Eli Lilly (LLY) CEO Presents at Sanford C. Bernstein Strategic Decisions Conference (Transcript)

May.28.14 | About: Eli Lilly (LLY)

Eli Lilly and Company (NYSE:LLY)

Sanford C Bernstein Strategic Decisions Conference Call

May 28, 2014; 03:00 p.m. ET


John Lechleiter - Chairman & Chief Executive Officer


Tim Anderson - Sanford Bernstein


I’m Tim Anderson. I’m the Global Pharmaceutical Analyst with Sanford Bernstein and thanks for coming for our fireside chat today with Eli Lilly and more generally I hope you’re enjoying the conference.

Lilly is a stock that we’ve been recommending for the last couple of years for a variety of reasons. It’s an earnings recovery story, after they worked their way through a difficult 2014, at least our model shows that they should return to growth for a multi-year period. It’s also a new pipeline story and for us that’s been a pivotal part of the investment thesis.

Lilly’s got a smaller revenue base, so of the nine companies I cover across the U.S. and Europe, Lilly’s revenue base is amongst the three smallest revenue based companies being Eli Lilly, AstraZeneca and Bristol. All have revenue basis of plus or minus $20 billion and that’s important, because it means that the pipeline drugs can make a bigger difference.

And lastly, Lilly’s put forth a promise to kind of rain in spending levels as a percent of revenues, eventually bring its cost structure more in line with the peer average and that should also be a uplift to earnings.

We are pleased to have with us today Dr. John Lechleiter who is the Chairman and CEO of Lilly. He’s been in that role since 2008. He has been with the company for far longer than that, since 1979, starting off as an Organic Chemist and then working his way up through a variety of scientific and commercial roles, and he is one of the very few scientist CEOs in the big pharma space.

You’ll notice that on your chairs you have question cards like other sessions at this conference. You want to fill those out and I think you just hold them up and someone brings them up to me and then I do my best to go through them. Try to make them legible of course, that makes my job easier.

With that, lets begin. John, I’ll turn it over to you to see if you want to make a few opening remarks.

John Lechleiter

Okay, thanks Tim. Good afternoon everybody. Its great to be back after one-year hiatus.

I think Tim summarized the Lilly story pretty well. Entering as CEO in early 2008 it was clear that what lied ahead of us at the time were the expiration of the patents for three or four very significant important products. Most recently Evista, we lost the U.S. patent on Evista in March, we lost the U.S. patent Cymbalta last December.

These are multi-billion dollar products, so we readied ourselves and prepared ourselves as best we could to work through and navigate through a period where we knew we were going to be loosing billions of dollars of our top-line, at the same time knowing we also had to invest and maintain steady investment in R&D to bring through that next wait of products and yet those launches were going to be somewhat out of sync with the negative impact we felt from the patent expirations.

Nevertheless, I think we’ve done a very good job of navigating through this period. We set some guide posts for investors in late 2009, saying that in no single year did we anticipate revenue being less than $20 billion, net income being less than $3 billion, operating cash flow being less than $4 billion.

There is in the guidance we’ve given this year, our guidance for revenue is actually slightly below the $20 billion, but by and large we’ve lived up to those commitments and we said we’d also maintain our dividend, at least that its been current level in 2009 and we’ve accomplished that as well.

In the meantime we’ve replenished our pipeline, not just our late stage pipeline, but our earlier stage pipeline as well. We had four regulatory filings last year; we launched Cyramza, this is ramucirumab. This was one of the reasons why we acquired ImClone in late 2008.

We launched Cyramza for Advanced Gastric Cancer several weeks ago. We received approval several days ago for empagliflozin. This is the SGLT2 inhibitor, part of the Lilly BI partnership. We received license for that product. It’s going to be called Jardiance in Europe and we hope to gain approval for dulaglutide later this year and file at least two more NCEs in the upcoming months.

So all in all we believe that our strategy is playing out. We got some exciting molecules in development, not just for diabetes and oncology, but for other therapeutic areas as well and I think we put the company on track to maintain a steadier output of new molecules over the longer term as well.

We completed a major acquisition or we announced a major acquisition, which we hope, will close by the first quarter of ‘15 and that’s Novartis Animal Health a few weeks ago, which moves us from the number four animal health player to the number two position. We like the animal health business.

We believe there are lots of synergies with pharma. It takes Elanco from being roughly 5% of our revenue base, as recently as the middle part of the last decade to something closer to 15% to 20% now and we see opportunities there for continued good growth and for good margins.

And I guess last night or middle of the night we announced our intention to partner with Sanofi to assist them in development of strategy to hopefully achieve the OTC status for Cialis, following the expiration of some of our patents. So that’s the latest news I guess you could say.

