Lilly 4Q16 – Diabetes portfolio up 24% to $1.8 billion in 4Q16; Trulicity drives 66% of Q growth with sales tripling YOY to $337 million, nearly $1 billion for 2016; Jardiance revenue quintuples YOY at $76 million – February 1, 2017

Lilly provided its 4Q16 and year-end earnings update yesterday in a call led by newly-minted CEO Mr. Dave Ricks. The press release, webcast, and presentation slides are available on Lilly’s website. Below we provide our commentary on the performance of Lilly’s diabetes products, the progress of its diabetes pipeline, and a big picture look at how pricing pressures and the uncertain US political climate are impacting the pharmaceutical industry.

Read on for an item-by-item overview of the highlights from the call, followed by relevant Q&A.

Table 1: 2016 Financial Results for Lilly’s Major Diabetes Products

Table 2: 4Q16 Financial Results for Lilly’s Major Diabetes Products

Financial Highlights

1. Lilly’s overall diabetes portfolio grew 24% year-over-year (YOY) as reported to $1.8 billion in 4Q16, and grew 19% YOY as reported to $5.9 billion for full year 2016. This extremely strong growth was driven by four well-performing products in 4Q16: (i) GLP-1 agonist Trulicity (dulaglutide) – accounting for 66% of growth; (ii) SGLT-2 inhibitor Jardiance (empagliflozin) – accounting for 18% of growth; (iii) biosimilar insulin glargine Basaglar – accounting for 10% of growth; and (iv) rapid-acting insulin Humalog (insulin lispro) – accounting for 6% of growth.

2. Once-weekly GLP-1 agonist Trulicity (dulaglutide) continued its strong performance, with revenue tripling YOY as reported to $337 million. This represents an impressive 38% sequential increase from $244 million in 3Q16. Trulicity sales for 2016, its second full year on the market, reached $925 million, nearly quadrupling its 2015 revenue of $249 million. Management highlighted Trulicity as the main driver of its US revenue growth, noting that the drug’s new-to-brand prescription (NBRx) share in the US is comparable to that of Novo Nordisk’s Victoza (liraglutide), the current market leader in the GLP-1 agonist arena. Management further expressed optimism about the momentum of the GLP-1 agonist class in general, pointing to 30% YOY growth in total prescriptions (TRx) in 4Q16.

3. Lilly’s share of revenue from the BI-partnered SGLT-2 inhibitor Jardiance (empagliflozin) franchise was $76 million in 4Q16, a remarkable five-fold YOY increase as reported from 4Q15, when Lilly’s recorded sales totaled $15 million. Lilly’s share of full year 2016 revenue more than tripled YOY to $202 million. Management highlighted that Jardiance leads its class in NBRx share among endocrinologists – in December 2016, the drug captured 39% of new SGLT-2 inhibitor therapy starts by endos. We’re very happy to see strong growth for Jardiance, especially now that it’s the first and only SGLT-2 inhibitor – and type 2 diabetes medicine, for that matter – indicated for CV risk reduction.

4. BI-partnered Basaglar (biosimilar insulin glargine, marketed as Abasaglar ex-US) generated revenue of $40 million in 4Q16, growing five-fold YOY. Full year 2016 revenue grew newly eight-fold to $86 million for the full year. US revenue totaled $15.8 million for 4Q16, despite Basaglar’s mid-December launch (with only two weeks of sales in 4Q16 to report).

5. Lilly’s flagship product Humalog (insulin lispro) brought in $820 million in revenue, up 3% YOY and 28% sequentially. Full year sales totaled $2.77 billion, down 2% YOY from $2.84 billion in 2015. Competitive pricing in the US insulin market continues to be a major influencer for Humalog’s performance.

6. Humulin (human insulin) revenue fell 1% YOY to $355 million, representing a 10% increase sequentially. Full year sales totaled $1.4 billion, up 5% from 2015. As has been the case for the past several quarters, Humulin’s performance is stronger in the US market. By geography, US sales increased 5% YOY to $222 million whereas ex-US sales decreased 9% YOY to $134 million.

7. In 4Q16, Lilly’s portion of revenue from BI-partnered DPP-4 inhibitor Tradjenta (linagliptin) and Jentadueto (linagliptin/metformin) totaled $106 million, up 4% YOY (as reported and operationally) but down 8% sequentially. Lilly’s share of sales for all of 2016 totaled $437 million, up 22% YOY as reported and operationally.

8. Sales of Lilly’s glucagon rose 7% YOY as reported and operationally to $26 million in 4Q16. Sequentially, sales fell 43% in 4Q16, against a particularly tough comparison of 50% sequential growth in 3Q16. Full year 2016 revenue for glucagon totaled $133 million, up 10% YOY as reported and operationally.

Pipeline Highlights

9. Lilly acknowledged its decision to terminate its partnership with Adocia for ultra-rapid insulin BioChaperone Lispro and emphasized that the company has an internally-developed, alternative ultra-rapid insulin (LY900014) that could begin phase 3 trials by the end of 2017.

10. Very excitingly, Lilly has added a fixed-ratio combination of a basal insulin and GLP-1 agonist dulaglutide (Trulicity) to phase 1 pipeline. As we understand it, this will be a once-weekly combination of Lilly’s next-generation basal insulin with Trulicity.

11. Notably, Lilly has also advanced an oxyntomodulin analog into phase 1 trials. As we understand it, this candidate will support once-weekly dosing and will be investigated for both NASH and type 2 diabetes.

