Lilly(Eli) & Company (LLY) — Q1 2017 Earnings Call Transcript

Good morning. Thank you for joining Eli Lilly & Company's First Quarter 2017 Earnings Call. I'm Dave Ricks, Lilly's President and CEO. Joining me on today's call are Derica Rice, our Chief Financial Officer; Dr. Jan Lundberg, President of Lilly Research Labs; Enrique Conterno, President of Lilly Diabetes and Lilly USA; Dr. Sue Mahoney, President of Lilly Oncology; Jeff Simmons, President of Elanco Animal Health; and I'd like to extend a special welcome to Christi Shaw, who joined us earlier this month as President of Lilly Bio-Medicines. We're also joined by Kristina Wright, Chris Ogden and Phil Johnson of the IR team. During this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on Slide three and as outlined in our latest Forms 10-K and 10-Q filed with the SEC. The information we provide about our products and pipelines is for the benefit of the investment community; it is not intended to be promotional and it is not sufficient for prescribing decisions. Before discussing key events for the quarter, I'll start with a summary of our progress on our strategic objectives since our earnings call in January. Starting with grow revenue. In Q1, we generated worldwide revenue growth of 7%, which was driven by 9% volume growth in our pharmaceutical business, led by our new products. On our strategic objective of expanding margins, our non-GAAP gross margin percent, excluding the effect of FX on international inventory sold, increased by nearly 220 basis points compared to Q1 2016. Total operating expenses as a percent of revenue also declined by nearly 220 basis points. Under the heading of sustaining the flow of innovation, we launched baricitinib under the trade name Olumiant in Europe for rheumatoid arthritis. However, here in the U.S., we were disappointed to receive the complete response letter from the FDA for baricitinib in RA. We remain confident in the benefit-risk profile of baricitinib as a new treatment option for adults with moderate-to-severe rheumatoid arthritis, and we will work with the FDA to determine a path forward to ultimately bring baricitinib to patients in the U.S. I will discuss more details later. Finally, on deploying capital to create value, we completed the acquisition of CoLucid Pharmaceuticals, which adds lasmiditan for acute migraine to our late-stage pipeline. We've also returned over $500 million to shareholders via our dividend. Our continued progress in 2017 keeps us on track to achieve our mid-term goals for each of our strategic objectives. Now let's go to slide five for a more detailed review of the key events that occurred since our last earnings call. On the commercial front, here in the U.S., in collaboration with Boehringer Ingelheim, we launched Synjardy XR, a once-daily combination tablet containing empagliflozin and extended-release metformin for the treatment of adults with type 2 diabetes. As I mentioned earlier, we launched Olumiant in Europe for the treatment of moderate-to-severe rheumatoid arthritis, following European Commission approval earlier this year. On the regulatory front, the U.S. FDA issued a complete response letter for baricitinib for rheumatoid arthritis, indicating that additional clinical data are needed to determine the most appropriate doses and to further characterize safety concerns. Lilly and Incyte disagree with the Agency's conclusion, and we look forward to meeting with the FDA in the coming months to determine appropriate next steps. Also here in the U.S., the FDA approved an update to the Trulicity label to include use in combination with basal insulin for adults with type 2 diabetes. And in Europe, along with Boehringer Ingelheim, we received European Commission approval of an update to the Synjardy label to include a change to the indication statement as well as data from the EMPA-REG OUTCOME trial on the reduction of cardiovascular death. On the clinical front, we announced that MONARCH 2, a Phase 3 trial of abemaciclib in combination with fulvestrant in women with HR+ and HER2- breast cancer met its primary endpoint of improved progression-free survival. We look forward to presenting data from this study at ASCO in early June. We also announced that the MONARCH 3 study with abemaciclib met its primary endpoint at an interim analysis. Women's HR+, HER2- advanced breast cancer who had not received prior systemic therapy experienced a statistically significant improvement in progression-free survival with treatment with abemaciclib plus an aromatase inhibitor compared to placebo plus an aromatase inhibitor. We intend to begin global regulatory submissions of these results in Q3 2017. For the RAINFALL study of ramucirumab in first-line gastric cancer, the independent data monitoring committee recently met to review the primary analysis. While we remain blinded to the data, we're pleased to report that the IBMC stated that the study met its primary endpoint of improved progression-free survival. Our expectation remains that regulatory submissions could occur after we have the final overall survival data in 2018. At the American Academy of Dermatology Meeting, we presented Phase 3 data showing that patients with moderate-to-severe plaque psoriasis treated with ixekizumab, or Taltz, demonstrated superior efficacy at 24 weeks compared to patients treated with Stelara. Along with Boehringer Ingelheim, we initiated two Phase 3 studies of Jardiance for the treatment of chronic heart failure. These trials will enroll patients with and without diabetes, and with both preserved and reduced ejection fraction heart failure. Moving to slide six. We completed the addition of CoLucid Pharmaceuticals and in other news, in Japan, the IP High Court ruled in our favor regarding our vitamin regimen patents for Alimta. If the patents are upheld through all the challenges, they could provide intellectual property protection for Alimta in Japan until June of 2021. To support the increased demand for our products in our pipeline, we announced plans to invest $850 million in our U.S. operations in 2017, including research laboratories, manufacturing facilities, and some administrative areas. We've also distributed over $500 million to shareholders via the dividend. Now I'll turn the call over to Phil for a discussion of our financial performance for the quarter.

