Lilly 4Q17 – Diabetes portfolio grows 32% YOY to $7.8B in 2017; Trulicity drives 58% of growth with $2B annual sales; Impressive growth from Jardiance, Basaglar – February 1, 2018

Lilly CEO Mr. Dave Ricks led a call this morning to discuss the company’s 4Q17 and 2017 financial results. Click for the press release and presentation slides. For Lilly Diabetes, it was a very strong quarter and a strong year.

This full report is much-expanded from the First Look we published early today, ~one hour after the call wrapped up. Read on for item-by-item highlights on the company’s major diabetes products and pipeline news, followed by a diabetes-heavy Q&A.

Key financial results are summarized in the tables below. Supplementary slides 28, 31, 32, 36, and 40 cover the major diabetes products. Slide 21 is perhaps the most notable, highlighting upcoming events for 2018, including the nasal glucagon filing (finally!), public presentation of phase 3 data on SGLT-2 inhibitor Jardiance in type 1 (this will be extremely closely watched). and from the CARMELINA CVOT for DPP-4 inhibitor Tradjenta (same), and topline results from REWIND for GLP-1 agonist Trulicity and CAROLINA comparing CV outcomes between Tradjenta and SU glimepiride.

Table 1. 2017 Financial Results for Lilly’s Major Diabetes Products

Table 2. 4Q17 Financial Results for Lilly’s Major Diabetes Products

Financial Highlights

1. In Stellar Close to 2017, Diabetes Portfolio Grows 28% YOY and 13% Sequentially to $2.3 Billion in 4Q; Full Year Sales Rise 32% YOY to $7.8 Billion; Trulicity Drives ~58% of Growth

Lilly’s overall diabetes portfolio grew 32% YOY in 2017 to $7.8 billion. In 4Q17, diabetes sales rose 28% YOY and a whopping 13% sequentially to $2.3 billion. These were challenging comparisons, as the portfolio grew 19% YOY in 2016 (to $5.9 billion), 24% YOY in 4Q16 (to $1.8 billion), and 6% sequentially in 3Q17 (to $2 billion). By our calculations, the impressive portfolio growth in 2017 was driven primarily by GLP-1 agonist Trulicity (58% share of growth), followed by biosimilar insulin Basaglar (18%), SGLT-2 inhibitor Jardiance (13%), DPP-4 inhibitor Tradjenta (5%), rapid-acting insulin Humalog (5%), and glucagon (1%). Management highlighted Trulicity and Basaglar as two of three growth drivers for Lilly’s entire business. Very notably, Trulicity passed $2 billion in revenue for 2017; for comparison, Humalog sales totaled $2.9 billion, which parallels a trend of GLP-1 agonists competing with and catching-up to the rapid-acting insulin market (pooled GLP-1 sales equaled pooled mealtime insulin sales in 2Q17 and 3Q17, at ~$1.6 billion). Certainly, Lilly Diabetes on the whole is on a promising sales trajectory on the strength of Trulicity, Basaglar, Jardiance, and even glucagon. As was true at the end of 2016, we note positive YOY revenue growth for all diabetes products except Humulin, which fell 2%. As we learned at JPM 2018 earlier this month, Lilly is now the second largest player in diabetes (after Novo Nordisk, recently surpassed Merck in total diabetes sales).

• Notably, US diabetes revenue rose 38% YOY in 2017, totaling $5.1 billion, despite what management continues to cite as a challenging commercial landscape in the US. Pricing pressure swirls around diabetes drugs, and particularly around insulin; Head of Diabetes and SVP Mr. Enrique Conterno suggested that high rebates (presumably to PBMs and payers) have negatively impacted Humalog and Basaglar. Though both products experienced YOY sales growth in 2017, the profitability associated sounds like it has fallen further (unsurprising for Humalog, but a bit surprising for Basaglar, as it is so new). For comparison, OUS sales grew a smaller 21% YOY in 2017 to $2.6 billion. In 4Q17, Lilly’s US diabetes revenue grew 32% YOY to $1.5 billion, and management underscored that this was driven by increase in volume, not price. While this is good news for patients, management also mentioned lower utilization of all pharmaceutical products (not only diabetes) in the Medicaid channel, which could imply reduced access for some of the most vulnerable patients who are at higher risk of complications. That said, we’re not sure of segment mix for Lilly’s diabetes drugs, specifically, and it’s possible that these medicines were still highly-utilized by people on Medicaid.
• In commenting on recent tax reform, management was extremely positive if a bit general. Reiterating the sentiment of a “level playing field” that we’ve heard from other pharma CEOs, Mr. Dave Ricks noted that the changes will “enable access to global cash” and lower effective 2018 tax rates from 20.5% to 18%. More than $9 billion in cash and investments will be “freed” and used, over the next two years, to (i) fund existing marketed and pipeline products, (ii) fund returns to shareholders, (iii) bolster growth prospects via in-licensing or acquisitions, and (iv) reduce debt levels by ~$2 billion. We’re hopeful that the extra cash flow will put Lilly in an even better financial position, particularly after significant workforce reductions announced September 2017 though of course fewer funds going toward governmental priorities makes us cautious. That said, Lilly’s revenue guidance for 2018 remains unchanged (slide 17), and the company still anticipates $23-$23.5 billion this fiscal year.

2. Trulicity Breaks $2 Billion in 2017, More than Doubling YOY; Revenue in 4Q17 Nearly Doubles YOY and Rises 23% Sequentially to $649 Million; Management Not Worried about Ozempic Competition – Points to Patient-Friendly Autoinjector

Trulicity sales more than doubled YOY to $2 billion in 2017 – we forecast earlier this year that sales of the weekly GLP-1 would indeed reach this level, up from $926 million in 2016. The product represented 26% of total diabetes revenue while driving a striking 58% of portfolio growth in 2017. Trulicity (dulaglutide) sales nearly doubled YOY and grew 23% sequentially to $649 million in 4Q17, when the product drove 59% of portfolio growth and reflected 29% of diabetes revenue. Trulicity is becoming an ever more important piece of a well-performing diabetes business though we are cautious about future growth given the recent launch of Novo Nordisk’s semaglutide and the upcoming ITCA650 from Intarcia. It’s now in second place for highest-selling diabetes product at Lilly (rapid-acting insulin Humalog posted $2.9 billion in full year revenue, which underscores increasing competition for mealtime insulin from GLP-1s).

