Eli Lilly Management Presents at Cowen and Company 34th Annual Health Care Conference (Transcript)

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 |  About: Eli Lilly and Company (LLY)
by: SA Transcripts

Steve Scala – Cowen & Co.

Good morning. I would like to welcome Eli Lilly to Cowen's 34th annual healthcare conference. Representing the company is Derica Rice, who is Executive Vice President of Global Services and he is also the Company's Chief Financial Officer. Among all of the 10 big cap pharma companies that we follow at Cowen, if you look to our pulse report you will see that Lilly has the most robust growth through the end of this decade. And that is of course driven by a pipeline, which has a multitude of big potential products and I think what’s particularly impressive is those big potential products have generated confirmatory data in recent even weeks. So it’s a story which is developing rapidly into a company with really standout growth. And the person who will deliver that of course is with us today, Derica.

Derica Rice

Good morning. It’s my pleasure to be here with you all today at the Cowen conference. Before I begin my remarks, let me read our standard protocol here. My comments will include forward-looking statements based upon our current expectations. Our actual results could differ materially due to a number of factors including those outlined in our latest 10-Q and 10-K filings with the SEC. The information we provide about our products and pipeline is for the benefit of the investment community, is not intended to be promotional and is not sufficient for prescribing decisions.

What I’d like to do is maybe just make a few opening comments and just share with you, just a handful of slides very quickly and then we can go straight into questions and answers and I can address anything that may be on your mind. But as Steve said, we’re very excited about the prospects of our pipeline today and obviously also in the industry we’re probably one of the first as being characterized by the most challenging series of patent expires. And so as we’ve been managing our way through this period, we really do try to find a balanced approach of 3 areas that we really have been focused on here as of late.

One, in the near term, we want to make sure that we meet our commitments as we look to close out 2014 and many of those commitments we established as far back as 2009. We also want to make sure that with the pipeline and the fact that we have a number of products before regulatory review today that we’re well-positioned to begin some of those launches this year and returning to growth in 2015 and expanding margins beyond that. And then last but not least, our third approach focus has been really on how do we make sure that we can create a sustainable level of R&D output and flow and well beyond even our current cohort of phase 3 assets in clinical development.

So with that we really have had a three-pronged strategy that’s enabled us to help manage our way through the series of patent expirations and truly reposition the firm to be in a stronger position for the future. We have been focused on replenishing and advancing our pipeline, investing and driving growth in those areas where we thought we could achieve that such as doubling the size of our animal health business, doubling the size of our Japanese business as well as doubling the size of our emerging markets business.

And last but not least we've also said that while we were not interested in doing a large scale M&A, we felt that there was ample opportunity for us to drive significant productivity gains within our own expense and infrastructure where we could takeout over billion dollars of out of our own cost structure which would enable us to manage our way through this patent expiry without sacrificing or compromising our investment strategy across the first two elements.

In terms of how we’ve done, as you will see here we had a goal of 10 assets in phase 3 by the end of ‘11, we actually exceeded that goal with ‘12 and later peaked at 13, many of which are sitting today in this next call where we have currently positive data, phase 3 data for five of those assets, ramucirumab, necitumumab, empagliflozin, dulaglutide and our insulin glargine product and we currently have four molecules that are before under review for regulatory approval.

And then last but not least, if you look at our -- the current state of our broader portfolio, including our phase 2 and phase 1 is the largest early to mid-stage portfolio in the history of the firm. So we believe that we are in a very advantageous position to be able to sustain the R&D output that we’ve begun with the cohort of phase 3 assets that we have before us today.

And last but not least, we are looking very much forward to being able to launch some of these products as we think about the latter half of this year.

So with that, my last two slides is really along this journey what we’ve tried to do is to put forth a very transparent score card and to give a clear indication as to – as we were navigating our way through this period, where we’re winning or losing, or where we’re making advances, or where we’re going to reverse. And so one of the things we’ve done is each year -- at the beginning of each year we put forward what we think are the key pipeline readouts that we expect over the course of the next 12 months. And then we keep track on each of our quarterly earnings call. What you have before here is the year end results of 2013 and as you can see that while we had some red checkmarks, disappointments along the way in the last 12 months, we had many more exciting positive news that outweigh that. And then as we think about 2014 this is the same slide that we used at our January earnings call to close out 2013 where we put forth what are the key events that we would be monitoring as we look to manage our way through 2014, you can see that we started the year with 3 positive data readouts.

Most recently the AWARD-6 trial for dulaglutide, but previous to that the non-small cell lung data for ramucirumab and second line therapy as well as also still for ram the RAINBOW gastric cancer results. So these would be my opening comments. And now I would love to entertain any questions or comments that you may have on your behalf.

