Eli Lilly (LLY) has been on a roll, powered by some fast-growing young products, some resiliency of its older stalwarts, and a promising pipeline. See p. 12 of LLY's Q2 detailed earnings release for a list of sales and yoy growth rates for these drugs. The reason I have rented LLY but not been smart enough to buy and hold is that it has a common Big Pharma/Big Biotech problem: only 28% of sales, and 31% of pharmaceutical sales, came from the young, growing drugs; and you just never know about a pipeline. LLY has been struggling since being hit hard by generics; from ETrade, here are LLY's annual sales since 2013:
- 2013: $23.3 B
- 2014: $19.6 B
- 2015: $20.0 B
- 2016: $21.2 B
- 2017: $22.9 B
- 2018 (consensus estimate): $24.3 B
- 2019 (consensus estimate): $24.7 B.
So, this year's revenues may be 5% higher than in 2013. In contrast, look at the stock chart:
LLY has surged from about $48 at this time in 2013 to about $114 as I write this, finally breaking through its all-time high set in 2000.
Part of the reason that LLY has been moving up relates to its next-generation diabetes pipeline drug. This candidate, LY3298176 (now named tirzepatide, or, tirze), is designed to add to LLY's formidable array of diabetes drugs. These drugs are led by Trulicity, a once-weekly GLP-1 agonist, or GLPa for short which is locked in a dogfight for market share with Novo Nordisk's (NVO) older once-daily GLPa Victoza and its recent once-weekly entry Ozempic.
Next up, a very brief overview of Trulicity and the GLPa class.
Some comments on GLPa's and Trulicity
Trulicity enjoyed huge sales of $780 MM in Q2 alone, up 62% yoy from $480 MM. The reason: once-a-week dosing and reasonably good weight loss data, versus once-daily dosing for Victoza; with limited competition from other members of the class. Ozempic launched in Q1, and the sum of its market share (of new patient starts) plus Victoza's market share has been holding steady near 45%. Trulicity is also near that level, so while there are several other GLPa's on the market now, at this point it is LLY versus NVO in the GLPa space.
While the pros talk about market share, market share, market share, what we as investors care about more than anything is sales growth. Total prescriptions for the GLPa class of drugs has been growing at about 30% per year for several years, thus vastly outpacing the diabetes market as a whole. So, even though Victoza has been losing market share of new Rx'es, its sales are doing fine for now, given how fast the entire GLPa class of drugs has been growing.
LLY's other major young diabetes drug is Jardiance, an oral diabetes drug that reduces the incidence of heart failure. Jardiance and Victoza were the first two drugs approved by the FDA to reduce the incidence of MACE (major adverse cardiovascular (or, CV) events). Ozempic also had a positive, Phase 2 CV outcomes trial (or, CVOT), which is in its label even though the study was not definitive enough to allow it the formal indication. Ozempic is so structurally similar that I believe that what applies to Victoza will apply to Ozempic as well.
The GLPa's are injected and, except for the caution about possibly increasing the incidence of a rare form of thyroid cancer, are safe. They do have various gastrointestinal side effects which tend to diminish with continued use.
The long-running 9900 patient CVOT for Trulicity, REWIND, is likely complete. LLY should have a first analysis in hand by now and may release top-line results any day. Significant volatility in LLY's share price could well result, in either direction.
So, if you are interested in initiating a long position in LLY anytime soon, you should be aware of the upside potential should results beat Street expectations as well as downside risk if the study fails to meet Street goals.
Trulicity tends to lower weight, but not enough to gain an FDA indication for obesity. However, Saxenda, a high-dose form of Victoza, is doing well in sales given FDA's approval of it for obesity treatment.
Adding Saxenda sales to those of Victoza and Ozempic, NVO appears to have the GLPa sales lead in the US over LLY. However, a strong showing from REWIND could change that, at least until the oral form of Ozempic reaches market (assuming it succeeds in gaining FDA approval).
Hopes for tirze may have contributed to LLY's multi-month ramp from $80
If Trulicity and Ozempic are as good as it gets for GLPa's, what comes next? While both have long protected lives, biotech stocks need a sense of future growth.
One solution is to add a related but different agonist, GIP. The drug that LLY invented, tirze, achieves breakthrough levels of glucose lowering apparently by acting as an agonist (stimulator) of GLP as well as GIP.