By geography, the US continues to account for the bulk of Trulicity sales (80% in 4Q17), with $520 million in revenue (+94% YOY and +26% sequentially) compared to $129 million OUS (+87% YOY and +12% sequentially). As in past quarters, Trulicity continues to benefit from increased market share as well as underlying class growth. Lilly’s presentation (slide 28) noted ~23% YOY growth in total GLP-1 prescriptions (TRx) in the US as of December 2017, driven by greater PCP adoption. Meanwhile, Trulicity’s TRx share climbed to 35% of the US GLP-1 market in December. Further, Trulicity’s share of new-to-brand prescriptions (NBRx) among endocrinologists stands at ~40%.

 One overall trend for the GLP-1 class in 2017 was convergence of market share between Trulicity and Novo Nordisk’s Victoza (liraglutide). We look forward to getting a better picture of these dynamics when Novo Nordisk reports tomorrow morning. At its recent Capital Markets Day, Novo Nordisk described the re-launch of Victoza with its new CV indication and pointed to an inflection in sales after debuting the new marketing strategy. However, Mr. Conterno shared during Q&A that Trulicity’s market share passed 40% for the first time last week, suggesting that Lilly’s GLP-1 business is still growing strong despite competition from “re-launched” Victoza (though it wasn’t clear whether he was referring to market share by volume or by value). Importantly, Trulicity could soon show CV benefit through the REWIND trial, while Novo Nordisk is strengthening its GLP-1 business with Ozempic (semaglutide), but above all, we think it has been shown that there’s more than enough room for multiple products in this class to do well. Mr. Conterno reinforced this head room for growth, explaining that GLP-1 agonist prescriptions still comprise only ~30% of basal insulin prescriptions.

• In the midst of Novo Nordisk’s Ozempic launch, there was significant interest from investors in market dynamics and competition within the GLP-1 agonist class – Lilly remained distinctly positive about Trulicity, which we think was smart given how much the class is growing. In the words of Mr. Conterno, “we’re extremely well prepared for semaglutide’s launch. We provide a unique experience for patients, and we’ll be able to compete very effectively.” He alluded to one key differentiating factor between GLP-1 products: injection devices. Trulicity comes in an IDEO-designed, patient-friendly autoinjector, without a visible needle; Ozempic will be packaged in a FlexTouch device, which is easier to use than the FlexPen (requiring less force to inject) and has a very similar appearance and other similar design elements. Some have characgterized Novo Nordisk’s reluctance to market an autoinjector as a bit puzzling but we saw Ozemba “sampled” the other day and saw that it is very easy to use: from our view, other products have become stronger, including AZ’s Bydureon BCise autoinjector gained FDA approval last fall, and Sanofi has already developed an autoinjector for its phase 3 GLP-1 candidate efpeglenatide. We think Trulicity is particularly well-balanced in terms of efficacy and patient-friendliness.
  
  • We estimate (conservatively) that the GLP-1 agonist market will hit at least $6 billion in 2017, up from nearly $5 billion in 2016. We’ll know for sure after all companies report, including Sanofi on February 7. YTD, pooled sales are up 28% YOY ($4.6 billion in 1Q17 + 2Q17 + 3Q17 vs. $3.6 billion in 1Q16 + 2Q16 + 3Q16). We’re optimistic that Ozempic and eventually Intarcia’s ITCA 650 as well as other updated products will accelerate class growth in 2018 and beyond. Not only has semaglutide demonstrated profound clinical efficacy, but Novo Nordisk is very committed to making this product a commercial success, given the promise of GLP-1 for diabetes care. From our view, we are very interested in the opportunity to expand the market and get GLP-1 agonists into more patient hands. This is not a story about in-class competition, from our view, though of course PBMs continue to have a lot of power.
• The REWIND CVOT is scheduled to complete in July 2018, and topline data is expected by year-end. Though listed on slides as an “internal readout,” management has previously promised topline results by end of 2018. During Q&A, Mr. Conterno stated “I don’t want to speculate about what a negative trial would mean – as we think about the future of diabetes therapies, having a CV benefit is going to be increasingly important.” This is especially true in the GLP-1 class since Novo Nordisk’s Victoza is now indicated for CV risk reduction. We’ve heard speculation from Novo Nordisk management that REWIND may be a neutral study due to a lower-risk population at baseline – but Lilly management seems confident, and ultimately, we’ll have to wait for the results. See our pipeline updates section for more on the possible implications of REWIND.

Figure 1. Trulicity Sales (4Q14-4Q17)

3. Jardiance Sales More than Double in 2017 for ~$1.4 Billion Globally, Driving 13% of Growth for Lilly Diabetes; CKD Outcomes Study to Begin This Year; Phase 3 Results in Type 1 Expected in 2018

Lilly’s share of revenue from BI-partnered SGLT-2 inhibitor Jardiance more than doubled YOY in 2017 to reach $448 million, driving 13% of overall portfolio growth while making up only 6% of total revenue. In 4Q17, Lilly’s Jardiance (empagliflozin) revenue rose 88% YOY as reported (85% operationally) to $143 million, which also represents 12% sequential growth from 3Q17. Jardiance accounted for a 13% share of portfolio growth and 6% of total revenue in 4Q17 as well. We estimate total global sales of Jardiance at $1.4 billion in 2017 and at $436 million in 4Q17, though this is speculation since BI’s portion of revenue is not reported publically. This would also reflect more than doubling YOY for 2017 (vs. $612 million in 2016) and a near-doubling YOY in 4Q17 (vs. $230 million in 4Q16). In a full-year 2015 diabetes update, BI listed global net sales for the franchise at €165 million, or ~$183 million, while Lilly collected $60 million in revenue from Jardiance in 2015, putting Lilly’s share at ~33%. Interestingly, Jardiance had a particularly strong year outside the US. Sequentially, OUS sales rose 18%, compared to 10% for the US, and presentation materials attributed this to increased volume in several countries. We certainly hope that the company’s claim of sales growth driven by volume, not price, applies to the Jardiance franchise, so that more people with diabetes can access this very effective drug (offering glucose-lowering, weight loss, CV benefit, and renal protection). Lilly mentioned that Jardiance is the market leader in new-t0-brand prescriptions (NBRx), with >50%, and that the SGLT-2 inhibitor is claiming 64% of new therapy starts among endocrinologists and 51% among PCPs. Indeed, J&J’s Invokana (canagliflozin) has had a challenging financial year following a safety signal for amputations seen in CANVAS and a boxed warning added to the label. J&J management has attributed this to increased patient discounts and  segment mix (more prescriptions going to Medicaid), as well as a 1% share loss (likely to Jardiance). Dr. Jay Skyler has commented that he switched his few patients on Invokana to Jardiance, because “why deal with this concern if you don’t have to?”, although many other experts don’t think amputation is a concern for most of their patients; this latter group emphasizes the low base rate of amputations, even in a diabetes patient population, and underscores that this risk is highly-manageable with patient education and proper foot care. Notably, Dr. Anne Peters has characterized Invokana as more effective in her patients in terms of glucose-lowering and weight loss vs. Jardiance.

