Memorandum

Lilly 4Q15 – Humalog up 10% YOY to $799 million; Trulicity and Tradjenta continue to drive growth; Modest market share gains for Jardiance – January 28, 2016

Executive Highlights

  • Overall diabetes portfolio sales in 2015 totaled $4.98 billion, up 6% from 2014. 4Q15 diabetes portfolio sales totaled $1.4 billion, up 13% YOY and 13% sequentially, a strong finish.
  • Flagship product Humalog (insulin lispro) sales rose 10% YOY to $799 million and were up 13% sequentially. Trulicity (dulaglutide) and Tradjenta (linagliptin) were also highlighted as contributors to 2015 growth – the former had revenues 25x as high as in 2014, while the Tradjenta franchise grew 9%.
  • Jardiance (empagliflozin) franchise sales declined 5% sequentially to $14.6 million in 4Q15. Full-year sales totaled $60.2 million, up from $10.1 million in 2014. Lilly attributed the revenue decline to a one-time inventory adjustment and stressed that the product’s market share has steadily increased post-EMPA-REG OUTCOME.

Lilly provided its 4Q15 update this morning in a call led by CEO Mr. John Lechleiter. Total sales for the company’s diabetes portfolio rose 13% year-over-year (YOY) as reported to $1.42 billion in 4Q15. That’s pretty great! Diabetes portfolio sales in 2015 totaled $4.98 billion, up 6% from 2014. Sales of  flagship rapid-acting insulin Humalog (insulin lispro) rose 10% YOY as reported (up 15% in constant currencies) to $799 million in 4Q15. 2015 sales totaled $2.8 billion, up 2% as reported (8% in constant currencies) from 2014. GLP-1 agonist Trulicity (dulaglutide) and DPP-4 inhibitor Tradjenta (linagliptin) were highlighted as contributors to 2015 growth. Trulicity sales reached $113 million in 4Q15 and totaled $249 million for all of 2015. Tradjenta sales of $103 million rose 23% YOY as reported (up 29% in constant currencies) in 4Q15. Combined Tradjenta sales for 2015 reached $357 million, up 9%.

Combined sales of SGLT-2 inhibitor Jardiance (empagliflozin) and SGLT-2/DPP-4 inhibitor Glyxambi (empagliflozin/linagliptin) declined 5% sequentially to $14.6 million in 4Q15. Full-year sales totaled $60.2 million, up from $10.1 million in 2014. While the sequential decline was quite surprising at first glance, management attributed it to a one-time inventory adjustment and stressed that market share has steadily increased following the EMPA-REG OUTCOME results. Still, compared to J&J’s Invokana franchise that had revenue of over $350 million for 4Q15 and $1.3 billion for 2015, the numbers seemed low – we do think they reflect a changing environment, however, where patient and provider choice are trumped by formulary status. As well, this also may reflect the belief of many that the EMPA-REG OUTCOME results will eventually lead to a class effect although that is not that case at present, since this is the only SGLT-2 CVOT that has reported.  Jardiance received a significant amount of attention during the call, with discussion ranging from the expected label additions to the effect of the positive results on prescribing patterns. Notably, Lilly said it would be disclosing the renal data from EMPA-REG OUTCOME sometime very soon. Otherwise, there were few updates on the R&D front this quarter, but the company has a number of exciting diabetes-related candidates in its pipeline. Management also provided extensive commentary on the hot topic of drug pricing. Read on below for an item-by-item overview of highlights from the call, followed by Q&A.

Table 1: 2015 Financial Results for Lilly’s Major Diabetes Products

Product

2015 Revenue (millions)

Year-Over-Year Reported (Operational) Growth

Humalog

$2,842

2% (8%)

Humulin

$1,307

-7% (-1%)

Tradjenta

$357

9% (21%)

Jardiance/Glyxambi

$60

-

Trulicity

$249

-

Basaglar/Abasaglar

$11

-

Glucagon

$121

15% (16%)

Actos

$28

-32% (-18%)

Total Diabetes

$4,975

6%

Table 2: 4Q15 Financial Results for Lilly’s Major Diabetes Products

Product

4Q15 Revenue (millions)

Year-Over-Year Reported (Operational) Growth

Sequential Reported Growth

Humalog

$799

10% (15%)

13%

Humulin

$359

-9% (-4%)

13%

Tradjenta

$102

23% (29%)

10%

Jardiance/Glyxambi

$14.6

161%

-5%

Trulicity

$113

1003%

53%

Basaglar/Abasaglar

$7

-

92%

Glucagon

$25

-2% (-1%)

-44% 

Actos

$6

-34% (-22%)

-6%

Total Diabetes

$1,424

13%

13%

 

