Lilly 3Q16 – Diabetes portfolio up 14% to $1.4 billion; Trulicity drives whopping 71% of growth with sales tripling to $244 million; Jardiance performance strong despite disappointing SGLT-2 inhibitor class growth – October 25, 2016

Lilly provided its 3Q16 earnings update this morning in a call led by CEO Mr. John Lechleiter. The press release, webcast, presentation slides, and a one-minute video summary are available on Lilly’s website. Below we provide our commentary on the the thing that matter most to Lilly’s progress – the performance of its diabetes products, the progress of its diabetes pipeline, and a big picture look at how pricing pressures and the US political climate are impacting the pharmaceutical industry.

Read on for an item-by-item overview of the highlights from the call, followed by relevant Q&A.

Table 1. 3Q16 Financial Results for Lilly’s Major Diabetes Products

Financial Highlights

1. Lilly experienced a strong 3Q16 in which its overall diabetes portfolio grew 14% year-over-year (YOY) as reported to $1.4 billion. Our first highlight is about the sources of growth in the quarter. First, Humalog sales of $641 million provided no growth, actually falling 9% - see below for more on pricing pressure in this market. The real growth story in 3Q16 was GLP-1 agonist Trulicity (dulaglutide) where revenue of nearly $250 million, up over 230%, drove the vast majority of growth in 3Q16, a whopping 71%. This is quite a result given that Trulicity still represented just 17% of revenue. SGLT-2 inhibitor Jardiance (empagliflozin) sales of just under $50 million also rose over 200% vs. 3Q15, but from a much smaller base – these sales represented just 3% of revenue and 13% of growth.

2. More on once-weekly GLP-1 agonist Trulicity (dulaglutide): As noted, Lilly’s GLP-1 continued its strong performance, with revenue more than tripling YOY to $244 million. Sales rose an impressive 21% sequentially from $201 million in 2Q16. Management attributed the product’s strong quarter to underlying volume growth in the GLP-1 agonist market and steadily increasing share of this market for Trulicity – TRx growth for the GLP-1 agonist class was ~30% YOY and Trulicity’s has now achieved 35% of the TRx share. We hear that patients love the mobile app that goes along with Trulicity and the design by IDEO has clearly served Lilly well.

3. Lilly’s share of revenue from sales of the BI-partnered SGLT-2 inhibitor Jardiance (empagliflozin) franchise reached $48 million in 3Q16, more than tripling YOY as reported from $15 million in 3Q15 and growing 19% sequentially. Based on our estimates, total worldwide Jardiance revenue including BI’s share was ~$144 million in the quarter. Lilly management expressed disappointment at slower-than-expected volume growth of the underlying SGLT-2 inhibitor market at ~20% in the US – we were a bit surprised and wonder if this is more related to pricing concerns (patients aren’t getting “prior auth’s” approved) or DKA concerns. Jardiance holds 30% of the new-to-brand prescription (NBRx) share in the US. Clearly, the FDA decision will be a big deal …

4. On that note, Lilly shared that December 4 is the new expected date for an FDA decision on an expanded indication for Jardiance and Synjardy (empagliflozin/metformin) reflecting the cardioprotective benefit demonstrated in EMPA-REG OUTCOME.  Management expressed optimism for a positive decision and continued to suggest that a label update could serve as a catalyst for sales of both Jardiance and the overall SGLT-2 inhibitor class. Management also provided a rare update on DPP-4 inhibitor/SGLT-2 inhibitor fixed-dose combination Glyxambi (linagliptin/empagliflozin) in Q&A – while current commercial preferred access is low at 20%, Lilly hopes to step up investment in the product’s promotion and formulary positioning following a positive label update decision.

5. Lilly’s flagship product Humalog (insulin lispro) brought in $641 million in revenue, down 9% YOY and down 8% sequentially from $702 million in 2Q16, quite a negative result that wasn’t seen so much in Lilly’s overall result for 3Q16 given Trulicity’s strength. This decline was largely driven by US sales, which fell 14% YOY to $379 million (ex-US sales fell 1% YOY to $262 million). Indeed, management emphasized that Humalog’s falling revenue is influenced by the competitive pricing environment in the US insulin market. The negative influence of pricing is further reflected in the fact that Humalog revenue fell despite Humalog’s increased total prescription (TRx) share (from ~3% at the start of 2016 to almost 7% as of October 2016) and 3% YOY volume growth in the underlying rapid-acting insulin market in 3Q16 (slide 28). Notably, insulin has become a far more competitive market from what we can compared to GLP-1. In the GLP-1 market, there is still more room to differentiate; Lilly’s once-weekly, in particular, may be viewed as associated with higher adherence – we’d love to know more about how payers view this, what big data is showing, what studies are being done, etc.

6. BI-partnered Basaglar (biosimilar insulin glargine, marketed as Abasaglar ex-US) generated revenues of $19.4 million in international sales, up over 5-fold YOY. Management shared that this strong performance was driven by early uptake of Basaglar in in Japan and various European countries, including Slovakia, the Czech Republic, and Germany (slide 42). Management was pleased by the progress Basaglar has made on the access front for 2017, but emphasized that the company must also carefully build the brand and experience of Basaglar post-launch.