Question-and-Answer Session

Steve Scala – Cowen & Co.

So, Derica, the company has given out guidance on SG&A and R&D, margin simply with a timeline it will be fully – these guidelines will be achieved post 2014. And I think the other element the company has said is that consensus reflects those targets being achieved in 2019 and that Lilly thinks they will be achieved before 2019. So do I have all of that correct? And if so can you give us any more clarity on how much before 2019 do you believe those margin targets are achievable? Because if they are achievable, significantly before 2019 numbers –

Derica Rice

Sure. What we said Steve is that we fully expect to achieve those goals at least ’19, if not before. We are not in a position to provide more details in terms of absolute timing. What I can say is that you need to expand margins and get back to those historical levels is really predicated on two aspects – one is our ability to return the growth in our top line, and if we are able to do that, we are able to get full leverage out of the --- products that our top line will grow but our bottom line will significantly faster than our top line because our OpEx stream, our gross margin should expand as well as you should expect to see in terms on the R&D front spend that we are at about the right range. And if you look at the 2014 guidance that we put out there, we said just between 2013 and 2014 alone we will reduce our absolute R&D spend somewhere between $800 million and $1 billion between 2013 and 2014. So those kind of synergies and with that kind of operating base growing forward we should be able to accelerate our bottom line growth.

Unidentified Analyst

[Question Inaudible]

Derica Rice

Sure. If you look across our portfolio, so maybe let me start with diabetes and then I will talk a little bit about oncology and then I will get to some of the other therapeutic classes. If I look within diabetes, we think about dulaglutide, I will take the most recent AWARD-6 data, our ability to demonstrate non-inferiority versus Victoza says that we are the only other glib that has been able to achieve that milestone. And then when you look at the other characteristics embedded in the dulaglutide opportunity, we like to think that within dulaglutide we are actually able to aggregate some of the best attributes of each of the glibs in that space into one product call dula. So we will be once weekly administrating, so consistent with BYDUREON, but we will have a ready-to-use device at a much easier administration versus BYDUREON and we will have the efficacy of Victoza, so all in one product called dulaglutide. So we believe that those will allow us… those attributes will allow us to clearly differentiate.

Unidentified Analyst

[Question Inaudible]

Derica Rice

Well I think that two things, one in the glib space alone and we believe that with the introduction of dulaglutide we potentially have the opportunity actually to grow the class of drugs to expand the market for glib. At the same time, we are also able to… with the introduction of glib and the introduction of our basal insulin to be able to take advantage of the overall insulin rate of type 2 diabetes. So for instance, if patients go directly or if they stay on orals longer much having a presence in both the DPP-4 segment with Trajenta as well as the potential to have a presence in SGLT-2 class with our introduction of empagliflozin, that if patient stay on orals longer, we can benefit from that in terms of our product offering. If they then progress to glibs, we have the benefit of offering dulaglutide. If they bypass glibs altogether and it goes straight to insulin either in terms of basal insulin or mealtime insulin, we obviously have the legacy of Humulin and Humalog in mealtime and with our potential introduction of two basal insulins both the glargine like basal insulin as well as our own novel basal insulin, we cover each of those therapeutic treatment segments.

So we are somewhat indifferent as to how the patient cascades. It’s more about meeting the patient where they are at that time. And so that’s how we think that we can both differentiate within each of those areas as well as take advantage as well from the breadth that we’re able to build across our diabetes portfolio. If I look at the therapeutic area beyond diabetes when we think about oncology, so let’s take Ramucirumab. One of the questions we would get earlier was “so how you guys differentiate ram from Avastin?” It is Ram just not another Avastin look alike and one of our clear strategies were, from a drug-development standpoint, was that we initially would go after areas that are tumor tight for which Avastin was not indicated. So Avastin is not indicated as mono therapy for gastric cancer.

And likewise Avastin is also not indicated for second-line non-small cell lung cancer. So the fact that we were able to achieve positive and the clinical endpoint in both gastric cancer mono therapy and second-line non-small cell lung cancer, in both patients with squamous and non-squamous cystology offered key points of differentiation of our oncology drug versus the gold standard that’s out there in the market today. If I look at therapeutic areas beyond those two, I will take IL-17 where our compound called Ixekizumab which is for psoriasis. We saw a very compelling phase 2 data where if you look at the passe [ph]75 score, we more than met that threshold and in fact in Phase 2 we saw that roughly 40% of patients had complete clearance… not in terms of clearance. So at least from the data that we’ve seen that from an efficacy standpoint we would be absolutely at least on par with the Novartis compound, and then likewise if you look at the side effect profile versus the anti-TNFs, these will be clear differentiators for us in the market place that will allow us to have a competitive positioning versus our competitors.