• As the SGLT-2 inhibitor market grows ~20%-35% YOY each quarter (most recently, in 3Q17, pooled class sales rose 35% YOY and 9% sequentially to $935 million), Jardiance appears to be “stealing share” from Invokana and driving impressive overall growth despite a weak commercial performance from Invokana. Jardiance revenue nearly doubled YOY in 4Q17, while Invokana revenue fell 28% YOY to $267 million. We’ll be back with a detailed pooled analysis for 4Q17 and 2017 overall after AZ reports this Friday, February 2. YTD, the SGLT-2 market grew 25% YOY to $2.5 billion as of 3Q17 vs. $2 billion in 1Q16 + 2Q16 + 3Q16 sales. The class could easily hit ~$3.5 billion in 2017, compared to $2.9 billion in 2016 (and for additional context, $2 billion in 2015, $800 million in 2014, and $93 million in 2013). Already, Jardiance ($1.4 billion) and Invokana ($1.1 billion) together sum to $2.5 billion in annual sales, and we think AZ’s Farxiga is on track to be a blockbuster this year (YTD, the dapagliflozin franchise has posted $742 million).
• Merck/Pfizer’s SGLT-2 inhibitor products Steglatro (ertugliflozin), Steglujan (ertugliflozin/sitagliptin), and Segluromet (ertugliflozin/metformin) will be launched in the US in 1Q18. Lilly welcomes these class additions. According to Mr. Conterno, the Jardiance business stands to benefit from the market entry of Steglatro, since another company (or two) will be promoting the SGLT-2 inhibitor class – in fact, Mr. Conterno expects Jardiance to be the main beneficiary of these entries. To be sure, there’s immense head room for growth in this category. We don’t think this class is being utilized as fully as it should or could be, as an early, oral treatment intensification option (or even a first-line drug!). A Diabetes Care article published last year showed that only ~7% of second-line type 2 prescriptions in the US go to an SGLT-2, and like GLP-1, the narrative here is about whole class growth rather than in-class competition.
  
  • We found Mr. Conterno’s comments on Merck/Pfizer’s fixed-dose combination (FDC) Steglujan particularly interesting. Referencing Lilly’s experience with Glyxambi (empagliflozin/linagliptin), he described how diabetes care providers prefer not to prescribe FDCs. This pattern of provider reluctance appears for injectable fixed-ratio combinations as well (real-world uptake of basal insulin/GLP-1 therapies has been disappointingly low), and we’ve heard numerous reasons cited – unfamiliarity with the concept of fixed-dose or fixed-ratio combination, concern over side-effects (which doesn’t entirely add up, since combos offer a milder side-effect profile vs. component monotherapies in most cases), reimbursement/access issues, etc. We don’t doubt that Merck/Pfizer face an uphill battle in HCP-targeted education and payer negotiations for Steglujan, but this seems like work both companies are willing to do. Moreover, Steglujan will benefit from Januvia’s (sitagliptin) high degree of familiarity in the diabetes community. We continue to believe that this FDC class could bring very meaningful benefits to patients, and we’d like to see more widespread use with a three-product market (Glyxambi, Steglujan, and AZ’s Qtern [dapagliflozin/saxagliptin]). It appears that Lilly is still committed to combination therapy: Presentation slides listed an empagliflozin + linagliptin + metformin XR submission as a potential 2018 milestone, and this was also mentioned during the company’s 2018 financial guidance call last month.
• Management confirmed that Lilly plans to initiate trials of Jardiance in CKD (participants with or without diabetes) sometime during 2018. Lilly originally announced this intent in June 2017, but didn’t reveal more concrete timing until the 2018 financial guidance update. Currently, CREDENCE and Dapa-CKD are investigating Invokana and Farxiga in people with diabetes-related nephropathy and CKD, respectively, and are expected to complete in June 2019 and November 2020. Given the difficulty of treating kidney disease, in patients with and without diabetes, these trials could have a significant impact, and we’re glad Lilly is putting the legwork in as well. 
• This week, Prime Therapeutics announced a new outcomes-based contract with BI for Jardiance. Under the agreement, total cost of care for patients taking Jardiance will be compared to costs for those on other diabetes medication, in order to determine the rebates Lilly pays out – an interesting approach that could eventually produce a clear picture of how cumulative drug and care costs for Jardiance stack up against others. We’re intrigued that this agreement focuses on cost generally rather than only CV or glycemic endpoints, and we’d love to see how things have panned out in a few years. Prime, a PBM owned by 18 Blue Cross Blue Shield plans, recently announced a similar plan for Victoza. Prime’s CareCentered Contract program has been using outcomes- and value-based contracts since 2010. We think this is the direction healthcare is heading (it has to), and it’s great to see progress in outcomes-based pricing for advanced diabetes drugs.
• Per Lilly’s presentation slides, phase 3 readouts on Jardiance in type 1 diabetes, presumably the 52-week EASE-2 trial (n=730) and the 26-week EASE-3 trial (n=977), are also expected this year. These results could have serious bearing on how providers and regulatory agencies view the risk/benefit profile of SGLT inhibitors for patients with type 1. Sanofi/Lexicon will submit an NDA for their SGLT-1/2 dual inhibitor sotagliflozin in type 1 diabetes in 1H18. The duo has been extremely positive about FDA so far, but we’re admittedly unsure of how the agency will approach the DKA data. To be sure, we and most thought leaders think that DKA risk is manageable with careful patient selection and education. This safety signal should not undermine the time-in-range increase these agents have provided in patients with type 1 diabetes. AZ’s SGLT-2 inhibitor Farxiga is also being investigated in type 1 diabetes through the DEPICT program: DEPICT 1 reported positive results at EASD 2017, and the DEPICT 2 trial is expected to complete in April 2018. J&J completed phase 2 studies on Invokana in type 1, but the fate of phase 3 toward this indication is uncertain. We’ll keep a close eye out for topline results from the EASE program.