LLY has been promoting tirze at least since its Q2 conference call in late July. In his prepared remarks, the CEO said (emphasis added):
We've also added a line for initiation of Phase 3 for our novel GIP/GLP agonist [tirze] in type 2 diabetes. We now have data inhouse from the Phase 2 study of this next-generation incretin [a hormone-like peptide].In the past, we've said that we have a high bar for efficacy to move this molecule into Phase 3, given the competitive intensity in this category. The Phase 2 results met this high bar. We look forward to presenting this data at EASD this fall. And following the data presentation, we will host a call to discuss the data. In addition, we plan to start Phase 3 in late 2018 or early 2019.
This is strong language, and analysts tend to respond to this sort of signal by upgrading LLY's long-term growth rate.
LLY had a well-received Q2 earnings report, which certainly moved the stock up. I suspect that the above comment on tirze from the CEO helped LLY move up in addition to the enhanced current profit picture. The last move from $108 at Wednesday's close to $115.02 at Friday's close added about $7 B to LLY's valuation. If only $2-3 of the ramp to $108 related to tirze, then this Phase 2 program for a drug that may not launch until 2023 may have added $10 B to LLY's valuation already.
Thus, I suggest that this latest ramp to $115 has brought in latecomers to the party. Momentum may carry LLY higher, and it is not wildly valued at $115 by any means. So, we shall see how it trades.
Let's look at some positives and negatives for tirze's prospects next as we focus first and foremost not on science but on LLY's stock price.
The positive tirze story
The EASD meeting (the European Association for the Study of Diabetes) prompted several LLY press releases. The press release that moved the stock up several percent was the one describing the Phase 2 (actually, Phase 2b) study of tirze.
Other resources for interested parties are easily found. The Lancet has a detailed summary of the study free for review. LLY has a 15-slide presentation up that summarizes matters more clearly than the dense Lancet abstract. And, Seeking Alpha did us a service and provides a transcript of a conference call that LLY held Thursday focusing on tirze.
There were two key efficacy points LLY emphasized.
1. Glucose lowering was about double that expected from a GLPa.
2. Very significant weight loss was seen (LLY is considering going for an obesity indication).
Also noted was some lowering of triglycerides; LDL and other cholesterol parameters were not affected.
LLY believes that the triglyceride effects and the outsized weight loss effects are due to the GIPa action rather than the Trulicity-like GLPa effect.
Neither the full mechanism of action, nor the full side effect profile, of a GIPa drug, is known. No GIPa has been submitted to the FDA for approval; LLY is well ahead of the competition here.
LLY also disclosed a SURPASS CVOT for tirze with a targeted 2025 completion date, and said that it is quite optimistic that a CV benefit will be shown. (My reaction is that I prefer managements that under-promise.)
So, how should actual or prospective LLY investors think about this Phase 2b study for which LLY expects global regulatory submissions to occur in 2022, suggesting a launch date close to 5 years from now?
Tirze addresses very large markets, so its long-term potential is exciting. On the other hand, the present value of that potential may be fully priced in given it is only 2018.
Next, some trading and other negatives to consider.
Side effects, both known and unknown, provide one set of risks
Slide 12 of the presentation shows side effects. Of the three tirze doses tested, the two higher ones (10 and 15 mg) had high rates of vomiting. There was also excessive diarrhea reported at all doses versus Trulicity, which was also studied at the higher of its two approved doses as the active comparator. The 15 mg tirze dose had a step-up in the incidence of diarrhea versus the 10 mg dose.
LLY downplayed these and other GI side effects. It said that a separate Phase 2 dose titration study (not reported to the public yet) gave much better tolerability.
We will have to wait years regarding this issue. My experience is that if someone takes a drug that is not treating an ongoing painful situation and throws up one time, just one time, in the real world of clinical practice (i.e., not in a structured clinical trial), that patient is likely to tell the doctor to give something milder. Then that person will often bad-mouth the drug to his/her friends. That's one way that a drug gets a negative buzz.
GI side effects pose a risk to tirze's potential to be a major blockbuster that would be additive to Trulicity.
Another side effect relates the observation of more hypoglycemia (low blood sugar levels) with the 10 and 15 mg tirze doses than with Trulicity.
If a drug lowers blood glucose very aggressively, but at the cost of more hypoglycemia, then it may not become a highly successful product if safer regimens are available. So, that's another discrete risk to commercial success.
In addition, there are the universal risks that a Phase 2 program is not powered to uncover the 1 in 10,000 incidence of side effects, sometimes serious ones.