Apart from that, I’m happy to be here and Tim, I’m looking forward to the questions.

Question-and-Answer Session

Tim Anderson - Sanford Bernstein

John, you had mentioned you are one of the few companies that have given long-term guidance and notably about the only company that’s really fit that guidance. I mean you talked about maybe coming in just a touch shy on the revenue side, but on the net income side it looks like that would likely be intact. So that was given in 2009. That was guidance for 2014.

When you look forward from here, I know the company hasn’t given explicit long-term guidance nor is it likely to do that again if I understand it right, but what can you say generally about this return to growth period. It seems like we do exit 2014 and we are on a fairly steady growth trajectory, maybe a down year or a flat year in 2017, that’s if a couple of other products that go off patent. But from our perspective it looks like you do have growth and it is one the better growers as the universal companies that we cover.

John Lechleiter

Yes, I think whether and what form we give guidance as we sort of exit YZ is you have to be determinant. I think we have said that certainly by the end of this decade we want to get back to a point where our combined SG&A and R&D is somewhere less than 50%, which is moving back to that more traditional percentages, 18% to 20% of sale for R&D and 28% to 30% of sales for SG&A. That will be a combination of continued expense management and also obviously growing revenue.

But you know, we have an infrastructure today for oncology, we have an infrastructure today for diabetes as we launch products into those two therapeutic areas for example. I believe we can do that without sort of full bore kind of expenses that one might associate with a new product entry and a completely new or different category.

So I think a lot of sort of the shape of the up swing which we anticipate coming in ’15 or beginning in’15 is going to be a function of some more data readouts. We have our three autoimmune assets baricitinib for rheumatoid arthritis, ixekizumab for psoriatic and tabalumab for Lupus that will read out, give us Phase 3 data, at least from individual trials later this year.

We gave top line data on our Novel Basal Insulin recently. We got two more trails underway for Cyramza, ramucirumab. One in hepatocellular cancer should read out in the middle of this year and we got a colorectal study that’s still going.

So we have a lot of balls in the air right now. Its pretty clear we’re emerging from this period we call wisely, which frankly has been the most challenging period in our history with a very strong capability in diabetes and oncology and animal health and our biomedicines business unit, which really took the brunt of most of our patent expirations were our big neuroscience products were all placed, is really going to be reinventing itself.

And we have a couple of big plays there in addition to the autoimmune assets, we have Solanezumab, the Alzheimer's, the anti beta amyloid, antibody in Phase 3, the EXPEDITION 3 trials enrolling. We have either isosorbide. We think we’ve more than caught up with Merck with our CETP inhibitor Phase 3 study being fully enrolled and with other opportunities in some other spaces there to complement things like Forteo the, possibility a sclerostin antibody, Blosozumab phase 3.

We partner with Pfizer on the pain drug tanezumab, which we believe and hope we can get off of clinical hold after supplying the FDA with some additional data sometime early next year.

Tim Anderson - Sanford Bernstein

So we’ll get to the pipeline in a minute, but lets stick with the cost structure promises if we can and those are kind of tied to the pipeline. So you ran a long list of pipeline drugs. I have on my little cheat sheet that I look at often; 11 drugs in Phase 3. I think you in fact had more. But that kind of begs the question, how are you going to bring down spending on the R&D side to those percentages that you had outlined, so that’s the first question.

And then the second question and I think Derica, your CFO has talked about this before. But maybe you can reaffirm this. You will get to those spending targets regardless of whether the pipeline plays out. I think that’s what his comments were maybe a year ago or so. So even if the pipeline doesn’t play out, he would somehow manage to push down your expenses. Is that accurate and still current?

John Lechleiter

Yes, I think what Derica said was accurate. He spoke from a different advantage point. A year ago we didn’t have so many of these data readouts and I think we are obviously betting on our pipeline and I think our pipeline is largely playing out and maturing as we had hoped. It’s not to say we don’t have some additional readouts, but we made that commitment just like we made the commitment in ’09. Either way, we intent to reach that goal.

I think on the R&D side, we don’t anticipate Tim having a stable of 12 to 13 molecules per perpetuity in phase 3. I don’t think we are a big enough company to support that kind of spend, at least not solo. So while there has been a bonus there and gratefully we are working through those by getting them approved, I expect that the Phase 3 stable for Lilly will look more like six, seven, eight, nine molecules in the future and we obviously have a lot of control over where we put the bars.

We put new molecules into that space, but I think if we want to maintain a steady spending in the earlier stages of R&D as well and we want to retain the flexibility to be able to do partnerships like tanezumab and even ones in earlier stage development, because I think there’s so much going on out there now that nobody can ever hope to have everything they need inside their own walls.

