Memorandum

Lilly 1Q14 – Humalog up 3% to $650 million; Tradjenta up 80% but stumbles sequentially; “FDA action” on empagliflozin expected in 2014 – April 25, 2014

Executive Highlights

  • Global Humalog (insulin lispro) revenue in 1Q14 rose 3% as reported to $650 million, driven by volume growth, partially offset by pricing; Humulin grew 1% to $316 million.
  • Tradjenta (linagliptin) grew 80% as reported to $77 million, and experienced its first sequential decline since 2012 (-12%).
  • The company expects “FDA action” on empagliflozin in 2014, following the agency’s March CRL; empagliflozin/linagliptin FDC filing accepted by the FDA in April.
  • Lilly is dealing with an ongoing lawsuit from Sanofi over Lilly/BI’s insulin glargine, as well as a patient lawsuit over Actos in which Lilly and Takeda were found liable.

Lilly provided its 1Q14 financial update in a call led by President and CEO Mr. John Lechleiter. Although Lilly entered the year with a great deal of optimism (with multiple diabetes candidates under review), the first three months of the year brought a number of challenges for the company. The flagship Humalog (insulin lispro) franchise grew a modest 3% year-over-year (YOY) as reported but fell 11% sequentially (against a challenging comparison) to $650 million. The franchise was slowed by pricing, but helped by an 8-9% increase in volume. Specifically, US pricing was particularly affected by the discount needed to secure a major 2014 contract with Express Scripts. Humulin, Lilly’s human insulin, also delivered modest results: worldwide, the franchise grew 1% YOY to $316 million. Tradjenta, Lilly/BI’s DPP-4 inhibitor, saw a continued slowdown in performance (~80% year-over-year growth), albeit from a growing base.

Lilly and co-defendant Takeda were recently found liable for $3 billion and $6 billion (respectively) in punitive damages in an Actos bladder cancer lawsuit (read our report). We learned that Takeda is challenging its agreement to indemnify Lilly for legal damages and expenses for the case. Sanofi has also sued Lilly over allegations that it and BI’s biosimilar insulin glargine (filed in December) infringes upon Sanofi’s patent protection for Lantus – the move could delay US regulatory action on the candidate by up to 30 months. We learned that Lilly received an FDA complete response letter for the Humalog U-200 KwikPen, in addition to the CRL it received for the SGLT-2 inhibitor empagliflozin in March over deficiencies in BI’s manufacturing facility (read our report). Two phase 1 diabetes candidates were dropped from Lilly’s pipeline in 1Q14, along with a phase 2 candidate for chronic kidney disease. 

On a brighter note, Lilly suggested that it expects FDA action on empagliflozin in 2014, suggesting that the factory issues have been resolved and that a resubmission may occur fairly soon. Additionally, management voiced cautious optimism that the drug should be approved soon in Europe (following the positive CHMP opinion in early April), and announced that the drug was recently approved in Australia under the brand name Jardiance. The company is enthusiastic about the FDA’s recent acceptance of it and BI’s submission of the empagliflozin/linagliptin fixed-dose combination, which has the potential to be the first SGLT-2/DPP-4 inhibitor combination on the market. Management continued to characterize the once-weekly GLP-1 agonist dulaglutide as a product that can expand the GLP-1 agonist market, and guided for a topline phase 3 data release on the novel basal insulin peglispro in 2Q14. See below for our top ten highlights from the call, followed by a selection from the subsequent Q&A session.

 

Results for Lilly’s major diabetes products in 1Q14

Product

1Q14 Revenue in Millions

Reported Growth from 1Q13

Reported Growth from 4Q13

Humalog

$650

2.7%

-11.4%

Humulin

$316

1.4%

-14.4%

Tradjenta

$77

80.5%

-11.7%

Total Diabetes

$1,088

0.3%

-13.1%

Top Ten Highlights

1. Lilly’s insulins had a relatively slow quarter in 1Q14: worldwide sales of Lilly’s flagship Humalog (insulin lispro) franchise rose 3% year-over-year as reported (4% in constant currencies) and fell 11% sequentially as reported to $650 million. The sequential comparison was difficult, as the franchise grew 19% sequentially in 4Q13 – the year-over-year comparison was neither particularly difficult nor easy).

