Eli Lilly and Company (NYSE:LLY) Morgan Stanley 20th Annual Global Healthcare Conference September 13, 2022 11:10 AM ET
Company Participants
Anat Ashkenazi – Senior Vice President and Chief Financial Officer
Conference Call Participants
Terence Flynn – Morgan Stanley
Terence Flynn
Great. Well, thanks, everybody, for joining us. I’m Terence Flynn, the U.S. Pharma analyst here at Morgan Stanley. We’re very pleased to be hosting Eli Lilly today. Joining us from the company is Anat Ashkenazi, who is the company’s CFO. Thank you so much, Anat, for being here. It’s great to see you in person.
Anat Ashkenazi
Absolutely.
Terence Flynn
Before we get started, for important disclosures, please see the Morgan Stanley Research Disclosure Web site, at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.
Well, again, obviously, very exciting time for Lilly here. You guys are in a pretty unique position in terms of potential number of new drug launches you have. Obviously, Mounjaro is, I think, front and center for a number of investors, and for obvious reasons.
Question-and-Answer Session
Q – Terence Flynn
But maybe before we jump into that, I just think one of the other big picture questions we’ve been getting is the Inflation Reduction Act, and just as we think about potential implications for both Lilly and the industry, and I know Dave has been pretty vocal about the company’s view there, but would just love your perspective in terms of how you think about navigating any potential impact to Lilly? And then what are the implications as you think about investing in the business on the forward in that kind of an environment?
Anat Ashkenazi
Sure. So, let’s — I would split the Inflation Reduction Act into three pieces. The first one is the changes that are going to be made to the ability to increase list prices or the impact of increasing list prices beyond inflation. And if that were to occur, there are penalties associated with that. I think the impact of that piece of the legislation is limited. It will have more impact on companies that take double-digit list price increases every day. To Lilly specifically, we have not been in that situation. So, for example, the last time we’ve increased list price on our insulin portfolio it was in May of 2017, so we have not taken any list price increases there. In most of the rest of our portfolio we take low single-digit list price increases.
The year, the highest one is around 5% for Trulicity and Verzenio. So, from that perspective, I think the impact to us is limited. Impact to companies who have taken different approaches may be more significant. The second portion is associated with the changes to Part D and the Part D reform. And the fact that the out-of-pocket costs are not going to be capped at $2,000 should help people when they’re at the pharmacy counter. And we’re seeing abandonment rate, not insignificant necessarily with people not being able to afford their second script, and that should help with that, that should help with patient staying on drug, adherent to their treatment as prescribed by their physician, and then, as a result, seeing better health outcome and improvement in the healthcare system.
So, I think that’s a good thing overall for patients. The impact to the manufacturer would be that we’re moving away from the 70% in the coverage gap, and now we’re going to have 10% in the initial phase, and 20% in the catastrophic phase. So, what’s the balance there? On the one hand, we may see improved adherence potentially across multiple classes of medicines, but the coverage structure changes. It depends — overall, it depends on the product specifically. So, for products and companies that are heavier on — in areas where patients go through the catastrophic phase very quickly, such as in oncology, there may be more impact as they’re picking up kind of at the tail end.
So, there are going to be some pushes and pulls there, but, overall, I think that’s a good change in the system overall. The third element, which I think is the more complex one, is around negotiation. And that’s the government negotiating prices for small-molecule drugs; Small molecules, today, defined by the number of amino acids in the molecule. For small molecules, nine years after launch; and for large molecules, 13 years after launch. So, what does that do? That’s quite significant impact to drug companies in the sense that, now, you may have patient protection that exceeds those nine years, obviously, but were coming in and we’ll have to negotiate the price. And it was communicated there will be at least 75% or no more than 75% of the initial price.
So, there will be an impact there. We’re looking at what that means. But the most important question that I think you had is what does that mean in terms of capital allocation decision we’re going to make in the company on how we develop drugs and where do we focus. I think the concerning piece is that for small molecule, not so much for large molecule, but that kind of inequality between small molecule and large molecule could result in our shift of companies investing more in R&D, and increasing their focus on large molecule as opposed to small molecules. In areas, such in oncology, where the treatment — the development paradigm is such that you typically start with later stages of disease and then you move up in line.
