Lilly 4Q13 – Strong quarter for Humalog; Sanofi lawsuit over biosimilar insulin glargine; dulaglutide & Victoza H2H – January 30, 2014

Lilly presented its 4Q13 and full-year 2013 financial results in a call this morning – diabetes took a bit of a backseat to Alzheimer’s during today’s call. Humalog achieved sales of $734 million in 4Q13, up 19% from 4Q12; full-year Humalog sales rose 9% to $2.6 billion. Tradjenta (linagliptin) growth remains strong, but is certainly slowing due to the higher base (ad also likely the overall DPP-4 inhibitor market slowdown too): 4Q13 year-over-year sales grew 118% year-over-year to $87 million and 35% sequentially. Later in the day, we learned that Sanofi has filed a lawsuit against Lilly for it and Boehringer Ingelheim’s (BI) insulin glargine biosimilar, which is currently under regulatory review in the US and EU — this could hold back FDA approval by up to 30 months. Management also chimed in on its once-weekly GLP-1 agonist candidate dulaglutide (revealing that the head-to-head trial with Victoza should report results by the end of 1Q14), its novel basal insulin peglispro (which, for the first time, Lilly has said it would drop if it doesn’t meaningfully differentiate itself from Lantus – topline data disclosure is expected mid-2014), its partnered SGLT-2 inhibitor empagliflozin (for which it remains optimistic due to Invokana’s success), and on the chaotic diabetes reimbursement environment.

Included below is a table summarizing the performance of Lilly’s major diabetes products, followed by our top five highlights from the call and selected Q&A.

Full-year 2013 and 4Q13 sales of major products

Top Five Highlights

1. Lilly’s flagship Humalog (insulin lispro) franchise had its best quarterly sales growth since 2011; Tradjenta’s (linagliptin) continues to experience quite robust growth, but certainly at a slightly slower pace due to the increasing base (and the slowdown of the rest of the DPP-4 inhibitor class may also be playing a role). Lilly achieved Humalog sales of $734 million in 4Q13, a rise of 19% both year-over-year (YOY) and sequentially against easy comparisons (sales were down 7% YOY in 4Q12, and down 2% sequentially in 3Q13). Growth from 4Q12 was stronger domestically (31%) than ex-US (6%). Full-year Humalog sales rose 9% to $2.6 billion. Humulin sales grew 8% YOY in 4Q13 to $370 million; full-year 2013 sales rose 6% to $1.3 billion.

• Tradjenta’s robust growth (albeit from a relatively small base) from 2012 into mid-2013 shows signs of slowing, though it is hard to tell. The franchise achieved total worldwide sales of $87 million in 4Q13, up from $65 million in 3Q13, $55 million in 2Q13, and $43 million in 1Q13. Full-year 2013 Tradjenta sales totaled $249 million. The product was barely mentioned during the company presentation and was not mentioned on the company slides. During Q&A, management acknowledged that the DPP-4 inhibitor class is being hit by the SGLT-2 inhibitor class, but forecast that DPP-4 inhibitors would return to robust growth in the longer-term future “due to underlying demographics and market dynamics” – this seemed rather vague to us, but we do think that each class will ultimately find its niche – DPP-4 inhibitors for people less willing to trade “nuisance” side effects for slightly greater efficacy and weight loss, and SGLT-2 inhibitors for people who are willing to take the risk of side effects for a better efficacy and a great change of losing weight..

2. Today was a big news day for Lilly/BI’s biosimilar Lantus (insulin glargine) candidate (currently under regulatory review), but perhaps not entirely in the way that Lilly management had intended: We learned a few hours after the call that Sanofi has filed a lawsuit against Lilly to defend its intellectual property for its original (and market-leading) Lantus, along with Lantus SoloStar pen (read Sanofi’s brief press release). Sanofi alleges the infringement of four patents, but did not disclose which specific patents. During Lilly’s call (before the suit was announced), management commented on the possibility of a lawsuit. Lilly notified Sanofi of its 505(b)(2) biosimilar application around the time that it publicly announced the candidate’s submission, which started the timer on a 45-day window within which Sanofi could initiate legal action. As such, we do not expect that Lilly management is particularly surprised today to hear about the lawsuit. This lawsuit triggers a “stay” on the drug’s FDA approval that could last up to 30 months, which would push the drug’s potential approval back into 2016.  