12. Though not mentioned on the call, the Lilly Go Dose system, consisting of the Go Dose and Go Dose Pro apps for Apple iOS, received FDA 510(k) clearance as a class II medical device in December. The app, available by prescription only for patients with type 2 diabetes, provides prandial Humalog dosing recommendations using manually-entered blood glucose values. This is a big deal and continues Lilly’s investment in digital diabetes care. No launch timing has been shared yet.

13. There were no other major updates on Lilly’s diabetes-related pipeline. Our pipeline table below contains a full overview of the company’s diabetes products in development of which we are aware.

Big Picture Highlights

14. Lilly shared that management met with President Trump earlier this very morning. While few specific policy items were discussed, Lilly emphasized that management impressed on the President the importance of biopharmaceutical innovation in the US.

Financial Highlights

1. Diabetes Portfolio Posts $1.8 billion in 4Q16 (24% YOY Growth), $5.9 Billion in 2016 (19% YOY Growth); A Strong Quarter Overall for Lilly Diabetes

Lilly’s overall diabetes portfolio grew 24% year-over-year (YOY) as reported to $1.8 billion in 4Q16, and grew 19% YOY as reported to $5.9 billion for the full year 2016. This extremely strong growth was driven by four well-performing products in 4Q16: (i) GLP-1 agonist Trulicity (dulaglutide) accounted for 66% of growth; (ii) SGLT-2 inhibitor Jardiance (empagliflozin) for 18%; (iii) biosimilar insulin glargine Basaglar for 10%; and (iv) rapid-acting insulin Humalog (insulin lispro) for 6%. The diabetes portfolio fell another 1% sequentially in 4Q16 (following a 1% sequential decline in 3Q16), but US sales grew 29% sequentially from 3Q16. Indeed, by geography, US sales continued to outstrip ex-US sales. 4Q16 sales of all diabetes products totaled $1.1 billion in the US (up 29% YOY as reported) and $618 million ex-US (up 15% YOY as reported). Full year 2016 sales totaled $3.7 billion in the US (up 23% YOY as reported) and $2.2 billion ex-US (up 13% YOY as reported). In terms of volume, new products (including Trulicity, Jardiance, and Basaglar), Humalog, and Humulin were highlighted as drivers of global volume growth in 4Q16. We’re pleased to note revenue growth – sometimes in the triple digits! – for almost all of Lilly’s major diabetes products in 4Q16, with the exception of Humulin (which fell 1% YOY as reported). Indeed, at JPM 2017, CEO Mr. Ricks shared that every single product in Lilly’s diabetes portfolio is growing share in every market.

2. Trulicity: Revenue Triples to $337 million, Accounts for 66% of Diabetes Portfolio Growth

Once-weekly GLP-1 agonist Trulicity (dulaglutide) continued its strong performance, with revenue tripling YOY and increasing 38% sequentially to $337 million. Sales reached $925 million for 2016, its second full year on the market, nearly quadrupling its 2015 revenue of $249 million. Management highlighted Trulicity as a main driver of its revenue growth, a point that was also emphasized in last month’s 2017 financial guidance update. Lilly management also particularly highlighted Trulicity during its JPM 2017 presentation. Indeed, according to our calculations, Trulicity sales accounted for a whopping 66% of the growth of Lilly’s overall diabetes portfolio in 4Q16. Trulicity generated strong revenue in US and ex-US markets alike; US sales rose nearly three-fold YOY to $268 million and ex-US sales rose 3.5-fold YOY to $69 million.

Figure 1: Trulicity Sales (4Q14-4Q16)

• Lilly attributed the product’s strong quarter to continued underlying volume growth in the GLP-1 agonist market and steadily increasing share of this market for Trulicity. Total prescription (TRx) growth for the GLP-1 agonist class was ~30% YOY and Trulicity has achieved 25% of the TRx share (slide 34). For comparison, Trulicity held 22% of the TRx market share in 3Q16, according to Novo Nordisk’s 3Q16 update. We’re looking forward to Novo Nordisk’s 4Q16 update this Thursday (February 2) for an updated look at the market dynamics of the GLP-1 agonist class; while we expect that Trulicity’s substantial share growth occurs partly at the expense of Novo Nordisk’s market-leading Victoza (liraglutide) and AZ’s exenatide franchise (once-weekly Bydureon and twice-daily Byetta), we also believe we’ll be seeing the class continue to grow. Overall, Trulicity’s patient-friendly design (by IDEO), once-weekly administration, and patient-friendly design continue to translate into market share gains for the product, despite recent cardiovascular outcome results demonstrating a cardioprotective benefit for Victoza (liraglutide). In fact, management noted that the drug’s new-to-brand prescription (NBRx) share in the US is comparable to that of Victoza at 32% and at JPM 2017, Lilly had shared that Trulicity has surpassed Victoza in terms of TRx.
• In Q&A, management shared that the REWIND CVOT for Trulicity remains on schedule, though the data readout slated for early 2019 is slightly delayed from earlier expectations. Lilly previously specified in its 3Q16 update that the trial will complete in July 2018, with the first interim results available in 4Q16. The July 2018 completion data is confirmed by ClinicalTrials.gov, representing an accelerated timeline (by nine months!) from the previously listed expected completion date of April 2019. Positive cardiovascular outcomes data will likely be important to Trulicity’s long-term success – Novo Nordisk’s upcoming entrant to the class, once-weekly injectable semaglutide, already has positive CVOT data available, having demonstrating impressive and unexpected reductions in cardiovascular risk in a pre-approval trial. Novo Nordisk expects to submit semaglutide for regulatory review in both the US and EU in 4Q16 and forecasts a 2018 launch for the product – that said, the SUSTAIN 6 CVOT will likely not support a cardioprotective indication claim and Novo Nordisk plans to conduct a larger, post-approval trial in pursuit of such as claim. Lilly management did acknowledge during Q&A that Novo Nordisk’s semaglutide may become a potential source of competition in the future but stated that “we are very prepared and we like [Trulicity’s] chances.” Lilly management also pointed out that the finding of increased retinopathy associated with semaglutide in SUSTAIN 6 may prove a challenge for semaglutide uptake and that little can be said about the competitive positioning of the two products until the full label for semaglutide is available. We do not think retinopathy data can be used to make any conclusions at this stage. We believe semaglutide will be formidable competitor to Trulicity and positive CVOT data for Trulicity from REWIND around the time of semaglutide’s launch could help Trulicity maintain its growing market share. Also on the horizon are GLP-1 agonists with innovative dose administration methods, such as Intarcia’s implantable ITCA 650 (exenatide mini-pump) and Novo Nordisk’s oral semaglutide, which may pose a threat to Trulicity due to their patient convenience and adherence advantages.