  • In the US, Humalog sales fell 1% YOY and 13% sequentially to $375 million. This was a surprising result, as Lilly had won a major 2014 contract for Humalog with Express Scripts, the largest pharmacy benefit management company in the US (see item #5 in our Letter). Lilly’s press release attributed the US results to lower net effective selling prices and wholesale buying patterns, largely offset by increased demand. During Q&A, management suggested the increase in volume due to the Express Scripts decision was counteracted by the discounting necessary to win that contract. As volume continues to grow through 2014 as Express Script patients switch to Humalog, the franchise could see stronger growth in the US. Regarding “wholesale buying patterns,” management shared during Q&A that inventory effects had an impact in the high single digits, which is remarkably high.
    • The Express Scripts decision and the trend towards single-source formularies was a discussion point during Q&A. Management noted that over 50% of the insulin analog market has gone to preferential formularies, and that it will be important to see how quickly the rest of the market follows suit. Although Lilly would like to take the standpoint of arguing in favor of more formulary choice at every point, the company understandably wants to be competitive when negotiating for single-source formulary contracts.  
  • Outside the US, Humalog sales rose 8% YOY as reported (11% in constant currencies) to $275 million. Sequentially, OUS Humalog sales were down 9%, although against a challenging comparison (4Q13 OUS Humalog sales were up 16% sequentially). The company attributed the relatively strong OUS growth to increased volume, which was partially offset by unfavorable foreign exchange rates.
  • Management shared that the company recently received an FDA CRL for the Humalog U-200 KwikPen, although the company hopes to re-file in 2H14. We have not yet learned the reasons for the CRL, but the short timeframe that the company sees between this CRL and resubmission would appear to indicate that no additional studies are required or any additional studies will be very short.
  • On the bright side for Lilly, although pricing and discounting may have slightly dampened insulin revenue, it appears that volume growth was relatively strong across the board, providing a foundation for further growth. During Q&A, management explicitly stated that there was volume growth of 8-9% worldwide in the company’s insulin portfolio, which was fairly consistent across geographies. The tug of war between volume growth and pricing pressure (due in part to increased formulary selection pressure) is a trend we see continuing into the future.

2. Lilly’s human insulin Humulin grew 1% as reported YOY (3% in constant currencies) to $316 million in 1Q14. Sequentially, worldwide Humulin sales fell 14% in 1Q14 against a challenging comparison (4Q13 worldwide Humulin sales were up 20% sequentially). As with Humalog, Humulin sales were relatively weak in the US, where they fell 5% YOY as reported to $155 million. According to the company press release, this was due to wholesaler buying patterns and lower net effective selling prices, offset somewhat by increased demand. Outside the US, Humulin sales grew 9% YOY as reported to $161 million, driven by increased volume, and adversely affected by foreign exchange. Overall, Humulin’s performance in 1Q14 represented a correction from trends seen in previous quarters: the strong international performance in 1Q14 followed two quarters of weaker ex-US sales (-5% in 3Q13, and -3% in 4Q13), and the weaker US performance followed two successive quarters of strong domestic growth (22% in 3Q13 and 19% in 4Q13).

3. Tradjenta (linagliptin), Lilly/BI’s DPP-4 inhibitor franchise, experienced slowing growth in 1Q14 (albeit from a growing base). However, the product is relatively new, and in absolute terms the numbers still look strong. Worldwide franchise sales rose 80% YOY as reported (85% in constant currencies) to $77 million. Sequentially, Tradjenta sales fell 12% as reported against a somewhat challenging comparison (4Q13 sales rose 35% sequentially). Notably, Tradjenta was responsible for over one half of the growth in Lilly’s overall diabetes portfolio. However, the 80% in YOY growth in 1Q14 was the lowest the franchise has seen since its launch (~500% YOY growth in 4Q12, ~230% in 1Q13, ~320% in 2Q13, ~180% in 3Q13, and ~120% in 4Q13), and 1Q14 was also the first quarter since 2012 in which sales fell sequentially. Of course, as a recently launched product, some attrition in YOY growth rates would be expected (due to a growing base). However, it does appear that Tradjenta is showing signs of the slowdown in the DPP-4 inhibitor class that we have seen in recent quarters (see our 4Q13 Diabetes Industry Roundup).