Thanks, Dave. Slide seven summarizes our presentation of GAAP results and non-GAAP measures, while slide eight provides a summary of our GAAP results. I'll focus my comments on our non-GAAP adjusted measures to provide insights into underlying trends in our business, so please refer to today's earnings press release for a detailed description of the year-on-year changes in our first quarter GAAP results. Looking at the non-GAAP measures on slide nine, you can see that Q1 2017 revenue increased 7% compared to Q1 2016, reaching $5.2 billion. Gross margin as a percent of revenue was 78.1%, an increase of 180 basis points over Q1 2016. Excluding the FX effect, our gross margin percent increased by nearly 220 basis points, driven by manufacturing efficiencies. Total operating expense increased 3% compared to Q1 of 2016. This increase is lower than the increase in revenue, leading total operating expense as a percent of revenue to decline by nearly 220 basis points, to 53.2%. Looking at the component parts of total operating expense, marketing, selling, and administrative expenses increased 5%, while R&D expenses increased just 1%. In marketing, selling, and administrative expenses, higher spending to support new products was partially offset by lower spending on late-cycle products. Our tax rate was 21.2%, an increase of 3.3 percentage points compared to the same quarter last year. At the bottom line, net income and earnings per share both increased 18%. We achieved this significant earnings growth by delivering high-single-digit volume-based revenue growth while improving our gross margin percent and reducing our operating expense percent, creating positive leverage. Slide 10 provides a reconciliation between reported and non-GAAP EPS, and you'll find additional details on these adjustments on slide 22. Now let's take a look at the effect of price, rate, and volume on revenue growth. On slide 11, in the gray highlighted row at the bottom of the table, you'll see the 7% revenue growth I mentioned earlier. The effect of foreign exchange on revenue growth was minimal this quarter. Excluding the slight headwind from FX, our worldwide revenue growth on our performance basis was 8% and was driven entirely by volume. By geography, you'll notice that U.S. pharma revenue increased 16%, driven primarily by volume. Trulicity was the main driver of U.S. volume growth, with meaningful contributions also coming from Taltz and Lartruvo. The decline in European human pharmaceutical revenue of 5% was driven by the negative effect of price and unfavorable foreign exchange movements, partially offset by higher volumes. On a constant currency or performance basis, European revenue decreased 1%. This performance decrease was driven primarily by Cymbalta and Alimta, partially offset by the uptake of new products led by Trulicity. In Japan, pharma revenue increased 5%, driven by a 6% benefit from higher volumes predominantly due to a stronger yen, partially offset by a 4% negative price effect from last year's biannual price cuts. On a constant-currency basis, Japan pharma revenue increased 3%. While excluding Zyprexa, Japan pharma revenue in Q1 grew 16% on a constant-currency basis, led by Cyramza with meaningful contributions from Cymbalta and Trulicity. Turning to our pharma revenue in the Rest of World (RoW), revenue this quarter increased 2%, as volume growth of 7% was largely offset by lower prices and the negative effect of FX. On a performance basis, RoW revenue increased 4%, as growth in Humalog, Trulicity, Trajenta, Cyramza, and Jardiance was partially offset by lower sales of Cymbalta, Alimta, and Cialis. Turning to Animal Health, this quarter, worldwide revenue increased 2%, driven by higher volume for our acquisition of Boehringer Ingelheim Vetmedica's U.S. vaccine business. The effect of FX as well as price was minimal. Excluding the BI Vetmedica vaccines acquisition, the rest of our Animal Health revenue decreased 3%. As we've done in recent quarters, let's now take a look at the drivers of our worldwide volume growth on slide 12. As I mentioned earlier, excluding FX, our worldwide revenue grew 8% this quarter, driven by an 8% increase in volume. Our new products comprising Trulicity, Cyramza, Jardiance, Taltz, Basaglar, Lartruvo, Portrazza, and now Olumiant in the EU, were again engines of our worldwide volume growth.