• As background, Lilly/BI had filed their biosimilar insulin glargine in the EU in mid-2013, and filed a 505(b)(2) new drug application (NDA) with the US FDA in December 2013. Lilly management’s guidance for the timeline of potential approval has been somewhat fluid. Initially, based on the submission dates and the expectation of a standard review cycle, we expected a decision in 2014 in both the US and EU. The slides from today’s call indicated “potential regulatory action” for the candidate (region unspecified) in 2014. However, during Lilly’s 2014 Financial Guidance Call earlier this month, management specified that a final approval and launch would not take place until after 2014 – we presume this means that the FDA could make a preliminary approval decision in 2014 but that Lilly would not be able to market the drug until the patent issue is resolved with Sanofi.  
• During Q&A, a question was asked about the delivery device for the biosimilar insulin glargine. Management declined to respond with details other than to say that the company is exploring “multiple options.” However, we now wonder whether Lilly’s proposed device (which we imagine was included in the submission) bears a great deal of similarity to Sanofi’s SoloStar pen, given that the SoloStar was mentioned in the lawsuit. 
• Also during the call, Lilly disclosed that it had submitted its biosimilar glargine for regulatory approval in Japan. It confirmed previous guidance for data disclosure from ELEMENT1 and 2 (phase 3 trials for the candidate) in 2014.

3. Lilly’s phase 3 novel basal insulin peglispro was not forgotten amidst all of the attention on Lilly/BI’s biosimilar glargine. The presentation slides confirmed that a 2014 regulatory submission is possible. During Q&A, management disclosed that the first phase 3 trial is currently wrapping up, and that the company plans on issuing a press release in mid-2014 with topline data once a few more studies are completed.

• We learned that Lilly will likely not file peglispro if clinical data do not demonstrate meaningful clinical differentiation from Lantus. We hope that the phase 2 results showing weight loss instead of weight gain, and a smoother PK/PD profile (resulting in less hypoglycemia) are born out in phase 3. Early data indicates that peglispro may act preferentially on the liver rather than the periphery (similar to endogenous insulin from the pancreas). Management reiterated today that Lilly sees peglispro as a potentially very substantial opportunity. See our Lilly 3Q13 Report for more details on peglispro’s phase 2 data and phase 3 IMAGINE program.

4. Management responded to growing anticipation about the AWARD-6 trial, which compares Lilly’s once-weekly GLP-1 agonist dulaglutide (currently under regulatory review) with Novo Nordisk’s Victoza (liraglutide). The study was not designed to help substantially with the product’s registration, but is widely seen as having major implications for the product’s reimbursement and access. Lilly’s primary goal for the study is to demonstrate non-inferiority, although it will investigate potential superiority if non-inferiority is met. The study has been completed, and management today guided for a press release with topline data by the end of 1Q14.

• Notably, we learned today that the company doesn’t expect that dulaglutide will demonstrate superiority over Victoza, based on the known profiles of the two drugs. However, management argued that non-inferiority in AWARD-6 will be enough to satisfy Lilly’s goals and open up opportunities for better pricing and reimbursement since the once-weekly dosing gives it an advantage over once-daily Victoza, and the simplicity of the automatic injection device (first unveiled at Lilly’s 2013 Investor Community Meeting in October) will give the product a leg up over AZ’s once-weekly Bydureon, as long as its efficacy is non-inferior to Victoza’s. Management also mentioned that Victoza 1.8 mg currently holds a substantial premium over AZ’s Byetta and Bydureon (exenatide) — we are not sure if this suggests that Lilly sees that level of pricing as an attractive level to match, or whether they believe they have room to undercut Victoza.

5. During Q&A, management opined on the future market dynamics in the SGLT-2 inhibitor and DPP-4 inhibitor arena. The company is pleased with the uptake of Invokana in the US (see our J&J 4Q13 Quick Take for more details), especially given the early uncertainty on the class’ prospects for success. Management also expressed excitement at the chance to bring the first SGLT-2 inhibitor/DPP-4 inhibitor fixed-dose combination (FDC) to market (management has previously stated that a US submission in 1H14 is possible for its empagliflozin/linagliptin FDC, placing it ahead of AZ’s Forxiga/Onglyza, which AZ expects to submit in 4Q14 in the US). The company has observed a slowdown in the DPP-4 inhibitor class in recent month, as evinced by the 4Q13 performance of its own Trajenta (linagliptin) as well as AZ’s Onglyza (see our BMS 4Q13 Quick Take for more details). However, Lilly management foresees there will be robust future growth in both the SGLT-2 inhibitor and DPP-4 inhibitor classes in the longer-term future due to underlying demographics and market dynamics.

• Management had no further updates on the warning letter BI received regarding the manufacturing facility for empagliflozin. Lilly first disclosed news of the warning in its 2014 Financial Guidance Call earlier this month. Lilly had stated that BI is working to resolve the issue, and we hope this does not adversely impact the approval or commercialization timeline for the drug.

