Lilly 2017 Financial Guidance – Growth expectations driven by Trulicity, Basaglar, Jardiance, and Humalog; Jardiance CV indication to launch mid-January 2017; Phase Ultra-Rapid BioChaperone Lispro and Jardiance heart failure trials in 2017 – December 16, 2016

Lilly provided its 2017 financial guidance yesterday in a call led by CEO Mr. John Lechleiter. Much of the call focused on the company’s financial prospects and overall product portfolio, including significant discussion of Lilly’s efforts in Alzheimer’s Disease following the high profile failure of its EXPEDITION3 phase 3 study of solanezumab. That said, the call did include several mentions of the spate of exciting diabetes-related news Lilly has experienced over the last several weeks and intriguing look at its diabetes-related expectations for 2017. Below, we include our top five highlights from the call, followed by relevant Q&A.

1. Overall, Lilly expects 5% revenue growth for its entire portfolio (including diabetes and non-diabetes products) through 2020 – total revenue in 2017 is forecast to be ~$22 billion. In particular, management highlighted GLP-1 agonist Trulicity (dulaglutide), BI-partnered biosimilar insulin glargine Basaglar, BI-partnered SGLT-2 inhibitor Jardiance (empagliflozin), and Humalog (insulin lispro) as drivers of growth in 2017. Lilly emphasized that the company will focus more on volume growth within its portfolio rather than net price increases, in light of the ongoing pricing pressure in the US and abroad. This was good news for patients.

2. Lilly management highlighted yesterday’s long-awaited launch of its BI-partnered biosimilar insulin glargine Basaglar. Notably, management shared that commercial access for Basaglar at launch is at the low end for Lilly diabetes products at ~65% of commercial plans, and Part D access is much weaker, in the single-digits.

3. The recently-approved expanded indication for Jardiance reflecting a cardiovascular benefit is expected to launch in mid-January 2017. In Q&A, management highlighted Jardiance’s impressive coverage access: Jardiance’s access to commercial plans is in the “high 80s” – also very good news for patients.  

4. On the pipeline front, Lilly highlighted a number of exciting phase 3 initiations for its diabetes portfolio in 2017. The phase 3 program for Adocia-partnered Ultra-Rapid BioChaperone Lispro is expected to initiate in 2017, a delay from the previous 2016 expectation. In addition, very excitingly, Lilly plans to begin its two trials of Jardiance in patients with heart failure. Management also shared that an interim analysis for the REWIND cardiovascular outcomes trial for Trulicity has been completed and the data monitoring committee has recommended that the trial continue as planned.

5. A key assumption underlying Lilly’s 2017 guidance is that any upcoming US healthcare reforms will not significantly impact pricing or access to medications. In Q&A, CEO Mr. John Lechleiter expressed support for President-elect Donald Trump and, in particular, Vice President-elect Mike Pence.

Top Five Highlights

1. Overall, Lilly expects 5% revenue growth for its entire portfolio (including diabetes and non-diabetes products) through 2020 – total revenue in 2017 is forecasted to be ~$22 billion. In particular, management highlighted GLP-1 agonist Trulicity (dulaglutide), BI-partnered biosimilar insulin glargine Basaglar, BI-partnered SGLT-2 inhibitor Jardiance (empagliflozin), and Humalog (insulin lispro) as drivers of growth in 2017. Trulicity, Jardiance, and Basaglar were all significant drivers of growth in 3Q16 – Trulicity alone accounted for a whopping 71% of growth of Lilly’s diabetes portfolio that quarter. In Q&A, management shared that every Lilly brand is gaining market share in key regions and characterized reimbursement and coverage access for its products positively. That said, management acknowledged that Humalog access in 2017 is “slightly reduced,” though other products have made gains in access. In Q&A, we learned that commercial coverage of Humalog is at the low end for Lilly diabetes products at ~65%. Indeed, we’re surprised to see Humalog included in Lilly’s list of growth drivers for 2017 – the product experienced revenue declines in 3Q16, largely attributable to a competitive insulin pricing environment. On the other hand, we expect sales of Basaglar and Jardiance, in particular, will experience an uptick in 2017, given the launch of Basaglar in the large US market yesterday and the recent FDA approval of a cardiovascular death indication for Jardiance. Trulicity experienced very impressive growth throughout 2016 – revenue for the product more than tripled YOY in 3Q16 to $244 million and we’d expect this trend to continue through 2017, given its patient-friendly once-weekly administration and ease-of-use. That said, competitive challengers are on the horizon – both Novo Nordisk’s once-weekly, extremely potent semaglutide (which already boasts impressive cardiovascular benefit data!) and Intarcia’s implantable ITCA 650 (exenatide mini-pump) are expected to be approved by year-end 2017, which may stunt Trulicity’s prospects going into 2018.