Now if we continue to go down other therapies where we think we can clearly differentiate, we have Solanezumab which is still where we’re running EXPEDITION 3. As you may recall, we already conducted two-phase 3 studies, EXPEDITION 1 and 2 for which overall it did not meet this clinical endpoint. What we did see is that there was a subset of patients, or cohorts of mild Alzheimer’s patients who were amyloid plaque positive where it did have a meaningful, clinical impact. And so we are now running a third trial EXPEDITION 3 solely focused on mild Alzheimer’s patients, amyloid plaque positive where we believe we can differentiate ourselves in the marketplace and if we are successful, Solanezumab would be the only drug that would be indicated at that time to slow the actual progression of the disease and in that cohort we saw about in that subpopulation, we saw about a 34% reduction and the decline or the deterioration of patients with mild Alzheimer’s disease. So what I have tried to share with you are some of the examples where we think we can clearly differentiate ourselves in the marketplace assuming we reach the clinical endpoint.

My last point on diabetes as it relates to clinical differentiation and this is around our novel basal insulin. What we clearly stated is that we believe based upon the Phase 2 data that we saw that it is possible that we can differentiate ourselves versus Lantus as it relates to a potential better hypoglycemia profile potentially and/or better way profile and potentially better A1c profile. If we are able to statistically meaningfully differentiate across a cohort of those parameters, then we think we have a clear differentiating product versus glargine and at the same time also with the introduction of our novel basal insulin, you could also see a reduction in the use of mealtime insulin in combination to the tune of and order magnitude of 20% to 25%. We will only move forward that compound if we are able to statistically separate across those parameters. Yes.

Unidentified Analyst

[Question Inaudible]

Derica Rice

It could be enough depending upon which one. We know that in the case of type 2 diabetes, clearly A1c is the level in glucose control as the primary. Okay? But obviously if we can differentiate across those secondary endpoint of weight and/or hypoglycemia and see a reduction in mealtime and/or we have a true product. Yes.

Unidentified Analyst

[Question Inaudible]

Derica Rice

Partly, it’s a great question if you heard that. Partly it will be a redistribution but partly it will be a net add-on, but relative to what we would typically see in a primary care setting, those incremental costs are somewhat inconsequential and in fact it will look more -- is much more significant than the commercial investment in the ecology space if that gives you a sense.

Unidentified Analyst

[Question Inaudible]

Derica Rice

I will say it’s difficult. It will be difficult to come forth before the conclusion of the 30-month stay. We weren’t surprised by the response of Sanofi, in fact, we very much-anticipated that. And one thing we were working towards was to make sure that we can get our submission and as quickly as possible which then forces them to start the clock. And if you take out, if you take the 30-month stay to its full extent, or timeline that puts us in about a mid ’16 timeframe. So that’s kind of what we are working with here but clearly we believe that we have not invalidated any of their patents in this case and we will challenge and fight as vigorously.

Steve Scala – Cowen & Co.

Apologies for splitting hairs. But back on the margin, you said that those studies would be delivered upon the return to top-line growth, that was the criteria. But that’s happening in 2015, right. So and then it looks like your top-line will grow for the next seven years. So what are the other things that we need to see to achieve those targets?

Derica Rice

The biggest thing is the top line growth and that is our plan A. So we’ve built out -- if you think about the new product launches, so let me maybe just walk through the P&L to give you may be a more in-depth sense. So to launch the cohort of products that you have before us in terms of either regulatory review or that we anticipate launching, we can launch those within our existing manufacturing footprint. So we do not have to commission new bulk manufacturing capacity to accommodate that. On the insulin front, we can actually – it was actually a technical agenda that’s underway that will allow us to double our insulin manufacturing capacity within our current insulin manufacturing footprint. That will allow us to accommodate both the continued growth in our mealtime insulins as well as accommodate the launch of two basal. So that part of our business you shouldn’t see significant infrastructure increases, and so as we launch those new molecules and we are flowing additional units though our existing base, our per unit cost should come down which affects positively our gross margins.

If I look at the SG&A, with the launch of Trajenta in diabetes, where we're actually potentially going to launch 4 molecules, we built out our commercial footprint and we use that as an opportunity not only to put sufficient support behind the launch of Trajenta but also to create capacity to accommodate the potential launches of dulaglutide and empagliflozin and our two basal insulins in clinical development. So with that we do not need to increase significantly the size of our sales force. There will be the additional marginal cost of the marketing spend behind those brands. So again the top line should exceed our SG&A expense growth as example. And so over time you will do that difference in rates of growth you should see margin expansion and bottom line growth faster.