Figure 2. Jardiance Sales (3Q14-4Q17)

4. Basaglar Revenue More Than Triples YOY to $154 Million in 4Q17; Climbs to $434 Million for Full Year; High Rebating Causes Flat US Sales, but Growth Prospects Ahead within Medicare Part D

Biosimilar insulin Basaglar (partnered with BI) was once again a bright spot for Lilly Diabetes, with sales quintupling in 2017 to $423 million (albeit, from a low base of $86 million in 2016). In 4Q17, revenue more than tripled YOY to $154 million, from a base of $40 million in 4Q16. Sequential growth was less positive, with sales rising 6% from $146 million in 3Q17. This product is relatively early in its launch cycle, only becoming available in the US in mid-December 2016, which explains the large YOY growth margins and also leads us to expect more dramatic sequential growth. Notably, this is the lowest sequential increase to-date for Basaglar (+17% in 1Q17, +88% in 2Q17, +68% in 3Q17). We imagine this may reflect the high rebates for insulin therapy (Basaglar as well as Humalog) highlighted on the call. Indeed, US Basaglar sales declined 1% in 4Q17 ($114 million vs. $115 million in 3Q17) while OUS sales of Abasaglar (the EU brand name) grew 28% sequentially ($39 million vs. $31 million in 3Q17). Basaglar’s strong formulary positioning in the US – preferred over originator product Lantus (Sanofi’s insulin glargine) on the CVS Health and UnitedHealthcare formularies – has helped mitigate the effects of US pricing pressure on this insulin franchise, but Lilly recognized that this is an inevitable obstacle even for its bright spot Basaglar. Of note, these sales figures are underestimates of total Basaglar franchise revenue, since BI’s portion is not reported publically.

• For 2017, our model attributes an 18% share of portfolio growth to Basaglar, which captured only 6% of total diabetes sales for the year. In 4Q17, Basaglar drove 22% of growth (vs. 7% of portfolio revenue). Based on these figures, it’s impossible to deny that Basaglar is an important product and growth driver for Lilly Diabetes, despite intensifying commercial challenges surrounding insulin in general. Management highlighted Basaglar as a growth driver for the pharmaceutical business overall during Lilly’s 2018 financial guidance call last month. (There was relatively less discussion of the biosimilar basal during 4Q17 prepared remarks.)
• During Q&A, Mr. Conterno shared some early data on Basaglar’s Medicare Part D performance in 2018 thus far, and suggested that this favorable positioning may help offset high rebating in commercial channels. According to Novo Nordisk’s 3Q17 update, Basaglar is listed as a tier 2 drug alongside Tresiba (insulin degludec) and Levemir (insulin detemir) on the Medicare Part D formulary for 2018, while Sanofi’s Lantus and Toujeo (insulin glargine U300) are excluded, or shifted to a higher tier. On Basaglar, Mr. Conterno cited “increased utilization in Medicare Part D starting January 1,” adding, “by the way, we’ve seen excellent uptake.” Basaglar’s share of new-to-brand basal insulin prescriptions (NBRx) hit 25% in the first few weeks of 2018, which is remarkable for a new product in a new class (biosimilars) that still needs to cultivate familiarity among HCPs. Many providers are rightfully wary of the equivalent efficacy/safety of biosimilar insulin, but comfort prescribing Basaglar will only grow over time, and then Lilly/BI may pave the way for additional biosimilar basals (including Merck’s Lusduna Nexvue and Mylan/Biocon’s Semglee – both are facing patent infringement lawsuits from Sanofi currently, and have yet to be fully approved or launched).

Figure 3. Basaglar Sales (3Q15-4Q17)

5. Lilly’s Tradjenta Revenue Rises 23% YOY to $538 Million in 2017; Total Sales ~$1.5 Billion Despite US Pricing Issues in 4Q17; CARMELINA and CAROLINA Readouts Up Ahead

Lilly’s revenue from BI-partnered DPP-4 inhibitor Tradjenta (linagliptin) grew 23% YOY as reported (21% operationally) in 2017 to hit $538 million, driving 5% of portfolio growth – a respectable performance for an established product in such a widely fluctuating market. In 4Q17, linagliptin sales totaled $130 million, also growing 23% YOY as reported (19% operationally) and driving 5% of growth. Sequentially, though, Tradjenta fell 15% after three consecutive quarters of growth (+7% in 1Q17, +26% in 2Q17, and +8% in 3Q17). The geographic breakdown adds important granularity: US sales fell 43% sequentially to $39 million from $68 million in 3Q17, while OUS revenue climbed 7% from $85 million in 3Q17 to $91 million in 4Q17. During Q&A, Mr. Conterno attributed this US crash to “an unfavorable impact due to our changes in estimates for rebates and discounts for the quarter,” calling the drop a sequential anomaly. We estimate total worldwide revenue including BI’s share at $1.5 billion for 2017 and $361 million for 4Q17. Since only Lilly’s portion of revenue is reported publically, these values for total Tradjenta sales are speculative. 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 by BI in a diabetes update released in 1H16.

• CARMELINA, the placebo-controlled CVOT for Tradjenta (n=7003), should read out this year. ClinicalTrials.gov lists a January 2018 completion date, and though the study is still listed as active, Lilly reiterated today that full results will become publically-available in 2018. We’re expecting the presentation at a major diabetes meeting – possibly ADA 2018 in Orlando or EASD 2018 in Berlin. We could also possibly see results from the CAROLINA CVOT, comparing linagliptin to the sulfonylurea glimepiride, though it’s currently listed as wrapping up in March 2019. Lilly listed an internal CAROLNA readout for 2018, and we can’t help getting our hopes up for topline data by year-end: This head-to-head trial could provide compelling, scientifically-sound evidence against sulfonylureas. While SUs remain the most common second-line diabetes therapy, the only advantage they have is low cost, which should never be a determinant of care. Data highlighting the CV harm, hypoglycemia, weight gain, and long-term beta cell burnout that SUs have been associated with could finally kick this class out of treatment algorithms. For more on the potential implications of both these DPP-4 CVOTs, scroll down to our pipeline updates section of this Lilly 4Q17 report.