3. Jardiance up Five-fold YOY (From a Small Base) to $76 million for 4Q16; Management Highlights New CV Indication, Optimistic about Continued Strong Uptake

Lilly’s share of revenue from the BI-partnered SGLT-2 inhibitor Jardiance (empagliflozin) franchise was $76 million in 4Q16, a remarkable five-fold YOY increase, albeit from 4Q15’s low base of $15 million. Sequentially, revenue increased 60% from $48 million in 3Q16. Lilly’s share of full year 2016 revenue more than tripled YOY to $202 million. Lilly’s reported revenue for the Jardiance franchise include its share of sales from a number of BI-partnered products, including Jardiance and fixed-dose combinations Synjardy (empagliflozin/metformin), Synjardy extended-release, and Glyxambi (empagliflozin/linagliptin).  We estimate that total worldwide revenue for the franchise including BI’s share amounted to $230 million in 4Q16 and $612 million in 2016. Note that these values are speculative, because only Lilly’s share of Jardiance sales is publically reported: We estimate Lilly’s share at ~33% based on a comparison of Lilly’s full-year 2015 Jardiance revenue ($60 million) vs. total global net sales for the franchise in 2015 (€165 million, or ~$183 million), which we gathered from BI’s full year 2015 diabetes update released in 1H16. If Lilly’s reported revenue from the SGLT-2 inhibitor is an indication of how Jardiance is faring overall, 4Q16 was a quarter of impressive growth (though we note that Jardiance sales are rising from a small base).

Figure 2: Lilly’s Reported Jardiance Sales (3Q14-4Q16)

• Management reviewed a long list of recent regulatory wins for the Jardiance franchise. Headlining this list was the FDA approval of Jardiance’s expanded indication for the reduction of CV death. Management elaborated on some of the major implications of the new Jardiance label and of the ADA’s 2017 Standards of Care, released shortly thereafter and explicitly recommending empagliflozin for adults with type 2 diabetes at high risk for CV events. Management emphasized that these milestones present an opportunity for Lilly to promote Jardiance to a broader range of healthcare providers – the company plans to promote the new label to cardiologists, along with the traditional endocrinologist and primary care physician (PCP) targets for diabetes drug promotion. Management shared that Jardiance leads its class in NBRx share among endocrinologists (in December 2016, the drug captured 39% of new SGLT-2 inhibitor therapy starts by endos), but acknowledged room for improvement among PCPs and now cardiologists. Indeed, at JPM 2017, Lilly acknowledged that the challenge will be to educate primary care physicians to consider and treat indications beyond glucose-lowering in their patients with diabetes and that this will take time. Given that Jardiance is the first and only SGLT-2 inhibitor – and type 2 diabetes medicine, for matter – indicated for CV risk reduction, we agree that reaching PCPs and especially cardiologists will be key for the franchise, and for all the patients who could benefit from a cardioprotective, glucose-lowering agent. During Q&A, management underscored that the expanded indication applies to a significant portion of people with diabetes, as up to 30% of patients with type 2 have established CV disease and face a heighted risk for CV death (and thus the new indication directly applies to them). Notably, the Jardiance label update was approved late in 4Q16 (December 2) and only officially launched in January, so we look forward to observing its full impact in future quarters. Other key regulatory highlights for Jardiance mentioned on the call include:
  