So, as you launch the drug or as you get data, you would add indications to the product. And you see a lot of these very large products in oncology, where we say they have a pipeline within a molecule, those are for small molecules, now will have an impact because they’re not going to have enough runway to actually be able to make those investments and recoup those investments over time. So, unfortunately, this could cause or result in a situation where companies invest less in those oncology opportunities or small molecules. So, we’ll see how that all transpire. Obviously, there is still ongoing discussion on that.
I think the idea would have been to equalize small molecule and large molecule, which would have created an opportunity for price reduction, which is what the government wanted but in a fashion that doesn’t negatively impact patients.
Terence Flynn
Okay, great. Well, thanks for framing that, and I guess we’ll stay tuned because I know there’s still a lot more details that are going to come out there.
Anat Ashkenazi
Sure.
Terence Flynn
So, back to Mounjaro, as I mentioned, launch if off to an extremely strong start. I think much better than all the prior GLP-1 launches; it’s been pretty amazing to watch here. I know, in the past, you’ve talked about the preparation that the organization has taken to prepare for any kind of launch scenario. So, maybe just as you think about the current scenario you are in, do you still feel confident with the ability of the organization to continue to deliver product as I know there’s been some challenges for one of your competitors. And so, as you think about the manufacturing capacity versus the demand you’re seeing, maybe just help us think about that dynamic?
Anat Ashkenazi
Yes. So, you’re right, we’re excited to see the launch — the initial days of launch of Mounjaro, initially several months. And I’m sure everyone is looking at the script data, and it’s really encouraging. It’s a good product that addresses real patients’ needs. So, that’s fantastic. As we’re thinking about where is it versus our supply situation and what we plan for, we plan for launch of the drug well before the drug even reads the Phase 3 data; we have to because it takes years to build capacity, certainly for a molecule, like tirzepatide, in a monoclonal — in a parental site where you need device assembly, et cetera. We’ve announced the — a new site in North Carolina, in 2018, so, well before we had the data, but we knew we had a robust — potentially robust [indiscernible] portfolio.
That site has — is going to be going online next year. And by the end of 2023, we will substantially increase the capacity we have to support the increasing portfolio where we are today. We’re going to be almost double in the overall capacity versus where we are today. So, we feel good about where we are. We’re making all the right investments. We’ve announced we’re going to be starting a second facility in North Carolina, so that should help even bring more capacity online in several years. But we’re doing — we’re taking actions across our manufacturing site to increase the supply capacity. We’re confident with where we are today in terms of our ability to supply the Mounjaro launch in the U.S.
Obviously, as demand continues to grow and as we see competitive situation in terms of other products in the GLP market, then we’ll have to make decision on how do we rollout the global launch outside the U.S. as well.
Terence Flynn
Yes, okay. What — and I guess the other question is just thinking about access, reimbursement. I would imagine you and the team are spending a lot of time on that front. Obviously, you’re in a different position now for the launch of Mounjaro versus when you came to market with Trulicity, where you were further behind the competition. So, maybe just help us think about some of the puts and takes as you guys look to build that access from kind of — I think you have 20% now on the forward?
Anat Ashkenazi
Yes, so you’re right, Trulicity was the fifth GLP to market, and we were able to build robust access. And obviously, it’s a leading product now. With Mounjaro, we have just over 20% access, which we’ve communicated on the Q2 call. And we’ll potentially provide update as we continue to grow access. We are in these discussions on a regular basis on adding Mounjaro to [formularies] [Ph]. These discussions are progressing as we expected. And we’re very disciplined in these discussions in terms of how we negotiate prices or discounts and rebates. We believe in the value that our product brings to patients, so we’ll continue to articulate that and ensure that any contract we sign is commensurate with that.
Terence Flynn
Yes. And is there, given the profile of the drug, I mean you have pretty impressive data. You have head-to-head data. Is there any reason to think you wouldn’t end up in a more favorable gross-to-net position relative to Trulicity?
Anat Ashkenazi
Well, we don’t — we — you have the — you’ve seen the list price, we don’t comment on the specific net prices for any of our products. But we do look at what is the additional value this drug provides to the marketplace when we decide on these contracts.