  • Boehringer Ingelheim’s recently published Annual Report discussed the reimbursement challenges that Trajenta has faced in Germany. As background, Lilly and BI decided not to launch the Trajenta in Germany following a ruling by the German Federal Joint Committee (G-BA) that the drug provided no additional benefit beyond standard care (defined as sulfonylureas), and therefore would be subject to reference (generic-level) pricing. Frustratingly for Lilly/BI (as well as other diabetes companies that received similar rulings), the “no additional benefit” ruling was largely due to the fact that sponsors’ clinical programs did not meet the G-BA’s very narrow requirements, and not because of the actual efficacy data. Although Lilly/BI is conducting additional trials to gain better reimbursement, BI believes that “the damage for a research company in Germany has already been done.” See our report on AZ’s withdrawal of Forxiga in Germany (for similar reasons) for more details and thoughts on the reimbursement situation in Germany.

4. Management suggested (somewhat cryptically) that the company expects “FDA action” on its BI-partnered SGLT-2 inhibitor empagliflozin in 2014, despite the fact that the companies received a Complete Response Letter (CRL) from the FDA in March. The CRL was due to deficiencies at partner BI’s manufacturing facility (read our report). Yesterday, management commented that BI has provided its responses to the FDA following the agency’s 1Q14 re-inspection of the facility. Management declined to comment on exactly when Lilly and BI would re-file in the US, but stated that they continue to expect FDA action in 2014. If the companies are able to resubmit in the coming few months, and are able to take advantage of a shortened review cycle (which we imagine would be likely, given that this was not a data-related issue), then we could see a decision in late 2014 as a possibility. If approved then, empagliflozin would become the third SGLT-2 inhibitor approved in the US, behind J&J’s Invokana (canagliflozin) and AZ’s recently-approved Farxiga (dapagliflozin.

  • Citing the positive CHMP opinion on empagliflozin from last month, management expressed cautious enthusiasm that empagliflozin would be approved in Europe – if approved, Lilly/BI plan for a European launch in 3Q14. In the vast majority of cases, positive CHMP opinions lead to approval by the EMA within a month or two following the CHMP’s announcement. If approved, empagliflozin would become the third SGLT-2 inhibitor approved in Europe (again, behind AZ’s Forxiga [dapagliflozin] and J&J’s Invokana [canagliflozin]).
  • Management shared that Australia has become the first market to approve empagliflozin (Australian brand name: Jardiance).

5. Management highlighted the submission of the empagliflozin/linagliptin fixed-dose combination (FDC) in the US, which the company announced in mid-April (read our report). If approved in this review cycle, “empa/lina” would become the first DPP-4 inhibitor/SGLT-2 inhibitor FDC approved anywhere. During Lilly’s 2014 financial guidance call, management guided for a European empa/lina submission in 2015. Currently, AZ is also aiming to submit a DPP-4 inhibitor/SGLT-2 inhibitor FDC, combining Onglyza (saxagliptin) and Forxiga (dapagliflozin). The company has guided for “saxa/dapa” data in 2Q14 and a submission in 4Q14. The combination of these two drug classes is very exciting, as it combines an insulin-dependent mechanism (DPP-4 inhibition) and an insulin-independent mechanism (SGLT-2 inhibition), which theoretically should yield strong efficacy. The two drug classes are both associated with a low risk of hypoglycemia. The SGLT-2 inhibitor component could confer a beneficial weight effect, although the class’ safety concerns (genital mycotic infections, slight increases in LDL) does slightly “muddy” the cleaner safety profile of DPP-4 inhibitors.

6. We received an update on the recent ruling in the case of Terrence Allen, et al. v. Takeda (regarding Actos and bladder cancer), in which Lilly was a co-defendant – read our report for more details on the initial story. The jury ruled in favor of the plaintiff, awarding ~$1.5 million in compensatory damages plus a whopping $9 billion in punitive damages ($6 billion from Takeda and $3 billion from Lilly). This total will almost certainly be reduced in the appeals process (which both Lilly and Takeda have pledged to pursue), probably to the neighborhood of ~$15 million or less, due to precedent from a Supreme Court ruling that punitive damages should not exceed roughly 10x the magnitude of compensatory damages. Notably, during the presentation, Lilly management shared that Takeda is challenging the stipulation in its indemnification agreement with Lilly that Takeda will be responsible for fully indemnifying Lilly for its losses and expenses with regards to US Actos litigation liability. Although Takeda is currently only challenging its indemnification responsibility regarding this single lawsuit (there are over 7,000 Actos cases against Takeda and, in some cases, Lilly in the US and elsewhere), Lilly’s presentation made it clear that it believes it is entitled to full indemnification in this case (as well as all future cases). The specifics of the two companies’ indemnification agreement has not been made public (we would have expected the companies to have a fairly concrete agreement over who is liable for what), but the way this issue is decided between the companies could set a precedent for further cases.

