Eli Lilly and Company (LLY) Presents at Cowen and Company 39th Annual Health Care Conference (Transcript)

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About: Eli Lilly and Company (LLY)
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Earning Call Audio

Eli Lilly and Company (NYSE:LLY) Cowen and Company 39th Annual Health Care Conference Call March 11, 2019 12:00 PM ET

Company Participants

Josh Smiley - EVP and CFO

Conference Call Participants

Steve Scala - Cowen & Co.

Steve Scala

Well, good afternoon. We're very, very happy to have Eli Lilly back at the Cowen conference. Joining us for this conference is Josh Smiley, who is Executive Vice President and Chief Financial Officer.

Before we start the Q&A, and please chime in with questions anywhere along the line. I just like you to note Lilly has been one of Cowen's longest standing recommended stocks. We upgraded the stock in April of 2014, so nearly five years. And we believe it's as now compelling as any time in that five-year period, because we like the new product story, we like the financial outlook, we like the fact that management consistently delivers, and we like the fact that over decades, Lilly has that creative spark that we can look forward to it bringing an innovative pipeline into the future. We don’t think many companies have that Lilly does and that we find very appealing. So, with that, Josh, thanks for coming.

Question-and-Answer Session

Q - Steve Scala

Maybe, given the news this morning on the Elanco separation, maybe you could just paraphrase it for those of us who didn’t have a chance to fully read the release and so far?

Josh Smiley

Okay. Well, thanks. And thank you for having me and thanks for the support for Lilly.

As it relates to Elanco, so, we announced last year that we were going to separate the Elanco business, which made up about 15% of our topline, and we went through a two-step process. We IPOed 20% of the shares in September of last year, and then we announced an exchange process for the remaining 80%, earlier this year in February. We concluded that exchange this morning and announced that it was successful. We actually had about a little bit more than five times the oversubscription. So, the proration factor was about 13% for people who chose to participate.

So, we were extremely pleased with the transaction overall. I think, Elanco is in a great position to be a standalone major player in the animal health business. And it gives Lilly the flexibility and focus going forward to be exclusively focused on the five therapeutic areas that were involved in diabetes, immunology, pain or neurodegeneration and oncology. And I think, what you should expect what we will do with the - obviously with the exchange that we retired shares, we did give guidance on our Q4 -- both in our December analyst meeting, as well as on our Q4 call, some high level pharma-only expectations. And you should expect we will update full expectations on our Q1 call, upcoming.

So, right now, we have some pharma-only expectations that are out as part of our slides that we gave on the Q4 call. And then, the additional information, you just look is at least from a non-GAAP perspective our shares outstanding that you can model is 924 million shares. So, we retired approximately 65 million shares as a function of this exchange. We economically think it's good, the PE ratios for animal health companies are a little bit higher than Pharma. So, I think on an overall basis this -- once we get to an apples-to-apples non-GAAP comparison, it will be slightly accretive. But, again, I think both companies are now well-positioned to be strong, independent, solely focused on one business companies.

Steve Scala

I think, we are quite impressed with the 924 million shares outstanding. Our estimate had been 990, of course or it is 990 of course that is with Elanco. But, that is a large difference, which will give some lift to the -- at least our earnings estimate in 2019. And what changes -- so, we're going to get the changes to the P&L and you just said you'll update those. What changes should we anticipate to the balance sheet now that Elanco is separated?

Josh Smiley

So, you will see a little bit of debt go away. So, we’ve consolidated Elanco’s balance sheet up until now. So, you should expect to see a few billion dollars in debt decline. Now, of course, Steve, that will be offset by the debt we just raised for the Loxo transaction. I think, in total, on the asset side, we'll see somewhere in the range of $5 billion to $6 billion go away, which is a function of the goodwill and intangibles for that without the Elanco business, both organically, but also through acquisitions. And then we've got the plans that make the Elanco products obviously go with that. We have been -- we have done a lot of work historically to of separate the animal health and pharmaceutical manufacturing plants. I know that’s not always been the case in some of the other transactions you’ve seen. So, that's a pretty clean transaction. We have -- over the course of next couple of years, we will have some transition services agreement between the companies, but they are mostly around back office types of our operations. So, you will see our asset base will go down, as I say, somewhere in the range of $5 billion to $6 billion that will go down a few billion. And that’s where we are.