• Lilly emphasized that the company will focus more on volume growth within its portfolio rather than net price increases, in light of the ongoing pricing pressure in the US and abroad. The company expects the pricing and access pressures in the US will continue in 2017 and beyond, and thus its guidance is driven by volume growth for new products rather than net price increases. That said, in Q&A, management clarified that the company remains focused on net price, particularly with regards to its more established products that are facing tough competition (we’d imagine that Humalog falls into this category), but the company is even more focused on volume and adoption.
• Conspicuously missing from Lilly’s prepared remarks was BI-partnered DPP-4 inhibitor Tradjenta (linagliptin). It seems clear that Lilly is not expecting major growth from the DPP-4 inhibitor class alone. That said, in Q&A, management highlighted Tradjenta’s strong commercial access, in the ~90% range – it’s our guess that it is not driving profitability.

2. Lilly management highlighted yesterday’s long-awaited launch of its BI-partnered biosimilar insulin glargine Basaglar. The company characterized Basaglar as “filling an important strategic need” within its diabetes portfolio. 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, 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. 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 benefits 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, 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%. That said, in our local pharmacies, the cash price for a box of five Basaglar pens is somewhat higher, between $380-$385 – this represents only a 6%-8% discount on the cash price of ~$410 for a five-pen box of Lantus. Of course, the cash price at pharmacies vary by pharmacy and region and is largely not set by the insulin manufacturers. In any case, 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. Strangely, Lilly’s discount insulin program was not mentioned at all in the 2017 financial update…
• See our coverage of Basaglar’s launch for a deeper dive.

3. The recently-approved expanded indication for Jardiance reflecting a cardiovascular benefit is expected to launch in mid-January 2017. The updated label for Jardiance plays a key role in Lilly’s positive financial guidance for 2018. Lilly management has long pointed to the inclusion of EMPA-REG OUTCOME data on the Jardiance label as an inflection point for product sales. Jardiance revenue in 2016, while strong, was somewhat disappointing for a product so early in its launch cycle, a circumstance that Lilly management attributed to sluggish performance of the underlying SGLT-2 inhibitor market. Management has also long highlighted the updating of diabetes treatment guidelines to reflect the EMPA-REG OUTCOME results as a second inflection point for Jardiance sales. In Q&A, the company suggested that treatment guidelines will be updated imminently – indeed, the ADA just released its 2017 Standards of Medical Care in Diabetes, which newly features a recommendation for the use of Jardiance and Novo Nordisk’s GLP-1 agonist Victoza (liraglutide) in patients with diabetes and established cardiovascular disease. Lilly released an announcement earlier today praising the inclusion of this recommendation in the Standards of Care.

• In Q&A, management highlighted Jardiance’s impressive coverage access. Jardiance’s access to commercial plans is in the “high 80s.” Along with Tradjenta, management highlighted Jardiance’s commercial access as among the high end of its diabetes portfolio. Coupled with the planned extensive education campaign for Jardiance’s new indication targeting cardiologists along with endocrinologists and primary care physicians, we view Jardiance as well-positioned to experience a strong upswing in 2017.