7. Humulin (human insulin) revenue grew 2% YOY to $322 million, a 3% decrease sequentially. As was also the case in 2Q16, Humulin’s favorable performance is due to its success in the US market. By geography, US sales increased 5% YOY to $196 million whereas ex-US sales decreased 4% YOY to $126 million.

8. Lilly’s combined portion of revenue for the BI-partnered Tradjenta franchise (including Tradjenta [linagliptin] and Jentadueto [linagliptin/metformin]) totaled $115 million, up 25% YOY and down 5% sequentially. The Tradjenta franchise was responsible for nearly 10% of Lilly’s diabetes portfolio growth in 3Q16, with strong performance from both US sales, both up 25% YOY to $48 million and $67.5 million respectively. Based on our estimates, total worldwide revenue for Tradjenta including BI’s share was $321 million in 3Q16.

9. Revenue for Lilly’s glucagon formulation totaled $46 million, up 5% YOY and 50% sequentially. As was also the case in previous quarters, glucagon revenue was driven primarily by US sales.

Pipeline Highlights

10. There were no major updates to Lilly’s diabetes pipeline. Phase 3 initiation for Adocia-partnered Ultra-Rapid BioChaperone Lispro is planned for 2017. The company’s Locemia-partnered intranasal glucagon remains in phase 3. The company also maintains a robust phase 1 and preclinical pipeline, including a phase 1 GLP-1/GIP dual agonist and a phase 1 soluble glucagon.

Big Picture Highlights

11. Much of the discussion in Q&A centered on the potential impact on the drug pricing landscape of both the US presidential election and various drug pricing regulation policy proposals. In particular, Lilly emphasized that it is “fighting tooth and nail” against California’s Proposition 61 (which would limit the amount state agencies pay for prescription drugs to that of the US Department of Veterans Affairs [VA]).

Financial Highlights

1. Overall Diabetes Portfolio: up 14% YOY to $1.4 billion

Lilly experienced a strong 3Q16 in which its overall diabetes portfolio grew 14% year-over-year (YOY) as reported to $1.4 billion. Sequentially, total revenue fell 1%. By product, GLP-1 agonist Trulicity (dulaglutide) drove the vast majority of growth, accounting for a whopping 71% of diabetes growth in 3Q16. SGLT-2 inhibitor Jardiance (empagliflozin) drove 13% of growth, DPP-4 inhibitor Tradjenta (linagliptin) accounted for 9% of growth, biosimilar insulin glargine Basaglar accounted for 7% of growth, and Humulin and glucagon rounded out with 2% and 1% of growth, respectively.

• By geography, US performance was stronger than ex-US performance, accounting for 62% and 38% of overall sales, respectively. US sales totaled $888 million, rising 13% YOY and remaining flat sequentially. Ex-US sales rose 15% YOY and fell 1% sequentially to $547 million in 2Q16 against a difficult comparison of 20% sequential growth in 2Q16. US sales accounted for 60% of the overall growth of Lilly’s diabetes portfolio in 3Q16, while ex-US sales accounted for 40% of growth. Refer to the table above for an overview of 3Q16 financial results for Lilly’s major diabetes products.

2. Trulicity (dulaglutide): Strong quarter with revenue tripling to $244 million

Once-weekly GLP-1 agonist Trulicity (dulaglutide) continued its strong performance, with revenue more than tripling YOY to $244 million. Sequentially, sales rose an impressive 21% from $201 million in 2Q16. Lilly highlighted Trulicity as one of the main drivers of the company’s growth. Indeed, according to our calculations, Trulicity sales accounted for a whopping 71% of the growth of Lilly’s diabetes portfolio in 3Q16. Trulicity generated strong revenues in US and ex-US markets alike; US sales rose 3-fold YOY to $189 million and ex-US sales rose 5-fold YOY to $55 million.

Figure 1: Trulicity Sales (4Q14-3Q16)

• Lilly attributed the product’s strong quarter to underlying volume growth in the GLP-1 agonist market and steadily increasing share of this market for Trulicity. Total prescription (TRx) growth for the GLP-1 agonist class was ~30% YOY and Trulicity has achieved 35% of the TRx share. Trulicity’s patient-friendly design, once-weekly administration, and patient-friendly design continue to translate into market share gains for the product, despite recent cardiovascular outcome results demonstrating a cardioprotective benefit for rival GLP-1 agonist Novo Nordisk’s Victoza (liraglutide). For comparison, Trulicity held 20% of the TRx market share in 2Q16, according to Novo Nordisk’s 2Q16 update. We expect Trulicity’s continued substantial TRx share growth occurs at the expense of market-leading Victoza (liraglutide) and AZ’s exenatide franchise (once-weekly Bydureon and twice-daily Byetta) – we’ll have to wait until Novo Nordisk provides its 3Q16 update this Friday October 28 to get a clearer picture of how the dynamics have shifted during the quarter.
• In Q&A, management shared that the REWIND CVOT for Trulicity is on schedule to complete in July 2018, with interim results available in 4Q16. This is a slightly accelerated timeline from the expected completion date of April 2019 previously listed on ClinicalTrials.gov. Lilly expressed optimism at Trulicity’s chances of demonstrating a cardioprotective benefit. That said, the company was careful to manage expectations for early termination of the trial due to overwhelming efficacy, noting that the number of events thus far for the interim analysis is much lower than the number of events in Novo Nordisk’s LEADER trial for liraglutide, suggesting that the hazard ratio in REWIND would be “quite impressive” for such an outcome. Positive cardiovascular outcomes data will likely be important to Trulicity’s long-term success – Novo Nordisk’s upcoming entrant to the class, once-weekly injectable semaglutide, already has positive CVOT data available, having demonstrating impressive and unexpected reductions in cardiovascular risk in a pre-approval trial. Novo Nordisk expects to submit semaglutide for regulatory review in both the US and EU in 4Q16 and forecasts a 2018 launch for the product. We believe semaglutide will be formidable competitor to Trulicity and positive CVOT data around the time of semaglutide’s launch could help Trulicity maintain its growing market share. Also on the horizon are GLP-1 agonists with innovation dose administration methods, such as Intarcia’s implantable ITCA 650 (exenatide mini-pump) and Novo Nordisk’s oral semaglutide, which may pose a threat to Trulicity due to their patient convenience and adherence advantages.