Tim Anderson - Sanford Bernstein

And you first gave that spending guidance in mid-2012 or Derica did I believe in the summary of 2012, so here we are about two years later. I think maybe you answered this question on R&D, but the general question is, does it look those targets are going to be easier or harder to hit generally than when you first talked about them two years ago.

John Lechleiter

Well, I think now I’d have to say I’m even more confident that we can hit those targets because we’ve seen positive data for dulaglutide, for our novel basal insulin, for ramucirumab, for necitumumab, for empagliflozin, etcetera. I mean that would be my answer.

Tim Anderson - Sanford Bernstein

And then on SG&A, when I looked at Lilly as an outsider, to me it seemed like a fairly efficiently run company over the years that has been pretty lien by design. So its hard for me to envision where the cost phase is going to actually come out of the SG&A if its not pipeline driven.

I can see, again its U.S. revenue growth is going to normalize that ratio. But when you are kind of locked in a marketing battle, lets just say Novartis kind of insulin, we got to march their sales force effort, yours to theirs. I guess to me it’s not clear that you would have a lot of room to cut. So in that case it does seem like to has to be more pipeline driven normalization on SG&A.

John Lechleiter

Well, I think if you look at Novartis SG&A, today it’s higher than that 28% to 30% goal we set for ourselves. So we want to remain competitive. But, I think there is more to remain competitive than R&D rates and SG&A. I think having great products. We hope in diabetes to be able to offer customers a complete portfolio and essence of drugs that could treat the disease across the whole spectrum of the disease.

We have a partnership with BI. We are the biggest commercial partnership in our history that we inaugurated in 2011. It’s already made a huge difference for us. I mean out of that partnership we have two oral drugs are now approved in at least one major geography in the space and that’s helped bolster our presence and our strength in markets around the world and with both the partner products and the non-partner products.

So you’re right, it is a balance. Looking back in 2011 our SG&A spend was $7.9 billion. This year we are guiding to $6.3 billion to $6.6 billion. So it’s clear in a fairly short period of time we’ve been able to bring that number down significantly, even as we prepare to launch new products. So, I think the levers are well within our control and it’s going to be a lot easier if we have the benefit of new revenue to help drive that ratio as well.

Tim Anderson - Sanford Bernstein

And then the timeline for achieving these, the spending normalization, I think the only comment Lilly has made in the past is that it would be 2019 or earlier and that was driven by the fact that that’s going to concessive have the cost structure normalizing in 2019. But can we expect at some point to maybe clarify and crystallize when we’ll see those?

John Lechleiter

Yes, I think our original guidance, we said by the end of the decade and then I think most people sort of pushed that all the way to the end. When we can be more specific about that, we’ll consider that. At a time when there’s so many moving parts and pieces with data readouts, new product launches, patents expiring, we’re going to cut ourselves some slack before we narrow that down too much more Tim.

Tim Anderson - Sanford Bernstein

Can you, again on this topic of growth looking forward what do you think, or just need to remind the audience what the biggest therapeutic area growth drivers will be for the company.

John Lechleiter

Yes, I think its animal health, diabetes and oncology. Now having said that, we’ve got some pretty exciting assets in what would be a new space for us in autoimmune. We have the only real late stage, current late stage effort in alzheimers with Solanezumab.

We got what we believe was very encouraging data in 2012 in the EXPEDITION 1, EXPEDITION 2 studies. The EXPEDITION 3 is designed to build in everything we learnt from those first two studies and more and then with our CETP inhibitor, this is another higher risk, but certainly higher reward opportunity that we have as well.

So I think part of what determined sort of where we play, where we compete is the way the data plays out and some of your members, we were numero uno in antibiotics as recently as the late 1980 and lower Cardiff just was not that much better than Suffolk. We didn’t really have anything that was demonstrably superior than the portfolio that we still had as recently as the early 90s. Along came PROZAC and PROZAC ushered in on a period of tremendous accomplishment for us in the area of neuroscience.

So on the one hand I want to be opportunistic, and if we can make a difference in alzheimers, I don’t think there’s anything more this company can do for human health. At the same time, we know in diabetes and oncology we have the infrastructure, we have the scientific leads, we have the substrate, we have the relationships.

Animal health the same way, we like animal health. We’ve been clear that given an opportunity we would invest more in animal health and I think those three can be main stage, but they won’t totally defy the Eli Lilly and Company. The way the pipeline plays out I think it will by the end of this decade.

Tim Anderson - Sanford Bernstein

Diabetes in our model, at least its prior accounts about 25% of our sales this year and that percentage grows slightly over time. You guys have the most breadth in diabetes across injectable and oral products, either on the market or coming to market through your pipeline.