7. Lilly’s once weekly GLP-1 agonist dulaglutide, which is currently under review in the US and EU, received only a brief mention during the call. Management briefly reminded the presentation attendees that the results of the AWARD-6 phase 3 trial (read our report) showed that dulaglutide was non-inferior to Novo Nordisk’s once-daily Victoza (liraglutide) in terms of A1c lowering; notably, the study’s non-inferiority margin was a fairly wide 0.4%. Management emphasized that dulaglutide is currently the only GLP-1 agonist to have demonstrated non-inferiority against Victoza’s highest dose (1.8 mg) in a phase 3 study. Data from AWARD-6 will be presented at this year’s ADA, along with results from AWARD-.2 (dulaglutide vs. insulin glargine) and AWARD-4 (dulaglutide vs. insulin glargine plus insulin lispro). Later in the call, management expressed enthusiasm at the possibility of receiving approval for dulaglutide later this year, and in Q&A management stated that they are very bullish on the product. 

  • In the once weekly GLP-1 agonist race, the administration protocol and device will likely be a key differentiating factor between agents. In this regard, even though dulaglutide will only be the third agent on the market (if approved in this cycle) behind AZ’s Bydureon (exenatide) and GSK’s Eperzan/Tanzeum (albiglutide), it may lead the field at the time of its launch in terms of ease of administration. Lilly revealed its auto-injector device during its Investor Meeting in October 2013 (read our report); the device is fully automatic, and dulaglutide comes ready-to-use in a preparation that does not require reconstitution. The dulaglutide auto-injector automatically inserts the 29-gauge needle into the skin, injects the drug, and withdraws the needle with the push of a single button, meaning that patients do not have to view the needle. By contrast, the recently released Bydureon pen requires a 15-minute warm-up and reconstitution protocol (read our report). AZ has stated that it is working on a Bydureon suspension and auto-injector, which it plans to file in 2015. Although we have not seen full specifics on the Eperzan/Tanzeum pen, management recently shared in a call following the drug’s US approval that it too requires a 15-minute warm-up and reconstitution protocol (read our report on that call).

8. During Q&A, management commented on the dynamics of the DPP-4 inhibitor, SGLT-2 inhibitor, and GLP-1 agonist markets. The growth in new patient volume for both DPP-4 inhibitors and SGLT-2 inhibitors is above where the company expected it to be. SGLT-2 inhibitors, in particular, are “off to a very good start.” By contrast, the company believes that the GLP-1 agonist market has the potential to expand significantly, but has demonstrated relatively lackluster growth relative to that potential. Management sees dulaglutide as a way to grow the class as a whole, and believes that the company’s goal in marketing should go beyond simply winning patients over from Novo Nordisk’s Victoza and other GLP-1 agonists. 

9. Both of Lilly’s basal insulin candidates were mentioned during the call, albeit briefly. For background, Lilly/BI’s insulin glargine biosimilar was submitted in the EU in mid-2013 (read our report) and in the US in December 2013. Sanofi’s US intellectual property lawsuit has resulted in a temporary pause in the US regulatory process either until the case is resolved in Lilly’s favor, or 30 months after the filing of the lawsuit (which would push potential approval back into 2016). Lilly management reiterated during the 1Q14 call that it does not believe it has infringed upon any of Sanofi’s intellectual property for Lantus (insulin glargine) or associated devices. Even if Lilly/BI’s biosimilar receives regulatory approval in 2014, a launch would be gated by Lantus’ patent protection (which ends in 2015). Merck and Samsung Bioepis together have a biosimilar insulin glargine beginning phase 3 testing (read our report), and Biocon has a biosimilar insulin glargine registered in over ten countries, with a global phase 3 program expected to begin in 1H14 (read our Biocon F3Q14 Report for more details).  