Thanks, Phil. As in prior quarters, I'll start by sharing some color on our new product launches. As you can see on the graph on slide 13, our new products generated over $800 million in revenue this quarter, led by Trulicity and Cyramza. This represents over 15% of our total worldwide revenue, up from 12% last quarter. Trulicity performance continues to be strong, benefiting from both growing market share and a rapidly expanding GLP-1 class. In the U.S., we're pleased that our new-to-brand share with endocrinologists, which we view as a key leading indicator, is comparable to Victoza. We've also recently expanded our efforts to reach primary care physicians and are encouraged by the early results. Cyramza continues to grow globally, driven largely by Japan, where we're seeing strong adoption in gastric cancer. U.S. Cyramza sales declined this quarter, largely due to pressure from IO agents in non-small cell lung cancer. Moving to Jardiance. We’re pleased that our new-to-therapy share with both endocrinologists and primary care physicians has increased substantially since the FDA approval of the cardiovascular indication and the update to the ADA's diabetes treatment guideline. In absolute terms, Jardiance's new-to-therapy volume has increased by 75% since we began active promotion of the new cardiovascular indication. We continue to see rapid uptake of Taltz, as well as continued strong growth of the IL-17A class in psoriasis. We're excited that our new-to-brand share of market with dermatologists, a proxy for use in psoriasis, exceeds that of Enbrel and Cosentyx. On Basaglar, we launched here in the U.S. in mid-December and are seeing strong uptake early this year, largely driven by switching in high controlled pharmacy benefit manager formularies. U.S. new-to-brand share of market is approaching Levemir and exceeds that of both Tresiba and Toujeo. In Q4, we also launched Lartruvo for soft tissue sarcoma in the U.S. and in early launch markets in Europe and this quarter have begun to launch in select rest of world countries. We're excited by initial physician feedback and the potential of this molecule to help patients with soft tissue sarcoma. Finally, earlier this quarter, we launched Olumiant in Europe, with this quarter's sales representing initial stocking in Germany. We are pleased with the initial customer feedback and we see great potential for this molecule in Europe. Moving to slide 14, you'll see that changes in foreign exchange rates had a modest effect on our Q1 2017 results. Growth in non-GAAP EPS was 18%, including the effect of FX, and 22% in constant currency terms. Moving on to our pipeline update. Slide 15 shows our NME pipeline as of April 18. We had positive movement which included: the European approval of Olumiant, the addition of Lasmitidan for acute migraine treatment via our acquisition of CoLucid; initiation of human testing for our long-acting insulin; and termination of development of a Phase 1 diabetes asset. In our NILEX pipeline on slide 16, you'll see the initiation in collaboration with Boehringer Ingelheim of the Phase 3 heart failure program for empagliflozin, as well as the initiation of Phase 2 work with abemaciclib in pancreatic cancer. Now turning to slide 17. Let's recap the recent progress we've made on the key events we projected for 2017. Since our last call, we've added checkmarks for the initiation of the EMPEROR studies of empagliflozin for heart failure in collaboration with Boehringer Ingelheim; the positive PFS readout for the ramucirumab RAINFALL trial; the U.S. submission of ixekizumab for psoriatic arthritis; the EU approval of baricitinib for rheumatoid arthritis; the closing of the CoLucid acquisition; and the favorable Japanese Supreme Court ruling upholding our Alimta IP. We’ve also added a red checkmark for the FDA's complete response letter for baricitinib. You will also see that we've moved the MONARCH-3 data readout from the internal readouts to the external disclosure section based on the positive interim analysis that will allow us to present the data at a medical meeting in the second half of the year. As we move into our financial guidance on slide 18, our expectations for 2017 remain largely unchanged from our last update in late January.

We would like to take as many questions from callers as we can. So I would ask that you limit your questions to two or a single two-part question. Thank you in advance for your collaboration with this request. John, if you could go ahead and provide the instructions for the Q&A session, we are ready for the first caller.

Yes. Hi. My question is on abemaciclib and your latest thinking about the ability to show that your drug is more efficacious than palbo. Because your pivotal trial didn't have Palbo as a comparator, any efficacy comparisons can really only be made on a side-by-side basis. And naturally, that has certain limitations. Do you think it's achievable? I'd like your latest thinking on that. And then a payer question. If you could just talk about payer trends and rebating trends in the SGLT2 category. If you addressed that earlier, I apologize. And on Cyramza, any additional color on the pricing erosion in the U.S.?