But it is a category also where we’ve seen pretty intense competition. We’ve seen some price erosion, we’ve seen some aggressive payer action, we’ve seen some formulary repositioning of certain products that shifted market shares around. So the outlook for diabetes going forward is that just the start of it or is that kind of a one time lets get aggressive on price and we’re at a new steady state. What’s the outlook for pricing and competition within that diabetes space.

John Lechleiter

Well, there is a lot of competition within the space. I think that’s an indicator of just the magnitude of the challenge we’ve got in treating diabetes and to some degree the level of dissatisfaction with current treatments.

We will have the broadest portfolio. I think we’re going to be able to talk with greater authority about transitions of care. We know diabetes is a progressive disease and I think we can ship the conversations of the physicians office to what’s best for the patient and not which patients do you have that would be candidates for this particular drug.

In terms of how do we compete against others with products that are similar or which others may say are similar, we seem to be ahead right now in terms of our approach to combining an SGLT2 with a DPP-4 with linagliptin, empagliflozin and that combination.

We think we will have a best in class GLP drug when we launch dulaglutide. We like the idea of having two basal insulins, our insulin glargine product and also the novel basal insulin. I think we were more than competitive down on delivery devices which ease of administration, which makes a big difference in the space and I think we’ve got a good standing still in the diabetes community that we can build on.

So I think the medical need and the opportunity that we have around the world outstrips or helps me get comfortable with the fact that it is very competitive. 100 million people in China; that number keeps going up by the way, who are estimated to have diabetes and a large number of pre-diabetes. Yes, we know today only a fraction are treated. So diabetes actually for us becomes an entrée to enter in more meaningful ways in many of the developing markets around the world as well.

Tim Anderson - Sanford Bernstein

We’re coming upon a watershed event of sorts in the diabetes space, which is in the not so distant future a generic insulin and ironically really the branded insulin company is going to be the company taking that to market and going after Sanofi’s Lantus and Sanofi likes to say that they are going to retaliate against you and go after one of your insulin’s with a generic.

But can you talk to me about how you think that’s going to play out, launching a pseudo generic insulin into the market place, because on the one-end you could benefit from that opportunity, on the other end your at risk.

John Lechleiter

Well, it’s a free country. I mean Sanofi can do what they want. We think Lantus is a great product. It’s clearly a market leader. It’s a big product for Sanofi. Since the days of MPH, we really haven’t had anything that’s competed in the basal space. It’s a glaring gap in our insulin portfolio and we think Lantus and Humalog make for a great combination.

So we’re pursing this because we think it’s important to offer a broad portfolio. We believe that Lantus can co-exist with our novel based insulin. There are going to be opportunities for us to participate in the market with both of those, given the heterogeneity of patient populations around the world and the different medical needs.

Tim Anderson - Sanford Bernstein

And I was careful not to call it a biosimilar, because it’s not technically a biologic in terms of how FDA classifies it. So my question to you is, do you think that there’s any chance whatsoever in the next three to five years that has these pseudo-generic versions of insulin come out, that they would actually be deemed as substitutable in the classic sense like you gave with the Lipitor for example.

John Lechleiter

Yes, it’s very difficult to say. We just had a kind of intramural symposium within the company looking at biosimilars and what’s happening across the whole landscape, not just insulins and its very complex and I think there’s still quite a bit of road ahead.

The FDA has said that at least set some expectations. There could be guidance on inter-changeability coming out this year, but we haven’t seen that yet. I think we’re approaching this in a very thoughtful and a very careful way in terms of understanding what the layer of land is likely to be at the time we launch and making sure that we got the data to support whatever approach we decide to take with positioning the product.

Tim Anderson - Sanford Bernstein

And that regulatory guidance, just to be clear, that’s not insulin specific guidance. That’s just…Cross Talk).

John Lechleiter

So the insulin’s as you know are under 505(b)(2), so it’s a different – they sort of fall in between small molecules and the so-called biologics.

Tim Anderson - Sanford Bernstein

You mentioned oncology as another driver of future growth. You got a lot going on in the pipeline. You also have a very large marketed product in the form of Alimta, but some would say that you have an absence in this ultra hot area of immuno-oncology and I’m wondering if you can talk about how you view that. In fact some folks would say that Lilly actually has net exposure in that area, because Alimta, which is more of a traditional chemotherapy could be put at risk as you get these non-chemotherapy immuno oncology products coming to market. So how does Lilly view immuno oncology? Where are you in trying to get into that and is Alimta really at risk or not?

