Eli Lilly and Company's (LLY) Management Presents at Goldman Sachs 40th Annual Global Helathcare Conference (Transcript)

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About: Eli Lilly and Company (LLY)
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Eli Lilly and Company (NYSE:LLY) Goldman Sachs 40th Annual Global Helathcare Conference June 11, 2019 4:20 PM ET

Company Participants

Josh Smiley – Chief Financial Officer

Conference Call Participants

Terence Flynn – Goldman Sachs

Terence Flynn

Okay, great. I think we’re going to get started. Thanks so much for joining us for the afternoon session. I’m Terence Flynn, the biopharma analyst here at Goldman Sachs. We’re very pleased to have Eli Lilly with us this afternoon. Joining us from the company is Josh Smiley, CFO. Josh, thanks very much for taking the time.

Josh Smiley

Thanks for having us.

Terence Flynn

Maybe just to get started, big picture, given your background and experience we just kind of love your thoughts on this question about broader industry consolidation. There’s been consolidation on the payer provider side now. Over the last couple of years, we saw another large transaction earlier this year in the biopharma space. So do you think this is the start of a trend here in the biopharma space in response to kind of the payer provider consolidation? Or do you expect kind of more bolt-on transactions to be the norm, which is what we saw kind of over the last couple of years?

Josh Smiley

Yes, well, I think Terence from Lilly’s perspective our interests would be in bolt-on and opportunities to enhance the pipeline. We’ve studied for a long-time the bigger acquisitions and at least from our vantage point, we don’t see them as making sense. We went through a patent expiration period and focused on investing and innovation. And we think that’s the way to manage through the – any turbulent time that’s coming whether that’s because you face a patent expiration or policy environments changing.

So from our perspective, we don’t see the changes either from a payer landscape perspective or a policy perspective as driving sort of a thought process from a consolidation perspective. Of course every company is different, but for us we think the future is going to be an innovation. We think the best way to do that is to do it as a lean company that mixes internal R&D with an external viewpoint. So we’ll continue to focus on that.

Terence Flynn

Okay. And what’s the right – what do you think is the right mix of kind of external, internal as you guys think about balancing that?

Josh Smiley

For now, what we look at is probably about two thirds internal, one third external. And that for us, I think when we look historically, we’ve done a good job in late phase of partnering and bringing in assets in earlier phases of development, getting to about one third sourced externally will be a move for us. But we think that’s a good mix. We don’t think you can be in a position where you’re exclusively or majority relying on external innovation. That’s just hard to manage. But at the same time, we know that the best ideas are many times going to be happening outside the walls of Lilly. So that’s the mix we’re looking for.

Terence Flynn

Okay. Maybe that’s a good segue into the deal that you guys announced earlier this year Loxo transaction. Maybe just would love your thoughts. Just remind a strategic rationale there and then how you think about that as kind of continuing to build your presence on oncology and what should we be looking for as we think about measuring kind of your return on investment from that acquisition?

Josh Smiley

Yes, sure. I think as it relates to any pipeline opportunity or project we’re looking at, our emphasis is on having drugs that are going to be either first or best in class. Now, of course, I think probably everybody up here says that, right? But what we saw with Loxo and what we’re going to focus on are the therapeutic areas we’re in today and oncology is one of them. What we saw with the Loxo opportunity is LOXO-292, the RET inhibitor. We saw it as an opportunity of both first and best. And as we had a chance to watch some of the data mature, we got to a point where we were convinced that there was enough data that this is going to be a drug. So we had a high probability of success on the – on 292.

We spent a lot of time on understanding the mutation, doing modeling to understand how many patients in the U.S. and around the world present each year with this mutation. And of course then did the work to figure out how quickly we could grow that market if we had the drug. We got to a number that we thought made sense. And I think what you saw from us is when we have conviction, we’re going to act fast and we were able to start the process with Loxo and concluded within a few weeks. That’s of course we’ve been thinking about it for a lot longer than a few weeks.

So I think what that would indicate or what you should look at as we think about things going forward, we’re going to look for high quality assets that provide meaningful benefits to patients that can be a first or best in class opportunity. And when we see those, we’re going to be aggressive in pursuing them obviously from a financial perspective. We’re going to make sure that whatever we pay to acquire or to partner the asset, there is still value on Lilly’s side. So I think when we look at the acquisition price of $8 billion it’s a little bit more than $8 billion. It was really all put against – almost all put against 292.