3. Jardiance (empagliflozin): Growth Despite Sluggish Underlying SGLT-2 Inhibitor Class Performance

Lilly’s share of revenue from sales of the BI-partnered SGLT-2 inhibitor Jardiance (empagliflozin) franchise (including Jardiance, Synjardy [empagliflozin/metformin], and DPP-4 inhibitor/SGLT-2 inhibitor fixed-dose combination Glyxambi [linagliptin/empagliflozin]) reached $48 million in 3Q16, more than tripling YOY as reported from $15 million in 3Q15. Sequentially, Jardiance sales grew only 19% against an easy comparison of only 5% growth in 2Q16. While it’s comforting to see growth for the Jardiance franchise (especially after revenue declines for competitor J&J’s Invokana [canagliflozin] in 3Q16), we would’ve expected more robust growth considering that Jardiance’s fairly low base and its status as the only SGLT-2 inhibitor with positive cardiovascular outcomes data to date. It’s unclear at this point if many providers are reserving judgement on the use of SGLT-2 inhibitor until more outcomes data is available or if the various safety concerns associated with members of the class (DKA risk, acute kidney injury, bone fractures, lower limb amputations – though notably only the first one applies to Jardiance thus far) have made some prescribers wary. In any case, we’ve been struck by the great enthusiasm among cardiologists for Jardiance following the EMPA-REG OUTCOME results, contrasted with the more measured response among many endocrinologists.

Figure 2: Jardiance Sales (3Q14-3Q16)

• Based on our estimates, total worldwide Jardiance revenue including BI’s share was ~$144 million in the quarter. As only Lilly’s share of revenue for Jardiance is publicly reported, these estimates are speculation only – we estimate Lilly’s share of Jardiance revenue at ~33%, based on a comparison between Lilly’s portion of full-year 2015 Jardiance revenue ($60 million) and total global net sales for 2015 from BI’s recent diabetes update (€165 million, or ~$183 million). Jardiance accounted for 13% of the overall growth of Lilly’s diabetes portfolio, making it the second largest driver of growth (though it remained fair overshadowed by Trulicity’s 71% share of growth). For comparison, 3Q16 sales of J&J’s Invokana (canagliflozin) totaled $328 million (a 4% YOY decline that the company attributed to the dip to costs for its co-pay program rather than a downturn in volume). AZ will report earnings for its SGLT-2 inhibitor Farxiga (dapagliflozin) on November 10 and we’ll be back with pooled class analysis for 3Q16 then. In 2Q16, the SGLT-2 inhibitor achieved $715 million in total estimated revenue and 49% YOY growth – we’ll be watching closely to see how 3Q16 performance compares.
• Lilly management expressed disappointment and concern at slower-than-expected volume growth of the underlying SGLT-2 inhibitor market at ~20% in the US, characterizing this level of growth as “significantly below expectations.” Furthermore, Lilly suggested that the underlying class growth will be one of the most important factors to pay attention to when considering Jardiance prospects. On the other hand, management emphasized that Jardiance is well-positioned within the SGLT-2 inhibitor class itself. Jardiance holds 30% of the new-to-brand prescription (NBRx) share in the US. Among endocrinologists, Jardiance holds 37% of the market in terms of New Therapy Starts (NTS Rx). This outstrips its share of NTS Rx among primary care physicians (24%) – management suggested this is a positive indicator for future adoption. Eventually, however, Lilly expects over 80% of Jardiance volume will come from primary care physician prescriptions, leading management to underscore the importance primary care providers to Jardiance’s long-term success.
• Management emphasized that ex-US performance of both Jardiance and the SGLT-2 inhibitor class is stronger than in the US, albeit from a lower base. In Q&A, the company shared that the SGLT-2 inhibitor class is expected to double in Europe and Japan, which it characterized as “encouraging.” Furthermore, management highlighted several ex-US countries in which Jardiance holds a significant share of the SGLT-2 inhibitor market by volume: nearly 40% share of market in Germany, over 40% share in Italy, and “growing” share in Spain, the UK, and Canada. Indeed, ex-US revenue for the Jardiance franchise grew more than six-fold in 3Q16 (albeit only to $15 million from $2 million in 3Q15). US revenue began from a much higher base of $13 million in 3Q16 and only grew 1.5-fold to $33 million in 3Q16.