Terence Flynn
Okay. And I know you’ve said in the past that we should continue to focus on scripts, not sales, as kind of the way to benchmark the launch. And so, again as you mentioned, we’ve been tracking that, others have been tracking that. But maybe help us think about that kind of — when should we start to focus on — like when is the right part to start to say, okay, we’ve — follow the scripts, but now it’s transitioning over to the sales, and starting to think about that as more ’23 should be our focus?
Anat Ashkenazi
So, I would say, as you look at this quarter and probably through end of the year, this underlying script data should provide a good indication for just the launch uptake. But given that we do have a copay card or a patient assistance program that’s pretty significant, you’ll see somewhat of a disconnect between what you would expect to see from a script data perspective and the actual revenue for the product. As we gain more access, next year, and then we expect to have significant access by the end of next year, you’ll see that translate to improved net prices and, as a result, impact to revenue. But we’ll probably communicate more with quarters to come.
Terence Flynn
Okay, understood. And I guess maybe just the follow-up on the ex-U.S. side. So, it’s sound there, more it’s going to be a kind of market-by-market approach that you guys are going to take based on underlying dynamics for Trulicity and Ozempic, or are there any geographies that maybe you’re focused more on or less on or just how are you approaching that because, again, it sounds like there are maybe a few more moving pieces than there are in the U.S.?
Anat Ashkenazi
So, what we do outside the U.S. for any launch, we look, obviously, the regulator process, may be such that a launch will occur after the U.S. launch, and not at the same time. But there is also the reimbursement process, and we want to make sure those drugs can be reimbursed appropriately. So, we take these two consideration into account, as well as our supply situation, we want to be able to launch in a market knowing that we can supply the patients’ need in that specific market. So, we’ll evaluate that on a market-by-market basis.
Terence Flynn
Okay, understood. The other, obviously, important indication for the drug is the obesity indication, I know you guys have been in communication with the FDA regarding the early filing. Do you have any update on that in terms of where that stands at this point?
Anat Ashkenazi
So, the initial agreement we had with the FDA on the SURMOUNT program, which is our obesity program for tirzepatide, is to complete the four studies. And in these studies you saw the first readout of SURMOUNT-1, which had really outstanding data. And then the following studies will come next year. So, that’s our current plan. And we are progressing towards the completion of these studies.
Now, given that we saw the strength of the data and the robust dataset we have, just the number of patient exposure on the entire SURPASS program as well, we felt that it was the right thing to do is to approach the FDA and engage in these conversation on that possibility. We don’t comment on the back and forth with the FDA. But, if there is anything material, then we will announce that obviously.
Terence Flynn
Okay. And I think you’ve said the latest would be an update by the 3Q call. Is that still the timing?
Anat Ashkenazi
We will see when that is. If it’s earlier or later, we’ll make that decision at that point.
Terence Flynn
Okay, understood. I guess as you think about building that obesity market, obviously you have done a tremendous job in diabetes. You’ve known that market for decades; obesity, a newer market for the company. So, maybe just help us think us about the preparation you are doing right now to no. 1, I guess prepare for an early launch. And then, no. 2, to think about the long-term drivers here that are really going to matter to make this a commercial success?
Anat Ashkenazi
Yes, you are right. We have strong presence in diabetes. And obviously, we know the market well and physician — prescribers know us, payers. So, we are well positioned in that marketplace. The overlap in terms of patients between the obese population in the U.S. and the diabetes populace is about 15% to 20%. So, we do have some inroad into that marketplace already that will help with kind of the start of that program. But what we will do once we near that potential launch is we look at how we market this drug, who do we call on, what are the types of physicians. We obviously don’t communicate about the sales force would look like. What educational information would we need to provide into that marketplace. I think one of the key areas of focus would be the shift the conversation on obesity from just weight loss conversation to actually improving health for patients who live with obesity.