Okay, Tim, thank you for the questions. So, Sue, if you'll handle the first question on abemaciclib and then the third one on Cyramza. Enrique, if you'd like to comment on the SGLT2 pricing.

Hi, Tim. Thanks for the question on abemaciclib. As you say, there are no comparative studies of the CDK-4 and 6 inhibitors. We believe it will be important to look at the totality of the data across multiple trials as we evaluate these agents. I consistently say that we believe that we could have a best-in-class CDK-4 and 6 inhibitor. This belief is based on the attributes of the molecule as well as the consistency of data across multiple trials. We are looking forward to presenting that data at ASCO and publishing it this year. Our intent is to show the overall robustness of abemaciclib's profile when compared to palbo and others in the class.

On the Cyramza.

With regards to Cyramza, we continue to see challenges in the lung cancer market mainly due to IO medicines. We've essentially seen flat to declining sales in the U.S. over the last few quarters, which is the opposite to Japan, where we're seeing phenomenal sales. Our focus in the U.S. is really a gross-to-net adjustment, so I wouldn't read too much into the pricing. Our focus is on ensuring uptake in gastric cancer, which is a differentiated market. A number of doctors treating gastric cancer in the U.S. treat only one patient a year. We're trying to target these doctors to ensure they appropriately prescribe Cyramza.

Great. Just complimenting Sue's answer, the gross-to-net adjustment was essentially a benefit recognized in our estimates for rebates and discounts in Q1 of 2016, leading to the negative year-on-year compare. So nothing unusual that we're seeing in the actual contracting or pricing for the product.

The SGLT2 class, like other diabetes classes, is highly managed from a formulary perspective. Given our data and the label, we position ourselves well with Jardiance. We have nearly 90% access on commercial plans and about 70% in Part D. As we've shared, there’s a very strong position for us. It's important to note that the 2nd class tends to have one of two contract statuses, whereas we advocate for open access.

Great. Thanks, Enrique. John, if we can go to the next caller, please.

Sorry. I was on mute. Thanks for taking the questions. First, on abemaciclib, can you talk a little bit about what you think is a differentiated response rate in the setting, whether it be for MONARCH-3? My understanding is that we’re seeing response rates between 52% and 55%. So it seems like the response rate dynamic is something you're focusing on. I'd love to just better understand what you see as a uniquely meaningful response rate, or if you're really just focused on the monotherapy response rate that we've already seen. The second question was, when I look at the revenue generated relative to Basaglar scripts, it came in below expectations. Can you give us a better sense of what the market dynamics may be in that situation? And finally, in terms of the dynamics around baricitinib, some questions have come from investors on your incorporation of the language in the press release regarding your disagreement with the agency regarding their response letter. Why did you choose to incorporate that language?

Okay, Seamus. Thanks for the questions. Sue, we'll start with you for abemaciclib then Enrique for Basaglar revenue. Christi, your first question on baricitinib and the language in the press release.

Thanks, Seamus, for the question. I'll reiterate regarding our confidence in abemaciclib. It's key to look at the totality of the data as we consider all trials. We want to ensure we can identify the depth and magnitude of response to prove its effectiveness compared to alternatives. We have seen positive Phase 3 trials showing efficacy across various lines of therapy; however, we want to ensure we consider the perspectives brought forward from our physicians.

On the Cyramza.

Seamus, as for revenue versus scripts on Basaglar, destocking explains the difference. We anticipate revenue tracking aligned with script levels. We have robust uptake in the new patient audience, and we continue to believe that our position remains strong. We believe no material variances in revenue can be presented without considering script performance. We expect the revenue to grow despite these fluctuations.

All right. Thank you, Enrique. Christi?

Yes. Thanks for the question. We truly believe in baricitinib's benefit-risk profile at both four and two milligrams. Our aim is to work closely with the FDA and understand their concerns better. Yes, we disagree with their analysis, but we want to fully explore options to provide the drug to patients who need it.

Great. Thanks, Christi. Before we go to the next caller, Seamus, I believe the numbers that you're citing for overall response rates are for patients with measurable disease. Ensure you're looking at the similar patient populations when examining our trial data. John, if we can go to the next caller, please?