  • FDA updates to the Synjardy, Synjardy XR, and Glyxambi labels to reflect positive CV data from EMPA-REG OUTCOME (importantly, these revisions did not amount to a new indication, as was the case for Jardiance, but we still see a benefit to having results for reduced CV death displayed plainly on the drub labels for busy patients and providers);
  • The FDA approval of Synjardy XR (empagliflozin/metformin extended-release), a once-daily tablet offering greater convenience than the twice-daily formulation of Synjardy;
  • EMA approval of a revised Jardiance label to include data for reduced CV death as well as an indication for the reduction of CV death;
  • A CHMP recommendation to the EMA to expand the Synjardy indication similarly, and to include EMPA-REG OUTCOME data on the label; and
  • EMA approval of Glyxambi.
• Lilly will prioritize volume growth going forward, focusing not only on in-class competitors, but on expanding Jardiance’s share of all type 2 diabetes prescriptions. Management emphasized that Jardiance now leads its class in new therapy starts among endocrinologists, with 39% NBRx share among endos in December 2016, which exceeds NBRx share for J&J’s Invokana (canagliflozin). Jardiance’s NBRx share among PCPs was lower, at 26% in December 2016. During Q&A, management maintained a confident outlook on volume growth prospects for the franchise and reiterated that the company is thinking about “share in the SGLT-2 class” as well as “overall share that Jardiance could capture when thinking about all people with type 2 diabetes taking prescription medications.” It appears that competitors in the SGLT-2 inhibitor class are beginning to feel some pressure – last week, J&J reported flat YOY growth for Invokana in 4Q16. Quite notably, US Invokana sales declined 4% YOY while US Jardiance sales more than quintupled (though overall global revenue for Jardiance in 4Q16 at an estimated $230 million still lags behind Invokana’s at $371 million). We’ll be back with a class-wide analysis on SGLT-2 inhibitors after AZ reports Farxiga’s (dapagliflozin) 4Q16 revenue this Thursday, February 2. For now, we can say that we’re not entirely surprised to see Jardiance catching up to its in-class competitors – it hasn’t been on the market quite as long as Farxiga or Invokana, but now has a major advantage in its FDA-approved indication and ADA endorsement for the reduction of CV death. We’re already intrigued to see how the SGLT-2 inhibitor class will be affected by CANVAS data for Invokana, which is expected to read out at ADA 2017 and in which J&J management has expressed optimism as being positive and similar to EMPA-REG OUTCOME data.
• Looking ahead, Lilly’s presentation slides point to the initiation of phase 3 heart failure trials and data from a phase 3 investigation of empagliflozin in type 1 diabetes as key events for 2017. Lilly/BI first announced their intent to study Jardiance as a treatment for chronic heart failure back in April 2016, with a plan to initiate two clinical trials by April 2017. The two trials will enroll patients with and without diabetes and one trial will be focused on heart failure with preserved ejection fraction while the other will focus on heart failure with reduced ejection fraction. We’re also excited to see results from the phase 3 EASE-2 and EASE-3 trials of empagliflozin in type 1 (expected to complete in October and September of this year, respectively), as we’re greatly intrigued by prospects for SGLT-2 inhibition in type 1 treatment. Lilly has focused its commentary surrounding Jardiance on its potential in patients with cardiovascular risk and we’re curious how the company may prioritize a potential type 1 diabetes indication next to its cardiovascular benefit promotion efforts (presumably it would take many years to determine if there is also cardioprotection in type 1 but watching big data may help). J&J has previously reported positive phase 2 data for low-dose Invokana in patients with type 1 diabetes, while Lexicon results of SGLT-1/SGLT-2 dual inhibition as a type 1 therapy from its phase 3 inTandem clinical program for Sanofi-partnered sotagliflozin.

4. Basaglar: Strong Post-Launch Performance in Both US and International Markets

Lilly’s share of revenue for BI-partnered Basaglar (biosimilar insulin glargine, marketed as Abasaglar ex-US) totaled $40 million in 4Q16, growing five-fold YOY. Full year 2016 revenue grew newly eight-fold to $86 million. US revenue totaled an impressive $15.8 million for 4Q16, despite Basaglar’s mid-December launch (with only two weeks of sales in 4Q16 to report).

Figure 3: Basaglar Sales (4Q15-4Q16)

• Basaglar accounted for nearly 10% of Lilly’s diabetes portfolio growth in 4Q16. During its 2017 financial guidance update, Lilly characterized Basaglar as “filling an important strategic need” in the company’s diabetes portfolio since its December 15 launch. Basaglar is Lilly’s first and only commercially-available basal insulin analog – its basal insulin peglispro was discontinued following phase 3 due to liver safety signals. Notably, in the 2017 Financial Guidance, management shared that commercial access for Basaglar at launch is at the low end of Lilly diabetes products at ~65% of commercial plans. Part D access is much weaker, in the single-digits. We expect that there is some reluctance amongst payers to adopt Basaglar, perhaps due to an unclear understanding of the relationship between biosimilars and originator products. It remains to be seen how providers and patients will understand biosimilars; unlike generics they are a new beast and some have expressed concerns about safety and quality control for these products, given the complexity and delicacy of the insulin manufacturing process. That said, the fairly strong initial commercial plan access bodes well for Basaglar’s prospects as it grows its coverage from this base. Indeed, the three largest pharmacy benefit managers (PBMs) in the US have all included Basaglar on their formularies for 2017 – with exclusive status for CVS Health and UnitedHealthcare and on equal footing with Sanofi’s Lantus (insulin glargine) for Express Scripts.
• In a separate call with Lilly management last month, we learned that Basaglar’s list price will be a 15% discount relative to Lantus’ list price. Lilly management shared that the list price of Basaglar is $317 for a box of five pens, each containing 3 ml of U100 insulin glargine. For comparison, the list price for Lantus is $373 for a box of five pens. A 15% discount is in line with the discounts for Basaglar compared to Lantus in ex-US countries, where the product has been available under the trade name Abasaglar at discounts ranging from 10%-20%. These discounts are significantly smaller than the up to 40% discount forecasted by some. On the other hand, the level of rebates to payers for Basaglar is unknown – we’d imagine the rebates are significant to win exclusive formulary status with CVS Health and UnitedHealthcare. In addition, Basaglar will be included in Lilly’s newly-announced direct-to-patient discount insulin program – the program will offer discounts of up to 40% off of the list price.
• Ex-US Abasaglar revenue totaled $23.7 million, up approximately two-fold sequentially and three-fold YOY for its first full year on the market. Management shared that this strong performance has been driven by early uptake of Abasaglar in Japan and Europe (particularly Slovakia, the Czech Republic, and Germany, as we learned in 3Q16). The product currently holds 16% of the days of therapy share of market (DoT SOM) in Japan and 4% DoT SOM in Europe (slide 43).