Figure 4. Tradjenta Sales (2Q11-4Q17)

6. Humalog Grows 3% YOY to $2.9 Billion (2017), Falls 5% YOY to $782 Million (4Q17); Pricing Pressure Makes for Sluggish US Sales – Down 12% YOY in 4Q17

Sales of rapid-acting insulin Humalog (insulin lispro) grew a modest 3% YOY as reported (4% operationally) in 2017 to reach $2.9 billion (from $2.8 billion in 2016). This is an all-time high for annual Humalog revenue, according to our model going back to 2004, although sales have hovered around $2.8-$2.9 billion since 2014. To be sure, the Humalog franchise is growing from a rather high base. The product accounted for 37% of Lilly’s total diabetes sales in 2017 (driving ~5% of growth, by our calculations) and remains the company’s highest-selling diabetes drug, though GLP-1 Trulicity is playing rapid catch-up ($2 billion in 2017, 26% of total portfolio). This fits with overarching class trends, as the GLP-1 agonist market matched pooled sales of the rapid-acting insulin market in 2Q17 and 3Q17 ($1.6 billion). Humalog sales in 4Q17 dropped 5% YOY as reported (6% operationally) to $782 million worldwide, from a base of $820 million in 4Q16 (when revenue rose 3% YOY). This marks 12% sequential growth, from $696 million in 3Q17 (when revenue rose 3% sequentially). Fluctuating revenue and low growth are characteristic of the rapid-acting insulin class overall, which faces competition from GLP-1 agonists and SGLT-2 inhibitors (advanced agents that address postprandial glucose excursions with minimal hypoglycemia risk) on top of tremendous pricing pressure in the US. Mr. Conterno called out high rebates during Lilly’s 4Q17 call specifically in the context of Humalog (as well as Basaglar): We suspect this means that the company is recording less revenue per prescription of the mealtime insulin, with a greater proportion of each sale going to the PBM/payer. All three major players in this market (Novo Nordisk with NovoLog and now Fiasp, Sanofi with Apidra and now Admelog, Lilly) have acknowledged that PBM/payer contracts are more exclusive in the rapid-acting insulin category than for any other diabetes drug class, exacerbating the adverse effects of pricing pressure for the manufacturer. The downside is that as more money goes to the middleman, less money goes back to the companies to fuel R&D and therapeutic innovation. (Plus, some thought leaders including Dr. Robert Ratner have criticized PBMs for adding no value to the healthcare system; we’re not sure it’s “no value,” but of course there’s no way to tell until these middlemen offer up more transparency around price-setting, rebates, and formulary positioning decisions.) Humalog’s financial performance by geography reflects this intense US pricing pressure. In 4Q17, US sales of the mealtime insulin fell 12% YOY to $463 million (down from $525 million in 4Q16) while OUS sales climbed 8% YOY to $319 million (another all-time high, according to our records). For the full year 2017, US revenue increased 2% to $1.7 billion while OUS revenue increased 6% to $1.1 billion.

• There was no discussion during the call of Sanofi’s Admelog (biosimilar insulin lispro), which received full FDA approval in December, and which will probably launch sometime in 2018. Admelog most likely won’t be a serious competitive pressure on Lilly’s Humalog business until 2019. Sanofi management has explained that due to timing of the payer contracting cycle and final approval very late in the calendar year, Admelog is expected to be a substantial source of revenue in 2019 rather than 2018. Given this, we’re not sure how quickly the product will be launched in US pharmacies (though we did see Insulin lispro Sanofi’s European debut in the EASD 2017 exhibit hall). Lilly CEO Mr. Dave Ricks did comment on Admelog during a breakout session at JPM 2018, confirming that the company is not worried about near-term competition from biosimilar lispro. He suggested that pricing pressure is so intense around rapid-acting insulin that Humalog and NovoLog are “already on the floor, with some of the lowest pricing in the market.” Mr. Ricks went on to explain how this distinguishes the Humalog/Admelog story from the Lantus/Basaglar story – Humalog may already be priced competitively and may be able to maintain its current reimbursement status, even in 2019 and beyond, while Lantus faced a major headwind with the CVS Health and UnitedHealthcare formulary exclusions in 2017.

Figure 5. Humalog Sales (1Q11-4Q17)

Pipeline Highlights

7. Nasal Glucagon NDA On Track for 2018 Submission

Though not explicitly discussed during prepared remarks, Lilly’s presentation confirmed that phase 3 nasal glucagon will be submitted to FDA in 2018. This timing was first announced during the company’s 2018 financial guidance call last month. Without more specifics on the filing window, we can expect an FDA decision anytime between 1Q19 (if Lilly submits an NDA pretty soon) and 1Q20 (if Lilly submits an NDA toward the end of the year). Regardless, the company is now positioned at the forefront of the next-gen glucagon competitive landscape. If all goes according to plan, Lilly could launch the first-to-market advanced glucagon product (a significant step up from current glucagon kits, which place immense burden on caregivers, require a lengthy reconstitution process, and leave too much room for error). Zealand’s phase 3 pivotal trial for dasiglucagon (liquid-stable glucagon, which the company aims to commercialize in a pen device branded “HypoPal”) began in 4Q17. Results are expected in 4Q18, and Zealand is targeting 2019 or 2020 for FDA submission – Lilly’s nasal glucagon could already be on the market by that point. Xeris also has an advanced glucagon in phase 3 development, but we haven’t heard any updates on next steps toward regulatory filing in some time. For more, see our glucagon competitive landscape and coverage of ADA 2017, where Dr. Elizabeth Seaquist presented real-world data on Lilly’s nasal glucagon showing a 96% recovery rate from hypoglycemia within 30 minutes and extremely high satisfaction scores from caregivers.

• This new product could also serve as a boost to Lilly’s glucagon business. The company’s glucagon sales have increased steadily throughout 2017 (+10% YOY in 1Q17, +6% YOY in 2Q17, +2% YOY in 3Q17, +14% YOY in 4Q17, and +7% YOY in 2017 overall to $142 million vs. $133 million in 2016) – but we imagine there’s substantial head room here for further growth. As we learned during Zealand’s recent Capital Markets Day, the hypoglycemia rescue market is expected to grow from ~$300 million today to well over $700 million in 2025. We can definitely foresee Lilly playing a leading role in driving this growth with nasal glucagon.

8. Three CVOT Presentations on the Horizon, Expected Milestones in 2018: REWIND (GLP-1 Trulicity), CARMELINA + CAROLINA (DPP-4 Tradjenta)

Lilly has major CVOTs lined-up to read out in 2018, each with key implications for the diabetes field. Mr. Conterno reassured investors during Q&A that the company has great experience designing diabetes CVOTs – EMPA-REG OUTCOME was the first positive diabetes CVOT to report, and SGLT-2 inhibitor Jardiance became the first diabetes drug with a CV indication in December 2016.