Thanks, team. First, when you announced the bari delay, you reiterated your 5% revenue growth goal. My question is, what are the caveats you would offer in terms of reaching that goal without bari other than the Alimta caveat you've mentioned before? Also, can you go deeper into the trends for Animal Health this quarter?

Gregg, thanks for the questions. Derica, we'll start with the long-term growth question. Jeff, your query on Animal Health.

Gregg, with our mid-term guidance of achieving at least 5% revenue growth through the end of the decade, I have no new additional caveats to share. We remain confident we can achieve that goal today as we did when we set that guidance out last year. Our growth prospects don't rest on a single product; it's about the strength across our product portfolio. To date, we have seven new products, and we feel optimistic about our projected growth going forward.

Great. Thanks, Derica. Jeff?

Yes, Gregg, on Animal Health. Q1 indicates we anticipate growth for the year will be back-half loaded, due to some one-time events in Q1 as well as our SAP 2016 implementation impacting Q2. Although Q1 was lighter than expected, we're excited for the growth trends in the latter part of the year, driven by new launches and volume in our key growth engines.

Thank you, Jeff.

A couple of questions. You showed significant improvement in your gross margin this quarter. Could you separate out mix versus manufacturing? Within manufacturing, how far do you think improvements will go? Also, could you discuss the rate-limiting steps for Jardiance in terms of class awareness? What can be done to accelerate uptake?

Andrew, thank you for your questions. Derica, you'll address gross margin, and Enrique will respond about Jardiance.

Hi, Andrew. Kudos to our manufacturing team for the gross margin improvement. This is primarily driven by lowering our per unit cost, not due to mix effects. This improvement should be sustainable moving forward. However, we expect negative pressure on gross margins in the second half of the year as we begin to feel the impact of the next round of patent expiries.

Thank you, Derica. Enrique?

Since our launch of the cardiovascular indication, we've seen a significant increase in new patient starts for Jardiance.We are seeing roughly a 70% increase in new patient starts just in three months post-launch of the indication. Class growth also sees upward momentum, with a 30% increase since last year. Peer-to-peer interaction will continue to be a priority for us in terms of education for physicians as we expand awareness.

Thanks, Enrique. John, if we can go to the next caller, please?

In light of the successful launch of Basaglar across your diabetes franchise, is there a consideration to partner with other companies for biosimilars across oncology or immunology? My second question is about productivity gains. What have you learned about YZ as you prepare for Cialis's loss of exclusivity in 2018, as it relates to the consensus earnings growth?

Thanks, John. Let me turn to Dave for the biosimilar partnership question, Derica for productivity learning related to YZ.

We've addressed this before, but to clarify. Basaglar fits well into our asset base where we can translate the experience into further entries. We focus on innovation over biosimilars. While it makes good sense to enter a collaboration if dynamics are favorable, we don't have broad-based biosimilar ambitions at this juncture.

With YZ, we launched key products during that period, unlike our last wave of patent expirations. Key is to maintain our R&D output and sustain product launches moving forward. Our productivity agenda remains focused on improving gross margins and operational efficiency.

The renal data for Jardiance is quite encouraging, and while we need to conduct additional trials for label claims, we believe we can position Jardiance strongly upon those outcomes as we work closely with the regulatory authorities.

Thanks, Enrique. John, if we could go to the next caller, please?

Is it safe to assume that in reiterating your medium-term guidance to 2020, you ascribe some value to baricitinib? Or would you clarify that Lilly's not dependent on a single product? Could you share your plans for baricitinib in other indications?

Great, Jami. Thanks for your questions. We'll have Derica clarify our medium-term outlook regarding baricitinib, and Christi can respond regarding indications.

Absolutely, we are planning for the success of baricitinib. We're looking to engage with the FDA and explore potential paths forward to ensure patients can access it here in the U.S. Hence, our confidence in the average 5% revenue growth we cited stands firm and is reliant on more than just baricitinib – it’s driven by our overall product portfolio.

Regarding rheumatoid arthritis, we have not considered not pursuing baricitinib for this indication. We stand firmly behind the safety profile. The submission in Europe mirrors that in the U.S., suggesting our commitment to continue development efforts pending discussions with FDA. We’re still planning to initiate Phase 3 trials in psoriatic arthritis by the year's end.

Thanks, Christi. Dave, would you like to close out the call?

Thank you for joining today’s earnings call. Eli Lilly is entering a growth phase driven by new product launches. Our diverse product lines, top-line growth prospects, and opportunities for margin expansion create a compelling case for investors. We look forward to keeping you informed of our progress. Please follow up with our IR team for any questions that we didn't address today. Thank you, and have a great day.