Financial Highlights

  • Total sales for Lilly’s diabetes portfolio increased 13% year-over-year (YOY) as reported to $1.42 billion in 4Q15 while total sales for 2015 rose 6% as reported to $4.98 billion. This was against an easy comparison as sales were essentially flat in 4Q14. By product, GLP-1 agonist Trulicity (dulaglutide) continued to account for the lion’s share of growth in 4Q15 (49%) and in 2015 overall (58%) – indeed, it seems to be doing well in an expanding market. Humalog (insulin lispro) also contributed significantly to growth in 4Q15 (33%), though its sales only accounted for 14% of the overall 2015 growth. DPP-4 inhibitor Tradjenta (linagliptin) contributed 9% and Jardiance (empagliflozin) and Abasaglar (biosimilar insulin glargine) each contributed 4% to 4Q15 growth. For 2015 overall, Jardiance contributed 12%, Tradjenta contributed 7%, Lilly’s glucagon formulation contributed 4%, and Abasaglar contributed 3%. US performance was significantly stronger than ex-US performance for both 4Q15 and 2015. In 4Q15, US diabetes sales rose 27% YOY while ex-US sales fell 4% YOY. For 2015 overall, US diabetes sales rose 19% YOY and ex-US sales fell 9%. We assume some of the US strength reflects favorable pricing for various payers although the negativity outside the US also reflects the currency impact. Indeed, management once again noted the negative effects of foreign exchange rates on ex-US sales numbers, a recurring theme throughout 2015 quarterly updates. Sequentially, sales for the portfolio rose 13% as reported in 4Q15 against a tough comparison - in 3Q15, the diabetes portfolio experienced double-digit sequential growth of 10%. Prior to 3Q15, Lilly’s diabetes portfolio had not experienced sequential growth since 2013. See the tables above for an overview of 2015 and 4Q15 financial results for Lilly’s major diabetes products.
  • “We believe that it’s bad policy and ultimately, for the people affected, would be bad medicine.” During Q&A, CEO Mr. John Lechleiter offered extensive commentary on the proposed drug pricing reforms for patients dually-eligible for Medicare and Medicaid. Mr. Lechleiter made it clear that Lilly is putting pressure on policymakers to maintain the status quo with regards to drug pricing, saying “we continue to build arguments and to attempt to maintain support for this [reform] not to happen.” On the broader drug pricing debate, he noted that there have been efforts to provide context for drug prices to “make sure that the views that ultimately translate into policy remain balanced and factual over time.” He pointed to CMS projections that forecast the rate of increase in drug prices through 2024 will fall in line with the rate of increase in overall healthcare costs. He emphasized that while medications are often expensive, downstream complications from disease are even more expensive (this is true in spades). He also drew the connection between pharmaceutical revenues and downstream research funding to cure Alzheimer’s disease or cancer, or prevent complications of diabetes.
    • This isn’t the first time Lilly has pushed back against the political rhetoric over drug prices. In the company’s 3Q15 update, Mr. Lechleiter stood by the “story” industry has to tell. In particular, he noted that the net effective price increase for medicines in the US was only 0.7% in 2Q15. He attributed this to many medications becoming generic and the large rebates companies provide to payers. He also highlighted the advances in the diabetes, hepatitis C, and cancer fields in recent years and expressed optimism about the industry’s ability to help people. At JPM 2016, management emphasized the importance of keeping the “right policies” in place at the legislative level and expressed confidence that policies on drug prices will not be significantly reformed. We think the confidence might be overplayed – but we certainly agree with the importance of R&D being funded.
    • As the campaign season heats up, “Big Pharma” has been increasingly on the defense over drug prices. Most relevant to Lilly, many patients and providers in diabetes have been increasingly frustrated with rising insulin prices for some time. Broader public furor over drug pricing came to a boiling point with the Turing Pharmaceuticals controversy this fall, though many companies have hastened to characterize founder Martin Shkreli as an outlier who does not represent the industry as a whole. We hope not! JPM 2016 also saw protests over Gilead’s high pricing for its hepatitis C drugs, which has been a topic of controversy for several years. Mr. Lechleiter asserted that Lilly is sympathetic and empathetic to patients unable to afford their medications and pointed to Lilly’s prescription assistance programs as a remedy (albeit one only applicable to those with commercial insurance). On the other hand, Dr. Irl Hirsch (University of Washington, Seattle, WA) has previously criticized such programs as creating pent-up demand for products, which weakens payers’ negotiating position in formulary access and rebating discussions. While the issue is undeniably complex, it’s clear to us that the status quo isn’t working for many patients and innovative solutions that bring policymakers, pharmaceutical companies, providers, and patients to the table are sorely needed – beyond the platitudes, it will obviously be increasingly important to demonstrate value for products – and value is clearly defined differently depending on the cohort one is in. For more on this issue, see our 2015 + 2016 Reflections.

Humalog

  • Humalog (insulin lispro) sales rose 10% as reported (15% in constant currencies) to $799 million in 4Q15; full-year sales rose 2% as reported (8% in constant currencies) to $2.84 billion. 4Q15 growth was against a relatively easy comparison as Humalog sales were flat in 4Q14. As with the diabetes portfolio as a whole, US sales (up 21%) rose significantly stronger than ex-US sales (down 6%). That said, the US growth was against an especially easy comparison as a negative adjustment in 4Q14 resulted in a 2% decline in sales. Management suggested that the overall 2015 Humalog sales growth of 9% is a better indicator of the product’s performance – that was fairly impressive to hear since the franchise is now nearly $3 billion. Management highlighted Humalog’s performance as a key driver of the overall strong growth in the US diabetes portfolio. On the ex-US side, management noted in Q&A that Humalog has done well in emerging markets, growing 15% in 2015. Humalog sales in emerging markets accounted for 37% of total ex-US Humalog sales in 2015. Sequentially, worldwide Humalog sales rose 13% overall (16% in the US and 9% ex-US). This is the first time Humalog sales have achieved double-digit sequential growth since 2013. We’re curious to better understand which emerging markets are driving the 15% growth.