4. On the pipeline front, Lilly highlighted a number of exciting phase 3 initiations for its diabetes portfolio in 2017. The phase 3 program for Adocia-partnered Ultra-Rapid BioChaperone Lispro is expected to initiate in 2017, a delay from the previous 2016 expectation. In addition, very excitingly, Lilly plans to begin its two trials of Jardiance in patients with heart failure – one trial will enroll patients with heart failure with reduced ejection fraction and the second trial will enroll patients with heart failure with preserved ejection fraction. Both trials will include participants with and without diabetes. The lack of mention of phase 2 intranasal glucagon, acquired from Locemia, appears to confirm the 1H18 timeline for phase 3 initiation for the product shared at DTM 2016. No other major late-stage, diabetes-related pipeline milestones are expected in 2017 – notably, this is the first time since at least 2013 in which Lilly did not forecast any diabetes-related phase 3 data readouts, regulatory actions, or regulatory submissions. Lilly has a stellar lineup of new diabetes product launches over the last few years – including many fruits of its alliance with BI – and it appears that we’re entering a lull before Lilly’s next wave of launches. We’d imagine that the bulk of Lilly’s diabetes resources will be devoted to marketing and access efforts to further establish its Jardiance franchise following the cardiovascular indication, promote Basaglar, and support Trulicity. Already, it appears that Lilly is focusing its resources on a number of priority products – management acknowledged that the company has invested minimally in the promotion of SGLT-2 inhibitor/DPP-4 inhibitor fixed-dose combination Glyxambi (empagliflozin/linagliptin), for example. We’d imagine that the initiation of not one but two large-scale cardiovascular outcomes trials for Jardiance represents further resource pressure on the R&D front. Big picture, the high-profile phase 3 failure of Lilly’s Alzheimer’s drug solanezumab likely had an impact on Lilly’s overall R&D budget as well.

• Management shared that an interim analysis for the REWIND cardiovascular outcomes trial for Trulicity has been completed and the data monitoring committee has recommended that the trial continue as planned. In its 3Q16 update, management had expressed optimism for Trulicity’s chances of demonstrating a cardiovascular benefit, but was carefully to manage expectations for an early termination of the trial due to overwhelming efficacy. In particular, management had emphasized that the number of events thus far for the interim analysis is much lower than the number of events in Novo Nordisk’s LEADER trial for liraglutide, suggesting that the hazard ratio in REWIND would have to be “quite impressive” for such an outcome. Thus, the recommendation of continuation is not altogether surprising, though an early termination for overwhelming efficacy would’ve been a major win for Lilly. As it stands, REWIND is not expected to complete until July 2018. On the other hand, Novo Nordisk’s market-leading GLP-1 agonist Victoza (liraglutide) already has positive cardiovascular outcomes data from the LEADER trial in hand and has submitted the data to the FDA and the EMA. In addition, Novo Nordisk’s once-weekly entrant to the class, injectable semaglutide (approval expected year-end 2017), has also demonstrated a statistically significant reduction in cardiovascular events in the SUSTAIN 6 trial – though these results will likely not support a cardiovascular indication, we imagine that they will nonetheless influence patients and providers. Demonstration of a cardioprotective benefit for Trulicity will be critical for its market prospects going into 2018 and beyond – we’re waiting on the edge of our seats. See our CVOT timeline for an overview of all ongoing trials.
• Lilly also reviewed its impressive list of pipeline achievements in 2016:

Table 1: Lilly 2016 Achieved Pipeline Milestones

5. A key assumption underlying Lilly’s 2017 guidance is that any upcoming US healthcare reforms will not significantly impact pricing or access to medications. In Q&A, CEO Mr. John Lechleiter expressed support for President-elect Donald Trump and, in particular, Vice President-elect Mike Pence. While Lilly management has not yet met with the duo following the election, Mr. Lechleiter shared that he had a “good discussion” with presidential candidate Trump and emphasized that President-elect Trump “understands the role that biomedical innovation has played on progress in this country.” Regarding Vice President-elect Pence, Mr. Lechleiter praised his record as governor of Indiana in supporting biomedical innovation. Overall, Mr. Lechleiter expressed optimism in Lilly working with the new administration to ensure that “all the great science we see emerging translates into products.” On the other hand, many Republican politicians have vowed to repeal the ACA – the President-elect Trump’s pick for Secretary of Health and Human Services Dr. Tom Price authored one of the most comprehensive plans to do so – which could result in as many as 22 million Americans losing health coverage and the ability to pay for prescription medications. The ACA isn’t a perfect policy and questions abound regarding the future of healthcare in 2017 and beyond, but in any case it seems that there will likely be significant demand for Lilly’s discount insulin program if the ongoing shift toward increased patient cost-sharing plans continues and/or if large numbers of patients lose health coverage. Lilly seems confident that a Trump/Pence administration would be a net positive for the company – we have a lot of questions that we’re keeping in mind as we move forward.