5. Humalog: Positive Growth Despite Tough Pricing Environment

Lilly’s flagship product Humalog (insulin lispro) brought in $820 million in revenue, up 3% YOY as reported and operationally and 28% sequentially. Full year sales totaled $2.77 billion, down 3% YOY as reported and down 1% YOY operationally from $2.84 billion in 2015. Competitive pricing in the US insulin market continues to be a major influencer for Humalog’s performance, particularly given that a majority of Humalog sales come from the US: in 4Q16, US revenue for Humalog totaled $525 million, versus $295 million in international sales. That said, Humalog’s TRx share of the rapid-acting insulin market has been steadily increasing from 45% in January 2016 to 49% at present, while the market has remained fairly steady at 3% TRx growth throughout the year (slide 29). In Lilly’s 2017 financial guidance update last month, management characterized Humalog as one of the company’s main drivers of expected growth for 2017 (alongside Trulicity, Basaglar, and Jardiance), though they acknowledged that Humalog access in 2017 is “slightly reduced” compared to other Lilly diabetes products at ~65% commercial coverage. As the 2017 formulary landscape currently stands, Humalog has a place on Express Scripts’ and UnitedHealthcare’s formularies but is excluded from CVS Health’s formulary in favor of Novo Nordisk’s NovoLog (insulin aspart) and Sanofi’s Apidra (insulin glulisine).

Figure 4: Humalog Sales (1Q12-4Q16)

• In response to recent public outcry over the price of insulin, Lilly highlighted the launch of a new program in partnership with Express Scripts that offers significant discounts on Lilly insulin (Humalog, in addition to Humulin and Basaglar), aimed particularly at those with high out of pocket drug expenses, such as patients with high deductible plans or no health insurance. The discounts began on January 1, 2017 through a web and mobile platform hosted by Blink Health; users simply pay for their insulin online at a discounted rate and pick up the prescription at their local pharmacy. The program is directed toward people with high out of pocket drug expenses, such as those with high deductible plans or no insurance, and could reduce their insulin costs by up to 40%. This is a direct outcome from conversations Lilly management had with various patients and patient advocates over the last three months, including team members from The diaTribe Foundation. See our coverage of the program announcement for much more on this – we were glad to see Lilly highlight this innovative initiative after there was no mention of the program in the company’s 2017 Financial Guidance and during the company’s JPM 2017 presentation.

6. Humulin: Modest Sequential Revenue Growth Driven by US Sales

Humulin (human insulin) revenue in 4Q16 fell 1% YOY as reported (rising 1% operationally) to $355 million, representing a 10% increase sequentially. Full year 2016 sales totaled $1.4 billion, up 5% YOY as reported (7% operationally) from 2015. As has been the case for the past several quarters, Humulin’s performance is stronger in the US market. By geography, US sales increased 5% YOY as reported to $222 million whereas ex-US sales decreased 9% YOY as reported (down 5% operationally) to $134 million. Humulin accounted for 4% of the growth of Lilly’s US diabetes portfolio (compared to <1% of the company’s global diabetes portfolio and 0.6% of the overall global volume growth of Lilly’s entire portfolio [slide 14]).

Figure 5: Humulin Sales (2Q15-4Q16)

• Humulin’s TRx share in the US remains stable at 54%-55%, following a slight uptick from 53% at the beginning of 2016. Despite its stable market share, the overall TRx for human insulins have been falling 4%-6% YOY since January 2016, after hitting a low of ~7% YOY decline in November 2015 (slide 33).
• We imagine that the launch of the Humulin U500 KwikPen in 1Q16 may also have contributed to the rise in US Humulin revenues and market share. The Humulin U500 KwikPen, targeted toward patients with very high insulin requirements, holds 1,500 units of insulin and is more cost-effective per unit of insulin than the Humulin U100 KwikPen, which holds five times less insulin. According to the company’s past updates, demand for this U500 formulation of Humulin has been driving the franchise’s US performance since 3Q15. The increased demand for concentrated insulins from the growing population of patients with high insulin requirements likely incentivized the development of the Humulin U500 KwikPen as well as the recently approved dedicated syringe for the U500 formulation – together, these products have mitigated the need for complicated dose conversions for U500 administration, improving the safety and convenience of the formulation. We’re pleased to see these advances in patient convenience, but don’t expect them to be able to overcome the challenges facing the human insulin field as a whole given the continued innovations in insulin analogs, burgeoning availability of increasingly affordable biosimilar insulin analogs, and growing popularity of non-insulin diabetes medications.

7. Tradjenta Franchise Sales Grow 4% YOY to $106 Million in 4Q16, Rise 22% YOY to $437 Million for 2016

In 4Q16, Lilly’s portion of revenue from BI-partnered DPP-4 inhibitor Tradjenta (linagliptin) and fixed-dose combination Jentadueto (linagliptin/metformin) totaled $106 million, up 4% YOY (as reported and operationally) but down 8% sequentially. This YOY growth was driven entirely by ex-US performance – an 18% YOY increase in international sales (reaching $75 million) canceled out a 19% YOY drop in US sales (falling to $31 million). Moreover, the DPP-4 inhibitor faced an easy comparison sequentially, given that revenue fell 5% sequentially between 2Q16 and 3Q16. Lilly’s share of sales for all of 2016 totaled $437 million, up 22% YOY as reported and operationally. Tradjenta’s modest growth in 4Q16 matches the flat YOY revenue of Novartis’ Galvus (vildagliptin) and follows a general trend we’ve noticed for DPP-4 inhibitors, in that while they still have a large and important role to play in diabetes care, their growth prospects are overshadowed by the rapid growth in newer drug classes such as SGLT-2 inhibitors and GLP-1 agonists. Indeed, at JPM 2017, Lilly management boldly expressed hopes for the SGLT-2 inhibitor class to surpass the DPP-4 inhibitor class, driven by Jardiance.  That said, Tradjenta was a notable growth driver for Lilly Diabetes in 3Q16, perhaps due to the then-recent approval of Jentadueto XR (extended release). The European approval of Glyxambi, a fixed-dose SGLT-2 inhibitor/DPP-4 inhibitor combo, was highlighted by Lilly management during the 4Q16 update, although the drug hasn’t seen much noteworthy commercial success since it launched in the US (partly due to Lilly’s acknowledged limited investment in the product’s promotion – it remains to be seen if this will change given the positive cardiovascular label updates for Jardiance, Glyxambi, and the rest of the franchise). We’ll have many more insights on the DPP-4 inhibitor class with our pooled analysis after AZ, Merck, and Takeda report their quarterly earnings for Onglyza (saxagliptin), Januvia (sitagliptin), and Nesina (alogliptin), respectively (all three companies report on February 2).