Figure 1: Humalog Sales (1Q12-4Q15)

  • Management shared that Humalog is gaining share in “key geographies,” and pointed to the Humalog U200 KwikPen (launched at the end of 3Q15) as a driving factor. The Humalog U200 KwikPen is the first concentrated mealtime insulin to reach the US market and its popularity is evidence of the growing demand for concentrated insulins as insulin resistance increases along with the obesity epidemic.
  • Echoing similar remarks from 3Q15, Lilly attributed the US sales growth more to higher realized prices than to increased volume. When asked about rebates in Q&A, management shared that prices have remained stable or increased for most diabetes product categories. We’re surprised that Lilly has managed to increase Humalog prices in an increasingly tough payer environment with growing public and political criticism of rising insulin prices and drug pricing overall. The higher pricing has presumably occurred in the context of high rebates that Lilly accepted in exchange for exclusive Express Scripts formulary access since 2014.
  • Lilly’s 2016 Financial Guidance included an expectation for flat pricing and continued volume growth for Humalog this year. The statement on pricing confirms our suspicions that the price increases of the past few years would eventually become unsustainable. We are curious to see whether the company’s prediction of volume growth for Humalog in 2016 proves correct, particularly given recent statements from Mr. Conterno suggesting that overall mealtime insulin growth has slowed as GLP-1 agonists and SGLT-2 inhibitors gain popularity. Volume is still on the side of Humalog however – there are so many more patients being diagnosed, progressing toward more aggressive therapy, and staying older.

Humulin

  • Sales of Lilly’s human insulin Humulin fell 9% YOY as reported (down 4% in constant currencies) to $359 million in 4Q15; full-year sales fell 7% (-1% in constant currencies) to $1.31 billion. Sales rose 13% sequentially against a relatively easy comparison of flat sales in 3Q15. While US sales were flat, ex-US sales fell 20% in 4Q15. For 2015 overall, US sales increased by 7% while ex-US sales decreased by 21%. As is the case with Humalog, Lilly attributed the comparatively strong US performance mostly to higher prices and shared that demand for Humulin has actually decreased. As in previous updates, Lilly pointed to the loss of a Humulin tender in Brazil and unfavorable foreign exchange rates as major factors behind the poorer ex-US performance.

Figure 2: Humulin Sales (1Q11-4Q15)

  • Lilly highlighted last week’s FDA approval of the Humulin U500 KwikPen. While the 4Q15 update did not discuss the product in detail, we learned last week that the aqua-colored pen will hold 1,500 units of insulin and dial in five-unit increments. Lilly management shared with us that increased demand for concentrated insulin due to the rise of insulin resistance drove development of the Humulin U500 KwikPen. Indeed, in the company’s 3Q15 update, management pointed to demand for the U500 formulation of Humulin in the US as a primary driver behind the overall franchise’s performance. Lilly expects to launch the product at the beginning of 2Q16.

Trulicity

  • Lilly’s patient-friendly GLP-1 agonist Trulicity (dulaglutide) continued to shine with $113 million in sales in 4Q15, up a whopping 53% sequentially; sales for its first full year on the market reached $249 million, up 25x the 2014 revenue of $10 million. By geography, in 4Q15 US sales accounted for $92 million and ex-US sales accounted for $20 million. For all of 2015, $208 million of Trulicity’s revenue came from the US and $41 million from ex-US regions. Lilly highlighted Trulicity’s volume growth as a factor driving the company’s overall revenue, particularly in the US. 4Q15 sales for Trulicity were more than 11 times greater than those in 4Q14, its first quarter on the market. Management has previously pointed to Trulicity as a driver of overall growth of the GLP-1 agonist class. In its 3Q15 update, Novo Nordisk shared IMS Health data indicating that US volume growth for the GLP-1 agonist class had rebounded to almost 20% by August 2015. The same data showed that Trulicity held 7% market share based on total prescriptions as of August 2015, the same market share as GSK’s Tanzeum (albiglutide). However, Trulicity sales in 3Q15 already far outstripped Tanzeum by value – Trulicity sales accounted for 7% of the total GLP-1 agonist market while Tanzeum sales accounted for a mere 2%. Trulicity sales had also overtaken AZ’s Byetta (exenatide twice-daily) and Sanofi’s Lyxumia (lixisenatide), making Trulicity the third largest GLP-1 agonist by sales market share (behind Novo Nordisk’s class-leading Victoza [liraglutide] and AZ’s Bydureon [exenatide once-weekly]). We eagerly await the upcoming updates from other GLP-1 agonist manufacturers to get a sense of how Trulicity’s sales compare to the other agents with another quarter under their belts.  Novo Nordisk will be the next to report with an update on Wednesday, February 3. Lilly also hasn’t ruled out the possibility of price increases for Trulicity, which may help its market position.

Figure 3: Trulicity Sales (4Q14-4Q15)

  • In prepared remarks, Lilly highlighted the AWARD-8 poster presentation at IDF 2015. The study found that Trulicity as an add-on to a sulfonylurea is more effective than a sulfonylurea alone, as expected. We continue to hear a lot of SFU negativity, also as expected, unsurprising given weight and hypoglycemia that are associated with the class.