Steve Scala

So, let’s touch on another exciting development at Lilly, and that is the acquisition of Loxo. Perhaps you can tell us what gave Lilly the conviction to do the Loxo deal, and where you see the potential for upside and downside to shareholders?

Josh Smiley

Sure. Yes. So, we were -- the thing that got us most excited was the patient level data really around the precision medicine overall. But, of course, the one we were most excited about is LOXO-292, which is still accruing patients and patient data in a Phase 1/2 trial. I think from a valuation perspective though, what got us the most excited was as we looked at that 292 data and understood the patient population around the world that has the reputation, we felt quite confident that there is a big enough patient base and the efficacy and safety data that we see so far is compelling that there is a significant commercial opportunity. So, we think the 292 is derisked clinically. We’re confident that we’ll have enough data before the end of the year to submit and be ready to launch the product in 2020. So, then, it becomes a function of how well we can execute commercially to drive testing for the reputation, educate physicians, get obviously physicians on drug. And then, if we’re able to see the kind of duration and other things that we’re starting to see in the clinical trials, we think that from a valuation perspective, we feel very good about being able to recoup more than the $7.2 billion net acquisition costs that we had.

I think, then, so first upside will be can we execute well. There will be competition in the space but we think that from the data we’ve seen so far that we will have the best-in-class and first-in-class RET inhibitor. So, first thing we will look at for, upside will be how -- what kind of share we can get, what kind of patient populations can we get on the drug? I think, the thing though that will be the bonus upside for shareholders will be, can we leverage the capabilities and expertise that Loxo has employed to develop the first two drugs into broader population. Now, there is a BTK inhibitor in Phase 1 and then there are also follow-on compounds for both the TRK inhibitor and the RET inhibitor in development. But, then, I think what's I think exciting for the long-term beyond that would be the ability to bring new precision medicine drugs into the clinic, leveraging the discovery, chemistry that team that Loxo has as well as the leadership team I think are staying on board to help ensure that we get these drugs to patients. So, I think that’s sort of a testament to the passion and the team used in getting Loxo to where it was. They're staying around and they're going to stay involved, and I'm excited about that.

Steve Scala

Any questions from the audience? So, maybe we can move to your very important diabetes business. So, what can you tell us about Trulicity's resiliency or staying power in the face of the recent launch of a GLP-1 competitor, why don't you start there?

Josh Smiley

Sure. I think, that the thing that we’ve said consistently over the last few years, Steve, is that we see lots of opportunity in the GLP space overall. From an overall patient population perspective, our data still says that only about 3 out of 10 patients who get a first injection or getting a GLP versus a basal insulin, I think that that data should be much closer to 100%. So, there's a lot of room for patient growth in the class. Now, what we see is Trulicity is we think a very well positioned product to help continue to enable that growth. As new products are launched into the class, so we continue to see not only class growth, which is something we're, as I say, very interested in but also actually share growth for Trulicity. And what we find is, it's around patient experience with once a week injection and the adherence then that that translates into for patients.

We do a lot of value-based contracting in the GLP space and we contract around adherence to Trulicity where we will compare that adherence to other products in diabetes overall, not just GLPs but oral medications as well and we find that we measure sort of second, third and fourth refills, which we think by the time you get to a fourth refill, if you can keep that patient on, you’re beginning to get the benefit that you should from GLPs. I think from that standpoint, we have a product that works really well in the primary care setting where about 80% of the prescriptions or patients are treated today, physicians have experience with it, they can prescribe a patient this drug and have some degree of confidence that they're going to be able to stay on it without many complications.