It is a chronic condition. And we need to shift the conversation for people to actually start thinking about obesity as a medical condition. It reminds me and wasn’t at Lilly back then, but the conversation around Prozac and depression. I believe when Prozac was launched even depression wasn’t discussed as much as it is. Today, everyone feels comfortable talking about depression. It’s acceptable and everyone understands it’s a medical condition. Back then, there were some — people may have thought about it differently. And we started that market and you look at where we are today. So, we will try to doing something not the exact same, it’s a different indication obviously, but similar in terms of educating the marketplace and patient. So, this is not just physicians. It’s not just payers. It’s also patients knowing that they should feel comfortable talking to their physician about a medical condition they have.
Terence Flynn
And, are you already having some of the payer conversations now? Like are you able to have those because in your context of diabetes reimbursement because you already have some SURMONT 1 data, are you having preliminary conversations that can help you address — I know you have already started a pretty big clinical program beyond just the original four SURMONT studies. But, are those conversations further informing how you are thinking about the market?
Anat Ashkenazi
No, it’s too preliminary to have any negotiations. Obliviously, we don’t have an approved drug, nor have we completed the four set of studies.
Terence Flynn
Okay, understood. I guess one of the other questions is the two brands versus one brand question. We’ve got that a lot. I think prior to the approval and diabetes continues to be a focus; same device, same doses, so it seems to me like the more likely scenario is the single brand. Any perspective on how you guys are thinking about that? I know you are not going to give commentary on pricing et cetera. But, just from the branding perspective?
Anat Ashkenazi
Yes, let me share because we can’t share any decisions on whether it’s a single brand or two brands. But, let me maybe provide a little bit of color on how a company would think of whether or not a single brand versus two brands. And we actually have within Lilly example of doing both. We had a product where we had two brands for the same molecule. And the other one with same molecule single brand.
So, you start with patient preferences. And you want to do market research to understand where the patients are and what their perception will be of having — being on the same molecule same brand or two different brands. A good example of that I have just talked about Prozac, so I am going to use that again. We have beyond the depression indication for PMDD at that time. And these are for women. And when we did the market research, we found that women did not want to be at that point associated with the depression indication. So, we launched under a different brand name called Sarafem. A different example is the Cialis where we have it for erectile dysfunction and BPH. It’s the same brand name. So, we want to understand patient preferences. There are benefits to have any single brand associated with marketing efficiencies.
You just create a very large brand as brand recognition associated with one name. Cialis is a well known name, I think, for many people. So, there are benefits there. But you have to understand what the pros and cons. And I often get the question from payer perspective, is it better to have one brand versus two brands? Payers can control utilization if they wanted to. The tools exist. But we will take all these into consideration when we make a decision on tirzepatide for obesity versus the type 2 diabetes indication.
Terence Flynn
Okay. No, that’s great perspective. I was hoping you would have only one example because then we could figure out which way you are leaning, so, in this scenario where again Mounjaro ends up being one of the most successful drugs in the pharma industry, significant margin expansion opportunity here. How does that change how you think about capital deployment in that scenario? Because obviously it’s a great luxury to have, but it’s also I can imagine can be challenging because you got to think about your internal R&D budget, scaling that across the business, but then also how to factor an external opportunity?
So, do you think about weighing that scenario? I know you guys do a lot of the planning decisions. And you are thinking about that right now. So, maybe help us think about the puts and takes of the situation that that creates for the company.
Anat Ashkenazi
Yes. So, if Mounjaro is successful and is a very large drug, then — and it sits on existing infrastructure, obviously there are going to be marketing investments to continue to promote the drug. But, it should provide opportunity for continued margin expansion from an SG&A perspective. From a capital allocation perspective, it does not change our overall priorities, right?
So, our priorities are first and foremost invest back in the business which is our internal R&D engine supplemented with external innovation, our launches in commercial portfolio, and our manufacturing footprint. We want to make sure we invest appropriately to drive the volume growth. And it’s volume growth, not price growth, but the volume growth that we see opportunity for in our business, and that we have the right supply chain and manufacturing capacities to support that launch.
So, that’s kind of the first area of priorities. And then, we will look at the share buyback and dividend. We have increased dividend 15% for several years in a row. So, we will continue — we will look at what can support as an organization. You are right; we are looking at a diverse set of scenarios. We always do in terms of product can range from very high to very low. And I will tell it’s really difficult in this business to precisely predict the revenue growth and exact curve for any single product. But if you have a portfolio, it’s much easier. We actually do a really good job internally predicting the portfolio and where it’s heading. So, we are able to balance that from a capital allocation perspective. But, the priorities remain unchanged.
