LLY
#Thank you and good morning
Thanks for joining Eli Lilly & Company's fourth quarter 2016 earnings call
I'm <UNK> <UNK>, Lilly's President and CEO
Joining me on today's call are <UNK> <UNK>, our Chief Financial Officer; Dr
<UNK> <UNK>, President of Lilly Research Labs; <UNK> <UNK>, President of Lilly Diabetes and Lilly U.S
<UNK> Mahoney, President of Lilly Oncology; Chito Zulueta, President of International Business; <UNK> <UNK>, President of Elanco Animal Health; Dr
<UNK> <UNK>, who is the interim President of Lilly Bio-Medicines; and of course Kristina Wright, <UNK> Ogden, and <UNK> <UNK> of the Investor Relations team
During this 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 3 and those outlined in our latest Forms 10-K and 10-Q filed with the SEC
The information we provide about our products and pipeline is for the benefit of the investment community
It's not intended to be promotional and it's not sufficient for prescribing decisions
Before discussing key events for the quarter, I'll start with a summary of our progress since the Q3 earnings call using our strategic objectives framework
Starting with Grow Revenue, in Q4 we generated worldwide revenue growth of 7%, which was driven by 9% volume growth in our pharmaceutical business, led by her new products
Prices declined 1% in Q4. On our strategic objective Expand Margins, total operating expenses as a percent of revenue declined over 400 basis points compared to Q4 of 2015, while our non-GAAP gross margin percent excluding the effect of FX on international inventory sold was essentially flat
Under the heading of Sustaining the Flow of Innovation, here in the U.S
in our collaboration with BI, the FDA approved and we began promotion of a new CV [Cardiovascular] indication for Jardiance, and we launched our long-acting insulin Basaglar
And in Europe, the European Commission approved Lartruvo for soft tissue sarcoma
Finally, on Deploy Capital to Create Value, we completed the acquisition of Boehringer Ingelheim's U.S
Animal Health Vaccine business
We announced an agreement to acquire CoLucid Pharmaceuticals, which will add a promising molecule for acute migraine for our late-stage pipeline
And we announced an increase of 2% in our quarterly dividend, and we repurchased $300 million of stock
We expect to make continued progress in 2017, and we remain on track to achieve our midterm goals for each of our strategic objectives
Now let's move on to slide 5 for a more detailed review of the key events that occurred since our last earnings call
New product launches continued
As I mentioned, in collaboration with Boehringer Ingelheim, we received FDA approval of the new CV indication for Jardiance in December and launched in <UNK>uary, right after the mid-December launch of Basaglar
Our initial sales were largely due to stocking, but we are pleased with initial feedback from customers
We also launched Lartruvo for advanced soft tissue sarcoma in both the U.S
and Europe, and the product is off to a strong start, while in Japan, we secured the price listing for Taltz in mid-November and launched the product for both psoriasis and psoriatic arthritis
We are in the process of opening accounts and completing hospital formulary reviews
While it's very early, initial feedback and IMS data are positive
In the Animal Health space, along with Aratana, we announced that Galliprant, a first-in-class product for dogs for the management of pain and inflammation associated with osteoarthritis, is now available to veterinarians here in the U.S
On the regulatory front, we made significant progress
We received conditional marketing authorization from the European Commission for Lartruvo to treat adults with advanced soft tissue sarcoma
Also in Europe, we received a positive opinion recommending approval of baricitinib for the treatment of moderate to severe active rheumatoid arthritis
In collaboration with Boehringer Ingelheim, we received multiple regulatory actions on the Jardiance family of products
A number of these actions were related to the EMPA-REG OUTCOME trial
The U.S
FDA approved of a new indication of Jardiance to reduce the risk of cardiovascular death in adults with Type 2 diabetes and established cardiovascular disease
We were also pleased that the ADA [American Diabetes Association] issued updated diabetes treatment guidelines shortly after the FDA approval
In Europe, the European Commission approved an update to the Jardiance label, including data on the reduction of the risk of CV death in patients with Type 2 diabetes and established CV disease
The U.S