4. Management Optimistic that FDA Approval of Expanded Jardiance Indication Will Revitalize Franchise and Overall Class

Lilly shared that December 4 is the new expected date for an FDA decision on an expanded indication for Jardiance and Synjardy (empagliflozin/metformin) reflecting the cardioprotective benefit demonstrated in EMPA-REG OUTCOME.  Management expressed optimism for a positive decision and continued to suggest that a label update could serve as a catalyst for sales of both Jardiance and the overall SGLT-2 inhibitor class. The company is hoping for a new indication for Jardiance for the reduction of cardiovascular death in patients with type 2 diabetes and existing cardiovascular disease. Management acknowledged that mere inclusion of the EMPA-REG OUTCOME data on the label, but not an expanded indication, would be disappointing and that inclusion in this manner would not allow Lilly and BI make as strong of a claim on the value proposition offered by Jardiance. In particular, management suggested that an expanded indication would be especially important for US formulary discussions and marketing. Previously, a decision on the indication was expected by early September before the FDA chose to delay its decision by 90 days. In its update, Lilly management emphasized this decision delay is not a signal of the indication’s approval prospects, whether positive or negative. Furthermore, management noted that a number of FDA submissions in the diabetes field have faced similar three-month delays recently – decisions for both GLP-1 agonist/basal insulin fixed-ratio combination from Novo Nordisk (IDegLira [insulin degludec/liraglutide]) and Sanofi (iGlarLixi [insulin glargine/lixisenatide]) have been delayed as well.

• Management also provided a rare update on DPP-4 inhibitor/SGLT-2 inhibitor fixed-dose combination Glyxambi (linagliptin/empagliflozin) in Q&A, acknowledging that investment in the product has been limited thus far. The company shared that it is currently focused on positioning Jardiance as the standard-of-care treatment for diabetes and expects that an expanded indication for the product and a reinvigoration of the SGLT-2 inhibitor class will help the product achieve that goal. Management expects that Glyxambi sales will receive a boost as uptake of Jardiance increases, but stated that investing significantly in Glyxambi’s access or promotion currently is not part of Lilly’s strategy. Furthermore, the company shared that Glyxambi’s current preferred status access is low – only 20% among commercial plans and even lower among Medicare Part D. Lilly noted that it plans to rethink the strategy for Glyxambi following a positive label update decision. We’re glad to hear that Lilly’s plans to potentially invest more resources into this fairly innovative fixed-dose combination, though the product will likely soon face competition from AZ’s Qtern (saxagliptin/dapagliflozin, approved in the EU and under review in the US) and from Merck/Pfizer’s ertugliflozin/sitagliptin combination (submission expected 4Q16). We expect these competitors will invest greater resources into the promotion and formulation positioning of their own combinations and perhaps could drive greater adoption of the class, despite Glyxambi’s first-to-market status in the US. Lilly certainly has its hands full with a number of highly exciting products (Trulicity, Jardiance, Basaglar), so it’s understandable that it may have limited resources to divert to Glyxambi at this point in time.
• Lilly also highlighted the recent positive CHMP opinion in favor of European approval of Glyxambi. If approved, Glyxambi will be the second-to-market DPP-4 inhibitor/SGLT-2 inhibitor fixed-dose combination, after AZ’s Qtern. Given the conservative reimbursement environment of many European countries and the measured enthusiasm for the combination on the conference circuit, we expect access will be a key determinant of the success of these combinations.
• Several line extension efforts for the Jardiance franchise, in addition to the cardiovascular outcomes label update, are ongoing. A once-daily, extended-release formulation of Synjardy is currently under regulatory review. Two phase 3 trials, EASE-2 and EASE-3 for empagliflozin in type 1 diabetes are ongoing as well, with expected completion in October 2017 and September 2017, respectively.

5. Humalog (insulin lispro): Negative growth reflecting the competitive insulin pricing environment

Lilly’s flagship product Humalog (insulin lispro) brought in $641 million in revenue, down 9% YOY (down 8% operationally) and down 8% sequentially from $702 million in 2Q16. This decline was largely driven by US sales, which fell 14% YOY to $379 million (ex-US sales fell 1% YOY to $262 million). Indeed, management emphasized that Humalog’s falling revenue is influenced by the competitive pricing environment in the US insulin market. The negative influence of pricing is further reflected in the fact that Humalog revenue fell despite Humalog’s increased TRx share (from ~3% at the start of 2016 to almost 7% as of October 2016) and 3% YOY volume growth in the underlying rapid-acting insulin market in 3Q16 (slide 28). Notably, Lilly management shared that, after adjusting for discounts and rebates, Humalog sales in the US only fell 1% rather than 14%. The product also experienced 10% volume growth in the US, implying a 11% negative price effect.

Figure 3: Humalog Sales (1Q12-3Q16)

• In response to questions about pricing for Humalog, management underscored that pricing dynamics are difficult to predict. As the 2017 formulary landscape currently stands, Humalog has a place on Express Scripts’ and UnitedHealthcare’s formularies but is excluded from CVS Health’s formulary in favor of Novo Nordisk’s NovoLog (insulin aspart) and Novolin (human insulin) and Sanofi’s Apidra (insulin glulisine). Lilly emphasized that rebates have increased across the board, but particularly with Part D coverage, and that the company is seeing a less favorable channel mix with more Humalog sales coming from less-profitable avenues (Medicare, Medicaid, etc. rather than commercial plans or cash). Management remarked that Humalog’s net price is fairly low, leaving less room for further deterioration in price in the future. Of course, management acknowledged that further exclusive formulary switches could translate into higher rebates, but ruled the possibility unlikely due to the disruption cost of switching so many patients from one insulin to another en masse.