Terence Flynn

Okay.

Josh Smiley

And again, we’re assuming that it’s going to be a drug and then it’s going to be a function of how many patients can we get tested, what kind of share can we maintain. Again, we think we’ll be first, but there will be competitors. And then how long will patients stay on the medication and that’s what we looked at when we looked at the price then that we thought was reasonable. You can assume that that’s well above our – the returns will be well above our cost of capital and we see good returns for shareholders on the back end.

That’s the biggest deal we’ve done in our history, $8 billion. And so I don’t think you should expect that you’ll see ones of that magnitude of frequency. But when we see a great asset, and we have conviction around it, we think we can create value. We’re going to move aggressively.

Terence Flynn

Yes. And in terms of the timelines for the drug so again, I think, you’ve said have some updated data later this year.

Josh Smiley

Yes.

Terence Flynn

And then plans to file by year end that’s all on track?

Josh Smiley

Yes, everything is on track from we saw at the time we announced the acquisition, we expect to file by the end of the year. We will provide more mature data later this year. We haven’t announced the venue yet, but it’ll be at a medical meeting. And then with fast track and breakthrough designation that the drug has, we’d expect to launch in the first half of 2020.

Terence Flynn

Okay. And you have the commercial infrastructure right now in place or is there anything more that you guys are doing to kind of perhaps build that market based on your current infrastructure?

Josh Smiley

Yes, the biggest thing that we’ll need to do, we do have, as a function of the acquisition lock, so had a sales force that they built that’s really focused on testing. That’s going to be the biggest piece here is driving, testing for this mutation. I think, if you are a patient who has an opportunity to get this drug, has lung cancer, or thyroid cancer, you’re going to want to be tested.

But that doesn’t exist today. So that’s the biggest commercial infrastructure piece that we’ll focus on. That’s not a significant investment, that’s a relatively small, but focused group that will do that.

Terence Flynn

And is there anything unique about this mutation versus EGFR, ALK, ROS that would say, okay, this is why it’s going to be either faster or slower than maybe some of the testing in those different models.

Josh Smiley

I think that we’ve looked at those the analogs, or I think what we find is if you have a drug that works against the mutation, the testing tends to follow. So we’re pretty – again it’s going to be execution, but we’re pretty confident that we’ll be able to drive good uptake here, again based on the strength of the drug and the opportunity for patients.

Terence Flynn

Okay, great. Maybe just moving on, drug pricing obviously there’s been a number of proposed changes here in the U.S. Maybe just would welcome your thoughts in terms of where you expect this to land over the forward here? Do you think we’re going to move away from a rebate system in the U.S.? And then how do you think if at all, you need to adapt your business model to that new norm?

Josh Smiley

I think first we think we should move away from a rebate model. That’s our starting point. I think the compounding effect, I think, of competition, consolidation on the payer side, which drives more price competition, and the growth of high deductible plans and things like that. I think the exposed to high – out-of-pocket cost and it’s pretty variable. And so I think, getting to a – resetting to a net price system, I think, is good for everybody, certainly going to be good for patients. I think it’s better for the industry and it’s better for anybody who touches cost, or drugs, or anything else. So we think that should happen.

Now in terms of when it will happen. We’ve advocated for the rebate rule. I think the timing piece is, I think, it changes every day in terms of the probability that it will go into effect in 2020. That’s our base operating assumption though that it will. So as we’ve provided Medicare Part D bids to our payer customers, we’ve done both the normal bid, as well as a net price bid. So we’re prepared for that to go into effect in 2020. We think that that’s an important first step and can help to reset sort of the environment longer term.

I think in terms of changes to the business model, hopefully some of the things that we would see we’ve already started to do. And I think if you look at the most recent launches of our new drugs, we’ve tried to price at list prices that are more representative of what we think the net price should be. I think Olumiant is probably the best example in the U.S. was launched it about 60% difference to the existing therapies, which I think historically you wouldn’t have done once a very high price and discounted down. So I think that’s one.

The thing for us that’s most important from business model perspective is driving volume growth. I think driving volume growth is going to win in any of these scenarios going forward. We’re in the fortunate position right now of having relatively new drug launches in big and growing categories. So that’s really what we’re focused on.