John Lechleiter

Well, I don’t Alimta’s really at risk. I’m going to come back and talk about that in a minute, but I think first of all we follow the story in immuno oncology. We have several drugs that are in clinical stage development; CXR, C4 and our TGF beta drug and at least one other that work through or influence the immune pathway. We’re not getting the credit of PDL-1 or PD1, yet we know these are the kind of drugs that are likely to be combined with the PD1’s and the PDL’s in trials, that almost by definition are going to feature more that one agent.

I think its early days still. I’m not trying to be cavalier. I mean I think if we had one of these drugs we’d be very happy about that. I think there’s still time to enter and I think there are different ways that Lilly could enter, either through the agency of our own laboratories or through partnerships or licensing and we’re looking at all of that right now.

I think with respect to Alimta, it’s the number one, non-platinum based therapy used in first line lung cancer and with the plus Alimta data. It’s used increasingly in the maintenance setting.

The immuno therapy agents will likely entering the second and third line setting. We believe there are going to be combinations. We believe there’s a case to be made for combining them with Alimta. So I think Alimta is still going to remain a mainstay in lung cancer and change if and when it occurs, but not occur overnight.

Tim Anderson - Sanford Bernstein

Yes, and I don’t know if you had a chance to look at the ASCO data coming out, but in the abstracts at least there was some preliminary data looking at PD1 plus Alimta and we actually had very favorable response rates, maybe to your point supporting that result, the combination therapy going forward.

John Lechleiter

We’ll be looking for opportunities to be involved in some of these combination studies.

Tim Anderson - Sanford Bernstein

Moving onto some specific pipeline drugs, so we’ve got data in the very near term on three cancer compounds that we’re tracking, at least going into ASCO Ramucirumab, necitumumab and then a compound that’s tip toeing into Phase 3, a CDK 4/6 inhibitor for breast and eventually lung cancer.

Ramucirumab is a late breaker. It’s a compound. As you mentioned earlier, its already starting to hit the market and one indication, the lung data that we’re going to see at ASCO, we don’t know anything about it yet, but I’m wondering if you can at least tell us your level of excitement without front running the data.

John Lechleiter

Yes, I can’t really say any more than we put in the top line like everybody is sort of eagerly waiting for the data next week, but I think it reinforces the one data, the REVEL’s data reinforces our confidence in Ramucirumab as a drug that has potentially multiple uses.

Now before we’re sure of that we got to see how the liver study and the colorectal study plays out, but what we’ve accomplished in gastric cancer there’s really nothing else indicated for advanced gastric cancer and we got data not only as a mono agent, but in combination with chemotherapy the RAINBOW trial.

So I think the fact that RAM can play in lung cancer and this was not a differentiated patient group, I think its exciting and we’ll have to wait until we see the data at ASCO to really get any more detail Tim.

Tim Anderson - Sanford Bernstein

And on differentiated you mean squamous and non- squamous primarily. So the trails that you mentioned and that you’ve run so far with ramucirumab or mostly in the second line setting or later lines of therapy. I would imagine that maybe the next step is to start first line trial. What’s your thoughts on doing that? Where is Lilly in initiating additional programs that would start to take ramucirumab upstream or…

John Lechleiter

Yes, I think you can take for granted that as we generate positive data in this initial cohort or Phase 3 studies, which is really one of the biggest Phase 3 programs we’ve ever undertaken. I mean we had five tumor types and two studies in gastric, so six total Phase 3 trials running in parallel. So I think as we collect the data we’re beginning to put in place the plans to continue to advance our knowledge and potentially look at earlier stages of disease.

Tim Anderson - Sanford Bernstein

And then you have necitumumab, where we have seen more data. I think that was disclosed in the abstracts and that would be for the squamous segment and non-small cell lung and there’s nothing but chemotherapy that has that indication.

The benefit in terms of their clinical benefit, the patient seems fairly modest. I think it was about a month and a half different in the survival, but nonetheless it presumably there was an indication for that. So my question to you is, is a month and a half, enough to be commercially relevant such that you’ll get payer option and prescribers will use the product.

John Lechleiter

Well, I think the answer is absolutely yes. It’s enough to be clinically relevant and there seems to be this that somebody dictated at some point its got to be at least two months. I don’t know, if you ever ask a cancer patient whether they know the difference between 1.6 and 2, whether that really mattered to them, but I think there’s been so little progress in this squamous cell area that for us to come along and show the biologic can be effective in this space is very important and this was very gratifying to see after we as you know stopped the non-squamous trial, the inspired trial because of some events that we saw there. We saw in the case of necitumumab in the SQUIRE study and the squamous cell population, I think a much more favorable profile once we look at the data.

Tim Anderson - Sanford Bernstein

Another compound of CDK 4/6 or 50 is a lead in that category with (inaudible). You have a compound not too far behind. Novartis has one as well.