6. Basaglar (biosimilar insulin glargine): Strong post-launch performance continues with 5-fold increase in ex-US revenues

BI-partnered Basaglar (biosimilar insulin glargine, marketed as Abasaglar ex-US) generated revenues of $19.4 million in international sales, up over 5-fold YOY. Management shared that this strong performance was driven by early uptake of Basaglar in Japan and various European countries, including Slovakia, the Czech Republic, and Germany.  Basaglar’s uptake is most pronounced in Slovakia, where it currently holds 22% share of the total basal insulin market, as compared to 14% in Japan, 7% in the Czech Republic, and 3% in Germany (slide 42). Basaglar’s share in Slovokia represents a slight dip from its share as of Lilly’s 2Q16 update (25%), though the product achieved market share gains in Japan (13% in 2Q16), the Czech Republic (6%) and Germany (2%). Basaglar will hit US markets on December 15.

• Management was pleased by the progress Basaglar has made on the access front for 2017, but emphasized that the company must also carefully build the brand and experience of Basaglar post-launch. As described in our 1Q16-2Q16 Earnings Roundup, all three of the largest PBMs – CVS Health, UnitedHealthcare, and Express Scripts – have included Basaglar on their 2017 formularies. Notably, Basaglar was included to the exclusion of Sanofi’s Lantus (insulin glargine) and Toujeo (U300 insulin glargine) on CVS Health and UnitedHealthcare’s formularies, whereas Express Scripts’ formulary list includes Sanofi’s products alongside Basaglar. Despite Basaglar’s excellent access on formulary lists, Lilly emphasized that this does not imply that the product will be an “automatic win,” underscoring the importance of communicating Basaglar as a compelling option to patients and providers (especially since competition from Novo Nordisk’s Tresiba [insulin degludec] and Levemir [insulin detemir] still remains). Indeed, it remains to be seen how providers and patients will understand biosimilars. Unlike generics they are a new beast and some have expressed concerns about safety and quality control for these products, given the complexity and delicacy of the insulin manufacturing process.

7. Humulin (human insulin): Modest revenue growth driven by strong US performance

Humulin (human insulin) revenue grew 2% YOY as reported (4% operationally) to $322 million, a 3% decrease sequentially. As was also the case in 2Q16, Humulin’s favorable performance is due to its success in the US market. By geography, US sales increased 5% YOY to $196 million whereas ex-US sales decreased 4% YOY to $126 million. Humulin accounted for 6% of the growth of Lilly’s US diabetes portfolio (compared to 2% of the company’s global diabetes portfolio and 0.4% of the overall global volume growth of Lilly’s entire portfolio [slide 14]).

Figure 4: Humulin Sales (2Q15-3Q16)

• Humulin’s TRx share in the US appears to have stabilized at 54-55%, following a slight uptick from 53% in January 2016. Humulin’s growth is fairly impressive in the context of the underlying human insulin market, which has been falling 5%-6% YOY since January 2016, after hitting a low of ~7% YOY decline in November 2015 (slide 30).
• Although this was not addressed in the call, we speculate that the launch of the Humulin U500 KwikPen earlier this year in 1Q16 may also have contributed to the rise in US Humulin revenues and market share, though the product is still very early in its launch cycle. The Humulin U500 KwikPen, targeted toward patients with very high insulin requirements, holds 1,500 units of insulin and is more cost-effective per unit of insulin than the Humulin U100 KwikPen, which holds five times less insulin. According to the company’s past updates, demand for this U500 formulation of Humulin has been driving the franchise’s US performance since 3Q15. The increased demand for concentrated insulins from the growing population of patients with high insulin requirements likely incentivized the development of the Humulin U500 KwikPen as well as the recently approved dedicated syringe for the U500 formulation. The approval of the KwikPen and the syringe eliminate the need for complicated dose conversions for Humulin U500, improving the safety and convenience of the formulation. Given the new options that ease administration, we wouldn’t be surprised to see Humulin’s sales and market share continue to grow in coming quarters.

8. Tradjenta (linagliptin): Strong quarter drives 10% of diabetes portfolio growth

Lilly’s combined portion of revenue for the BI-partnered Tradjenta franchise (including the DPP-4 inhibitor Tradjenta [linagliptin] and recently-approved Jentadueto [linagliptin/metformin]) totaled $115 million, up 25% YOY as reported (22% operationally) and down 5% sequentially. The Tradjenta franchise was responsible for nearly 10% of Lilly’s diabetes portfolio growth in 3Q16, with strong performance from both US and ex-US sales, both up 25% YOY to $48 million and $67.5 million respectively. Based on our estimates, total worldwide revenue for Tradjenta including BI’s share was $321 million in 3Q16. Since only Lilly’s portion of revenue is reported publicly, our estimates for total Tradjenta revenue are speculation only. We estimate Lilly’s share of revenue at ~36% based on Lilly’s reported Tradjenta franchise sales for 2015 ($357 million) and global net sales for the franchise in 2015 (€909 million, or ~$1 billion) as reported in BI’s recent diabetes update.