• REWIND (GLP-1 agonist Trulicity): This CVOT is expected to complete in July, per ClinicalTrials.gov. Lilly’s presentation (slide 21) lists REWIND as an internal readout for 2018, but management clarified that topline data will also be publically-available by year-end. As debate continues over CV class effect for GLP-1 agonists, Lilly’s study could be illuminating. Like Novo Nordisk’s liraglutide and semaglutide, dulaglutide is a human GLP-1-based molecule – will REWIND support the theory that human GLP-1-based agents are cardioprotective while exendin-4-based agents (exenatide, lixisenatide) are not? Several thought leaders have argued against this dichotomy, and our view is that the mix of neutral vs. positive GLP-1 CVOTs has more to do with trial design than within-class molecular differences. Nonetheless, we imagine this discussion could return with full force once REWIND reports. There are elements of trial design that distinguish REWIND from LEADER (for liraglutide) and SUSTAIN 6 (for semaglutide): Only ~31% of participants have CV disease at baseline, the mean starting A1c is low at ~7.3%, and the average duration of diabetes is relatively short at ~10 years. In other words, Lilly’s study population is lower-risk compared to the population in either of Novo Nordisk’s CVOTs. On the one hand, this could make it more difficult for Trulicity to reach statistical significance on the primary CV endpoint – but on the other hand (and this is exciting), if dulaglutide shows cardioprotection in REWIND, these results could support a broader CV indication for the Trulicity label that applies to a broader spectrum of the type 2 diabetes population (whereas Victoza is indicated for CV risk reduction only in type 2 patients with established CV disease). Above all, as the bar for new diabetes drugs continues to rise, and as patients/providers look for beyond-A1c benefits, positive CVOT results may be necessary in order for a product to compete commercially. As Mr. Conterno put it during Q&A on REWIND: “I don’t want to speculate about what a negative trial would mean – as we think about the future of diabetes therapies, having a CV benefit is going to be increasingly important.” He expressed optimism that REWIND will be positive for cardioprotection. We think this is especially true for the GLP-1 class, given Victoza’s label update to reflect CV benefit.
• CARMELINA (DPP-4 inhibitor Tradjenta): This CVOT comparing linagliptin vs. placebo is expected to complete this month (January 2018). During Lilly’s 2018 financial guidance call and today, management stated that full results will be presented sometime this year. For the most part, DPP-4 inhibitors have shown neutral CV effects so far. There were concerns, following the SAVOR-TIMI readout for AZ’s Onglyza (saxagliptin), that agents in this class might increase risk for heart failure. The current consensus among thought leaders is that this heart failure signal is specific to Onglyza, not a class effect, but the FDA extended heart failure warnings to all DPP-4 products last year (including Tradjenta, Merck’s Januvia, and Takeda’s Nesina). Could CARMELINA results change this, if the study shows resounding safety on heart failure hospitalizations? We’d hate to think that a conservative warning is preventing HCPs/patients from trying DPP-4 inhibitor therapy in situations where it could offer pronounced benefits (CV safe, weight neutral, glucose-lowering efficacy, convenient oral administration, and relatively cheaper than GLP-1 agonists and SGLT-2 inhibitors).
• CAROLINA (DPP-4 inhibitor Tradjenta): This trial compares CV outcomes between linagliptin and SU glimepiride. According to ClinicalTrials.gov, the study is expected to complete in March 2019. Lilly’s presentation slides list CAROLINA as an internal readout for 2018, but management suggested that topline results could also be released by year-end. This data is highly-anticipated given the unique comparator arm of a sulfonylurea instead of placebo. SUs are associated with weight gain, hypoglycemia, beta cell burnout with long-term use, and possible CV harm, and yet the class remains in diabetes treatment algorithms due to its generic status and low cost. An outcomes trial like CAROLINA that highlights CV risk to glimepiride could be enough to push SUs much further down in treatment guidelines (or out entirely) – Dr. Robert Ratner, former Chief Scientific and Medical Officer of ADA, endorsed this at CMHC 2016. Mr. Conterno agreed that positive CAROLINA results could accelerate attrition away from sulfonylureas to other diabetes therapy classes, though he didn’t forecast a volume/sales spike for DPP-4 inhibitors specifically. “My view is that most classes will benefit, it will not be limited to DPP-4s or to Tradjenta in particular – we’ll also see an acceleration for SGLT-2s (in particular, Jardiance) and GLP-1s.” According to Mr. Conterno, sulfonylureas comprise ~20% of the market for oral diabetes medications today, which is far, far too high in our view. We would very much like to see one of the CGM companies assess the value of this therapy in light of the considerably higher hypoglycemia.

9. Lilly Shows Clear Commitment to “Connected Diabetes Ecosystem”; Phase 1 Trial for AID System Expected to Complete April 2018

Lilly highlighted the December 2017 launch of a phase 1 feasibility study for its automated insulin delivery (AID) system with Dexcom CGM, an in-house insulin pump, and a hybrid closed loop algorithm acquired from Class AP in Montreal. This trial is expected to complete in April 2018, and is now officially listed on the company’s pipeline page (you’ll also find it in our pipeline summary table below). The study will evaluate functionality and safety of the system with rapid-acting insulin Humalog (lispro) over 12-18 days in type 1 diabetes (n=30). At JPM 2018, CEO Mr. Dave Ricks elaborated on the decision to build an insulin pump from scratch: “We have a very different idea on this system compared to what people experience today. We want to harness cloud computing and digital experience to create a self-managed system. That’s the vision we’re pursuing – not just to make a pump, but to make a solution that doesn’t exist today. We saw building as a much more attractive option, and a much less expensive option.” Management also briefly mentioned Lilly’s partnership with Rimidi to develop provider-focused tools for integrated insulin management. Overall, management emphasized Lilly’s commitment to its “Connected Diabetes Ecosystem,” which includes a connected pen as well as the AID system – the company anticipates both products launching in two-three years, pending FDA approval. This focus on diabetes technology from a predominantly pharmaceutical company is quite notable; it reflects our view that to meaningfully improve diabetes care, drug/device have to be integrated more seamlessly. This vision could start in early-stage R&D, and definitely needs to be implemented in the process of creating whole products that are patient-friendly, that make medication adherence easy, that minimize the daily burden of this chronic disease, and that maximize quality of life.