So, that's the thing that has, I think allowed us to continue to maintain and grow share, even as good newer products have come into the class. And I think we welcome innovation in this space, not just from competitors but are -- we're very excited about tirzepatide, which is a GLP product that we just moved into Phase 3 at the end of last year.

Steve Scala

So, it appears that oral Ozempic will be filed in this quarter. And prior priority review voucher is being used. So, it could be on the market in the second half of the year. How does Lilly envision an oral semaglutide impacting the marketplace, Trulicity, and even Jardiance?

Josh Smiley

Yes. I think, first, I'd go back and say, again, there's lots of room to continue to get patients onto GLP. Our experience would say, an injectable once a week GLP is the right product. But, I think, new innovation in diabetes is good for everybody. I think, how that drug is going to be positioned, we will have to wait and see. I can speculate, but Novo obviously will make those decisions. I think to the extent that it’s positioned between current orals and the GLP today, of course that could grow everything or could begin to cut into some of the classes. Again, I think, as we look at SGLT2s and Jardiance and the data around cardiovascular -- the prevention of cardiovascular events, there is still a huge opportunity to get patients onto that drug. And I think the data there is going to be more compelling than you see for an oral GLP. So, we’re -- I think in all the classes, we’ve got a drug that’s in every major branded class in our diabetes franchise. And I think, if we look at those, certainly as you move back to GLPs and SGLT2s for example, there is a really big opportunity there. And I think, to the extent that oral semag can come in and take some of that. We’re still -- we are not overly concerned about the ability for those products that we are most interested in and continue to grow.

Steve Scala

Speaking of Jardiance and other SGLT2s, so the various products within this class all have some degree of or some nature of CV data. How does Lilly view your CV package versus that of the competitor’s? Do you believe that’s the best-in-class, on par? How would you characterize that?

Josh Smiley

I think the data from EMPA-REG we would say is the most robust and compelling data across the SGLT2 class today. I think, that generally has played out in the market. I think, our challenge on SGLT2 is to continue to grow the class. If you look at new to brand share, I think we’re above 66% now. So, I think physicians and payers are sort of speaking in the marketplace around what product provides the best risk benefit in the class. The class should be bigger though. And I think, that’s where we would like it. So, I think as other products build out their data package in CV or other areas, again, I think that's good for everybody because there are more patients who should be on these drugs.

Steve Scala

Questions from the audience? So, let's move to migraine. So, do you think -- what do you think of the Emgality uptake? Maybe what do you think of the overall CGRP uptake? Is it what you expected? And, how do you view the class from here?

Josh Smiley

I think, we had -- we were excited about the opportunity in the class. I think, when we look and try to measure patients who we think would benefit from preventative therapy and try to get it down to the moderate to severe patients, so those who have multiple days of migraine attacks per month, I think our number was probably in the 8 million patients in the U.S. sort of size.

And then, the challenge I think when you -- what we find historically is when you bring new drugs though into areas that haven't had great treatments before, it's hard to sort of -- you learn a lot about the patient size. So, I think the first thing we’re seeing Steve is that the initial patient uptake is supportive of the kind of patient population that we were estimating. In our December Investor Day, we superimposed the initial patient uptake of CGRPs against the GLP class and saw that actually in a point in time CGRPs are generating more patients than at a similar point in the GLP launch. So, that to us is exciting and sort of validates the fact that there are a lot of patients who will benefit from these medications who are coming into to seek treatment. So, I think that’s good.

The other piece that I think we are pleased with is the access, both in terms of from a Lilly perspective, we’ve got access at all three major PDBs and almost all major regional insurers. So, that’s great from our perspective. I think for the class though, what’s also good is there are fewer restrictions in prescribing than we would have probably anticipated for the first year or two. We were concerned that the drugs would be positioned that only specialists could write them. And what we know from our patient understanding is that the vast majority of patients who will benefit from these drugs are showing up in a primary care GP setting. So, for those physicians to be able to write those drugs is important. So, we're seeing that.

