propels US Price Decline

Rapid-acting insulin Humalog dropped 12% YOY (-7% sequentially) to $678 million from $770 million in 2Q18. In the US, where the brunt of loss was taken, Humalog revenue fell 15% YOY (-12% sequentially) to $396 million. Management attributed the domestic decline to lower realized prices due 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. More broadly, Humalog was identified as a major driver of Lilly’s overall drop in US pricing; this comes as little surprise given the high degree of pricing pressure in insulin. OUS sales decreased 8% (flat sequentially) to $282 million due to the unfavorable impact of foreign exchange rates and, to a lesser extent, decreased volume. In 1Q19, leadership mentioned that they would push forward on (i) connected care and pens; and (ii) the more advanced ultra-rapid insulin lispro (URLi) in preparation for insulin’s shift in regulatory status to a biologic in 2020, however, no new updates were given in today’s presentation.

• Lilly also launched Insulin Lispro – its half-priced, authorized generic of Humalog this quarter. Management acknowledged that access has so far been limited. For example, the product is excluded from Express Scripts’ 2019 formulary, but increased availability continues to be a goal. For now, however, it looks as though Insulin Lispro will be most beneficial to the uninsured marketplace.

• During prepared remarks, as well as Q&A, leadership underscored that the possible senate initiative to increase Medicaid’s rebate cap from 100 to 125% AMP would negatively impact Humalog revenue. As of now, Medicaid represents 10% of Humalog volume. 

Humalog Worldwide Financial Results – Past Five Quarters

Humalog – 2Q19 Geographic Results

Humalog Sales (1Q11-2Q19)

6. Tradjenta Sales Increase 9% YOY to $154 Million

Tradjenta (linagliptin) sales increased 9% YOY to $154 million from a base of $142 million in 2Q18. Sequentially, revenue for the DPP-4 inhibitor grew 17% from $132 million in 1Q19 - an easy comparison as 1Q19 showed a 16% sequential decline in revenue from 4Q18. As Tradjenta is manufactured in partnership with BI, we assume a 50/50 split in revenue, bringing the franchise’s total revenue for 2Q19 up to $308 million. Most of the drug’s growth was driven by US markets (+14% YOY, +36% sequential vs. +5% YOY, +6% sequential in international markets), but the majority of revenue still lies OUS ($90 million in revenue vs. $65 million in the US). To our surprise, 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 enough to be highlighted by management.

Tradjenta Worldwide Financial Results – Past Five Quarters

Tradjenta Sales (2Q11-2Q19)

Tradjenta – 2Q19 Geographic Results

Close Concerns Questions

• How will FDA approach a regulatory decision on Jardiance for type 1, given compelling data from the EASE program showing reduced DKA risk with a lower dose? When will this decision be made?

• Will Trulicity become the first diabetes drug with a CV indication in both primary and secondary prevention populations?

• How will Trulicity sales be impacted by the emergence of Novo Nordisk’s oral semaglutide? How will Lilly assess various pipeline opportunities for oral GLP-1 given cost advantages compared to efficacy advantages? 

• Will Lilly release financial results for Insulin Lispro (its half-priced generic of Humalog) moving forward?

• What are launch plans for Lilly’s nasal glucagon?

--by Ursula Biba, Rhea Teng, Albert Cai, Peter Rentzepis, Martin Kurian, and Kelly Close