  • Management guided for a topline phase 3 data release on Lilly’s novel basal insulin peglispro (a PEGylated formulation of insulin lispro) in 2Q14, a slight narrowing of previous guidance for mid-2014. We are very eagerly awaiting this data, as phase 2 data on the candidate demonstrated some intriguing potential benefits along with some potentially worrying safety signals. On the benefit side, peglispro’s hepato-selectivity appears to confer a weight benefit vs. other insulins, along with a particularly potent effect to reduce hepatic gluconeogenesis and a possible nocturnal hypoglycemia benefit. However, investigators in phase 2 also noticed imbalances in liver enzymes and triglycerides. The safety of PEGylation as a means to extend the action of insulin has yet to be fully characterized in late-stage clinical testing, making the coming phase 3 data on peglispro particularly worth examining.

10. Disappointingly, we learned of a few diabetes-related pipeline discontinuations that happened during 1Q14. A phase 2 TGF-beta monoclonal antibody for chronic kidney disease was dropped from phase 2 (especially disappointing given the lack of late-stage candidates for chronic kidney disease and the high level of unmet need). Additionally, the company dropped two undisclosed phase 1 small molecules for diabetes. The company’s diabetes pipeline is far from empty, however: Lilly still has a glucagon receptor antagonist for diabetes, a TGF alpha/Epireg monoclonal antibody for chronic kidney disease, and a PCSK9 inhibitor in phase 2. In phase 1, Lilly has four biologics for diabetes (one is oxyntomodulin, a GLP-1/glucagon co-agonist; the other three are undisclosed), one undisclosed small molecule for diabetes, and an undisclosed small molecule for chronic kidney disease. 

Honorable Mentions

  • Lilly reported financial results for some of its other diabetes products. Lilly’s glucagon product rose 11% to $21.6 million in 1Q14. Lilly’s share of Actos (pioglitazone) revenue fell 23% to $11.2 million – $10.8 million of that total was from outside the US.
  • It came up during Q&A that Lilly’s PCSK9 inhibitor (currently in phase 2) may have the advantage of less frequent dosing than other candidates in the field. This would be a much-needed point of differentiation, as a number of players are currently in the PCSK9 inhibitor race. Currently, Amgen’s evolocumab (phase 3) is leading the pack – see our American College of Cardiology Full Report for the first phase 3 data on this exciting new drug class for hyperlipidemia.
  • We learned during a pipeline update from Transition Therapeutics in early April that Lilly plans to begin phase 2 dosing of their GLP-1/glucagon dual agonist in 2Q14. It is possible that this candidate (formerly TT401) could have been renamed LY3053102, although that is speculative for the moment.

Questions and Answers

Q: The insulin price environment obviously has a one-time impact here. Can you give us your thoughts about how you view this environment going forward, particularly in the analog space?

A: When it comes to our overall insulin business, let me provide a bit of broader context. When we look at our overall insulin franchise, we had very good volume growth worldwide. Our volume growth was basically 8%-9% when we look at our insulin franchise, and this volume of growth was solid across all regions based on our ability to be competitive when it comes to our presence in different geographies. Looking at the US, I think it’s important that we recognize that there were two impacts here. There was a net pricing impact of the contract with Express Scripts and other contracts, as well. Additionally, there was a very significant inventory effect regarding wholesalers. That inventory effect was in the high single digits in the US, so that was an important impact.

When we look at our overall demand – and you have access to the script data – it is very clear that we’ve seen a very significant impact when it comes to our share performance and our overall volume performance. Going forward, this is something that we monitor very carefully when it comes to pricing. We now have over 50% of the market that has gone to preferential formularies in terms of analogues. The question is how quickly will the rest of the market go there? I think it’s fair to say that we are fighting to make sure that patients continue to have choice, but, at the same time, we need to be competitive whenever a payer makes a decision that its going to narrow the formulary.

At this stage, it is difficult to make more comments when it comes to looking at the future pricing of insulin. I would say that we do monitor this carefully, and we have become increasingly more sophisticated in our thinking about what is in our best interest both strategically and financially.

Q: Can you speak to how well prepared you are to secure formulary access for your diabetes and oncology assets going forward?