So, now, what we need to see is that here is the translation of the patient volumes into sales, right? And, from a Lilly perspective, you'll start to see that -- I think we've said this in prior discussions, you'll start to see I think meaningful sales really start to kick in, in Q2 through the end of the year, just given the time that we launched in when we begin to generate good paid access. But, we're very optimistic about the opportunity for Emgality to impact patients and certainly to deliver meaningful top and bottom line results for shareholders.

Steve Scala

So, does Lilly view this as a market which is kind of all participants win equally and the rising tide floats all boats or does Lilly really feel that Emgality is a differentiated drug within this class?

Josh Smiley

We do feel like it's in a differentiated drug. I think, first, what the benefits of launching this competitively with three at the same time is it does generate a lot of opportunity to educate physicians and patients. And I think that will be a net positive overall. We do think we've got some differentiation that will play out over time, and that it starts with the data in the label. We are the only drug of the three that's got remission rate data for 50%, 75% and 100% sort of days reduced from baseline. So, we have powerful data there.

I think, the other thing we have is the device itself. We talk about Trulicity. Emgality uses the same platform and the same device as Trulicity. And we also know that as I mentioned, primary care physicians are the ones prescribing here, and there is a significant overlap between a physician who has a history and experience with prescribing Trulicity and what they’ll do on Emgality. So, we think that's a important piece. I think also, while not for the same indication, but we are in the middle of the approval process for cluster headache, which we think is another interesting and certainly compelling opportunity for patients. I think, we’d add on to that than the fact that we then expect to launch lasmiditan as a rescue therapy, abortive therapy in migraine, we’re in the middle of the regulatory review process there. So, I think that the breath of opportunity we have in pain then potentially followed by tanezumab for osteoarthritis pain or chronic lower back pain. So, we think we've got a franchise approach here as well that can work.

Steve Scala

How does the -- how is the lasmiditan review going? Do you anticipate FDA AdCom? What would you like to tell us about expectations for the label and so forth?

Josh Smiley

I think, we’re about the mid-cycle review now. So, I think, we have much more to say at this point, I mean the data and we think it's compelling. And we are certainly looking forward to an approval and launch this year.

Steve Scala

Okay, questions from the audience? I should have asked this question at the outset but neglected to. So, Lilly did nine acquisitions in 2018, four in 2017 and one in 2016. So, it's quite a steep ramp. Was there anything unusual about 2018? Is this what we should expect from this point forward? So, just talk about the dynamics and how things may or may not be changing?

Josh Smiley

Okay. I think, what we first -- we’re probably not going to do 18 launch -- acquisition this year. So, nine is probably closer to steady state than on some kind of slope. But, what we have said is we -- our goal of that 35% or so, about a third of our clinical portfolio at any given time, they have been sourced externally, in the therapeutic areas that we’re focused in today with a heavy emphasis I think on Phase 1 and Phase 2 types of acquisitions. The Loxo acquisition was unique. We don't anticipate seeing -- I mean, we’re going to look at Phase 3 opportunities. And if we see something that fits in our therapeutic area that has an opportunity to be first or best-in-class and we can create value for shareholders through the acquisition, we’ll look at those. But more often than not, Steve, I think what we’re looking at is Phase 1 and Phase 2 acquisitions. And to sort of be at a rate where about a third of your portfolio is sourced externally, probably somewhere in that 8 to 9 range is probably the right kind of steady state over time. Again, what we’re going to look at though is we want first or best in class opportunities in our therapeutic areas where we can acquire a partner the product and still add value for shareholders after that.

Steve Scala

I should have asked this when we were talking about diabetes, but I was somewhat surprised by the recent news that you’re offering this lower-priced insulin, insulin lispro. It’s kind of not within the Lilly armamentaria of history to do such a thing, at least my recollection of it. So, maybe you could talk about the thought process there and how this may impact the market going forward.