Tradjenta

  • Sales of Lilly/BI’s DPP-4 inhibitor Tradjenta (linagliptin) rose 23% YOY as reported (29% in constant currencies) to $102 million; full-year sales rose 9% as reported (21% in constant currencies) to $357 million. As usual, Jentadueto (linagliptin/metformin) sales were included in this total. The sales growth was against an easy comparison as sales fell 5% YOY in 4Q14, due largely to a 35% decline in US sales as part of an overall slowdown in the DPP-4 inhibitor class in the US. Sequentially, Tradjenta sales rose 10% from $93 million in 3Q15. Management pointed to Tradjenta as another bright spot driving overall revenue in 4Q15. By geography, $38 million in Tradjenta sales came from the US and $63 million came from ex-US markets. Management noted that Tradjenta is doing “very well” in emerging markets. US performance was significantly stronger (43% growth) than ex-US performance (13% growth), though ex-US sales were against a much tougher comparison (in 4Q14, ex-US sales grew 22% while US sales fell 35%). In any case, we’re glad to see Tradjenta resuming its upward trajectory.

Figure 4: Tradjenta Sales (2Q11-4Q15)

  • Lilly’s presentation slides noted that a linagliptin/metformin XR combination is under regulatory review in the US with a decision expected in 2016. This information was first shared during the company’s 2016 Financial Guidance call.
  • As the latest entrant to the DPP-4 inhibitor market, Tradjenta held the smallest share of the market (6%) as of 3Q15. That said, Lilly management previously called Tradjenta the fastest-growing DPP-4 inhibitor (obviously easier from a lower base) and by the end of 3Q15 it looked poised to overtake Takeda’s Nesina (alogliptin) in terms of sales. The other DPP-4 inhibitor manufacturers will provide their 4Q15 updates next week.
  • Mr. Conterno recently suggested that SGLT-2 inhibitor class growth has had more of a negative impact on sulfonylureas than on DPP-4 inhibitors. This is consistent with Lilly’s statement in 3Q15 that it does not intend to change its messaging or strategy for Tradjenta following the EMPA-REG OUTCOME results. However, we assume the rise of SGLT-2 inhibitors has contributed at least in part to the DPP-4 inhibitor class slowdown in recent years and that EMPA-REG OUTCOME could accelerate those trends even without explicit marketing from Lilly/BI along those lines.

Jardiance

  • Combined sales of Lilly/BI’s Jardiance (empagliflozin) and Glyxambi (empagliflozin/linagliptin) declined 5% sequentially to $14.6 million in 4Q15. Full-year sales totaled $60.2 million, up from $10.1 million in 2014. 2015 was Jardiance’s first full year on the market, and Glyxambi has been on the market in the US for approximately ten months. This sequential revenue decline was quite surprising at first glance given the positive publicity around the EMPA-REG OUTCOME results, but management explained during Q&A that this was due to a one-time adjustment in inventory assumptions. The company indicated that without that adjustment, sequential revenue growth would have been consistent with the ~30% sequential growth in total prescription share (TRx). While this is reassuring, it is still clear that the commercial impact of the results has been modest at best so far. Lilly has indicated in the past that it expects the major inflection points to occur following label additions and updates to treatment guidelines.

Figure 5: Jardiance Franchise Sales (3Q14-4Q15)