Terence Flynn

And then in terms of the rebate rule changes, maybe anything – I know it seems like Taltz maybe would be a beneficiary of that. May be talk to us about why that is. And then on the flip side and diabetes, any nuances there in terms of how to think about those changes in where you might have an impact in the portfolio?

Josh Smiley

Yes, I think from a rebate perspective where we see the most challenge is with our portfolio is in immunology as we’ve launched Taltz or IL-17 for psoriasis and psoriatic arthritis and Olumiant for rheumatoid arthritis. I think the established opportunity that Humira has and the amount of rebates for a drug of that size, that covers so many indications, we find it hard to sort of break through that. So in many cases, even though we think Taltz is the right first line age it’s used behind a TNF. Again for lots of historical reasons, we don’t think that’s the right thing for patients.

So I think if you’re in a more of a net price system, we think we have a better opportunity on an indication by indication basis to compete based on the sort of the net price of the drug and the merits of the indication, or the data. So that is something we certainly would see an opportunity there. I think that sort of plays out almost in any new innovation, right. If you don’t have the challenge of having to break through the legacy of repeats and other things that exist now.

So of course on the diabetes side we have that, because in many cases, where that’s to be established player. but I think what we see on the diabetes side that because of the intense competition in almost every class we’re in, the difference between list price and net price is pretty significant. So, when a patient shows up at the pharmacy counter, who is in the high deductible phase of their plan or for some other reason they don’t have insurance are exposed the list price, that’s a significant hardship for patients, that’s not what we intend. We’re pricing our drugs for our biggest customers. right now, that does lead in diabetes to big spread.

So, reset here, we think would be good for patients. And probably, this is a place, where just the number of patients, who are exposed to your diabetes is one of these classes. It’s one of the most challenging dynamics that we see. So, I think this would be an important – an important benefit for patients. And I think would help, I think from a broader perspective to maybe take some of the pressure off. Again, if you have a patient, who shows up and can’t afford their insulin and doesn’t take it, that’s a terrible outcome and it is very difficult to sort of manage through that now, resetting the price environment would help.

Terence Flynn

And what about in terms of sort of this Part D specifically, what’s your expectation for impact on the commercial market? Do you expect that would follow and maybe how slowly or quickly?

Josh Smiley

I think from our perspective, again, we’re just sort of speculating here, but what we’ve seen in other cases is the Medicare Part D, I mean it’s only been 10 years or so, but tends to help set direction, right? So, without any other legislative changes or regulatory changes, we would expect that probably over the course of the next couple of years, you’d sort of see a convergence in commercial and the Medicare Part D toward a net price system. I get, I’m sure other companies may have different perspectives. The PBMs or others, but I think we may have some of them at their conference here. They may have a different view. That’s sort of our view though just from what we’ve seen, play out over time that, if it happens in 2020 in Medicare probably over the course of the bidding cycles for commercial, so a couple of years we’d probably try to move things towards, I think it’d be very hard to manage two different systems long-term.

Terence Flynn

Okay. Maybe, moving on another timely topic, ADA was, last weekend, you guys had a couple of important presentations there. Maybe, we’ll just start with the Trulicity REWIND data. Maybe just help us think about the key takeaways from your perspective, confidence level in the U.S. and European filing, and then the commercial impact. What do you really see this doing to the GLP market in terms of forward growth outlook?

Josh Smiley

Sure. The REWIND trial, we are pleased with the outcome. It was a trial almost 10,000 patients and it was really designed to represent the broadest population possible for commercial opportunity in the diabetes – in a diabetes treating physician’s office. About 42% – if you look at the inclusion criteria for the trial, about 42% of the patients with diabetes show up have the inclusion factors.

So, it’s a very relevant trial to the prescribing physicians. the trial hit on its primary endpoint and based on the breadth of the data. We’re as confident as we could be in terms of the submission. Of course, as you work through the regulatory process, you don’t know until the end and we’d been surprised before, but I don’t know how we can be any more confident about the opportunity to get an indication that’s representative of the broad population patients with diabetes, who have cardiovascular risk factors. They don’t need to have had a cardiovascular event. We see that as the big differentiator versus other trials that have been run in the class.