Honorable Mentions

Lilly does not appear to be concerned by the recent trend in the reimbursement environment towards single-source formularies. In September, we learned that Lilly won a major insulin contract with Express Scripts (a pharmacy benefit management company) from Novo Nordisk through a discount on pricing. However, during the call, management emphasized that highly controlled formularies are the minority of the business in the US. Although certain major plans have switched to a single source in the past few years, overall share has not swung by more than a few percentage points. Management also pointed out that from a payer perspective, switching to a single source or switching products on or off the formulary every few years risks pushing patients away. Lilly’s overall position, which they echoed today, is to press for dual access among the products in their portfolio.

There were no major updates to Lilly’s early-stage diabetes pipeline. One phase 1 biologic was dropped from the pipeline, but a new small molecule for diabetes was added to phase 1. The company continues to have a glucagon receptor antagonist in phase 2, a PCSK9 inhibitor in phase 2, two biologics for chronic kidney disease in phase 2, seven candidates for diabetes in phase 1 (one is an oxyntomodulin, the rest are undisclosed), and one phase 1 candidate for chronic kidney disease.

Questions and Answers

Q: Assuming that Sanofi does sue Lilly in the next few days over the filing of the insulin glargine biosimilar, do you believe that they will enjoy the full 30-month stay or does Lilly believe a quicker resolution can be gained?

A: Should Sanofi sue us, they would enjoy the full benefit of the 30-month stay. At this point it's premature to speculate on how that may play out. We have, as is required, notified Sanofi of the acceptance of our filing with the FDA and that's where things stand as of today. So there may be more developments in the future, but it would be premature to comment at this time.

Q: Regarding the biosimilar for Lantus, can you confirm that you've actually filed a paragraph IV and notified the branded company?

A: With regard to the insulin glargine product and the paragraph IV certification notification to Sanofi, we can't give specific dates, but in terms of process our 505(b)(2) filing did then also include a paragraph IV certification. Once it was clear to us that FDA had accepted our filing for review, that then triggered our 20-day window to provide notice to Sanofi. And then once we provide notice to them, they have the 45-day period upon which they can initiate a suit. I think it's safe to assume that by the time we issued our press release on December 20, saying that the FDA had accepted the filing for review, it would have been around that kind of timeframe that we would have made that communication to Sanofi. So if you're trying to figure out where we are in the process, that may help you to tighten that timeframe down a little bit.

Q: For your two insulins, the novel basal and biosimilar insulin glargine, would you characterize what you think the bigger commercial opportunity would be with either of those over the next five years?

A: With the insulin glargine product, we see ourselves as one of the few companies that are very well positioned, given our expertise in the space, our ongoing commitment to developing devices over time, and our strong physician relationships. We believe this is a very important opportunity for us to establish a foothold in the basal insulin segment, which we haven’t really been participating in up until this point. The commercial opportunity for the novel basal insulin could be substantial but it will depend on the clinical profile we see in the phase 3 trials. As we have shared in previous meetings, there were some very encouraging signs that we saw in phase 2 with the profiles for reduction in A1c, the weight profile, and reduction in uptime insulin usage relative to the current standard of care basal insulin.  If these results are confirmed in the phase 3 trials, then that could lead that product to a very substantial opportunity.

We've also been very clear that, if this product cannot be substantially differentiated from Lantus, it's more likely than not that it would not be launched and therefore our efforts would be focused solely on the insulin glargine product. So again, until we see the data it's very difficult to know. We do have trials for the novel basal insulin that began to wrap up late last year. A number of them end over 1Q14, 2Q14, and 3Q14. We would hope to have enough of those trials in-house by about the middle part of the year, so stay tuned for a top line press release later this year.

Q: On AWARD-6 [26-week trial comparing Lilly’s dulaglutide to Novo Nordisk’s Victoza], is non-inferiority enough to maximize the potential of that product?

A: We have received a number of investor questions and analysts' questions over the last month or so around whether we're attempting to show non-inferiority or whether what we're really hoping and attempting to show is superiority. We intend to show non-inferiority to the highest dose in a forced titration trial of Victoza. There have been two other competitor molecules that have run similar trials and have failed to show non-inferiority. We believe that showing non-inferiority to the high dose of Victoza will be a win and would achieve our goal for the study.  If we do achieve non-inferiority, we would certainly test for superiority, but that seems unlikely given the profiles of the two molecules as we know them.

I also think that the presentation of the product - the once weekly format, the straightforward nature of the injection and injection device - when paired with solid non-inferiority data across a spectrum of comparators, will give us a leg up.

