Lilly(Eli) & Company (LLY) — Q2 2020 Earnings Call Transcript

Thank you. Good morning and thank you for joining us for Eli Lilly and Company’s Q2 2020 earnings call. I’m Kevin Hern, Vice President of Investor Relations. Joining me on today’s call are Dave Ricks, Lilly’s Chairman and CEO; Josh Smiley, Chief Financial Officer; Dr. Dan Skovronsky, Chief Scientific Officer; Anne White, President of Lilly Oncology; Patrik Jonsson, President of Lilly Bio-Medicines; and Mike Mason, President of Lilly Diabetes. We’re also joined by Sara Smith and Mike Czapar of the Investor Relations 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 the extent and duration of the effects of the COVID-19 pandemic, as well as other factors listed on slide three, and those outlined in our latest forms 10-K, 10-Q and any 8-Ks filed with the Securities and Exchange Commission. The information we provide about our products and pipeline is for the benefit of the investment community. It is not intended to be promotional and is not sufficient for prescribing decisions. As we transition to our prepared remarks, I’ll remind you that our commentary will focus on non-GAAP financial measures, which exclude the financial contribution from Elanco during 2019 and present earnings per share as though the full disposition via the exchange offer was complete on January 1, 2019. Now, I’ll turn the call over to Dave for some opening comments.

Thanks Kevin. A lot has changed in the world since our last earnings call. Science has continued to advance our understanding of COVID-19 and efforts across the industry to develop treatments and vaccines are progressing rapidly. While some regions and countries have begun to reopen, COVID-19 cases and deaths are climbing in other places. Despite these challenges, Lilly continues to demonstrate resilience and resourcefulness to progress our mission of making medicines for the millions of patients we serve. I've never been more proud of the company and my 35,000 teammates. This past quarter was unlike any other during my tenure as CEO and currently combating social, economic and public health crises. Economic uncertainty remains as high unemployment persists in many countries. As expected, our business experienced headwinds this quarter, with patients unable to see doctors or access healthcare during periods when the economies were shut down to prevent the spread of COVID-19, and by the dwindling or the unwinding afford buying into Q1 that occurred. Overall, our year-to-date results are strong and indicative of the underlying trends. I'm proud of Lilly’s efforts to ensure patients have access to their medicines, to find creative ways to ensure we advance critical research, and to advance our ongoing efforts to develop treatments for COVID-19. We continue to staff our manufacturing facilities around the globe with essential personnel, to ensure there are no disruptions in the supply of medicine, and in recent weeks we resumed activity in the majority of our clinical trials where enrollment had been paused. Resuming in-person promotional activities when it's safe on a country-by-country and on a state-by-state basis in the U.S., and we will continue to use these virtual engagement tools we’ve built to augment in-person promotional activities. Throughout Q2, we saw a steady increase in customer contacts and medical education touch points as we leveraged new platforms to reach physicians. We continue to see increased interest in volume of virtual interactions from physicians and expect a hybrid model of in-person remote engagement for some time in the U.S. as well as internationally. We also made good progress this quarter, executing our R&D strategy, launching two new medicines in the U.S., including Retevmo, the first therapy ever approved for patients with RET driven lung and thyroid cancers, and Lyumjeva, a fast-acting mealtime insulin for patients with Type 1 and Type 2 diabetes. Taltz and non-radiographic axSpA, Cyramza in combination with erlotinib for EGFR mutated non-small cell lung cancer and Tauvid, our new diagnostic for patients with Alzheimer's disease were also approved in the U.S. Several positive Phase 3 readouts this quarter include Verzenio in adjuvant breast cancer, now the first and the only CDK4/6 inhibitor to succeed in this population. Mirikizumab and psoriasis compared to both placebo and head-to-head versus Cosentyx and just today, in collaboration with Boehringer and Jardiance in heart failure patients with reduced injection fraction, both with and without diabetes. We also continue to make progress on our potential COVID-19 therapies, notably the initiation of multiple clinical trials developing neutralizing antibodies, both as monotherapy and in combination. The unprecedented pace at which we're executing this project across our development and manufacturing organizations is evidence of what we are capable of as an innovative company. As I mentioned earlier, our Q2 business results were negatively impacted by COVID-19; however, we remain confident in the underlying fundamentals of our business. COVID-19 had a meaningful impact on economic activity and we observed the following trends in the U.S.: A sharp decline in the number of patient visits to physicians dropping to roughly 50% of pre-COVID-19 levels. Reduced visits translated into fewer new prescriptions with the peak impact in late April and early May in most therapeutic classes. A slow return to health care activity through a combination of Telehealth and in-person visits as IQVIA data showed patient visits were back to 85% of pre-COVID-19 levels in June, and new prescriptions slowly beginning to recover although some variation across therapeutic areas. While the outlook for economic activity is uncertain, we remain optimistic that patients, physicians, and hospital systems will continue to find ways to ensure patients can access the medicines they need. Turning to our Q2 results, as expected, reduced patient visits and inventory dynamics were both a drag on otherwise solid total prescription trends. Revenue declined 2% compared to Q2 2019 and we estimated revenue was negatively impacted by the reversal of largely all of the $250 million of stocking related to COVID-19 that we experienced in Q1. While most existing prescriptions were maintained, new patient prescriptions declined in Q2 relative to pre-COVID-19 baselines. We estimate this impact to have been about $250 million across the portfolio. Taking into account current trends, we are on track to deliver the financial goals we established for 2020. The strength of our new products, our ability to scale them worldwide, and our productivity agenda position us well to continue to deliver robust business performance and to create shareholder value. Moving to slide five, you’ll see the full list of key events since our last earnings call. Before Josh discusses our financial results, just a few comments about the executive orders that were announced last Friday. We all share the goal of making medicines more affordable and accessible to patients and believe concepts such as rebate reform and the sharing of savings within the eligible 340B patient population offer real opportunities to lower the out-of-pocket costs for patients quickly. However, as I've noted before, the concept of international price indexing is bad policy. This policy will have almost no benefit to patient out-of-pocket costs, but together with re-importation will most assuredly have serious negative consequences for patients, for the safety of our supply chain, and for the future of innovation. So now is the wrong time to introduce sweeping government actions that will at best distract and at worst, cripple the same industry that's racing to discover vaccines and treatments to defeat COVID-19. Now, I’ll turn the call over to Josh to review our Q2 results in more detail and provide an update on our financial guidance for 2020.