So, we think this is going to be very relevant from a commercial perspective, because it’s a meaningful – it is the patients that treating physicians in the USC. So, we’ve submitted REWIND in Q1 and I would expect regulatory action in 2020 and then we will certainly educate and promote aggressively behind it. I think from an overall perspective, for us, from an overall company perspective, growth – continued growth in a GLP class is that things that we’re most focused on. We’re confident that Trulicity with its current profile and with new data will continue to do well from a share perspective. But of course, as you’ve alluded to, we’ve got tirzepatide coming. We want the GLP class to continue to grow at the 25% to 30% rate that we’ve seen for the last few years. We certainly think that’s – that’s a viable projection. The REWIND data certainly will help both in terms of the class growth, but also share preservation for Trulicity.

Terence Flynn

And anything to think about is, I know, investors are trying to kind of compare across this trial versus some of the other CVOT studies. Anything there, any caveats or things we should think about as we kind of try to compare and contrast the different GLP studies?

Josh Smiley

Yes. I take first don’t – try to compare that. I think that’s the statistical answer, right? I mean they’re totally different patient populations, right? So, we designed the trial, said to really look at a broad swath of patients, who have risk factors. I think when we do compare the patient populations from the other CV trials in the GLP space, I think the big difference we see is 70% of the patients of the nearly 10,000 in the trial, had not had a prior MACE event and all the other trials with focus on patients secondary prevention patients had already had an event. So, from that standpoint, the patient population was completely different. They were different in other ways as well as the HbA1c, was in the sevens, where the other trials when you look at it just on average were more in the eights.

And then we studied for a longer period of time. We went out for five and a half years, where I think most of the other trials were in the two to three-year timeframe. I think when you look at the less sick population and the fact that it’s more heavily weighted to primary prevention. We also saw big differences in terms of a number of events in the trial. So, I think also when you look at how it was powered and statistical significance, you have to take into account the fact that this was a less sick population. So, they were going to be fewer events. So, you needed to – you’re going to see a different hazard ratio, just because of the population we’re studying. The thing we’re most excited about is it hit and we think it hit in a way that’ll get us a good label and indication.

Terence Flynn

Okay. And where are you guys have focused a lot on first injection share? I think you said it’s about 50% right now. Where can that go over what timeframe and again, how important is this data to really driving that on the forward?

Josh Smiley

Yes. I think so we’ve – if you look at total prescriptions now for first injections, it’s three out of 10 patients are getting a GLP versus a basal insulin in new prescriptions, it’s five or 10. So, it is moving, right? and a part of that, that certainly the launch, it was epic, has helped. So, having good weekly product helps. I think the recognition across classes not just in a GLPs of cardiovascular benefits is important. and certainly, the rewind data will play an important role here. I don’t think there’s any – I mean as we look at the data, sort of everybody was treated per guidelines and follows a progression in a logical way that that five out of 10 should be like nine out of 10 or something, right. So, we see lots of room for the class to continue to grow. I think given the growth rates in the 25% to 30% range to get up to the seven, eight, nine, nine out of 10 patients, that’s 25% to 30% growth for the next four or five years. It’s still, I think a logical way to look at this.

Terence Flynn

Okay. And one of the – before we get tirzepatide one of the other debates or some of GLPs, obviously, oral sema is expected to be launched later this year. So, as you think about that, and maybe, again, no it’s not your decision, but in terms of kind of price volume dynamics and the impact that that drug could have and you talked about the 20% to 30% growth, maybe just help us think about where – or you expect oral sema to kind of fit into that framework.

Josh Smiley

Sure. Well, Terence as we said, I think that’s there are some interesting and difficult decisions I think for Novo here and I assume they’ll make good ones. So, I think what we would look at is first in the injectable GLP space is something that has got a lot of room for growth there. We know that physicians are going to want to try oral sema. And in some cases, we’ll try it instead of putting a patient that would have gone onto an injectable GLP. So that, that’ll be a little bit of a headwind in terms of class growth, but relative to the 25% to 30% that I was alluding to earlier, we think that’s a – that’s not going to all of a sudden cause GLPs to slow down to a big extent.