  • Jardiance’s prescription share has risen slowly but steadily post-EMPA-REG OUTCOME. Lilly Diabetes head Mr. Enrique Conterno indicated that new-to-brand share (NBRx) for the franchise within the SGLT-2 inhibitor class is now 26%, up from 15% before the release of the topline results and even up slightly from 25% as of Lilly’s 2016 Financial Guidance call in early January. As mentioned above, Mr. Conterno also noted that TRx for the franchise rose ~30% sequentially in the quarter, though he did not disclose specific figures. Any TRx gains are especially notable, as our impression after the Financial Guidance call was that there had not yet been any significant impact on that metric. Mr. Conterno did suggest during that call that the NBRx gains for Jardiance likely foreshadowed future TRx gains. J&J reported in its 4Q15 update this week that TRx for its market-leading SGLT-2 inhibitor Invokana (canagliflozin) in the US type 2 diabetes market excluding insulin and metformin essentially held steady at 6.5% in 4Q15.
    • The EMPA-REG OUTCOME results appear to have had more of an impact on prescribing patterns for endocrinologists than PCPs. Lilly did not provide a breakdown between the two segments in this call but noted in 3Q15 that Jardiance’s NBRx share among endocrinologists had jumped from 21% to 31% after the results were released. J&J indicated that TRx for Invokana fell slightly among US endocrinologists but rose among PCPs in both 3Q15 and 4Q15. While there may clearly be other factors underlying these trends, they do provide some indication that endocrinologists have responded to the results more quickly than primary care providers, as one might expect.
  • Lilly highlighted the FDA’s recent acceptance of its supplemental NDA for the EMPA-REG OUTCOME results. Management also reminded investors that the FDA will review the data within a standard time frame of 10 months, rather than a priority review of six months as the company had previously hoped. Lilly has also submitted the data to EU regulatory authorities, and we assume that timeline will be similar or slightly delayed compared to the US. Lilly has repeatedly indicated that it expects these label additions to have a significant impact on Jardiance’s performance. We are inclined to agree, though we do wonder if expectations could be over-inflated by the time the additions occur. We expect that the impact of the label updates will depend largely on how persuasive they are to payers, who increasingly have the real decision-making power when it comes to choosing among new drugs.
  • Management highlighted the additional renal outcomes and heart failure data for Jardiance presented over the past few months. Management noted that topline data presented at the American Society of Nephrology’s Kidney Week demonstrated significantly improved renal outcomes with Jardiance vs. standard of care. Full results will be published later this year. While EMPA-REG OUTCOME was not a dedicated renal outcomes trial, this data could potentially be very impactful for clinical practice and should certainly whet the field’s appetite for results from the CREDENCE renal outcomes trial for Invokana in 2020. The company also highlighted data presented at AHA showing that Jardiance’s benefits on heart failure hospitalization and mortality were consistent regardless of baseline heart failure status. Full heart failure results were published in the European Heart Journal just two days ago. In addition to the subgroup analysis, the results showed a benefit of Jardiance on other related outcomes including death from heart failure and all-cause hospitalization.
    • During Q&A, management suggested that a future trial of Jardiance in patients with heart failure but not diabetes could be a possibility. Management declined to offer any specifics in response to a question on this but confirmed that Lilly is “actively exploring and thinking about important opportunities” for Jardiance.
  • According to Lilly’s market research, physicians are fairly evenly split on whether the EMPA-REG OUTCOME results are a class effect or specific to Jardiance. While emphasizing that it is hard to gauge broad provider opinion without the ability to promote the results, management suggested during Q&A that approximately half of physicians believe the benefit is a class effect and half believe it is a Jardiance effect. Management stressed that Jardiance is the only SGLT-2 inhibitor with hard evidence of a cardiovascular benefit and predicted that future label additions will have a significant impact on provider perception. However, Lilly also expressed optimism regarding the future of the SGLT-2 inhibitor class as a whole, noting that the class has returned to growth after a brief slowdown during the height of the DKA controversy in mid-2015. This assessment is consistent with our sense that the EMPA-REG OUTCOME results would primarily boost the class as a whole, with some marginal added benefit for Jardiance.
    • For its part, J&J expressed strong confidence during its 4Q15 update that the results would be interpreted as a class effect. The company even made the argument that the recently updated AACE/ACE guidelines treat the benefit as a class effect, but we are more inclined to agree with Lilly’s statement that the results had only a minimal impact on the recommendations in that update. We continue to assume that AACE/ACE and other professional organizations will hedge their bets and make no serious changes to prescribing recommendations until other SGLT-2 inhibitor CVOTs report results.
  • Lilly largely played down concerns about DKA with the SGLT-2 inhibitor class, noting that there was absolutely no signal of increased risk in EMPA-REG OUTCOME. Management did not specifically respond to a question about whether the company should be concerned about class-action lawsuits over DKA but stressed that the incidence in EMPA-REG OUTCOME was very low and consistent between groups. We expect that AACE/ACE’s statement recommending no major change in prescribing patterns based on the available evidence has likely provided reassurance that the risk is quite low and manageable in type 2 diabetes. DKA still appears to be more of a significant concern in type 1 diabetes, where we believe further study is needed to better understand who is most at risk and how the risk can best be managed.
  • Jardiance remains in phase 3 for type 1 diabetes. The EASE-2 (52 weeks; n=720) and EASE-3 (24 weeks; n=960) studies are both currently recruiting participants and expected to complete in the spring of 2017. Both trials have a primary endpoint of change in A1c after 26 weeks. Secondary endpoints include time in range (70-180 mg/dl) measured by CGM, change in body weight, blood pressure, and total daily insulin dose, and incidence of hypoglycemia. EASE-3 is also investigating change in interstitial glucose area under the curve and variability using CGM. Surprisingly, incidence of ketone-related adverse events was not listed as a secondary endpoint, but we assume it is being assessed. We are glad that Lilly chose to proceed with a type 1 diabetes program for Jardiance despite the unexpected concerns and hope these robust studies can provide a clearer indication of the product’s risk/benefit profile in this population.

Glyxambi

  • Lilly confirmed that Glyxambi has been submitted in Europe. The submission was included in Lilly’s list of key events in 2015, and a regulatory decision is expected to be a key event in 2016. The product otherwise received little commentary during the call except in the context of total Jardiance franchise performance. This has been the case since Glyxambi was first launched in March 2015, and the combination certainly does not appear to have had a major impact on sales considering the modest growth for the Jardiance franchise over the past year. We find this somewhat surprising given how highly anticipated this class was as it moved through phase 3 and hope to hear more specifics on how the launch has progressed, particularly in terms of reimbursement. We also wonder whether there are any plans to submit the EMPA-REG OUTCOME data for inclusion in Glyxambi’s label after it is approved for Jardiance. The other SGLT-2/DPP-4 inhibitor combination on the horizon, AZ’s saxagliptin/dapagliflozin, has been delayed by a Complete Response Letter in the US, but management expressed confidence at JP Morgan this month that the concerns should be straightforward to address. The combination was still on track for an EU regulatory decision in 2H16 as of AZ’s 3Q15 update.