Not a side effect per se, but something to be aware of, is that sometimes prolonged use of a drug induces neutralizing antibodies that make a drug unmarketable due to attenuation of effect. Pfizer (PFE) had to stop its late-stage PCSK9 inhibitor program for that reason. Some questioning of LLY involved that topic; LLY expressed a high degree of confidence that there will be no such problem for tirze. But until a longer study is performed, we will not know for sure.
So, let's say that tirze has a high chance of coming to market, perhaps with a good side effect profile.
How might we think about LLY stock with a focus on tirze, understanding LLY has lots going on aside from this drug?
2023 is eons away for Mr. Market
At Friday's closing price of $115, LLY has a $118 B market cap based on 1.03 B diluted shares outstanding as of Q2 (a number that is declining steadily).
An optimist can project that LLY's diabetes franchise has a present value equal to the company's market cap, if there are very high expectations for tirze to grow strongly well into the 2030s. So, that would mean that over time, LLY is severely undervalued and will trend upward.
But that sort of behavior is not what typically happens to a stock in the biotech world when a drug is not expected to come to market for about 5 years.
Biogen (BIIB) provides an example of this.
BIIB surged to powerful new highs in late 2014 and into 2015 due to its "adu" Alzheimer's drug. The drug had encouraging Phase 2a results and was jumped to Phase 3.
What happened after the frenzy ended? BIIB got cut almost in half. Other news appeared on BIIB, such as with its major drug Tecfidera, and doubts about adu's likelihood of success were stoked by other news flow.
Subsequently, BIIB rebounded, and as decision day for adu approaches, we will begin to find out the truth about the drug's real worth. It will have taken years.
Something similar may occur with respect to tirze.
There are two types of competition for tirze even if it proves out well in Phase 3 to talk about. The first type is the traditional one:
LLY in pole position, but lots of other new drugs are being studied
Look at one presentation of diabetes drugs in late-stage development:
As seen in the figure below, the current late-stage T2D [type 2 diabetes] pipeline consists mostly of glucagon-like peptide-1 receptor agonists [GLPa's] and sodium-glucose co-transporter inhibitors, whereas the early-stage pipeline comprises a number of novel agents including G protein-coupled receptor 119 agonists, glucokinase activators, protein tyrosine phosphatase 1B inhibitors, and glucagon-like peptide 1 receptor (GLP-1R)/glucagon receptor dual agonists.
Figure: Type 2 diabetes agents in clinical development
Even though this was from April, it may be partly out of date, and some of the candidates are from LLY. However, it's clear in a general way that potential competition for next-gen diabetes (and obesity) drugs is intense.
For example, Sanofi (SNY) has two dual-action combos, SAR425899 in Phase 1/2 and SAR438335 in Phase 1. Novo Nordisk (NVO) has both a dual-action and tri-action GLP-based set of products in Phase 1, but lists the drugs at this point as focused on obesity. Nonetheless, their mode of action suggests to me that they could also be effective in diabetes.
Moving on from highlighting the point that the competition is not standing still, a different and possibly more dangerous form of competition may arise from changing treatment paradigms, such as toward oral drugs.
The future of diabetes prevention and treatment might not be headed toward orals and multi-drug regimens
Maybe - just maybe - the world may simply not need an extremely powerful diabetes drug in 2023 if it has to be injected.
That's because we already have proven CV benefits from Jardiance and Victoza (and probably Ozempic), and soon possibly Trulicity. (Not to mention various lipid-lowering drugs; see below for that discussion.)
I expect Ozempic, currently given by injection, to have an oral version of the same molecule on the market by early 2020. Ozempic has a large scale CVOT underway; a smaller CVOT done during its development was successful.
Jardiance prevents MACE, mostly heart failure (it promotes sodium excretion).
Oral, inexpensive and safe metformin is widely accepted as first-line therapy and as a backbone for other regimens.
Thus, respecting patient preference and mindful of the lower cost of pills versus injectables, one potential leading triple therapy that will both lower glucose strongly and, I believe, provide additive CVOT benefits, is this:
- Jardiance (or other similar drug that succeeds in a CVOT)
- oral Ozempic (or other once-weekly injectable GLPa that does not require dose titration).
All components would be good for patients beyond the proxy parameter of glucose lowering, and all would be orally administered unless an injectable GLPa is needed.