• We estimate total worldwide revenue including BI’s share at $294 million for 4Q16 and $1.2 billion for the full year 2016. Since only Lilly’s portion of revenue is reported publically, these values for total Tradjenta sales are speculative. We estimate Lilly’s share of revenue at ~36% based on Lilly’s reported Tradjenta franchise sales for 2015 ($357 million) and global net sales for the franchise in 2015 (€909 million, or ~$1 billion) as reported by BI in a diabetes update released in 1H16.

Figure 6: Lilly’s Reported Tradjenta Sales (2Q11-4Q16)

8. Glucagon Sales up 7% YOY to $26 Million in 4Q16; up 10% YOY to $133 Million for Full Year 2016

Sales of Lilly’s glucagon rose 7% YOY as reported and operationally to $26 million in 4Q16. Sequentially, sales fell 43% in 4Q16, against a particularly tough comparison of 50% sequential growth in 3Q16. Full year 2016 revenue for glucagon totaled $133 million, up 10% YOY as reported and operationally. Lilly’s glucagon has faced generally regular, if modest, growth, though from a low base. Lilly seems well positioned for innovation in glucagon, as it owns the phase 3 intranasal glucagon from Locemia (FDA submission expected by 1H18, per Dr. Jessica Castle’s DTM 2016 presentation) and a phase 1 soluble glucagon.

Pipeline Highlights

9. Adocia Partnership for BioChaperone Lispro Terminated; Internally-Developed Ultra-Rapid Insulin to Initiate Phase 3 in 2017

Lilly acknowledged its decision to terminate its partnership with Adocia for phase 3-ready ultra-rapid insulin BioChaperone Lispro and emphasized that the company has an internally-developed, alternative ultra-rapid insulin (LY900014) that could begin phase 3 trials by the end of 2017. Management underscored that, in accordance with its 2017 Financial Guidance, Lilly continues to expect to have an ultra-rapid insulin in phase 3 development by the end of 2017. Since Adocia’s announcement of the partnership termination late last week, Lilly has updated the details for the phase 2 ultra-rapid insulin on its pipeline page to discuss LY900014, rather than reference BioChaperone Lispro as it had previously. Few details on LY900014 mechanism of ultra-rapid action on available – the company’s May R&D update had only explicitly discussed BioChaperone Lispro in the ultra-rapid insulin category (slides here) and Lilly has not specifically discussed LY900014 by name in its earnings updates. Nonetheless, we’re eager to learn more – the candidate has completed phase 1b trials and we hope that the data may be presented at ADA 2017. There are currently no upcoming trials for the candidate listed on ClinicalTrials.gov – we’ll be keeping a close eye on this in the coming year.

• Lilly management also shared with us that the company has a separate, proprietary ultra-rapid insulin lispro formulation in pre-phase 1. ClinicalTrials.gov lists three phase 1 trials for the candidate – NCT02623478, NCT02623452, NCT02623465 – with a planned start date of January 2018. Very few details on this candidate are available – it was not discussed during the company’s May R&D update or today’s earnings update, nor is it listed on the company’s pipeline page.
• LY900014 will likely be the second next-generation ultra-rapid insulin to reach the market. Novo Nordisk’s Fiasp (faster-acting insulin aspart) was recently approved in Europe, though its US approval and launch is delayed for an unspecified amount of time due following the FDA’s Complete Response Letter (CRL). Adocia is now seeking a new partner for BioChaperone Lispro while continuing preparations for phase 3 – given Lilly’s resources and expertise in the insulin field, we expect that LY900014 will likely initiate its phase 3 program ahead of BioChaperone Lispro.

10. Basal Insulin/Dulaglutide Fixed-ratio Combination Added to Phase 1 Pipeline

Very excitingly, Lilly has added a fixed-ratio combination of a basal insulin and GLP-1 agonist dulaglutide (Trulicity) to phase 1 pipeline. During its R&D update in May, Lilly had highlighted a preclinical “next-generation basal insulin” and suggested the candidate may be co-formulated with Trulicity. At the time, Lilly shared that the candidate has a single chain Fc fusion, a once-weekly time-action profile, and a design that specifically allows for combination with Trulicity. Based on this, we expect Lilly is developing its fixed-ratio combination product to support once-weekly dosing. We expect that the basal insulin component of combination will present a greater challenge than the Trulicity component – we imagine that creating a flat profile of action in a once-weekly insulin that is comparable to the impressively flat profiles of the latest daily basal insulins (such as Novo Nordisk’s Tresiba [insulin degludec]) will prove no minor feat. On the other hand, a once-weekly basal insulin/GLP-1 agonist combination will likely be a particularly attractive alternative for many to the currently-available daily combinations (Novo Nordisk’s Xultophy [insulin degludec/liraglutide] and Sanofi’s Soliqua [insulin glargine/lixisenatide]). Sanofi also has a preclinical once-weekly basal insulin and GLP-1 agonist combination, LAPSInsulin Combo (combination of phase 3 once-weekly GLP-1 agonist efpeglenatide and phase 1 once-weekly LAPSInsulin-115). The combination, along with its components, were acquired from Hanmi in November 2015 and we have no heard any updates on the combination specifically since. As a result, it’s possible that Lilly’s candidate is currently leading the once-weekly basal insulin/GLP-1 agonist field.