Figure 5: Lilly’s Portion of Tradjenta Sales (2Q11-3Q16)

• We are curious how prescriptions and sales of DPP-4 inhibitors will continue to be affected by the continued growing popularity of SGLT-2 inhibitors and GLP-1 agonists. Recent strong commentary from Dr. Jay Skyler (University of Miami, FL) suggested that DPP-4 inhibitors should not be the preferred choice for patients due to their lower A1c efficacy compared to GLP-1 agonists, and that SGLT-2 inhibitors may also be preferable to DPP-4 inhibitors due to demonstrated renal-protective effects. On the other hand, at Keystone 2016, we heard ADA Chief Medical Officer Dr. Robert Ratner advocate for use of DPP-4 inhibitors in the elderly based on their benign safety profile, extremely easy dose administration, and very clean side effects. Ultimately, we think familiarity and tolerability will mean that DPP-4 inhibitors remain a central part of diabetes care for the near future, though their long-term prospects are not quite as certain – we imagine once they go generic they will be extremely popular. AZ and Takeda, which also have DPP-4 inhibitors in their portfolios, will report 3Q16 results in the coming days, and Merck reported earlier today. We’ll be back with a class-wide look at revenues for this drug class after AZ reports on November 10.

9. Glucagon: Revenue up 5% YOY totaling $46 million, driven largely by US sales

Revenue for Lilly’s glucagon formulation totaled $46 million, up 5% YOY as reported and operationally and 50% sequentially. As was also the case in previous quarters, glucagon revenue was driven primarily by US sales, which accounted for $44 million (up 6% YOY and up 50% sequentially). For comparison ex-US sales accounted for the remaining $2 million and have remained relatively flat since the product’s launch in 1Q12. Glucagon accounted for 1% of the growth of Lilly’s overall diabetes portfolio. We continue to be very interested in following this market and on following progress on Lilly’s nasal glucagon, which we think could drive the glucagon market substantially.

Figure 6: Glucagon Sales (1Q12-3Q16)

Pipeline Highlights

10. Diabetes Pipeline: No Major Updates

There were no major updates to Lilly’s diabetes pipeline. Phase 3 initiation for Adocia-partnered Ultra-Rapid BioChaperone Lispro is planned for 2017. The company’s Locemia-partnered intranasal glucagon remains in phase 3. The company also maintains a robust phase 1 and preclinical pipeline, including a phase 1 GLP-1/GIP dual agonist and a phase 1 soluble glucagon – see below a complete overview of all products in Lilly’s diabetes pipeline of which we are aware. We’re especially pleased to see Lilly’s continued investments in the insulin, NAFLD/NASH, and GLP-1/glucagon dual agonist competitive landscapes.

Table 2: Lilly Diabetes Pipeline

Big Picture Highlights

11. Challenging Political Landscape

Much of the discussion in Q&A centered on the potential impact on the drug pricing landscape of both the US presidential election and various drug pricing regulation policy proposals.

• Lilly management noted that the first two years of the next US president’s term will be critical for the pharmaceutical industry. Management emphasized that the larger, long-term big picture question is “what does Hillary Clinton or Donald Trump have in mind for healthcare?” The company acknowledged that changes in healthcare will likely need to occur in order to sustainably offer universal health coverage in the US over the long term and that the industry must be prepared for shifts in healthcare.
• Lilly emphasized that it is “fighting tooth and nail” against California’s Proposition 61, which is on the ballot for this election. The proposition would limit the amount state agencies, such as Medicaid, pay for prescription drugs to that of the US Department of Veterans Affairs (VA). Prominent supporters of the initiative include former presidential candidate Senator Bernie Sanders, the AIDS Healthcare Foundation, the California Nurses Association, and California AARP, among others – supporters argue that the proposition could combat “price-gouging” from pharmaceutical companies, promote better access to life-saving drugs, and save taxpayer dollars. On the other hand, many pharmaceutical companies and many organizations have thrown their weight against the proposition, including Lilly, J&J, AZ, Amgen, Novartis, BMS, AbbVie, the California Medical Association, Latino Diabetes Association, and 30 other health organizations, the California NAACP, nearly 30 veterans organizations, over 40 business associations, and 25 unions. Lilly management characterized the proposition as “not only bad legislation” but also “bad for your health.” Opponents of the proposition argue that it could actually reduce patient access to medicines, hurt veterans by increasing veteran prices, increase bureaucracy, red tape, lawsuits, and taxpayer cost, and increase state prescription drug costs. Management emphasized that Lilly is engaged in a large-scale awareness campaign to educate voters on the negative effects of Proposition 61 and suggested that the more people learn about the implications of the initiative, the less likely they are to support it. J&J also addressed Proposition 61 in its 3Q16 update, stating that it is a “misguided action that would be difficult to operationalize and would create access barriers for patients.” Instead, J&J posed outcomes-based pricing as an alternative. Similarly, Merck management also shared its opposition to Proposition 61 in its 3Q16 update this morning and emphasized that the focus should be on the long-term benefits of prescription drugs rather than their affordability or pricing. Overall, in our view, Proposition 61 is a clearly a manifestation of the growing public and political frustration with rising and unaffordable drug costs and we applaud efforts to make access to medications easier for patients. However, as with most policy proposals, the devil is in the details and clearly many stakeholders on all sides of the issue feel that this particular proposition is deeply flawed and could have severe unintended consequences. We hope that the advocacy and frustration that led to the creation of this proposition can be channeled toward improved, thoughtful solutions to the prescription access issue that are able to truly enhance the affordability of medications for the majority of patients.
• Management also characterized any changes to low-income subsidies or Medicare-Medicaid dual eligible Part D coverage as “bad policy and bad medicine.” Lilly suggested that the impact to industry would rival that of the ACA, translating into a $110-$120 billion hit over a 10-year period. Management pointed out that separating these patients from Part D coverage would lead to decreased access to modern therapies. Furthermore, management suggested that policies aimed at restricting drug prices such as these could (i) actually create incentives to price drugs higher for a higher starting point in reimbursement and rebating negotiations and (ii) decrease long-term incentives to develop drugs aimed at this population. Lilly acknowledged that the diabetes field would be particularly impacted by such policy proposals, though management also emphasized that Lilly’s own diabetes portfolio is defensively positioned to some extent as the company generally prioritizes commercial access over Part D access. While we acknowledge the validity of Lilly’s criticisms of these drug price regulation proposals, we would love to see Lilly publicly work with government agencies and payers to create and support alternative proposals to make drugs more affordable for patients (particularly uninsured or underinsured patients). While there are clearly issues related to PBMs, much of the challenge for patients stems from changes that employers have made on the insurance front – much higher deductibles and co-pays.