Finally, simply and at relatively to very low cost depending on the formulation and its pricing at the time, we are finally in the era where long-acting insulins are relatively safe re hypoglycemia and also are finally proven to do more good for patients with type 2 diabetes than harm. So, if an injectable is needed, there is the insulin option. Beyond insulin, NVO markets Xultophy, which combines insulin with Victoza to give an insulin-GLPa combination.
A 3-drug combination of drugs that work by different mechanisms would tend to be preferred, because it would tend to both limit side effects, have maximal dosage flexibility, and would allowing lower doses of all drugs to be used to gain the best efficacy:tolerability ratios. If a 4th drug is needed, that could either be an insulin or perhaps Xultophy (insulin/Victoza in one injection); use of Xultophy would obviate the need for oral Ozempic or other injectable GLPa drug.
The above combinations are just some of many combinations that could be created right now, and more are coming every year.
Then, we should address the triglyceride-lowering effect of tirze.
It might not be needed, as diabetics should as a rule be treated with a statin and/or other lipid-lowering therapy with a proven CVOT trial.
We also have either Repatha from Amgen (AMGN) or Praluent from SNY/Regeneron (REGN) for further lipid-lowering effects, each drug having shown positive CVOT results. Finally, there is ezetimibe if a statin treatment requires a mild assist in LDL-lowering, also with a successful CVOT.
Thus, aside from competition from new agents, tirze may have trouble as an injectable, and as an inherently very powerful agent, breaking through into treatment paradigms, at least until and unless it demonstrates impressive results in the SURPASS CVOT. And those results may not appear until 2025, and if so, they will not be expected to be reviewed and approved by the FDA until 2026.
I'm not predicting how matters will come out for tirze for its lead diabetes indication. Rather, I foresee a wide range of possibilities.
Now, it's time to sum up.
Conclusions - it's getting incrementally safer to be a junk food junkie
Not that diabetes is a safe condition to have, even if all the drugs under development meet the high hopes of their sponsors. But diabetes as well as high cholesterol are becoming less serious than they were.
Beginning with the first statin in 1987 (Mevacor), pharma companies have succeeded in developing drugs that reduce the incidence of complications of diabetes, up to and including death. The industry is finally moving past improving the proxy endpoints of lower blood sugar or lower cholesterol. This process is well underway; further advances are needed. (This retired cardiologist part of me does believe that prevention via diet and exercise trumps medicines, however.)
Based on its Phase 2 data, LLY should be praised for cutting-edge drug development work and its determination to move the state of the art forward.
Tirze may play a big role in diabetes treatment in the next decade if clinical trials go well, including its CVOT. And, LLY could well add an obesity indication on, and that could provide another large market opportunity.
However, as discussed above, tirze may now be efficiently priced into LLY's share price, with upside and downside possibilities reasonably well balanced.
(In contrast, LLY's long-time major competitor in diabetes, NVO, which lost 6-7% of its market cap on Thursday/Friday, may have over-reacted to LLY's media effort. NVO has ongoing operational struggles and a thinned-out pipeline. The launch of Ozempic appears to be going well, the company is cutting costs and may finally be adapting to the new, PBM-driven sales and marketing environment in the US, and oral Ozempic could reach the market in little over a year. I am sitting tight with NVO with the hope that oral Ozempic can catalyze a profits turnaround.)
Returning to LLY, the stock is extended short term.
The REWIND CVOT on Trulicity is a potentially major wild card for the stock in either direction.
Longer term, LLY has many irons in the fire, is doing more things right than wrong, and is reasonably valued relative to the market (SPY). I have said good things once or twice, in passing, about LLY as a stock much earlier in the year, but I believe that was when LLY was in the $79 range. With most of its earning assets mature, LLY's 5X price:sales ratio tells me that the stock is not on the bargain counter. Please review the company's 10-K or other documents for the company's recitation of risks associated with investing in LLY shares, as well as for any other stock discussed herein.
In summary, LLY has presented data on an impressive, very interesting molecule, and investors have responded positively. Long term, tirze may be a boon to LLY as well as a very positive contribution to human health. Shorter term, it's anybody's guess how much tirze will matter to LLY's stock while it undergoes its lengthy Phase 3 studies and the even longer-duration CVOT.
Thanks for reading and sharing any thoughts you wish to contribute.
Disclosure: I am/we are long LLY,NVO,AMRN,REGN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Not investment advice. I am not an investment adviser. May sell LLY or any of the above stocks (or buy more) at any time without notice to anyone.