Another question I get asked, Steve, so Derica, if you were so reliant on top line growth, what happens to the topline growth that doesn’t come? Either you do not get your products through regulatory to review or the launches go much differently than what you anticipated. Then obviously what we will do is we’d like to come back and revisit both the size of our commercial footprint, if we’re not launching the molecules, they are proceeding there in phase 3 today, then that means probably don't we need the size of commercial footprint that we’ve created. Likewise we would also revisit what's the right level of R&D spend for a company that would have a much more revenue line than what may be embedded in our internal projections. So in either scenario we believe we can return to those historical levels of profitability.

Unidentified Analyst

[Question Inaudible]

Derica Rice

We haven’t talked about where we think we will fall in the treatment paradigm. I think a lot of that’s going to depend on the data, and so as we see the data that I think will get data on our IO17 later this year, it’s probably around midyear that we will have a readout on our ixekizumab and as we get that, then that will determine -- the data itself will determine what will likely to be utilized. ’14 is going to be another key year for us and as you can see from this chart, there are number of key data readouts that we will have that will not only tell us where we stand on our current – 4 products that are before regulatory but where we said in regards to the remaining product in phase 3 development as well.

Unidentified Analyst

[Question Inaudible]

Derica Rice

Clearly with this compound, if we can demonstrate that we can significantly increase the bone marrow density, patients beyond what they are able to get today either on the [indiscernible] as well as significant reduce the prevalence of fracture rates in those severe osteoporotic patients, then we believe that, that will be a clear differentiator. So we would look to go after those more severe osteoporotic patients, not mild.

Unidentified Analyst

[Question Inaudible]

Derica Rice

Yes, this grows both. But it would potentially grow bone and more significantly than even a Forteo.

Steve Scala – Cowen & Co.

It’s still a few years off, but what are the profit implications of what happens with Erbitux in 2018? Do you gain full US rights but you lose foreign royalties. So is that good for the profits in this drug or is that a drag?

Derica Rice

So the sales base for Erbitux is still larger in the US than outside of US, or at least in this case Europe. We will still have co-rights, co-ownership rights both with BMS and Merck KG in Japan. So we are really only talking about the US and Europe. In the US let’s see if I recall correctly, we today receive about a 39% royalty on Erbitux sales in the US. We have not disclosed what the royalty rate is we receive on Erbitux outside of the US and Europe. But it’s fair to say with the conclusion of arrangement with BMS and ’18 we’d then convert to 100% of that and obviously from a commercialization standpoint we have an existing oncology commercial footprint that this would just fit right into. Currently we do not promote Erbitux in the US.

Steve Scala – Cowen & Co.

So from a profit standpoint it is a big plus.

Derica Rice

Yes. Part – it’s really going to depend on what the K-curve for Erbitux looks like in terms of –

Unidentified Analyst

[Question Inaudible]

Derica Rice

Yes, we’re excited about the opportunity. We believe that we will be not only participants to floors [ph] but may even be the only pharma company with a fixed dose combination of linagliptin or DPP 4 and empagliflozin, or SCOT-2 [ph]. We look to submit this later this year probably in the second half and so we think that that will also again offer a clear point of differentiation for us versus our competitors.

Unidentified Analyst

[Question Inaudible]

I think it’s going to depend upon the efficacy of the product themselves. And so clearly some of the early growth of this – DPP 4 class was benefiting from the TZDs, okay and as those were ramping down and having some other challenges clearly there was a conversion underway. I think after that you should at least expect that the DPP 4 -- type II diabetes in the various market around the world, because we know that still from an ease of use standpoint, and from a patient convenience and preference if they can be well-controlled on oral, then that’s where physicians are most comfortable prescribing definitely in the primary care settings and that's typically what patients are more willing to take if they can in any kind of way avoid an injection whether it’s a glib or insulin. Obviously as those patients there, then I think having the introduction of the SGLT-2 class and potentially of the combination of SGLT 2 and the DPP4 gives us the opportunity to lengthen the efficacy of oral class and that’s another way of driving growth and lengthening that capture rate before they potentially cascade to either glib or an insulin.

Steve Scala – Cowen & Co.

I think we need to move to the next room –

Derica Rice

I have been kicked out. So thank you for your time and your questions. If I haven’t answered everything, maybe we can cover them in the next session.

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