Questions and Answers

Q: How are you feeling about getting the superior label for Jardiance? Why did the FDA require three more months for review of this issue? Is this a positive or a negative? And what are the options – to get a superior label (i.e. an indication for CV risk reduction) or simply mentioning of the EMPA-REG trial data?

A: The new action date is now December 4, 2016. It's difficult to say always what drives that, and I would highlight that this is not the only major amendment that has been requested by the FDA in the diabetes area in recent months. I don't think it is appropriate for us to color this in any way positive or negative.

When it comes to the indication and the label, we have requested a separate distinct indication for Jardiance given the data from the EMPA-REG OUTCOME trial – something along the lines of reducing the instance of cardiovascular death in patients with type 2 diabetes and established cardiovascular disease. We believe that the data warrants this type of indication, but it's the FDA reviewing the label and it's probably not appropriate for me to comment more at this stage given that the action date is getting very near. I will continue to highlight that I believe that we have the strength of the evidence to be able to have a new indication. Particularly in the US, having an indication does make an important difference. Of course, if the clinical data is included in the body of the label we could still make a claim, but the strength of the claim is not the same as it would be with a distinct indication.

Q: What's happening with pricing in diabetes? It does seem to be getting worse. You talked about rebates and discounts with Humalog but it also seems that we're seeing some price discounting in the SGLT-2 inhibitor class just based on Invokana's recent performance and their weakness due to discounting.

A: When we normalize for changes in the estimates of rebates and discounts for both Q3 and Q4, we basically see in the case of Humalog that our normalized sales would have been -1% instead of -14%. We grew volume 10% with Humalog in the US, so that's basically implies -11% when it comes to price. We are seeing two things: increased rebates across the board (but in particular when it comes to Part D) and significantly more business flowing through less profitable channels – Medicare, Medicaid, and chargebacks. There has been an acceleration of those books of business at the expense of commercial and cash, and those impacts are pretty significant. In the case of Humalog we have quite a bit of volatility, and we expect for this unfortunately to continue.

Q: You've had a few big formulary wins for Basaglar in 2017. Can you help us just understand the dynamics of that product in the US next year? What percent of market do you have access to and how should we think about Lilly prioritizing Basaglar relative to other assets in the diabetes portfolio?

A: We've had a successful contracting season with Basaglar and we feel good about our commercial access in particular. Basaglar clearly is a newly launched product and we need to make this product relevant in the basal insulin space. This is a new segment for us, and Lilly now has a complete portfolio, a full range of insulins. As we launch Basaglar I think it is key that we continue driving the entire diabetes portfolio and the success that we're seeing with Trulicity and the opportunity we have with Jardiance.

Q: What can you say about the launch of Basaglar in the US? It's somewhat imminent. Do you have a sense of demand and what price you're willing to part with the product?

A: We will be disclosing the list price in the near future, but the real competition when it comes to prices really happens at the rebate levels and at the net price level. As I mentioned, we will have good market access, but this doesn't automatically mean that Basaglar is going to be a win. We need to make this product relevant with our customers. We need to build that brand and we need to provide great experiences. Yes, in some cases, Lantus and Toujeo are excluded from formularies, but this is not the case for Tresiba or Levemir, so at the end of the day, we need to make sure that Basaglar is an important and compelling option for patients.

Q: How will the ongoing election influence pricing? For instance, Proposition 61 on the California ballot is proposing a statute which could create a price ceiling on prescription drug costs by state programs. What are your thoughts about this? And is there any silver lining on pricing coming out of it?

A: We are fighting Prop 61 tooth-and-nail in California. We are trying to impress on the voters that it's not only bad legislation, it's bad for your health. So we have a big campaign underway in California right now to increase the level of awareness on this issue and hopefully continue to shift voters toward a position of being against it.