11. GLP-1/Glucagon Dual Agonist Advanced into Phase 1

Notably, Lilly has also advanced an oxyntomodulin analog into phase 1 trials. This candidate was first announced during Lilly’s May R&D update, at which point we learned that the candidate is expected to support once-weekly dosing. In addition, Lilly shared that the candidate may be developed for a NASH indication, alongside a type 2 diabetes indication. During its R&D update, Lilly especially highlighted preclinical data demonstrating this next-generation oxyntomodulin candidate’s impact on liver fat in diet-induced obese mice – notably, in these mouse models, Lilly’s candidate produced a greater reduction in liver fat than Novo Nordisk’s GLP-1 agonist semaglutide, which is currently in phase 2 for NASH. Lilly’s oxyntomodulin candidate is the only GLP-1/glucagon dual agonist in the NASH competitive landscape to our knowledge thus far, though we may see more GLP-1/glucagon dual agonist candidates investigated for this indication in the future, given the flurry of industry interest in both dual agonists and NAFLD/NASH.

• Lilly appears to be focused on early-stage, once-weekly applications of GLP-1 and glucagon dual agonism. In addition to its oxyntomodulin candidate, at the R&D event, Lilly had highlighted the potential for co-formulation of a preclinical once-weekly glucagon with Trulicity or with its phase 1 GLP-1/GIP dual agonist – we have not heard any updates on this front since but assume that it is still under development. Lilly previously made the decision not to advance its Transition Therapeutics-partnered phase 2 daily GLP-1/glucagon dual agonist TT401 into phase 3, despite the candidate’s leading status in the robust GLP-1/glucagon dual agonist competitive landscape at the time. TT401 had demonstrate modest, though positive, results in phase 2 trials and we expect that Lilly’s decision at the time was not driven by a lack of confidence or interest in the GLP-1/glucagon dual agonism mechanism but rather by a very high internal bar for new diabetes drugs. Presumably, Lilly’s newer phase 1 oxyntomodulin candidate has demonstrated more impressive results in early trials thus far.

12. Go Dose, Lilly’s prandial insulin titration app, receives FDA 510(k) clearance; No Launch Timing Shared

Though not mentioned on the call, the Lilly Go Dose system, consisting of the Go Dose and Go Dose Pro apps for Apple iOS, received FDA 510(k) clearance as a class II medical device in December. The app, available by prescription only for patients with type 2 diabetes, provides prandial Humalog dosing recommendations using manually-entered blood glucose values. Go Dose is the patient-facing app, while Go Dose Pro allows the provider to determine a starting dose and send the recommendation to the patient’s app. As the patient manually enters glucose values, the software generates more individualized dosing recommendations until the provider determines that titration can be stabilized or stopped. Lilly would not share launch timing with us, though perhaps we’ll hear more in the company’s ATTD symposium. To our knowledge, this makes Lilly the first insulin company with a bolus calculator app, and it complements the company’s greater move into digital diabetes care with investments in Companion Medical (Bluetooth-enabled pen expected to launch this year) and Beta Bionics (insulin-only pivotal now expected by end of year or early 2018). It will be interesting to see how Go Dose is brought to market – a few offering for those prescribed Humalog? Sold through health systems/payers? Sold to HCPs? As a reminder, Novo Nordisk also partnered with Glooko earlier this month to develop jointly-branded digital tools for diabetes management, none more pertinent than an insulin dose titration software exclusively for Novo Nordisk insulins. Sanofi also has the Onduo joint venture with Verily, which has shared few details but most certainly could include an app like this for basal or bolus titration. Sanofi is also an investor in Common Sensing (Bluetooth-enabled insulin cap) and sells AgaMatrix’s MyStar Dose Coach meter in Europe (titrates basal insulin).      

• The Go Dose clearance is very exciting to see; here are some of the unanswered questions:
  
  • When will Go Dose launch?
  • Will providers have a population view where they can easily manage and monitor many patients?
  • Will the app integrate with Bluetooth-enabled BGMs, CGMs, pens, and pumps at some point?
  • Do providers have to give new dose recommendations the “ok,” or are they automatically sent to the patient?
  • Are there any plans to build a titration app for Lilly’s basal insulins?
  • Will Go Dose be provided along with a Humalog prescription for free? Or will there be a business model (i.e., through payers/health systems/providers)? Will patients have some copay or will some health system will cover it?
  • Will Go Dose work on Android at some point?
  • Will the app pair with a connected pen?
  • Is this out of the Cambridge Innovation Center?

13. No Major Updates to the Rest of Lilly’s Diabetes-related Pipeline

There were no major updates to the remainder of Lilly’s diabetes-related pipeline. Please see below for a complete overview of products in Lilly’s diabetes pipeline of which we are aware. We’re especially pleased to see Lilly’s continued investments in the insulin, NAFLD/NASH, GLP-1/glucagon dual agonist, and glucagon competitive landscapes.