We think another place, certainly, it’ll also compete on an oral basis against SGLT2s and DPP-4s. Again, I think we look and say, there’s such an opportunity still for SGLT2s that even if you take a little bit of that volume away, you still got – we still feel really good about Jardiance. And I think frankly when we look at the data though the comparison to Jardiance in the PIONEER trial. Jardiance looks really good. So, we think competitively, we’re well positioned. But we do expect that there, you’ll see usage, you’re sort of across the spectrum, and again it’s not completely clear to us until we see how Novo chooses to position the drug. But for now, we sort of assume it’s going to carve off a little bit of volume from almost every area in diabetes and of course, if you’re in Novo shoes, it’s figuring out how do you position that, right? So, we’re sort of assuming it’s going to be a good drug, it’s going to get good uptake. but we’re going to focus on the big opportunities still left in GLP and SGLT2s for Jardiance.

Terence Flynn

Okay. And I guess how disciplined would you guys be on the pricing side? Because I know that’s one of the other debates just as you move into the – again making GLPs a bigger category.

Josh Smiley

Yes.

Terence Flynn

And again, maybe taking share from some of these older generic drugs. I mean where are you guys on the kind of pricing side?

Josh Smiley

We think that GLPs are priced appropriately for the value they bring to the healthcare system at ADA. One of the things we showed was a sort of cost effectiveness and what it costs to reduce HbA1c relative to basal insulin, then the comparison looks really good. So we will be, I think very disciplined and trying to preserve appropriate value that we think exists today. Given the – our perspective here is physicians and patients should have ability to choose different drugs in some cases, whether it’s oral sema or Ozempic. It’s going to be a better choice than trulicity. We’re confident in Trulicity’s profile as a product and the benefits that it brings to patients in terms of the device and otherwise.

So, we don’t want to be in a position, where we’re trying to trade price to get share. Trulicity is going to get plenty of share if we can keep the class open and available. So, I think the decisions around oral sema pricing, we don’t see that as a major event. It’s not going to be something that we’re going to try to proactively do anything around.

Terence Flynn

Okay. maybe, tirzepatide, obviously an important pipeline program for you guys, had some new data. Maybe, just remind us what was the aim of this phase II titration study and then in your view, did you achieve the aims that you set out to, I think…

Josh Smiley

Sure. Yes. So, last year at EASD, we released the data from our core phase II trials for tirzepatide. And I think what we saw is across a range of doses, really impressive performance in terms of HbA1c and weight loss. I think when you got up to the 15 mg are the highest dose that was tested in phase II. the concern was could patients tolerate it. And then the phase II study that we did, we got them up to 15 mg very, very quickly. And what we saw was about a 34% – 32% dropout rate and that’s not practical.

So, what we needed to do before we started into phase III was to figure out and the doses up to 15 mg, we saw reasonable discontinuation rates, reasonable compared Trulicity trials and other things. So what we wanted to do before we started the Phase III program was to figure out a more reasonable dosing titration system that could allow patients to get to 15 mg without that kind of discontinuation rate.

So the titration study was done to inform that Phase III dosing protocol and we certainly think we achieved what we set out to do and that was to inform the Phase III piece. I think if you look at that, we have three different titration schemes that we laid out in the dose – in the titration study. And then the one that where we went a little bit slower to get to 15 mg, you saw that 32% number in the Phase II trial come down to about 7% in the titration study, which is I think in line with what we’ve seen in other GLP studies.

We think we can do better than that, so this was just to inform the Phase III protocol decision. We’ve looked at that data, we’ve looked at the Phase – the core Phase II data and based on our modeling then have chosen an even slower progression in Phase III, so to get to 15 mg patients will progress starting with a 2.5 mg dose every four weeks up to 15 mg. So we think we can do better than the 7%, but we think that was – the main goal was to say, is there a titration approach that can get the full benefits of the 15 mg without a third of the patients dropping out.

Terence Flynn

Okay. And I think one of the other questions has been, how easy would it be for patients to kind of implement the titration schedule assuming you get to market?

Josh Smiley

Yes. We think it will be easy. We’re using the Trulicity device, the pen for Trulicity and basically you’d get the pen at same presentation each time, so it’d be no dialing of dose or anything, so you’d get your first month, 2.5 mg, you’d go back to the pharmacy when require physician titration or anything like this, it’s a pretty straightforward thing, the pen would look the same to the patients. So we think this is not only doable in a clinical trial but practical in the real world.

