Memorandum

Lilly 2016 Financial Guidance – EMPA-REG data submitted for label additions; Jardiance NBRx up to 25%; Flat pricing for Humalog in 2016 – January 5, 2016

Executive Highlights

  • Lilly/BI are in the process of submitting the positive EMPA-REG OUTCOME results for Jardiance (empagliflozin) for inclusion in product labels.
  • New-to-brand (NBRx) share for Jardiance is now 25%, up from 21% as of Lilly’s 3Q15 update and 15% before the release of the topline EMPA-REG OUTCOME results. We’re surprised it isn’t higher.
  • Lilly expects flat pricing but continued volume growth for Humalog (insulin lispro) in the US in 2016.

Lilly provided its 2016 financial guidance today in a call led by CEO Mr. John Lechleiter. While the call focused primarily on company-wide financial expectations, it included several insights related to Lilly’s diabetes portfolio. Below we include our top five highlights from the call, followed by a transcript of diabetes-related Q&A.

1. Lilly/BI are in the process of submitting the positive EMPA-REG OUTCOME data to regulatory authorities for inclusion in the label for Jardiance (empagliflozin) and Synjardy (empagliflozin/metformin).

2. New-to-brand (NBRx) share for Jardiance is now 25%, up from 21% as of Lilly’s 3Q15 update and 15% before the release of the topline EMPA-REG OUTCOME results.  

3. Lilly expects flat pricing but continued volume growth for Humalog (insulin lispro) in the US in 2016.

4. Lilly’s prepared remarks included an overview of key expected pipeline milestones in 2016. Highlights include results from the phase 3 MARLINA study of Tradjenta (DPP-4 inhibitor linagliptin) in patients with renal impairment and an EU decision for Glyxambi (empagliflozin/linagliptin – a fixed dose combination DPP-4 /SGLT-2 inhibitor).

5. Lilly Diabetes head Mr. Enrique Conterno suggested that SGLT-2 inhibitor class growth has had more of a negative impact on sulfonylureas and insulin than on DPP-4 inhibitors.                                

Top Five Highlights

1. Lilly/BI are in the process of submitting the EMPA-REG OUTCOME data to regulatory authorities for inclusion in product labels. Lilly Diabetes head Mr. Enrique Conterno shared that the companies have submitted the data for Jardiance (empagliflozin) and Synjardy (empagliflozin/metformin) in the US. In the EU, data has been submitted for Jardiance and will be submitted soon for Synjardy. Lilly listed the addition of these results to product labels as one of the company’s key expected milestones in 2016. During Q&A, Mr. Conterno highlighted the label additions as one of two likely inflection points for Jardiance growth following EMPA-REG OUTCOME. The other expected inflection point is the incorporation of the results into treatment guidelines, which we do not expect will officially occur in any meaningful way until the other SGLT-2 inhibitor CVOTs report results in 2017-2019. The latest version of AACE/ACE’s type 2 diabetes treatment algorithm, just released today, mentions a “possible benefit” of SGLT-2 inhibitors on CVD but makes few significant changes to past recommendations.

  • There was no mention of label additions for Glyxambi (empagliflozin/linagliptin) based on the EMPA-REG OUTCOME results. Perhaps the companies could be waiting for EU approval of the combination, expected this year, before submitting the data. It is also possible that regulatory authorities would want to wait for CV outcomes data for Tradjenta (linagliptin) in 2018 before making any updates to Glyxambi’s label, though we would be surprised if that were the case.

2. New-to-brand (NBRx) share for Jardiance is now 25%, up from 21% as of Lilly’s 3Q15 update and 15% before the release of the topline EMPA-REG OUTCOME results. While these increases are not huge, it is encouraging for Lilly/BI that they have continued to rise throughout 4Q15 even without any direct promotion of the EMPA-REG OUTCOME results. Lilly management had noted during the 3Q15 update that Jardiance’s NBRx share among endocrinologists had jumped from 21% to 31% post-EMPA-REG OUTCOME, and we wonder whether this trend has continued as well. In Q&A during this call, Mr. Conterno argued that NBRx share is the best leading indicator of the trends for Jardiance and suggested that this growth foreshadows a rise in total prescription (TRx) share in the near future. He did not provide specific TRx figures for Jardiance, but the implication was that EMPA-REG OUTCOME has not yet had a significant impact. We are very curious to learn how much of Jardiance’s bump is coming from patients new to the class vs. those switching from other SGLT-2 inhibitors. Competitors J&J and AZ have (not surprisingly) suggested that the positive results will be interpreted as a class effect, but several speakers at this fall’s Cardiometabolic Health Congress said they would support switching patients from other SGLT-2 inhibitors to Jardiance based on the results.

3. Lilly expects flat pricing but continued volume growth for Humalog (insulin lispro) in the US in 2016. During prepared remarks, management highlighted continued Humalog growth as a key expected tailwind for Lilly in 2016. When pressed during Q&A on whether this growth is expected to come from price increases, Mr. Conterno stated that pricing is expected to be flat and that “most” of the revenue growth going forward will come from increased volume. We are frankly surprised that Lilly has been able to increase Humalog’s price in the US in the past few years given the challenging payer environment and rising public frustration over insulin costs. We assume the company has also had to agree to increased rebates, particularly in order to win an exclusive 2014 Express Scripts formulary contract over Novo Nordisk’s NovoLog. 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 – we suspect it’s also not being able to continue the extent of price increases of past years, though we do understand there was a price increase for both Humalog and Novolog in late 2015.