Josh Smiley

Yes. This was really designed to try to get a solution to patients. What we now is, about 5% of the patients in the U.S. are asked at the pharma counter to pay a $100 or more for Humalog. And this has been something that’s been increasing over time. Last year, we launched a comprehensive diabetes solution center to try to help patients who are at the pharmacy counter who can’t afford their insulin. And what we -- since then, what we’re getting now is about 10,000 patients a month access this. And this program, as they call -- and then we find the best solution for them, it could be free insulin, if they qualify, it could be some kind of a discount card or something. But, what we found is even with those 10,000 patients a month that we’re helping now, again, about 5% are still not either able to access that solution center because they are in a government program or because they don’t know about it and these things are clunky and they rely on some kind of prior knowledge, either by the pharmacist or patient.

So, we thought the best way to sort of go after this relatively small but important segment of patients who may not be able to afford their insulin, is to leverage the generic system where a pharmacist can actually switch a patient at the pharmacy counter. The only way to do that is through some kind of generic mechanism or through an authorized generic. We don't see this as a long-term strategy. It’s really -- as we move I think from a system today where we do have in certain classes -- and insulin is probably one of the most where you have a high list price and a high rebate and a low net price, you do have patients you’re going to fall through that system and get exposed to list price.

So, we’re really trying to get a target of the solution to that group as possible. Again, if we’re able to move towards a system that resets like has been proposed by these administration, where in Part D you getting patient base discounts at the pharmacy counter, that would obviate I think the need for this long-term. But for now, there is not a good solution, and we are having patients show up and having this challenge. I think from overall financial perspective, it'll be a net cost to Lilly. But, we've been anticipating these kind of moves when we gave our guidance for this year. We said that you should expect net low to mid-single-digit price decline in the U.S. across our book of business. These kinds of things were contemplated in that guidance.

Steve Scala

Questions from the audience? So, let's move to some of your exciting immunology assets, some on the market, some on the way. So, you have Taltz, you have Olumiant and you have mirikizumab, all competing in different areas within immunology, but that is kind of the common thread. Maybe you can talk about how you see the competitive landscape in each of these three areas?

Josh Smiley

Yes. I think, immunology for us is a relatively new area with the launch of Taltz a few years ago. But, I think the thing that’s exciting is the level of innovation that's happening and the change in expectations for patients across the various sort of sub-disease states within immunology, I think psoriasis is the one for us where -- the most compelling example, because we've been involved the most. And I think the change in, over the last few years, patient expectations around totally clear skin and really now what we're debating and what we're competing in a very, very intense way is around levels of clearance, whether it’s 90% or 100% PASI, and how quickly and how durable that clearance is. And I think if we go back to a few years ago, the patient expectations were much different, right? It was looking at 50% or 60% sort clearance and taking a long time.

So, I think fiercely competitive but great benefits for patients, great opportunities for innovation. I think the other thing is in many of the disease states, whether it's psoriasis or psoriatic arthritis or as we now move into IBD areas are even with really good opportunities patients cycle through different medications. So, I think there's lots of room for continued innovation. And we're of course making significant investments in the area. What we're -- we’ve generated I think good share performance and sales in psoriasis with Taltz. We're in the middle of the launching now in the room space with psoriatic arthritis and we're waiting for data and approvals in axSpA. So, I think from a Taltz perspective, we see lots of room for continued growth. We're very excited about our IL-23 mirikizumab, which we started Phase 3 trials in psoriasis. And you see and we'll see Crohn's Phase 2 data later this year and make a decision on a Phase 3 program.

So, with IL-23, we see the opportunity to cross over into IBD. And think, there's a really good opportunity there and certainly you see we think we have an opportunity first in class in an area that's got I think really significant unmet needs. So, I think maybe long of way answering, if you look at the change in patient expectations in psoriasis, we're really excited to be on the front end of that opportunity in IBD. And I think that's where one of the places we’d expect to see more growth over time.