A: When it comes to diabetes, I think all of us know that the payer environment is very complex. It’s challenging, both coming from the decisions that payers are making, as well as the competition that we have. From our perspective, we believe – and we continue to believe –that choice remains extremely important. Now, we clearly see that sometimes this is not an option that we have. In those cases, we do compete for preferential access, in particular when it comes to our insulin portfolio, which is what we are marketing now. As we make the decisions, we do look at both financial and strategic considerations in terms of how competitive we are going to be with different accounts. I would mention that in the case of Tradjenta, the engagement with payers is done through Boehringer Ingelheim.

Q: Could you discuss pricing in the US?

A: As related to the rebates, we did see the impact of the Express Scripts contract – in our diabetes business we did see price deflation rather than price growth on a net basis.

Q: Based on the data that you now have, are you fully confident that you have a differentiated molecule for a novel basal insulin vs. Lantus (Sanofi’s basal insulin)?

A: We have very consistently said that when it comes to our innovative basal insulin peglispro, we would only launch if we truly felt that we could differentiate against Lantus. Now all of our trials are basically against Lantus. We have a number of measures that we are looking at – we have talked about glycemic control. We have also talked about nocturnal hypoglycemia, a better weight profile, and lower use of mealtime insulin with a product of some indications we basically saw in phase 2. Clearly, we also saw some signals with side effects. At this time, I’m just going to ask everyone to wait. We believe that we should be in a position to issue a top-line press release this quarter.

Q: On dulaglutide, you achieved non-inferiority to Victoza in AWARD-6, but if the numerical trend was worse on some endpoint, how will you overcome that obstacle in the marketplace?

A: On dulaglutide, I really cannot comment more than what we have said as part of this press release. We are pleased with the results of AWARD-6, and we’ll have to wait for the detailed disclosure of the data. At this stage, we believe that we have a very competitive product, and we’re very bullish on it.

Q: Could you give us your sense of what you’re seeing with orals, DPP-4 inhibitors, and SGLT-2 inhibitors? Additionally, could you comment on general growth rates and how much SGLT-2 inhibitors are moving ahead of DPP-4 inhibitors and how much is using a combination therapy?

A: First on the market dynamics for the orals, I think we’re seeing very good growth in terms of new patient volumes, when it is taken in combination both DPP-4 inhibitor new patient start and the DPP-4 inhibitor class plus the SGLT-2 inhibitor class. This new patient growth that we’re seeing is slightly above where we expected it to be. We’re very pleased with that. I think that the SGLT-2 inhibitor class is off to a very good start, and it seems that is being adopted very well.

When it comes to the GLP-1 agonists, I think it’s slightly different. We believe that the GLP-1 market could expand in a very significant way, but we have not seen that at this stage. I’ll be very frank: We are counting on dulaglutide to be an enormous catalyst for that growth. I think I shared that while we have basically looked at dulaglutide against liraglutide at the highest dose, our intent of doing that has been to ensure that we get the right price and reimbursement for our product. We are not seeking to switch patients. The big opportunity that we have in this particular case is to ensure that we can expand the GLP-1 agonist class in a very significant way, and once again we see dulaglutide as a pretty important catalyst.

Without going into a lot of detail, payers today need much more differentiation between GLP-1 agonist products than maybe a mealtime insulin. I think that’s also the case for basal insulins, so the formulas for GLP-1 agonists and basal insulins don’t tend to be as narrow as mealtime insulins. In the case of orals, formulas today are not as narrow. That is clearly a risk going forward, but it is not like the case of the mealtime insulins where you may have just exclusively one product in the formulary. In most of the formularies for orals, there tend to be more than one product in the formulary.

Q: I was hoping to get a quick update on your PCSK-9 antibody program. Could you clarify whether or not your antibody might be able to be dosed less frequently than all the other competitors out there – something like one quarterly?

A: As a reminder, we’re in the middle of the phase 2 study. We expect better results of that study in the second half. The purpose of the study is really to better elucidate the dosing schedule of the medicine, but I think it’s safe to say that we believe that these can make a significant difference in cardiovascular risk – Lilly PCSK-9 may have the benefit of an extended dosing schedule. How long and what we would actually decide to do if we proceed with the medicine is to be determined.

--by Manu Venkat, Hannah Martin, and Kelly Close