Terence Flynn
Yes, okay. Does it put more pressure on Lilly to do another Loxo-type deal at that point? Again, under the scenario where Mounjaro was extremely successful? Or, is it irrespective of that? Is it not really linked to that?
Anat Ashkenazi
So, if you look at not just Mounjaro but the current cohort of products we call them key growth products in our quarterly calls, they are already growing double digits. And represent over two-third of our total business. So, those products are going to grow. Most of them are not exposed to any patent expiry in the next three to five years with the exception of Cialis in 2027. But we already have the next best product right behind it. So, that product — that set of product is growing. And then we have not just Mounjaro but potentially additional other products that we are going to be launching here in the next 18 – 24 months. So, we do see significant opportunity for growth. We said we expect to be one of the fastest growing companies in the industry.
And as such, we would expect we said by 2030 — and as such we would expect by end of the decade, we will be a larger company than what we are today, which means we need to have an R&D organization that’s able to deliver an output that exceeds where we are today, whether it’s in number of molecule that’s coming out the pipeline every year, or in value. Ideally for us, it’s both. How will we achieve it? We are investing heavily in our internal R&D that has always been our focus, but we will supplement externally. I don’t know that we are pressured. I think right now it’s not — we don’t have the need to do something, but we are interest in looking at business development opportunities. And they will be primarily — we are looking at early stage where we can bring something in and actually add value from our own R&D experience and organization. But it would be another Loxo size opportunity. If we find it, we will pursue it. If it fits in our kind of — within our core therapeutic areas or fits on existing infrastructure, it makes sense for us to do, then we will pursue it.
Terence Flynn
Yes, okay, great. Maybe just want to shift gear to another franchise that sometimes gets overlooked given all the focus on Mounjaro, which is Verzenio. I think that’s another place where you guys have significant commercial momentum especially in the adjuvant settings now. So, maybe just help us think about the drivers there. And then there is a potential competitor coming in to that market, again depends on their data. But how do you think about positioning in that kind of a market?
Anat Ashkenazi
Right, so, we’ve launched Verzenio early on in the metastatic breast cancer indication. We were not the first to market at that point, but we had good data. And what we saw is, obviously, when there is an entrenched product in the marketplace it makes it a little more challenging framing from commercial perspective. But as physician got — oncologists got to experience the use of the drug and saw the impact on patient, they were becoming Verzenio prescribers. So, they would prescribe more, and we saw the uptick there. Obviously, the adjuvant indication gave another boost to the drug, and we saw it in the TRx data. It’s a little difficult on oncology because the data is not as robust as some other disease states to parse out what’s coming from where.
But we are seeing an uptake associated with that. And it’s exciting. It’s exciting for women with breast cancer, obviously, it provides meaningful benefit. It’s good if there’s additional options for patients. Is this a good thing? Depending on when they come in, you obviously need to think about is there a product already in the marketplace that has positioned itself and that physicians are comfortable prescribing. But we’re very excited about what we’re seeing with Verzenio.
Terence Flynn
Yes. And what — and just remind us the survival data, I think monarchE, you were waiting on an updated survival data. Is that expected this year?
Anat Ashkenazi
I don’t believe we’ve communicated the specific timing.
Terence Flynn
Okay. The other important franchise where, again, you’ve got an established presence is with — is in immunology, with Taltz. And maybe speak to us about kind of the growth outlook there? But then also you have the opportunity with lebrikizumab to add another second important product, [indiscernible] [Olumiant] [Ph] as well. But, again, seems like that’s more ex-U.S. momentum. So, as you think about layering a second product here, what are the implications of that on the growth?
Anat Ashkenazi
Yes. So, it’s interesting, if you looked at Lilly 10 years ago, we were not in the immunology space. And we’re really built our presence in that space by Taltz, Olumiant, and now, potentially, lebrikizumab coming behind it. And with Taltz, gaining access in the U.S. helped us gain — grow our positions, our market share, and we have more patients on drug. The drug has tremendous outcome for patients. And the ability to achieve skin clearance quickly is really important for patients on Taltz. We talked about the access we gained last year, which was kind of a step change in terms of share in number of patients on the drug. But as physicians were getting experience now that more of their patients had access to the drug on formulary and seeing the results, they — that expanded kind of that impact beyond just that specific formulary.