Questions and Answers

Q: There are still some concerns around the growth trajectory and pricing in the diabetes space. Could you just help us understand how we should be thinking about that? Certainly 2017 seems like it should be relatively well-established. What are your general thoughts on the opportunity for material growth in the diabetes segment, not just in 2017, but as we then progress into 2018?

A: As we look at 2016, we are clearly having good momentum across regions and across all of our brands. In fact, we are gaining share with every single brand in the key regions where we compete. We’re very pleased with that. Clearly, we do see pricing pressures when it comes to diabetes everywhere, and we know how pronounced those pressures are in the US. Our access for 2017 for our key products is very good. In some cases, we have some improved access. In some other cases, we have some slightly reduced access, like in the case of Humalog. All in all, we do not see a step-change when it comes to pricing in diabetes as we look at 2017.

Q: On pricing, I know you're planning to drive your growth more from a volume standpoint. Could you provide some color on your plans and your philosophy? Is the plan to continue to raise list price in a similar way in frequency and magnitude going forward, or is there going to be a new tone from Lilly?

A: As in years past, we're focused on driving growth for the company through volume and the introduction of new products. That's our key focus. Now, of course, price plays a role, but we're really focused in our decision-making on net price appreciation where we can achieve it, and we have a portfolio that has different dynamics in it.

We have well-established products that are through the end of their life. There, you may see one set of dynamics, different than products in the middle of their life that are well-established and, in many cases, are facing tough competition. There we're really focused on the net price and how we can maximize that. With new products, we’re really trying to drive volume growth, while maintaining the value proposition that we seek to have through what hopefully will be a decade or more long lifecycle.

It's tough to answer your question any more specifically than that. We manage it product by product. We're very focused on net price, but we're even more focused on volume and adoption.

Q: Has President-elect Trump invited you and your peers yet to Trump Tower to have a chat about the future? If that opportunity comes up, what would your key messages be?

A: I did have a chance to visit with candidate Trump in the summer along with some other CEOs representing a cross-section of industries. We had a good discussion. I think he understands the role that biomedical innovation has played in progress of this country and some leading companies in this country. I'm also pleased that Vice President Mike Pence is our outgoing Governor.

As Governor, Pence certainly understood Lilly, understood what makes biomedical innovation tick, the risks associated with that. I think he has a great appreciation of the importance of the life sciences. He initiated the Indiana Biosciences Research Institute with state funding during his term. We look forward to working constructively with the administration and also with key individuals in the House and Senate to make sure that all this great science that we see emerging translates into products are going to help the American people going forward.

Q: Going back to US pricing and diabetes pricing, are you expecting positive net pricing in the US in 2017? Is the no step-change in diabetes pricing true in the DPP-4 inhibitor category as well?

A: Unfortunately, we do not provide product-specific guidance whether it's volume or pricing. Basically the same trends that we have seen playing out are expected to continue into 2017. More plans are in formularies, continued pressures. So it is a continuation of trends. We do not see any type of step change and as I mentioned, as we look across our products, we feel very good about the access level that we have in order to compete.

We have very good access when it comes to commercial across all of our products. Humalog and Basaglar are on the low end, maybe at the 65% access when it comes to commercial plans. Tradjenta and Jardiance have higher access. 90% for Tradjenta, while Jardiance access is in high 80s. In Part D, we also have very good access across our products with the exception of Basaglar, where our access is going to be lower. We are going to be in the high single digits and expect to get more access over time.

Q: Can you elaborate a little bit more on the plants to promote the new Jardiance CV indication and how fast of a ramp are you anticipating in 2017? Based on the SGLT-2 market this year, have any of your longer term views or approaches to Jardiance changed at all, or this really just you needed to get the label and we're going to watch the ramp from here?

A: We have received a strong label for Jardiance in the US based on the EMPA-REG OUTCOME data. We are very excited. We are planning to launch in mid-January with the new indication. As I've shared before, we see two inflection points. This is one of them. And we expect that to be immediate upon us starting promotion. We also believe that treatment guidelines are quite imminent, so we should see them anytime.

-- by Helen Gao and Kelly Close