Terence Flynn

Okay. And then remind us in terms of you’ve got a broad Phase III program, I think you kicked off in December, so maybe just what’s the cadence of kind of data readouts and regulatory filings? Like, where the next things we should look for?

Josh Smiley

The next things you should look for, as it relates to the type two diabetes program in Phase III will be our – the trials will start to readout in 2021. So 2021 and 2022 is when the data will come together for submission. And again, what we’re really looking at is replicating the Phase II efficacy and wade with better tolerability, which we feel good about. We also then are – later this year kicking off a separate Phase III program with tirzepatide for obesity as a standalone indication. And again, based on the weight loss data we saw in the Phase II trial, we are pretty excited about that opportunity. We also will commence a Phase II NASH study. Again based on the data we see not just weight loss but some of the biomarker data we see that gives us some good confidence that we would have at a good NASH opportunity here. And we’re following the protocol established by the FDA. We’ll do a Phase II study with biopsy and presumably move into Phase III from there.

Terence Flynn

And how much work have you guys done there on the commercial side in terms of the NASH market, because I know that’s a market, there’s a lot of debate in terms of kind of the addressable market size, amount of diagnosis that has to happen to really build that. So where are you guys in kind of that discussion in terms of thinking about the commercial opportunity on NASH side?

Josh Smiley

I think we have been cautious on NASH up until now, because I think some of the other drugs that we’ve looked at externally wasn’t clear to us, what that commercial opportunity would look like. I think with what we see with tirzepatide and our assumption, we think we can hit a pretty significant market. I think our estimates are about 16 million patients probably in the U.S. have NASH and there should be some function – some subset of that tirzepatide would be appropriate for, but it’s a pretty significant number.

And again, I think what we’re looking at is, we know weight loss contributes I think the other metabolic impacts, we think there’s something here that’s meaningful that would be compelling for physicians to want to treat patients, I think our question has been, if NASH really something that physicians are going to treat and it’s most sort of prevalent form, I think with tirzepatide, if we’re able to replicate the data we see in Phase II, we think it becomes a compelling commercial opportunity.

Terence Flynn

Okay. And you think that alone is enough or do you think like combination opportunity, I know somebody else some other companies have talked about, like I know nobody did a partnership with Gilead for some combination approaches.

Josh Smiley

Again, we’re going to learn from the Phase II study, but we think there’s a compelling probably standalone opportunity.

Terence Flynn

Okay, great. Maybe moving onto one of your other new product cycles Emgality, maybe just walk us through where access stands right now? And then what should we look for in terms of the free drug program? I know that’s something else that, again, there’s been transition going on there. So if we think about the kind of forward metrics, where are we at?

Josh Smiley

Yes. We’re really excited about the long-term opportunity in migraine. When we look today at patient access, it’s about 80%. So about 80% of patients who would present for Emgality would have coverage through their PBM or insurance plan through a really pretty limited, I mean, pretty straightforward PA process, in most cases it is an electronic attestation that says they’ve tried some other preventative therapy in the past one or two in some cases. So that’s pretty straight forward, so 80%.

Now what – we’re not seeing 80% today in terms of reimbursed prescriptions. We said in Q1 that the number, the average was about 50%, a little bit over 50%. That is just the – it’s just the time it’s taken from agreeing on formulary status to that getting all the way pushed through the system down to the whatever the relevant sort of regional unit plan is. We think that’s all pretty much in place by April. So you should expect to see a number. We even said on our Q1 call that by the end of the quarter, we were seeing about two-thirds of the prescriptions being reimbursed. Again, that number over time should get up to 80%, and it should be at 80% in the sort of Q3 timeframe.

We still though, our approach is to make this really easy for physicians and patients to get Emgality. So the first month of dose is generally given in the office as a sample. So that doesn’t show up as a prescription. And then you’ve got 30 days to go through that electronic attestation process and everything else. So, we expect that you’ll start to see the cumulative effect of the access decisions and the volume growth that we continue to see. We’re pleased with the in-market performance, we’ve taken first place in terms of new to brand share.