I think the bigger question is, if Hillary Clinton wins, what does she have in mind for healthcare? If Donald Trump wins, what's the direction going to be? It's pretty clear that something needs to be done if we're going to render health insurance availability for everybody in this country sustainable on an ongoing basis. The bigger focus for the pharmaceutical industry is what decisions happen in those critical first two years of the next president’s first term.

Q: Could you update us on the REWIND trial for Trulicity? What are your thoughts on the upcoming interim analysis and stoppage of that trial?

A: Our REWIND has a scheduled completion date of July of 2018. We expect the interim later this quarter. We already have the number of events to be able to reach the interim. I think it's important to remind everyone that given the number of events that we have at the interim is significantly lower than what was seen in the LEADER trial. So that's a sign that the hazard ratio for us will likely have to be significant and will have to be quite impressive. We will see what the data says once we have the readout.

Q: Can you help explain why Glyxambi is not doing better, in terms of prescription trends?

A: The strategy we had for Glyxambi was different prior to the readout of the EMPA-REG OUTCOME trial. As we see it today, we need to make sure that we position Jardiance as a standard of care, we need the new indication to truly do so and really reinvigorate the growth of the SGLT-2 inhibitor class. We believe that Glyxambi will have very significant benefit once this happens, but investing in a big way in Glyxambi really doesn't make sense today. Whether it's access or promotional investment, Glyxambi has today pretty low access. We are in the 20% range when we look at commercial access and it's even lower than that in Part D. We need to rethink that once we get the new label for Jardiance.

Q: So first just on the diabetes side for Trulicity, Jardiance. Can you provide a little more color in terms of how much the sales for Trulicity and Jardiance compare against the classes as a whole, and among specialists versus generalists? I’m interested to see if these drugs are getting better traction with the primary care physicians.

A: For these products to be successful we have to be relevant when it comes to primary care. We expect long-term that over 80% of the prescription volume for these two products will come from primary care. Currently our share with specialists is indeed higher with endocrinologists than with primary care physicians. This is important as a leading indicator as we look at the future and a great prognosticator of what is to come ahead.

Q: With the rebating changes that are being kicked around again during this election cycle, could you talk a little bit about your exposure to the low-income-subsidy (LIS) and duel eligible population? What you think the probability of any rebating changes could be there and are there any ways could potentially mitigate those?

A: I think if the LIS patients were moved out, the order of magnitude of the impact it would have on the industry is akin to the overall impact of the Affordable Care Act. We're talking something around $110-$120 billion over a 10-year period. It's a significant hit and, as I said earlier, it's not just bad policy, it's bad medicine. These folks are not going to enjoy near the kind of care and access to modern therapy that they would be able to benefit from under Part D coverage. So you can bet we're going to fight any such proposal tooth-and-nail.

Clearly when it comes to diabetes this would be very significant impact. Now, as we look at Lilly relative to our competition, I think we're well-positioned. We have stronger access generally in commercial than in R&D and we have continued to prioritize that because clearly it is a more profitable and sustainable business. We've done this across all of our products.

Q: How should we think about pricing for Humalog?

A: I've commented on some of the dynamics of the quarter and some of the changes as we look at increases in Medicare/Medicaid chargebacks as a percentage of the overall business. Clearly we expect some of those dynamics to continue. Now, for the most part, all of the large formularies have gone exclusive. As of 2017, whether it's on the Part D side or on the commercial side as of 2017, we have a situation where Humalog will be exclusive in a certain number of formularies and a competitor in some others. Clearly there could be switches back and forth that would deteriorate prices even further. But we have not seen that because there's a very high disruption cost at the patient level to be able to switch 100% of the business now for more incremental gains. It's difficult to say what the pricing dynamics would be. But net prices for Humalog are pretty low already.

Q: Can you give some more color on what's driving the light sales of Jardiance, despite what’s implied in its high script volumes? I know you said last quarter it was a mix of gross to net adjustments and high use of copay cards. I'm wondering whether we should assume that the current net pricing is a reasonable baseline or if there is a negative pricing dynamic that could dissipate.

A: In my view, the most relevant factor to look at when we think about Jardiance overall is class growth. We have been concerned with the overall class, which is only growing about 20% currently – that’s significantly below our expectations. We are hopeful that the inclusion of the EMPA-REG OUTCOME data on the label will be a catalyst for the overall growth of the SGLT-2 inhibitor class and we feel confident if we get the right language on the label that we'll be able to make a huge value proposition for this product in the eyes of our customers. Class growth it is a little bit different outside of the US. In Europe and Japan, the class is expected to double, although from a lower base. These growth dynamics are very encouraging.

We are doing fairly well when it comes to share: We now have a 30% NBRx share in the US, and our overall share in Germany and Italy is about 40%. We are also growing in Spain, the UK, and Canada. I feel very good about the position that we have within the SGLT-2 inhibitor class itself.

On pricing question and rebates, I believe that the impact of the copay cards is going to lessen over time because the cards have a limited duration. We have some patients on these copay cards already and some of them are also on markets, so we expect this to be a long-term phenomenon and that will lessen over time.

-- by Abigail Dove, Helen Gao, and Kelly Close