  • Management suggested that price increases may still be possible for other products like Trulicity (dulaglutide). Trulicity has had a very strong launch trajectory in its first year on the market (bringing in $74 million in sales in 3Q15, up 66% sequentially), which should help Lilly gain leverage in payer negotiations. We also imagine that the company will face pressure from investors to increase Jardiance’s price once the EMPA-REG OUTCOME data is included in the label, if it has not already.

4. Lilly’s prepared remarks included an overview of key expected pipeline milestones in 2016. While the company’s diabetes news flow will likely not quite match the very impressive pace of the past two years, there are still a number of “events to watch” in 2016.

Table 1: Expected Lilly 2016 pipeline milestones

Potential phase 3 data disclosures

MARLINA study of Tradjenta in patients with renal impairment

Potential regulatory submissions

Empagliflozin/metformin XR (US)

Potential regulatory actions

Label additions for Jardiance CV outcomes data (US and EU)

Empagliflozin/linagliptin FDC (EU)

Linagliptin/metformin XR (US)

5. Mr. Conterno suggested that SGLT-2 inhibitor class growth has had more of a negative impact on sulfonylureas and insulin than on DPP-4 inhibitors. When asked about the impact of the EMPA-REG OUTCOME results on DPP-4 inhibitors or other diabetes drug classes, Mr. Conterno spoke more broadly about the effects of SGLT-2 inhibitor class growth in the past few years. He suggested that the sulfonylurea class has been the main “loser” following the introduction of SGLT-2 inhibitors, which he believes (and we agree) is a healthy trend for patients. He argued that insulin has been impacted to a lesser extent as SGLT-2 inhibitors have helped patients delay insulin initiation or lower insulin requirements. By contrast, he argued that the impact on DPP-4 inhibitors has been minimal. 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.

Questions and Answers

Q: What are the assumptions for the change in the rate of growth for Jardiance if the CV outcomes data are part of the label?

A: We do not provide specific product forecasts, but I can share what we’ve seen so far and what we expect the inflection points will be. Since the topline press release, we have seen new to brand share go up for the Jardiance family from about 15% to basically 25%. That’s a full 10 points of new to brand share. We expect two inflection points, one when it comes to the label change and the next one any time new treatment guidelines will be issued. I can confirm that we have submitted the CV outcomes data for both Jardiance and Synjardy in the US. In the EU we have submitted the Jardiance data and we expect to submit Synjardy soon.

Q: You call out Humalog as growing in 2016. Can we infer that you expect that you’ll have positive pricing power in the US in diabetes in 2016?

A: In the US market for Humalog, we basically expect flat pricing. When we look all the way back through 2009, while we see some differences from year to year, on average we’ve seen about one to two percentage points of pricing leverage in an average year. Most of the revenue growth that we will see going forward is going to be due to volume growth. I will make a distinction between insulin and some of the other diabetes products, but insulin in particular is basically stable. When it comes to Trulicity and some of the other products, we do have a little more pricing leverage.

Q: On M&A, can you talk about the sorts of things you’re considering and bracket the upper limit of deals you might be looking at?

A: What you should expect to see from Lilly going forward is behavior that’s consistent with what you’ve seen from us historically. We’ve been very focused on accessing our early-stage R&D opportunities, as exemplified by the recent intranasal glucagon deal that we signed with Locemia … If you think about bigger business development opportunities, if we can find assets that may come through an M&A route that we believe would complement our organic footprint and the therapeutic areas of focus we’ve laid out, we will absolutely be interested in those. What we’ve made clear is that we’re not looking for the “transformative deal” or the mega-merger deal because we’re not convinced that is what we need and is consistent with our strategy going forward. So you should see us looking at early-stage R&D deals, and if they’re later stage, there will still be things that complement our therapeutic area priorities.

Q: You mentioned the loss of exclusivity for multiple products in emerging markets as a headwind, and you then said 75% of emerging markets have already lost exclusivity. What are the incremental changes in 2016 relative to where we were?

A: …We’re pleased to see that Humalog, Forteo, and Tradjenta are still growing mid-teens in the emerging markets. So we want to make sure we invest in those brands and accelerate the growth while ensuring that we invest in new products, primarily Jardiance, where we’ve seen very good uptake in most of the emerging markets where we’ve launched, as well as Trulicity. But keep in mind, there is a lag between products being launched in the US and Europe and Japan vs. the emerging markets. There’s about a year or year and a half lag between those products being made available in the emerging markets. But we’re very pleased with the initial uptake and there are a few more markets that will launch the new products.

Q: On Jardiance, you mentioned the impact on NBRx. When do you expect to see more impact on the TRx side?

A: I used NBRx because it’s the best leading indicator of what’s happening right now. Clearly, it takes some time for that to translate into TRx. But given the significant gap we have today between our NBRx share and our TRx share, we should expect significant acceleration on total prescription share market trends in the very near future.

Q: What has been the impact of the Jardiance data on other classes, particularly DPP-4 inhibitors?

A: We’ve seen minimal impact on the DPP-4 inhibitors with the growth of the SGLT-2 inhibitor class. The main class that has been impacted – and I think this is a very healthy trend for all brands in diabetes – is the SU class, which still has a very significant share of the overall diabetes market. That’s the main loser as a class. To a lesser extent but also impacted is insulin. We’ve seen less insulin use as SGLT-2 inhibitors are now used on top of insulin, either replacing or delaying insulin or in some cases just reducing overall insulin requirements.

 

-- by Emily Regier and Kelly Close