Lilly has called before how its product seems to be more tolerable and doesn’t have to have the dosing interruption you had with the Pfizer compound. We are going to see some lung data coming up. Some of that’s been disclosed in the abstracts already, so its the first time that we’ve seen lung data with the new class of drugs. Can you talk about that lung indication setting and expand a little bit upon how you view the competitive positioning against other CDKs, specifically the tolerability.

John Lechleiter

Yes, I think so we shared the expansion cohort data in the breast cancer population at the ACR and as you say at ASCO, we’re going to look at that lung expansion cohort. This is obviously early stage data and until we really do the large definitive studies its difficult to make a comparison with the Pfizer product, which has more mature data. But I think based on what we’ve seen so far we’re hopeful that we can study our CDK 4/6, which is called bemaciclib. Some day I’m going to fail to be able to pronounce one of these things, but I’m still on the side of the angels here.

Bemaciclib, what we are seeing so far, we think we can continuously dose the product and we are talking about cell cycle disruption, you really want to be on target we think for us to continue as a period of time and so far we’ve been pleased at the side effect of the profile relative to the efficacy.

But again, its early stage data; we’re throwing a lot of guns on this, we’re excited about this, we’re putting a lot of effort in to obviously getting the breast cancer trial up and running and you can expect we’re entering into a lung cancer Phase 3 before the year is up.

Tim Anderson - Sanford Bernstein

And on the lung cancer setting is there anything more you guys can say about what that would like to be if that…(Cross Talk)

John Lechleiter

I can’t steal the thunder from ASCO, so stay tuned.

Tim Anderson - Sanford Bernstein

Okay. So shifting gears, dulaglutide on the diabetes front, a weak DPP-4 and a weak GLP-1 injectable diabetes drug. How do you view that in this competitive landscape? It seems to me that there’s some real scientific merit in the GLP-1 class and you’ve got a compound here that will have a better dosing regiment or better use of administration versus current therapy, but how are you viewing that in terms of its importance of the overall diabetes franchise?

John Lechleiter

Well, I think it’s important. We think it’s an important part of that continuum of care and we believe there’s an important role for GLP drugs in this space. We’re hopefully able to expand the category and we believe that we’ve got a drug with a very strong data set in the award trials. We’ve achieved our end point of non-inferiority and Victoza before has demonstrated that. We believe we have a product that’s very easy to use and some of you would have seen the injector device we had at our analyst meeting in Indianapolis last year. So I think that it’s an important category and we intend to support the product.

Tim Anderson - Sanford Bernstein

And when the data comes up at the American Diabetes Association, it is the head to head trial versus the…

John Lechleiter

Yes, that’s Award-6 and we’re also going to be I think sharing a detailed data from some – I think Award-2 and 4 as well at the ADA.

Tim Anderson - Sanford Bernstein

Anything you can talk about in terms of the comparability of the side effect profile, so I guess one of the things we are looking for, how the nausea rates and the vomiting rates will compare and how the weight loss will compare. Novo has gone out before and talked about how your drug doesn’t cross into the blood brain barrier and into the brain compartment and it may not have any sort of centrally mediated weight loss effect. Your thoughts?

John Lechleiter

Yes, I can’t comment on that specifically or to compare the side effect profile. That will be covered in a few more weeks in a pretty thorough way Tim.

Tim Anderson - Sanford Bernstein

And then pipeline, so you’ve got a mix of products in the pipeline across a variety of therapeutic areas, some are higher risks than others. Are there any that are in Phase 3 that you think investors are just fundamentally misunderstanding or not appreciating.

Take solanezumab for example and that data came out for Alzheimer’s in 2012. Lilly has continued to say that there’s a clear signal there, but you talked to some experts and they say you have to squint really hard to really see any signs of efficacy. But my question to you is, of your phase 3 drugs, anything that when you say models like mine and as much as utility capacity sort of thing. Do you think the street is really getting along?

John Lechleiter

Well, it’s difficult to say. I think that more often than not we certainly at Lilly have been surprised over the years at how well certain products do, that we have not banked on and how disappointed we can be in a product and Xigris comes to mind. You know when we launched the Sepsis drug 10 or 12 years ago.

So I tend to view these as a portfolio. I think we got some high risk, high reward plays that will be solanezumab. I think now that we’ve gotten Phase 3 data for a good number of these, we’ve got some oral risk, medium to high reward drugs and then I think the auto immune portfolio is probably the biggest wild card. I mean we saw really good Phase 2 data with Ixekizumab, we published that.

Baricitinib, we remain very interested in our jack. We believe that it could compete quite effectively against the Pfizer product, but its really going to depend on the outcome of the Phase 3 study.