Thanks Dave and good morning everyone. Moving to slide six and seven, our non-GAAP financial performance in Q2 and during the first half of 2020 was impacted by COVID-19 across many lines of the income statement. As Dave mentioned, revenue declined 2% this quarter compared to Q2 2019. It was negatively impacted by COVID-19 in two ways. First, largely all of the $250 million of COVID-related stocking in Q1 reversed as excess supply in the channel and in medicine cabinets was consumed and Q2 closing inventory returned to historically normal levels. Second, reduced patient visits due to COVID-19 resulted in lower new prescriptions across many of our brands, which we estimate had a negative impact on Q2 revenue of approximately $250 million as well. We estimate this impact to be a temporary step down in market size, which we expect will return to pre-COVID levels over the balance of the year, with the pace of recovery varying by therapeutic area. Given the stocking and destocking seen between quarters, our first half performance of 7% sales growth in constant currency is a more accurate reflection of underlying performance. Gross margin as a percent of revenue in Q2 was 79.6%, a decline of 140 basis points versus Q2 2019, driven primarily by the negative impact of price, which I'll describe in more detail in a moment. Moving down the P&L, selling, general and administrative expenses declined 9% this quarter compared to Q2 2019, as reduced marketing and travel meeting expenses were only partially offset by investment in virtual tactics. Research and development expenses declined 1% as a pause in clinical trials have shifted activity and expenses to the second half of 2020. In total, operating income decreased 2% compared to Q2 2019. During the first half, sorry, I'm just having a technical issue here. So in total, operating income decreased 2% compared to Q2 2019. During the first half of 2020, operating income increased by 14% as revenue growth outpaced operating expense growth by 500 basis points. Operating income as a percent of revenue was 28% during the second quarter and 29.1% for the first half of 2020. We continue to adapt the way we allocate resources to efficiently address the operating environment, where the threat of COVID-19 is likely to be disruptive for a sustained period of time. We are expanding our virtual capabilities to support executing our strategy and are committed to our 2020 full year operating margin target of 31%. Other income and expense was income of $447 million this quarter compared to an expense of $32 million in Q2 2019. This quarter’s other income was primarily driven by the increase in value of investments in Asian biopharma companies, as well as previously private companies that went public here in the U.S. We have investments across a range of private and public biopharma companies as a part of our external innovation strategy and these investments allow us to nurture emerging science and access potential new medicines and novel modalities. As we regularly highlight, this line item can be volatile as public market valuations fluctuate. Our tax rate was 13.4%, an increase of 340 basis points compared with the same quarter last year, driven by the mix of our earnings in higher tax jurisdictions and a lower net discrete tax benefit than last year. At the bottom line, earnings per share increased 26% in Q2 as a sizable gain on public equities more than offset the decline in operating income. During the first half of 2020, earnings per share increased 29%.