Table 3: Lilly Diabetes Pipeline

Table 4: Lilly Diabetes Pipeline Candidates Discontinued 4Q16

Big Picture Highlights

14. Lilly Management Meets with President Trump

Lilly shared that management met with President Trump earlier this very morning. While few specific policy items were discussed, Lilly emphasized that management impressed on the President the importance of biopharmaceutical innovation in the US. In particular, it seems that the parts of the conversation focused on education the President about the role of PBMs and rebates in driving drug pricing, discussion of the role of taxes in driving biomedical innovation, and the desire to streamline FDA regulation. We expect this latter point, especially, will play heavily into President Trump’s eventual pick for FDA commissioner – two of the frontrunners for the position have little to no medical background and have been highly critical of the FDA and current drug approval processes. Overall, Lilly characterized the meeting positively and was optimistic about the company’s ability to work with policymakers and the current administration to encourage “good policies that can promote consumer-driven choice and more broadly available medications.” Given the significant controversy over President Trump’s actions overall since he took office on January 20, there has been less attention paid to its healthcare policies at the moment – that said, we continue to have lots of questions… 

Questions and Answers

On Lilly’s Diabetes Portfolio

Q: In the past, you flagged the concern about slowing of new patient starts for the SGLT-2 inhibitor class. What are your latest thoughts on that, given the label update for Jardiance and the updated ADA guidelines?

A: We are clearly very excited about the new label for Jardiance in the US and the new guidelines published by the ADA. But for us to be successful, Jardiance has to grow and the SGLT-2 inhibitor class has to grow. We need to think not just about Jardiance’s share in the SGLT-2 inhibitor market, but the overall size of this market and how many people with type 2 diabetes Jardiance could reach, particularly those with established cardiovascular disease. This is as many as 30% of people with type 2 diabetes, which is very significant opportunity. I expect that we will see an uptick in Jardiance sales in terms of new patient starts right away.

Q: Given Trulicity's strong performance, could you share your thoughts on the upcoming competition from Novo Nordisk's semaglutide? How do you view semaglutide’s retinopathy data and what are your hopes for the REWIND study?

A: We are seeing great sequential growth for Trulicity, driven both by the increasing share growth for Trulicity and the underlying growth of the GLP-1 agonist class. As of last week, Trulicity is now nearly half of the NBRx share in the GLP-1 agonist class. For us, continued class growth is probably the most important factor. We recently started reaching additional prescribers as of late last year, and we've seen significant, continued adoption by them. Looking at the competitive environment, semaglutide is a potential competitor in the near future. The candidate has good efficacy data, but one trial reported an increased risk of diabetic retinopathy. We really like our chances.

Q: What are your expectations for timing of market entry for Sanofi's biosimilar Humalog and what your plans are to mitigate that?

A:  We, of course, are prepared for that event. We have the fortune of launching a biosimilar glargine in Europe, Abasaglar, and now a follow-on insulin glargine in the US, Basaglar. We are thinking about how to best ensure that Humalog can continue to be an extremely strong franchise for Lilly, though I won't discuss our specific plans.

On the Future of US Healthcare Policy

Q: Was there any discussion today in your meeting with President Trump on the role of PBMs and the role they play in the pricing equation? Do you feel like this could be a bigger part of the drug pricing conversation going forward?

A: PBMs specifically weren’t a centerpiece of the discussion with the President. Mostly, we discussed how to get value to consumers who, particularly in ACA-sponsored plans or in high-deductible plans, have limited formularies. We did discuss PBMs broadly, but more as an educational point. Pharma has recently put out some work to educate the public on drug spending in the nation, and how much of that is innovative, generic, or going into the channel if you will. It always surprises people that fully one-third of spending in the US is not going to drug manufacturers but to other entities. I think the President was interested to know that.

Q: In his campaign, Donald Trump highlighted turning down regulation, improving the tax outlook, and reducing drug prices. After your meeting, does he understand the level of discount that's going on – that Medicaid is getting products for free and that Medicare Part D hasn't broken the budget?

A: We had a good meeting with President this morning, and a broad ranging discussion. He was very interested in understanding how our business works and where opportunities exist to further grow the American innovative engine in the biopharmaceutical industry. Of course, we talked about taxes and how that could be a positive catalyst for more investment and growth in the US industry. He's interested in finding ways to reduce and streamline regulation both at the FDA side but also in healthcare markets that the government plays a role in. We did not get into elaborate policy detail in terms of the US pricing environment, but I left the meeting with confidence that the people who we'll be working with closely as legislation moves forward have a good grasp of those facts.

Q: Could you comment on how the meeting with President Trump concluded, and the next steps we should expect from the administration?

A: There are a number of follow-ups that will be happening through staff and with key members of Congress. I was encouraged overall that changes will made – and likely rapidly. Most of those will involve the legislative branch, but are not many specifics in terms of exact timing. Overall, I think it was productive to engage the President – educational for both sides – and I think we can go forward and look at enacting policies that can help both the industry and also healthcare in the United States.

Q: From your perspective, would it be good or bad for drug companies to have the whole rebate process potentially go away?

A: Hypothetically, if we didn't have rebates, would I worry long-term about our future? My answer is no. We’re in the business of making innovative products that help patients, and we need to do that in a way that creates value in the health care system. There are many ways we could get paid for that value. In international markets we have productive and profitable businesses despite the absence of PBMs or anything like them. Because of the breadth of our portfolio and the company's focus on volume growth across several key markets, we are confident that we have a durable strategy going forward.

Q: What would happen to the pharmaceutical industry’s over $100 billion in taxes if the ACA is repealed? Would that go away?

A: We haven't seen the specifics on the repeal, or, for that matter, any pay forwards for the replace.  We're preparing for all of those scenarios and working closely with policymakers and industry leaders to develop policies that can promote consumer-driven choice and more broadly available medications in uninsured populations.

-- by Abigail Dove, Payal Marathe, Brian Levine, Helen Gao, Hae-Lin Cho, Adam Brown, and Kelly Close