Tanezumab, the product that we’re partnering with on Pfizer, not withstanding the clinical hold. I have seen some very interesting data associated with very normal mechanism in an area, namely pain treatment, but we haven’t seen a lot new in recent years and they treated thousands of patients already.

So that’s not to say that there’s a clear path at this point to put in process on the market. We still have studies to do, but I think that’s something that could potentially be very interesting and I think Pfizer recognizes that through the marketing of cymbalta when we had a couple of different pain indications, neuropathic pain for diabetes and then chronic lower back pain. For that molecule we know a lot about that space and I think we can be good partners there.

Tim Anderson - Sanford Bernstein

We’ve gotten some cards from the audience that ask a few other questions on the pipeline; one being on your CGRP antibody for a migraine that you recently got your hands on. So is there a level of enthusiasm there for that mechanism. It has been a category where I think some companies have got into and gotten out of. I think Merck had an active presence and that has been improvised over time.

John Lechleiter

Yes, I think Merck had an oral drug and this is injectable product. We’re very excited about this. Again, I’ve been around the industry long enough to temper my excitement until we see additional data, but I think based on the initial study that we reported on, at the point at which we announced in early January that we were buying the asset from Arteaus, I’m very excited about that.

Again, a very different approach to treating a disease that is still quite a problem. I mean from people who suffer from frequently occurring migraines, this has been very difficult to treat and that’s the population we study I the early Phase 2(a) study.

Tim Anderson - Sanford Bernstein

And now are competing CGRP’s and developments, is there anything that you can say at this point about differentiation of….

John Lechleiter

No, I don’t have that at my finger tips Tim.

Tim Anderson - Sanford Bernstein

Another question is on the anti-sclerostin antibody. If you could just frame out the opportunity and what your general thoughts are towards the compound and again, any comparison or competing anti-sclerostin.

John Lechleiter

Yes, I don’t have it at my fingertips, the comparative data with a couple of others that are in development. I will say that we were very pleased and impressed with the Phase 2 data. We have a lot of experience in this area with Evista and Forteo and I think if this mechanism proves it has the opportunity to really offer a very new approach and potentially a more effective approach to treating osteoporosis in any of the current classes.

Tim Anderson - Sanford Bernstein

We have a question going back to insulin franchise, one that I didn’t ask about, which is your Novel Basal Insulin that I believe you guys called [BIL] (ph) and in the data that you disclosed there has been some side effects that have shown up. For example, a slight increase in liver enzyme elevation that you don’t really see within the other insulins and that creates a question among a variety of folks about whether that’s really going to be a competitive product. So efficacy looks good, safety looks, I’ll tell you, better than standard of care. Safety you’ve got some liabilities of standard of care that it has and how do those net out?

John Lechleiter

Yes, well I think first of all we need to recognize this is an insulin that appears to work in a very different way than the insulins that we developed up to this point in time and nothing that we’re aware of is showing superiority against the Lantus from an efficacy point of view, i.e., lowering HbA1c.

At the same time its physically significantly less, nocturnal hypoglycemia. Usually these things go hand in hand. As the efficacy improves, you see nocturnal hypo and then we had either weight loss or sort of non-weight gain, also compared to Lantus and these three studies, all in Type 2 patients that we gave top line results for a couple of weeks ago.

I think in terms of the data we reported on triglycerides, on HDO and LDO, on liver fat, I think all these things need to be put in the proper context and discussed in greater detail on the appropriate scientific form, but we don’t believe at this point that this going to slow down our progression to filing this and we intend to pursue registration approval for this novel basal insulin in the general Type 2 population.

Tim Anderson - Sanford Bernstein

You and I were talking before the session began here about what a busy sector its been in large pharma. One of the notable news items of course was Pfizer trying to make a move on AstraZeneca. So my question to you is just a broad one, its not Lilly specific at all, yet the question is your views on industry consolidation. I think you and I were both talking about how we were surprised to see that transaction, that attempted transaction, but when you look forward, do you think there is going to be further consolidation, big pharma to big pharma or do you think the Pfizer-Astro was a real one-off.

John Lechleiter

It’s very difficult to say. I was surprised when I first heard the news that the two companies have been talking together. There’s not that much more big to big combination. One can consider unless its mega to mega.

Lilly remains the only non-merged company in the major pharma space, so we intend to keep it that way. We believe these large mergers and combination destroy value and we said that since before the pros patent expiration in the early part of the last decade. We’re focused on advancing our pipeline. We’re focused on partnering and doing deals and such and in a manner that is much less expensive for shareholders than a large scale or combination, which I think ultimately has failed to prove it creates long term value.