10. Lilly Working on Bioavailability for Oral GLP-1 Agonists; Program Lags Far Behind Novo Nordisk’s Phase 3 Oral Semaglutide

During Q&A, several investors inquired about the status of Lilly’s preclinical oral GLP-1 agonists and asked for management’s take on Novo Nordisk’s oral semaglutide (all 10 phase 3 PIONEER studies are scheduled to report this year, starting in 1Q18). What is Lilly waiting for in advancing an oral GLP-1 into phase 1? The main hurdle right now is improving bioavailability, so that a substantial proportion of medicine actually reaches and benefits the patient, and so that cost of goods is reasonable for manufacturing (indeed, high cost of goods was one reason behind Novo Nordisk discontinuing oral insulin). Lilly management suggested that oral semaglutide only achieves 1%-2% bioavailability. They shared some skepticism on Novo Nordisk’s proposed pricing strategy: The company intends to price oral semaglutide on par with injectable GLP-1s, but to have the drug compete with other oral classes like SGLT-2 sand DPP-4s. As Mr. Conterno explained, “the value proposition of Jardiance is pretty high, and it’ll be difficult for oral semaglutide to match.” We’ll have to wait-and-see how market dynamics pan out with oral semaglutide, and before that, we’ll have to take a close look at all the phase 3 PIONEER data. While some development and commercialization challenges are to be expected for a very new therapy – Will real-world patients struggle with the ~30-minute fasting requirement? How will payers respond? Will HCPs show any hesitation? – these questions (which will all be answered in due time) shouldn’t undermine the value that oral GLP-1 could bring to patients. GLP-1 agonists have shown profound glucose-lowering, weight loss, and beyond-A1c benefits like cardioprotection. Injectable administration deters some patients, and an oral formulation could be revolutionary for people with diabetes. Suffice it to say, we’re excited by the prospect of oral semaglutide and we hope to see movement on Lilly’s preclinical oral GLP-1 agonists sometime soon.

11. High-Dose Dulaglutide (3.0 and 4.5 mg) to Advance into Phase 3 This Year; Lilly’s Future in Obesity?

As noted in Lilly’s slide deck, a phase 3 program for high-dose GLP-1 agonist dulaglutide (3.0 mg and 4.5 mg once-weekly) should begin in 2018. Management expressed optimism around phase 2 results during Lilly’s 3Q17 update, but didn’t mention any specific data. We hope to see the phase 2 trial presented at a scientific meeting this year. Notably, we heard from Senior Director Dr. Brian Bloomquist at JPM that Lilly is interested in obesity R&D, but is taking a slightly different approach than Novo Nordisk, Sanofi, and others. Since the regulatory pathway for obesity drugs is more uncertain, Dr. Bloomquist described type 2 diabetes as the primary focus for approval and launch of new products, but explained that the company will pursue obesity indications after that. We imagine that high-dose dulaglutide would be a promising candidate for obesity therapy, given the success of Novo Nordisk’s Saxenda (high-dose liraglutide) on the obesity market and in general, the potent weight loss effects of GLP-1 agonists. We’ll also be curious to see if Lilly eventually investigates its phase 2 GLP-1/GIP dual agonist in obesity. Management alluded to this pipeline product as a potential future blockbuster during Q&A today, pointing especially to its powerful effects on body weight. A phase 2 study in type 2 diabetes is currently ongoing, with an expected completion date in May 2018.

Table 3. Lilly Diabetes Pipeline Summary

The table below reflects the latest updates, as far as we are aware, on Lilly’s diabetes pipeline products. Rows highlighted in yellow indicate notable changes to the pipeline in 4Q17.

Select Questions and Answers

On Trulicity and the GLP-1 Class

Q: What would the impact be if REWIND is negative?

Mr. Enrique Conterno (Head of Diabetes and SVP, Lilly): A number of CVOTs are going to read out this year – REWIND, but also trials for our DPP-4 linagliptin (CAROLINA and CARMELINA). Lilly has quite a bit of experience when it comes to designing CVOTs in the diabetes space, so we feel good about how we designed the trial, and we continue to be optimistic about the result. I don’t want to speculate about what a negative trial would mean – as we think about the future of diabetes therapies, having a CV benefit is going to be increasingly important.

Q: Ozempic will be launched shortly, if it hasn’t already. What changes do you expect to Trulicity’s market share, also considering that Victoza now has a CV claim?

Mr. Conterno: We are very pleased with the performance of Trulicity. We had significant sequential QOQ growth. Our market share for the last week is now >40% for the first time, so we’re seeing continued gains in overall share despite Victoza’s CV indication. One big thing to keep in mind is how under-utilized the GLP-1 class is today. In the US, GLP-1 prescriptions total about 30% basal insulin prescriptions, so there’s huge room for expansion. Trulicity is going to benefit from that. We’re extremely well prepared for semaglutide’s launch. We provide a unique experience for patients, and we’ll be able to compete very effectively.

Q: With Trulicity, was there anything strange with pricing or inventory in 4Q17, or was that clean compared to earlier quarters, just so we can understand the ramp?

Mr. Conterno: There was some buy-in, roughly around $25 million when it comes to inventory. We’re excited by the sequential growth Trulicity is having.

Q: On oral GLP-1, your program is much earlier than Novo Nordisk’s. Why is there such a disparity in timeline? Does Novo Nordisk have a unique technology that Lilly has had trouble replicating?

Mr. Conterno: We are highly interested in this space. We are working on oral GLP-1 agonists, and as we think about progressing to the clinical phase, the hurdle we face is getting the right bioavailability for our product in order to make sure we can make this commercially successful on a worldwide basis.

A: At a high level, oral absorption of peptides is hindered by a lot of mechanisms. We assume Novo Nordisk’s product only has 1%-2% bioavailability, so you lose a lot of the substance. There’s also a dilemma about fasting and not eating for some time after taking the drug. So really, we think oral semaglutide is a sub-optimal agent. It would be so much better to have a traditional small molecule for this receptor.

Q: Obviously, we’re going to see a lot of oral semaglutide trials in 2018. While there are concerns about food effects and nausea, what impact will oral semaglutide have on your overall diabetes franchise including GLP-1?

Mr. Conterno: I think it’s extremely important we wait for phase 3 data. There are going to be some tradeoffs between efficacy and side-effect profile. In real life, is this product going to perform, given that it may require strict adherence when it comes to fasting? We need to see the data. Novo Nordisk has explicitly expressed an intent to price this product on par with existing injectable GLP-1s, but is going to position oral semaglutide earlier in the course of treatment to compete with other oral drugs (SGLT-2s, DPP-4s). We need to see how that’s going to work, because the value proposition of Jardiance is pretty high, and it’ll be difficult for oral semaglutide to match. There’s a lot of speculation circulating right now. We need to see more data before we can provide an educated sense of how successful that product could be and the impact on the rest of the diabetes market.