Synjardy

  • Lilly highlighted the approvals of Synjardy (empagliflozin/metformin) as a key event in 2015. Synjardy was approved in the EU in May and in the US in August. It is the third SGLT-2 inhibitor/metformin combination to reach the market after J&J’s Invokamet/Vokanamet (canagliflozin/metformin) and AZ’s Xigduo (dapagliflozin/metformin). Lilly does not appear to be reporting sales for Synjardy yet, as its financial workbook specifies that Jardiance sales include Glyxambi but does not mention Synjardy. Management shared in the 2016 Financial Guidance call that the EMPA-REG OUTCOME data had been submitted for addition to Synjardy’s label in the US and would be submitted soon in the EU.
  • Lilly/BI’s empagliflozin/extended-release metformin combination should be submitted in the US in 2016. This combination will likely be third to market as well: AZ’s Xigduo XR is already on the market and J&J’s canagliflozin/metformin XR combination was submitted in November 2015. Extended-release metformin is not approved in the EU.

Basaglar/Abasaglar

  • Lilly/BI’s biosimilar insulin glargine Abasaglar (Basaglar in the US) is ramping up reasonably well with $7.3 million in sales in 4Q15, up 92% sequentially from $3.8 million in 3Q15. Abasaglar has launched in several ex-US markets but has yet to reach the US. Lilly highlighted the recent FDA approval for Basaglar as a key event in 2015. Under the terms of the US patent lawsuit settlement with Sanofi, Lilly will be able to launch Basaglar in the US on December 15, 2016 under a royalty-bearing license. The company has previously stated that it can enter into contract negotiations with payers in the meantime.
  • In prepared remarks, Lilly also noted that it has submitted an 80-unit pen formulation of Basaglar for FDA approval. Presumably, this formulation would be most useful for patients with lower insulin requirements and may be targeted toward patients with type 1 diabetes. The currently marketed pen contains 100 units of insulin.
  • In Q&A, management noted that Abasaglar is priced at a 10%-20% discount relative to Lantus in the markets where it has already launched. The lower bound of this range is lower than the range of 15%-20% that we’ve previously heard. It appears that Lilly has been able to negotiate prices with less discounting, which may be worrisome for those who look to biosimilar insulin glargine as a welcome reprieve from high insulin costs. That said, Lilly has consistently maintained that it intends to market the biosimilar as it would a new branded product, so the low discounting is not overly surprising. We assume the discounts may be greater in the US than in Europe given the relatively higher cost of Lantus and other analog insulins.

Other Products

  • Sales of Lilly’s glucagon formulation fell 2% as reported to $25 million; full-year sales grew 15% to $121 million. Sequentially, sales fell 44% in 4Q15 against a tough comparison (sequential growth was 66% in 3Q15). As usual, the vast majority of the product’s 4Q15 sales were in the US ($23 million vs. 2 million in ex-US sales).

Figure 6: Glucagon Sales (1Q12-4Q15)

  • Lilly’s revenue from Actos (pioglitazone) sales totaled $6 million in 4Q15, declining 34% YOY as reported; total 2015 revenue from Actos was down 32% to $28 million. Actos sales have been declining for some time following the loss of patent exclusivity and concerns about heart failure, bone fractures, and bladder cancer. Despite an observational study published in JAMA that found that there was no significant increase in bladder cancer risk associated with Actos, our sense is that the damage is largely done and that Actos’ performance is unlikely to turn around going forward. Takeda’s decision to settle thousands of lawsuits stemming from the controversy for ~$2.4 billion will hopefully allow both Takeda and Lilly to put this behind them and move forward.

Figure 7: Actos Sales (1Q11-4Q15)

Peglispro

  • The termination of basal insulin peglispro was one of the few negative items in Lilly’s 2015 overview. The product received little discussion during the call other than acknowledgment of the discontinuation. Lilly announced the decision in December, framing it as part of an effort to focus R&D resources on other assets – it goes without saying it would be part of the R&D effort had safety issues not arisen. Indeed, though there were high hopes for this insulin at one time due to weight benefits and the ability to better mimic physiological insulin delivery, it had been plagued by safety concerns, primarily changes in liver enzymes and lipids, ever since phase 3 results were reported in late 2014. Lilly was still quite bullish on peglispro as recently as its ADA Diabetes Business Update in June, but we think the decision to discontinue was understandable – the chances of FDA approval were likely slim in the context of a competitive market of basal insulins with no safety issues – as we say, the bar is high.

Other Pipeline Updates

  • There were no new updates on Lilly’s earlier-stage diabetes pipeline, which remains fairly crowded. Lilly’s intranasal glucagon acquired from Locemia in October remains in phase 3 and should be submitted within the next 15 months according to the previously stated timeline. The company’s phase 2 pipeline includes the ultra-rapid-acting BioChaperone Lispro (partnered with Adocia) and a GLP-1/glucagon dual agonist. The three ongoing phase 1/2 trials of BioChaperone Lispro were all expected to complete this month, though they have not been updated on ClinicalTrials.gov since September. Lilly also has a PCSK9 inhibitor for LDL lowering in phase 2; as of 3Q15, the company was still evaluating its options for what would be at least a fourth-to-market product (in a very big market – presumably given Lilly’s vast product portfolio, having a product like this would be useful in terms of bundling). Lilly’s phase 1 pipeline includes two undisclosed candidates for diabetes, and an addition candidate for hypoglycemia. Management also confirmed that Lilly is considering diabetic nephropathy as one potential expanded indication for its rheumatoid arthritis drug baricitinib but acknowledged that the path to approval would be more arduous than for other potential indications like psoriasis or dermatitis. That was so interesting – kidney disease remains a major unmet need.