I can’t speculate on Pfizer motives. I don’t know where this particular deal is going to go, but it certainly has stirred things up in the space. I think equally notable though are some of the other moves that have been made, Lilly acquiring Novartis Animal Health, the whole series of moves Novartis made; Bayer buying Merck’s OTC business.

I think there’s a trend in think its understandable for each of our companies to move, to strengthen areas where we have or aim to build a global presence. So you can say we were number four in animal healthy, but really at top three at critical mass we never had with Elanco with the acquisition of Novartis Animal Health, we are number two and we can play at a global level.

You can bet we are going to invest robustly in diabetes, we are going to invest robustly in oncology. We think these are spaces where not only do we have a foothold today, but we can grow and expand in the future. We are not as diversified as most the other companies are, we are really pharma animal health player. We have been like that for some time, but I this trend towards doing what you do very well and getting out of the stuff that you are playing at a smaller scale where you are not a critical mass, you know I think that’s a story of the year as far as I’m concerned so far, but the year is not over yet.

Tim Anderson - Sanford Bernstein

So on the same topic of consolidation, I occasionally get the question whether Lilly itself could be a takeout candidate and some of the positive and Valiant might be an acquirer of Eli Lilly given its aggressive growth strategy. My answer has been that it’s pretty unlikely. It’s only the reason that I think Lilly has some sort of state laws in place that kind of prevent the cost of takeovers of Indiana Corporation that I’m hoping you can elaborate on that, because I honestly never dug into it very deeply.

John Lechleiter

Well, I think any company has things that can be sided as defenses. I mean we still have a stage report. We have a super majority rule and had a couple of provisions. There is law in Indiana that has several provisions that make hostile takeovers or attempted hostile takeovers more difficult.

But I think what we are focused on creating value for our shareholders and having that recognized in our share price and having our shareholders really look at a company that has been through the worst, that has coped well, kept shareholders engaged in the processes, rewarded shareholders through the process and now has very bright future ahead of it in terms of growth opportunities resident in our pipeline. So we are focused on that Tim.

Tim Anderson - Sanford Bernstein

Let me close out the session with another line of questioning. I got a couple of cards on this and then I have my own questions on as well. But looking at pricing in the US, what pricing and whether you think that something is going to change. As we talked about earlier in the discussion in diabetes and also in respiratory you had seen formulary tightening where payers have effectively driven down price and we’ve had a lot of noise being made about high price specialty therapeutics in hepatitis C as one example.

So when you look forward, do you think that we are going to get to a point in the U.S. where things will impact change. They haven’t really changed thus far other than in those areas I mentioned.

John Lechleiter

I think when you look at pricing, the headlines versus the reality. I think the headlines are always going to be about the next so-called high price drug that gets introduced. The reality is that for the past several years drug prices in this country was actually paid for medicines, has been growing at a rate equal to or slower than the overall inflation rate for healthcare.

Part of this is because a heck of a lot of our products are now available at low cost generics. So one can argue, the fact of generics increases the headroom for innovation. I mean if 80%, one out of five prescriptions in this country are for generic medicines. We really ought to be focused on what are those situations where a generic is not appropriate and where is a branded alternative that really does offer value.

And that’s my second point, it’s always about price, okay. You hear about the numerator and you never hear about the denominator. And I think when you dig down and really understand the value that medicines can bring, there is a lot more to the story.

The healthcare consolidation is not all bad for our industry. I think if we had more organizations that were really focused on population health in the same way Kiser is for example, the role of modern medicines would be better understood an I think the value of modern medicines will be better appreciated than is now.

If you’re health plan, you turn over patients year-over-year, you got a pharmacy budget to mange and all it comes down to is how low the price can you negotiate for the formularity you’re managing and whether or not that has any downstream benefits for the patient becomes secondary.

I think the other thing, we are not in the Hep-C business, but I read the newspaper like everybody here reads the newspaper. What do people what from this industry, they want cures.

When I talk about diabetes, they are all happy we make insulin, but if they got a child with Type 1 they want to cure and it seems to mean what Gilead is offering for a lot of people is a cure. That’s pretty darn valuable, that’s pretty darn important. And I think we got to get our heads around the value part of the equation to make sure that if we really what to cures and we really want big advances in medicine that we maintain a ecosystem and a system of rewards for the risk takers who are ultimately going to be able to general those sorts of breakthroughs.

Tim Anderson - Sanford Bernstein

All right, it’s the end of our session length. I want to thank everyone, especially John Lechleiter from Eli Lilly for talking to us today and for the Investor Relations team, including Phil Johnson here nodding. Thank you everybody.

John Lechleiter

Thank you.

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