One of the main reasons for doing the study was essentially from a pricing, reimbursement, and access perspective. Essentially, there is a base price level defined by Bydureon, Byetta, and the 1.2 mg dose of Victoza. This means that the 1.8 mg dose actually carries a 50% premium. So showing non-inferiority to that particular dose, we believe, would give us a better position as we negotiate with payers downstream.

Q: What is the most granular timing you can offer on AWARD-6?

A: For AWARD-6 timing, we do intend to issue a press release of the top line results of this study, whatever the outcome is, in the first quarter of the year and hopefully present that data in a medical meeting in the middle of the year.

Q: We've seen some of these national formularies moving to a single covered product in any given category, not just Tier 2 or 3. Can you tell us what percent of market in your view is impacted by those national formularies? And once a provider selects a preferred product, how difficult is it going to to displace that product?

A: I don't think we have a percent of covered lives on the national formulary with someone like ESI, for example, but that is only a portion of their business. A better way to answer your question would be to point out that these highly controlled formularies are a minority of the business in the US. The best evidence for that is that, in the last two or three years, when you’ve seen some of the larger plans switch to a single source for one of the insulins, you’ve seen market shares moderate by maybe a couple of percentage points for meal time insulin. These are sizable swings, but it's not like a majority of the market is moving at any one point in time.

In terms of switching, there certainly are difficulties. Payers, from our experience, don't do this lightly. I think it is unlikely that they would be switching every two or three years from one product to another. We believe that having multiple products available in a class is in the best interest of both patients and payers. That way they can maintain a competitive dynamic and not significantly inconvenience patients that they are trying to get into their plans. We’ll continue, as we have in the past, to argue for dual access among the products that we are involved in selling.  Where dual access is possible, that’s great, if not, then we’ll have to make some decisions in order to have our products available in the US market.

Q: On diabetes, how do you see this market playing out with respect to the SGLT2s and the DPP-4s? Are you hearing anything behind the scenes on how Invokana is doing? Are the SGLT2’s moving in front of DPP-4’s?

A: For the SGLT-2, we've been actually quite pleased to see the kind of uptake that Invokana has experienced in the U.S. market in particular. There was a lot of discussion prior to the approval and launch of that product that many observers were thinking this product class was not going have a significant adoption by physicians. So I think we're pleased as observers who could be coming relatively soon with one of our own and also potentially the first to have a combination product of a DPP-4 with an SGLT-2. But there seems to be pretty good acceptance for this mechanism and the efficacy and tolerability safety profile that at least this first entrant carries. So we're looking forward to coming into the marketplace ourselves as well. The DPP-4 market growth has slowed in part due to the uptake of canagliflozin (Invokana). We do expect long term that with the underlying demographics and market dynamics, we will continue to see robust growth in both of these areas of the oral diabetes class. So we're looking forward to participating in both these classes going forward.

Q: Following up on the SGLT-2s, are there any updates on the implementing factory issues you discussed on your last call? And when can we expect a resolution?

Q: In terms of the timing on the manufacturing issues and the re-inspection that BI will be having pursuant to their warning letter, there are no updates at this point in time. As we mention on the guidance call, there is a re-inspection scheduled for the first quarter, and we also have the potential action date for the submission that we have from empagliflozin. And so we'll keep you guys appraised as the situation evolves, but there are no updates from earlier this month.

Q: First, regarding peglispro, do you have any new data either from Phase 3 or other ongoing studies in-house? And if so, do these data provide any greater comfort around the liver safety of peglispro?

A: As I mentioned earlier, we have begun to have the first trial essentially wrap up in that program. We won't provide a running commentary as the single trial comes out, as we've done for example the with the dulaglutide trials, where we waited until we had AWARD-1, -3, and -5 before issuing a top line press release. We'll be doing the same thing with the studies for the basal insulin peglispro.

Q: First, can you just give us a bit more color on the pricing you've put through and your recent pricing increases across the insulin portfolio, as well as cumulative loss to price increases you've had across the portfolio?

A: There were a couple of different price increases over the course of 2013. I think the last one in December, but we follow up with you on specific numbers for those.

Q: For the insulin glargine product, I think I'm correct in saying you don't yet have a device that's public or known or used that is suitable for administering the basal insulin in terms of number units that's required. We aren't able to detect any patent applications for such a device. What is your long-term game plan with devices for the insulin glargine?

A: For the presentations we would use for commercialization of the insulin glargine product, we have not been specific on our plans other than to state that we're definitely looking at multiple options. We also believe that we would be in a position to commercialize that product upon expiration of the Lantus compound patent in early 2015.

-- by Manu Venkat, Katherine Sanders, Jessica Dong, and Kelly Close