And I think now the play is to drive volume growth, there are 6 million patients we think that are eligible for preventative medicine in migraine and at least 3 million of them have taken medications in the past. So that’s our goals to drive those patients into the office asking for a new therapy. And that’s why you watch TV, you see lots of DTC ads from all three companies really here, so.

Terence Flynn

And what in terms of I guess the volumes where you’ve seen that come from now primarily, is it a mix of kind of the specialist, the primary care guys, or is there a mix shift happening?

Josh Smiley

Yes.

Terence Flynn

And then where do you think you can – in terms of like market share, I mean, is your goal – obviously you want to have the most market share, but do you think ultimately it settles out where there’s some kind of even distribution or do you see advantages on your drug profile that could give you majority market share?

Josh Smiley

So I think first in terms of where is volume coming from, we did see a bolus in specialist office right away, patients who coming in and had been treated and not responding well. So that’s where the initial uptake I think was. But long-term and what we’re seeing now, more than half of the prescription should come out off the primary care setting. We think we’re really well positioned in primary care. In fact, when we look at prescribing physician targets about – there’s about a 70% overlap with our Trulicity targets and the other benefit that we see here is, it’s the device for Emgality is the same as a device for Trulicity, so physicians have competence there. But yes, I do think that for the – to see the kind of growth that we would expect in the class, you’re going to see the majority of that growth in the future coming out of the – more of the primary care, setting and that’s where we’re focused.

What we’re hearing from physicians and particularly specialists who have more experience now is, they think all three drugs are good and they’re choosing the drugs based on the margins, what do they see in terms of ease-of-use for patients, ease-of-use for the access programs and side effects? I think I have to say that we think Emgality is going to be the best drug and it’s not going to be a third, third, third. We do think there are some benefits, again starting with our presence and capabilities in the primary care office. We also have a while not for migraine, but we have a related indication the other two don’t for cluster headache, which is a terrible condition, now that’s going to be in the specialist setting. But we’re very pleased with that indications can bring a big benefit to patients and certainly reinforces our commitment to headache basically in the space.

And then we’ll launch our acute migraine drug lasmiditan presumably next year. And I think that brings again back to what our physicians looking at sort of full suite of products and services that we can bring.

Terence Flynn

Great. Maybe just in the last couple of minutes, we just love your outlook and kind of the margin structure. Obviously, you guys post the Elanco spin, put some targets out there, executing against those growing the top line. But how should we think about the evolution of the margin structure now that you’re more of a pure biopharma company?

Josh Smiley

Yes. So our goal – our target for 2020 is to have operating margin of 31%. We’re confident we’re on track for that, you’ve seen year-over-year margin expansion since we’ve come out of our YZ period. We’ve used 2020, just because that’s sort of the time window that we gave some mid-term guidance around. We expect to see ongoing year-over-year margin expansion really as a function of our sales line continuing to scale on the products that we’ve already launched. So every incremental dollar of sales that we think of in the next few years of most of those incremental dollars are going to come from products like Trulicity or Emgality or Taltz, where we already have a fixed investment in infrastructure.

So it’s certainly from our perspective, we’d expect to see year-over-year margin expansion. I think one of the things that’s unique for Lilly and our history and I think unique across the industries is as we look in the decade of the 2020s, we have very limited patent exposure. So which tends to cause the sort of the dips in margin and that’s why we’re still building our way out of our generic events from the middle of the decade. We don’t see that to any large degree in the 2020. So if we execute on the sales opportunities that we see in front of us, we’ll continue to invest in R&D, but we’ll get margin expansion as a function of that.

Terence Flynn

Maybe last one, how should we think about longer-term targets? Again, I mean, there’s obviously a reason why you gave you those targets at the time you did. But is that something we should think about again, or is it too early to…

Josh Smiley

In 2020, we’ll – yes, what we’re going to focus on is achieving the 2020 goals. In 2020, we’ll look and say, is there value to give investors another set of targets. I think there’s value when there is a difference between what we see and what we think investors are saying, so we’ll have to assess that at that time. I think the one thing you can certainly takeaways your prior question. We’re going to stay focused on margins, not at the expense of R&D investment, but just as a function of running the business and growing the business like we think we can.

Terence Flynn

Yes. Great. Well, thanks so much Josh. I appreciate it.

Josh Smiley

Thank you, Terence. Thank you. Thanks.

Question-and-Answer Session

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