Q: I’d love to get your thoughts on real-world use of oral semaglutide, particularly the carefully calibrated pre- and post-dose fasting periods and the specific water volumes. How will that play out in a real-world setting based on the experience in diabetes that you guys have?

Mr. Conterno: That’s a question probably better for Novo Nordisk than for us. As a frame, anything that introduces complexity into the lives of people with diabetes is going to have a number of headwinds. We develop products that can be adhered to simply, that offer a number of benefits. That’s our mantra when it comes to developing our diabetes products.

On Jardiance and the SGLT-2 Class

Q: Can you give us your perception of where the SGLT-2 class is going to go? What are the barriers to overcome? How does CVOT data balance out with additional safety concerns?

Mr. Conterno: I continue to be quite bullish on Jardiance, and I think the frame should be much more on Jardiance rather than the SGLT-2 class. When you look at the class, you do see a number of headwinds, in particular because of the label update for Invokana. That has been a headwind for the class, and for what was formerly the leader of the class, but Jardiance has been a catalyst for the overall market. We’re focused today on type 2 diabetes, but we do have trials for heart failure and CKD. We like that there will be increased promotion by having some additional companies enter the space. Finally, being able to make cardioprotection a much higher priority for all physicians, beyond A1c – that will be important for the Jardiance business. We are encouraged by the progress we see, but much more progress is needed.

Q: What do you think the impact will be of Merck entering the combo space with an SGLT-2/DPP-4? What are you expecting from Merck, given they haven’t launched something in diabetes in a while?

Mr. Conterno: As I mentioned, we view additional competitors coming into the SGLT-2 class as a positive. We believe it’s going to be an important catalyst for growth, and it’s going to help the class, but given Jardiance’s strong position, we’ll likely be the main beneficiary. I can’t comment on Merck’s strategy, but when we look at current practices from physicians in diabetes, they prefer not to prescribe fixed-dose combinations. We do have that experience with Glyxambi. So, we view Steglujan as a long-term proposition for Merck. I don’t know exactly what their strategy is, but they’re going to have to establish the benefit of ertugliflozin first anyway. We are prepared, and I feel very good about where each of our brands stands today in terms of the benefit it provides.

On Basaglar and Biosimilar Insulin

Q: Can you talk about the previous four quarters of sales for Basaglar?

Mr. Conterno: On Basaglar, we do see very strong sequential growth. We do also have high rebates. Part of this is channel accrual given the increased utilization in Medicare Part D starting January 1. By the way, we’ve seen excellent uptake. In the first few weeks of 2018, we’re capturing 25% of new patients in the basal insulin class. We’re excited about the growth prospects.

Q: When do you expect additional biosimilars? When should we expect interchangeability data on Basaglar? Is that something you’re actively pursuing?

Mr. Conterno: To your first question, that should be directed to Sanofi, because it depends on ongoing litigation. As for interchangeability – we think this will eventually happen. But I view this as years away. There’s nothing imminent.

On Tradjenta and DPP-4 CVOTs

Q: Tradjenta looked very strange in 4Q17 in the US. Can you give us some color on what happened?

Mr. Conterno: We did have an unfavorable impact due to changes in estimates of our rebates and discounts. That was roughly $10 million as it relates to Lilly revenue. In 3Q17, we actually had a favorable adjustment for Tradjenta, so sequentially it does look like an anomaly.

Q: Switching people off SUs onto higher-cost brands has been a high value driver for diabetes companies. If CAROLINA is positive, do you think this will drive more conversion to DPP-4? Or do you see it as a broader catalyst for branded diabetes drugs over sulfonylureas?

Mr. Conterno: SUs still represent ~20% of the oral diabetes drug market. That’s declining over time. A positive CAROLINA trial would accelerate that significantly. My view is that most classes will benefit, it will not be limited to DPP-4s or to Tradjenta in particular – we’ll also see an acceleration for SGLT-2s (in particular, Jardiance) and GLP-1s.

On the Diabetes Pipeline

Q: Over the past two-three decades, Lilly has always had one or two big potential products in the pipeline that investors could focus on. This appears less a dimension of Lilly today. You probably disagree, so can you please point to what billion dollar-plus opportunities you have in the mid-stage pipeline?

A: …The other agent I want to emphasize comes with potentially more powerful weight loss effects compared to current GLP-1, and that is our GLP-1/GIP co-formulation. We have seen some interesting data in phase 1, in healthy volunteers, so now we’re conducting a larger phase 2 study. How much can this actually reduce body weight, while at the same time offering a powerful glucose-lowering effect?

On Price and Policy

Q: Sequentially, it seems like there was a higher degree of discounting and rebating for diabetes products in 4Q17. Can you give us some insight into that?

Mr. Conterno: We continue to see pricing pressure across all diabetes products. Rebates affect our insulin portfolio, including Humalog and Basaglar in particular. But we are being extremely disciplined. We like the access we have across all our top brands. Trulicity and Jardiance are both well-positioned for 2018.

Q: How do you anticipate the administration is going to go about lowering drug prices? Certainly, there’s a lot of value trapped within the system in discounts and rebates. How would you go about unleashing that and getting it back into the hands of employer groups and more importantly, patients?

Mr. Dave Ricks (CEO, Lilly): I think you’re right to point out – what’s the connection between Lilly’s actions as a provider of healthcare benefits to employees as well as our balance sheet positions? We try to make them as similar as we can. We do self-insure, and we own a financial risk for our beneficiaries and our programs. I think there’s two things we do to stand out from the market: (i) We have no bias in our health insurance programs for our employees toward medication, whereas in the general marketplace, on average, patients pay four-fold out-of-pocket for medications and other health services. We think that bias should go away. (ii) The other thing which is new for us is rebate pass-through. We’ve executed, for our employee population, a rebate pass-through program. We are calling for that throughout pharma and directly from the government, because CMS has unique roles here, particularly in the Part D program. We’d like to see rebate pass-through for Part D beneficiaries. As you know, the rebate levels across all pharma are something like 30%-40%. Rebate pass-through could have an immediate and very positive impact on seniors who are struggling to cover their doughnut hole – we think this is a good idea that the administration should act on immediately. I would expect a busy year regulatory-wise. In Washington, they’re looking to introduce market mechanisms and lower cost at the pharmacy counter for patients. They’re trying to make positive progress that actually affects patient pocket books.

-- by Ann Carracher, Payal Marathe, and Kelly Close