Questions and Answers

Q: On Jardiance sales, I would have expected to see some sequential improvement given all the positive publicity. Could you talk about what’s going on there?

A: You are absolutely right. Our US Jardiance revenue is not consistent with the sequential TRx growth that we're observing for the overall franchise, which is basically 30%. I had mentioned that before we disclosed the topline results for EMPA-REG OUTCOME, the franchise was capturing about 15% of the new patients in the SGLT-2 class. As we look at the latest weeks, it's capturing over 26% of the new patients. The reason for the lack of consistency is that we had a one-time adjustment due to changes in assumptions when it comes to the accrual for the inventory that we have in the channel. Without that accrual, you would have seen sequential revenue growth consistent with the TRx growth.

Q: In terms of the label that you expect to get from the FDA for Jardiance, what are the scenarios that you see? What is a base case scenario? What is the best case scenario? And what do you think we need to see to reach consensus numbers by 2020?

A: We have now shared that the FDA has designated this to be a standard review, which basically means that we would be launching in the second half of this year. I'm not in a position to speculate in terms of how the label would read. But we clearly are bullish on the consistency and strength of the data. And we do believe that when the FDA takes action, this will have a very significant impact on the overall trend of Jardiance and the class in general.

Q: What are you hearing from physicians in terms of interpreting this data as a class effect or applying just to Jardiance?

A: We are not promoting the new label, so it's difficult to say what the reaction from the broad physician population would be. But we do conduct some targeted market research. And it is pretty clear to us based on the research that about half of the physicians believe that this has been proven to be a class effect. Let's keep in mind, there's no evidence of that. And half believe that this might be a Jardiance effect. So I think the jury is clearly out for the other products, but we do have the evidence for Jardiance. And we think that is going make a huge difference when we have the label.

Q: Is this class-action lawsuit against the SGLT-2 inhibitor class something we need to be paying attention to?

A: We are seeing actually strength in the overall class. I would say that the biggest events we saw impacting the overall growth of the class were the warnings about diabetic ketoacidosis. We saw stabilization somewhere in September–October when the EMPA-REG OUTCOME data came out. And now we're basically seeing class growth. So I do not believe in any way that – my bullishness on the overall growth of the class continues to be very, very high.

In the EMPA-REG OUTCOME study as well, the incidence of diabetic ketoacidosis was very low and consistent across the arms, so that’s another data point to add to the discussion for that particular potential side effect.

Q: J&J made comments about changes in guidelines to include the SGLT-2 inhibitor class. I know you’ve spoken in the past about changes in guidelines. Can you separate the two and discuss how meaningful one may be over the other?

A: I really cannot comment on other companies' statements. But what I can say is that we today do not see any significant changes in the treatment guidelines for type 2 diabetes coming from any of the major societies or associations, whether it's ADA or EASD. Clearly, AACE issued new guidelines, but they really did not fully incorporate the EMPA-REG OUTCOME data as they were looking at those guidelines in early January. I am pretty confident that different societies will have a thorough review of the different treatment guidelines. And I expect, as I have mentioned before, that that will happen once we have a label change in the US or in Europe.

Q: Is the nephrology data included in the CV outcomes dataset or would it be potentially something that is added after regulatory action on the CV outcomes dataset for EMPA-REG?

A: As part of our submission, we really focused on the CV outcomes. We will be disclosing the renal outcomes that we saw in the very near future. There is a publication that we are targeting. We think that the results are also very impressive, so we look forward to the possibilities that may give us in the future.

Q: If Donald Trump is elected, would that impact your long-term margin guidance? That’s not a serious question. But I’ve enjoyed following your comments over time on the drug pricing debate. On the last call, you said that the industry was preparing to defend itself. Has that effort happened yet, and how do you see this playing out? What do you think will actually happen over the next two to four years, if anything?

A: There have been, certainly since the last time we discussed this, a number of initiatives aimed at putting prices in perspective and providing the kind of information that we believe policymakers and key advocacy groups need to have to make sure that this debate remains balanced, and that this industry, which we all hope in the future can provide cures for things like Alzheimer's, cancer, and other diseases, remains strong and viable in this country. I think that when you look at it from that aspect, as the old saying goes, facts are stubborn things.

I think when you look at the comparison year that in many cases is being used as ammunition in this debate, 2014, as all of you know, was a breakout year in terms of pricing, driven by the launch of the hepatitis C drugs, which in some cases cure up to 90% of the people that take those medicines, and the warehousing of patients waiting to receive those medicines. If you go back and look at 2009 to 2013 – this data is from CMS – the price increases in that period significantly lagged overall healthcare inflation. We felt the pain, obviously, by the fact that we lost patents on four of our biggest products during that period. CMS projections out to 2024 show that, based on everything we know and everything they can see, the rate of increase in drug prices is going to fall roughly within the same line as the rate of increases in overall healthcare costs. So yes, I think that's one side of the equation.