Thanks Josh. Since our last call, we’ve had major lifecycle readouts for three of our most important new medicines; Verzenio, Trulicity, and Jardiance. All three were positive, all represent clinically meaningful advances for patients, and all should help drive continued growth for these important brands. I’ll speak briefly about each, as well as the Phase 3 readout from Mirikizumab, a molecule still under development. In addition to advancing our existing R&D portfolio, we have devoted significant efforts to creating and testing potential therapies for COVID-19 and here too we have made good progress this quarter. Before I go through the pipeline update, I'll provide an overview of the active programs we are pursuing to treat or prevent COVID-19. These programs have moved with unprecedented speed in hopes of finding new medicine to help blunt the impact of the virus. Baricitinib, our JAK inhibitor, has two ongoing Phase 3 clinical trials in patients hospitalized with COVID-19. The anti-inflammatory activity observed by Baricitinib in other diseases is thought to be potentially beneficial in treating COVID-19. The first trial is investigating Baricitinib in combination with Remdesivir as part of the NIAID’s Adaptive COVID-19 Treatment Trial, and we expect to have data from this trial within the coming months. The second trial is Lilly sponsored and is assessing Baricitinib as monotherapy. We expect results from this trial later this year. Second, we are pursuing a Phase 2 trial of an antibody that targets Angiopoietin 2, which has been observed to be elevated in patients with acute respiratory distress syndrome or ARDS. Based on trial enrollment, we now expect to have data in-house this fall to inform next steps. While these two efforts may inform treatment of symptoms of COVID-19, the approach I’m most excited about is virus neutralizing antibodies for the treatment and prevention of COVID-19, both single antibody therapies and in combinations. We currently have efforts ongoing with LY-CoV555, which arose from our collaboration with AbCellera, and with LY-CoV016, which we licensed from Junshi Biosciences. The development status is summarized on slide 15. Both antibodies have completed dosing in their Phase 1 studies with safety and PK results that support advancing the molecules. Neither Phase 1 study was designed to collect efficacy data; that is, the LY-CoV555 trial only enrolled six patients per dose and LY-CoV016 enrolled only healthy volunteers. LY-CoV555 is further along in development and has progressed to a large dose-ranging Phase 2 study in ambulatory patients recently diagnosed with COVID-19. Here we are focused on reducing viral load. The study is enrolling quickly, and we should have data to report by Q4. This will be our first opportunity to share human efficacy data from the neutralizing antibody program. Based on safety and tolerability data gathered to date, as well as taking into account the gravity of the unmet medical need here, we plan to initiate registrational studies in the coming weeks, even in advance of having efficacy data. We've been in studies across several different patient populations, including a Phase 3 study for prevention of COVID-19 in residents and staff at long-term care facilities, as well as additional registrational studies for potential treatment indication in both the ambulatory and hospitalized settings. Once underway, the timing for data disclosure from these trials will be highly dependent on patient enrollment and any interim efficacy and safety data we may see. In addition to the monotherapy trials I describe for LY-CoV555, we intend to test the combination of LY-CoV016 with LY-CoV555, in case such a combination is needed to combat viral resistance. We look forward to producing additional data for both programs and we’ll provide updates as we achieve program milestones or data become available. We continue to invest in manufacturing for these potential therapies at risk and we are focused on ramping up our manufacturing capacity as quickly as possible. While developing treatments for COVID-19 is an important priority for Lilly right now, we also continue to advance the rest of our pipeline to help people with diabetes, immune disorders, neurodegeneration, and cancer. One particularly exciting development this quarter was the positive interim readout of the MonarchE trial, assessing the use of Verzenio to reduce the risk of recurrence in HR-positive, HER2-negative high-risk early breast cancer. Verzenio is the only CDK4/6 inhibitor to show a benefit in this setting, where another competing product failed at our T-cell analysis. Our conviction and the differentiation of Verzenio from the competition continues to increase based on important data, including safety and tolerability data and mechanism of action that have allowed for continuous dosing and therefore continuous target inhibition. This is a unique feature of Abemaciclib. Clinical efficacy that supports use even as a monotherapy in metastatic breast cancer, another unique feature of Abemaciclib. The demonstrated benefit in overall survival in the metastatic setting in combination with Fulvestrant, something not all CDK4/6 inhibitors have been able to show, and most recently, positive results in the adjuvant setting, another unique feature of Abemaciclib. These data continue to support our convictions, but not all CDK4/6 inhibitors are the same. The positive results in MonarchE could significantly increase the opportunity for Verzenio. Looking at the MonarchE study clinical pathological criteria for enrollment, we estimate that approximately 20,000 patients in the U.S. would match these criteria. This represents a roughly 50% increase over the current addressable market in metastatic breast cancer. Our market is projected to reach almost $7 billion in 2020. In addition, we anticipate the duration of therapy in the adjuvant setting will be longer. We plan to submit this data by the end of the year to regulators around the world and to present them at a major medical meeting in 2020.

Thank you, Dan. Josh, can you please provide additional insights on our financial results and guidance? Thank you, Dave. We’d like to take questions from as many callers as possible, so we ask that you limit your questions to two per caller. Kevin, if you can please provide the instructions for the Q&A session and then we're ready for the first caller.

Yeah, can you hear me?

Yes, yes.