Steve Scala

Questions from the audience? So, when I think about tanezumab, I can't think of a better drug for the time we're in. So, we just have to get through this next safety readout. So far so good. We’ve had a few readouts and they look all very constructive to getting this drug to market and filling a desperately needed position within the market. How is Lilly approaching this safety bid? Would you say you are on the one hand optimistic about the outcome or on the other hand it’s simply a wait and see or is there some middle road? What's the psychology within Lilly about this very large data set?

Josh Smiley

I think, the starting point is how you started the question, Steve. But, I think we are I would say cautiously optimistic. I think, the more data that we generate and still see a positive risk benefit then the better we are going to feel. We still have more data to see. And then, we have to get in front of the FDA. And this is a -- it’s a huge data package, it’s huge data set. And I think for sure, if you are comparing this -- the opportunity -- the risk benefit profile on tanezumab versus opioids, I think it seems like a pretty compelling case. We have to see how the FDA will look at it, but we certainly are -- there are many scenarios where we wouldn't be talking about this at all because we would've stopped the trials for some safety reason along the way. So, I think more data we generate, the better we feel. And I think until we get to a point with a label, I would say the best we are going be as cautiously optimistic because we know this is a complex submission and then there will be lots of scrutiny. That being said, I think if we can get to a point with an approval and a label, really confident in the ability between us and Pfizer to make this drug a relevant part of pain management for osteoarthritis or chronic lower back pain, and a significant commercial opportunity.

Steve Scala

So, tanezumab is probably -- in the safety readout is probably one of the most important data readouts for Lilly in 2019. What are say two or three others that you would point investors to? You have a long list of upcoming data, but what ones do you feel are most critical?

Josh Smiley

Yes. As I say, we’ve got a big and exciting year I think in terms of data readouts. But, certainly, the conclusion -- the tanezumab program. We’ve given the topline on REWIND, but we will release that data at ADA in its totality. And I think that will be interesting and important for investors and clinicians to understand the class there. Certainly, we’ve already talked about Loxo 292 but again the sort of the completion of that or the maturation of that data to put us in a position to submit, I think on the oncology side, I would also say the ARMO. We had an ARMO acquisition in sort of middle of last year. And we will see data from Cypress 1 and Cypress 2. So, this is data -- our PEGylated IL-10 asset in combination with both Opdivo and Keytruda in first and second line lung, and we will see that toward the end of this year. And I think that’s one that we can see a confirmation of some of the very early -- very few patients, that early data that we saw there, I think that would have an opportunity to significantly impact how we think about oncology and sort of next generation of oncology assets.

Steve Scala

So, we are out of time but allow me one last question. So, what is the one thing that you don't think investors don't ask you much about Lilly but you feel is critical to fully understanding the story? Is there one thing?

Josh Smiley

Well, I don’t know if there is one thing, but I think one of the things when you -- just if you put the questions together, I think one of the things that makes me excited about the future is the breadth of opportunities that we have. We are not dependent on one big drug, one single readout. I think, the five therapeutic areas we are in, we’ve got a good mix of -- we've got really good capabilities, we’ve got market-leading position in oncology, we’ve got opportunity to grow in a couple other very-big and growing areas. And then, I that you look at some of the next generation opportunities, I think neurodegeneration, we’re still wait and see but we’ve learned through lots of experience, I think how to run good early Phase trials in neurodegeneration. So, depending on readouts the next few years from both us and other competitors, if something works, if Taltz is an important target for Alzheimer's or beta-amyloid, we think we've got really good assets there. So, that’s probably maybe the wild card for the future.

Steve Scala

I would say, if any company cracks the Alzheimer’s riddle, it’s going to be Lilly. With that, thank you for attending the session.