The second side of the equation is the consumer aspect. It's great to talk facts and figures with policymakers. But if they're hearing from consumers that they got walloped with a huge copay or that they're not able to access medicines they need, obviously we're sympathetic and empathetic to that and tuned into that with various patient assistance programs, copay assistance, etc., but also a continuing push to ensure that everybody in this country has access to quality insurance. Medicines, after all, help prevent disease in many cases or treat disease and avoid higher downstream costs. This is well documented. I think we've got to keep that in perspective as well.

In terms of what we can expect after the election, I’d love to talk to anybody that thinks they can predict the nomination, much less the election right now. But I think this is going to continue to be an issue or it's going continue to be on the radar screen because of demographics. To some extent, as people get older, they're going to be more and more reliant on our medicines. I think we've got to continue to demonstrate that there's value in the medicines we bring. Yes, they can be expensive, but disease is a lot more expensive, and we need to emphasize the fact that low-cost generics, which account for over four out of five prescriptions today, ultimately represent the legacy of these investment efforts on our part and provide the American consumer with tremendous value. So I think you can assume the industry is going to continue to maintain an active dialogue with each of the candidates and to work across party lines to make sure that the views that ultimately translate into policy – and that's what we've really got be focused on – remain balanced and factual over time.

So while I think we are and should be concerned about the rhetoric, I think the facts of the underlying story remain very strong. And I think in surveys of consumers that we've done, the interest is just as keen in what we can do to prevent or slow down the progression of diseases like Alzheimer's, how we incrementally take more steps in treating and curing cancer, and even with diabetes, what can we do there to go from in essence slowing down the progression of the disease today to perhaps someday abating the complications altogether? Clearly we're working on all of those things, and I think that's what people expect us, the research-based industry, to do. And we've got to distinguish the research-based industry from other aspects of this price debate.

Q: Should we expect Lilly to initiate a trial of Jardiance in non-diabetic heart failure patients this year? When is the earliest you could expect data for that indication?

A: Clearly, the data for empagliflozin when it comes to heart failure from the EMPA-REG OUTCOME study was very impressive. There's not much that I can share now other than to say that we are actively exploring and thinking about this very important opportunity for the brand.

Q: Can you give us some color on the Humalog strength in the quarter?

A: We are very pleased with the performance of Humalog on a global basis. The product grew 15% in local currencies in 4Q15. I think this is remarkable given all of the new launches that we have ongoing, so we are very pleased. We are gaining share in most key geographies. A key driver for that is the launch of our Humalog U200 KwikPen, which is adding growth to this important brand for us. When we look specifically at the US, which grew 20% for the quarter, we have to keep in mind that we had a negative adjustment in 4Q14, so this is an easier comparison. That adjustment was about 10 points. So it's probably better to look at the entire year as a better reflection of the overall growth for the product in the US market.

Q: On baricitinib, when do you expect to make and communicate the phase 2 progression decisions for the diabetic nephropathy indication? What’s your current thinking on the potential there?

A: As you know, we have a number of interesting phase 2 initiatives to explore future indications for baricitinib (currently being developed for rheumatoid arthritis). I would say there's a high priority for the company to work through those and make lifecycle decisions this year on baricitinib. Diabetic nephropathy is one of them. The data look strong, as presented last year at the American Diabetes Association, but I would point out two things that I think are weighing on our minds. One is the way in which these studies are conducted under the current regulatory guidance is not the simplest path to market. The studies can be long. Patient selection can be difficult, and recruitment rates historically in the industry are very low for these studies. And we need to then balance what looks like strong clinical data against other opportunities we have right now with the molecule in psoriasis. We’re studying atopic dermatitis and we're looking at several other immunology indications, so it’s to be determined. I would expect we'll exit the year with lots of clarity on the path to phase 3 for baricitinib line extensions.

Q: With respect to biosimilar Lantus, could you discuss the pricing and the adoption ramp that you expect ex-US? How aggressively are you competing with that to enhance your diabetes franchise commercially?

A: We don't share our future expectations for our products or forecasts, but we do know what some of the pricing is in the different markets. They are public, at least the listed prices. In general, we see our biosimilar, Basaglar, is 10% to 20% below Lantus. It's difficult to say what the exact price difference might be because there are sometimes rebates that are given that are not public. But what I can share is that we're pleased with our performance. Each country has its own dynamics and we need to see how this all is going to unfold. We expect this is going to be an important product for us that clearly complements our overall diabetes portfolio.

Q: I wanted to ask about one of the more likely US pricing reform debates coming up with dual-eligibles. I know in the past you talked about the impact being similar to the Affordable Care Act, but could you characterize Lilly’s potential extra exposure given the insulin franchise, where pricing is particularly different in the Medicaid vs. Medicare patient populations? And could you speak more broadly about pharma’s defense against what might be a more likely potential reform over the next couple of years?

A: I think in terms of exposure, we're significantly less exposed than we were when we had the big neuroscience psychiatric medical business here. Clearly we have some exposure; it’s not nearly what it was, but I think the number you're talking about is still correct in terms of approximating the impact to the industry of the fee and the other measures that are part of the Affordable Care Act. I think you can assume that on our policy agenda this is at the top of the list. And we believe that it's bad policy and ultimately for the people affected would be bad medicine. And we continue to build arguments and to attempt to maintain support for this not to happen.

-- by Helen Gao, Emily Regier, and Kelly Close