So, you’re right, we’re gaining — we’re building that presence. And we potentially will have lebrikizumab come behind it. So, it is helpful when we work our structure or business unit structure in neuroscience, immunology, oncology, diabetes does help us drive, in an efficient way, growth for specific products. It has proven to be a — the right strategy for us. And lebrikizumab will sit on that existing infrastructure. It also helps from a manufacturing perspective when we talk about how we built our devices. And the fact that we have similar devices across — and not just within the same disease state, and if you think about Trulicity and truzepatide being on the same device, but also using that platform for Taltz, for Emgality, and for other products does give us leverage beyond just the commercial footprint.
Terence Flynn
And how about on the reimbursement side, I mean, obviously, immunology, a very competitive area. But again, does it help having that scale when you think about having multiple assets?
Anat Ashkenazi
Well, it helps in the sense that you are negotiating with the same customer group, and you have the credibility of having a very successful product on the marketplace. So, once we get lebrikizumab we’ll start negotiating and we’ll see where we are, but we’ll advocate for access just given the robust efficacy for the product.
Terence Flynn
Right, okay. And one other question we’ve gotten recently is, just given the approval of Bristol’s deucravacitinib, which is an oral product for psoriasis; do you think that’s going to have any impact on the injectable market where Taltz plays?
Anat Ashkenazi
I think just, first, different level of efficacy for a biologic versus an oral. So, I view that — and you should ask them the question as well, but I view that as competing mostly against the oral, and not necessarily against the biologics.
Terence Flynn
Yes, okay, makes sense. I guess the other question is just on — you touched on this a little bit, but just the philosophy around dividend growth. If I think back when Merck launched or had a successful launch of Keytruda, they consecutively brought up the dividend and dividend growth. And so, as you think about the period where many products like — well, not just Mounjaro you’re going to be launching here, how are you thinking about the dividend growth outlook over a longer-term period?
Anat Ashkenazi
So, we’ve raised our dividend 15% now for several years in a row. And what we do when we make those decisions, we have a long-range process by which we look at the next five years and the next 10 years. And I try to look at what is the number we can sustain and support over a period of time and not have to go up and down in dividend. So, that’s our current strategy, is to look at is it 15%, is it something different? We’ll obviously communicate that when we get to that point, but something that, from a growth perspective, we can support over time. Generally, think about EPS growth and then dividend growth in line generally with that growth rate, it’s not precisely going to be the same number, but something that we can, again, support for multiple years.
Terence Flynn
Got it. Maybe just in the last minute, donanemab, obviously another one of the potential product cycles here, as you think about that product what are you doing as an organization to prepare for a potential launch? Obviously, there’s some reimbursement challenges because of a competitor drug, but how are you thinking about planning for that possibility of a launch in ’23?
Anat Ashkenazi
So, one of the things we need to do with Alzheimer’s, given that we’re not active in Alzheimer’s in the commercial side. Obviously, we have great expertise on the R&D side, but we need to build that commercial space, is the treatment process for Alzheimer’s needs to improve in the U.S. Today, for a patient to get diagnosed and actually treated takes about nine months — eight to nine months in the U.S., that’s not — we have to change that. And think about it on a cancer patient that comes in, immediately a cancer team is put around that patient and a treatment algorithm is prescribed. We need to get to a place where Alzheimer’s patients flow through that system much better. And there’s use of tools to diagnose the patients appropriately.
So, we’re working — along these lines, we’re working with thought leaders and Alzheimer’s centers to understand where are the patients and how can we get better education, better tools to make sure that that flow is done in a more appropriate fashion.
Terence Flynn
Great. Well, I think we’re up against time, but thank you so much, Anat.
Anat Ashkenazi
Absolutely.
Terence Flynn
Great to see you in person, really appreciate it.
Anat Ashkenazi
Thanks.
Terence Flynn
Thank you.
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