FDA also approved updates to the labels of Synjardy, Synjardy XR, and Glyxambi to include data on the reduction of the risk of CV death in patients with Type 2 diabetes and established CV disease when treated with empagliflozin
Similarly, Europe's CHMP recommended an update to the Synjardy label to include data on the reduction of risk of CV death in patients with Type 2 diabetes and established CV disease when treated with empagliflozin
Separate from actions related to EMPA-REG OUTCOME, the FDA approved Synjardy XR, a tablet containing empagliflozin and metformin extended release for the treatment of adults with Type 2 diabetes
The European Commission approved Glyxambi, a single pill combining Jardiance and Trajenta, for the treatment of adults with Type 2 diabetes
Finally, here in the U.S
, the FDA extended the NDA review period for baricitinib, and we now expect regulatory action early in Q2. Moving to slide 6, there was one significant data readout in Q4. We were disappointed to announce that the EXPEDITION3 trial of solanezumab in patients with mild dementia due to Alzheimer's disease did not meet its primary endpoint
Since the solanezumab update we provided on our guidance call, we made the decision to terminate the EXPEDITION-PRO study of solanezumab in prodromal Alzheimer's disease
After careful review of the data from the EXPEDITION3 study and given the overlap in patient populations between EXPEDITION3 and EXPEDITION-PRO, we did not find sufficient scientific evidence to support the hypothesis that solanezumab would demonstrate a meaningful benefit to patients with prodromal Alzheimer's disease
In addition, the decision has been made to continue two ongoing public-private partnership studies in earlier stages of AD, the A4 study in pre-clinical AD and the DIAN2 study in dominantly inherited AD
In other news, the U.S
Court of Appeals for the Federal Circuit upheld the District Court's decision that the Alimta vitamin regimen patent is valid and would be infringed by the generic challenger's proposed products
If the patent is ultimately upheld through all remaining challenges, including intellectual property review proceedings, Alimta would maintain U.S
exclusivity until May 2022. We announced completion of the acquisition of BI Vetmedica, Inc's U.S
feline, canine, and rabies vaccine portfolio, which also brings a fully integrated manufacturing and R&D site and several pipeline assets
The acquisition diversifies Elanco's U.S
companion animal portfolio by adding vaccines for a range of common conditions
We also announced an agreement to acquire CoLucid Pharmaceuticals for $960 million
When closed, this will add lasmiditan, a potential first-in-class non-vasoconstrictive migraine treatment to our pain management pipeline
We believe this potential treatment for acute migraine complements our growing pain portfolio, specifically galcanezumab, which is in development for migraine prevention
Along with AstraZeneca, we announced a worldwide agreement to co-develop MEDI1814, an antibody selective for A-beta 42, which is currently in Phase 1 trials as a potential disease modifying treatment for Alzheimer's disease
In oncology, we announced an expansion of our existing immuno-oncology collaboration with Merck to add a new study for our Lartruvo with Merck's Keytruda patients with previously treated advanced or metastatic soft tissue sarcoma
We also announced a partnership with Express Scripts to allow people who use Lilly insulin, in particular those who have no insurance or those who are in the deductible phase of their high-deductible insurance plans, to purchase product at a 40% discount using mobile and web platforms hosted by Blink Health
Finally, in December we announced a 2% dividend increase, bringing our quarterly dividend to $0.52 per share
And during the fourth quarter, we distributed over $500 million to shareholders via the dividend, and we paid $300 million for share repurchases
Now I'll turn the call over to <UNK> for a discussion of our financial performance during the quarter
Sure, thank you, <UNK>
We had a good meeting with the President this morning
It was a broad-ranging discussion
We touched on several of the issues there
And your question in terms of innovation, the President was very interested in understanding how our business works and what the opportunities are to further grow the American innovative engine in the biopharmaceutical industry
Of course, we talked about taxes and how that could be a positive catalyst for more investment and growth in the U.S
We talked about regulation
I think he made some comments on camera about that
He's interested in finding ways to reduce and streamline regulation, both at the FDA side but also in healthcare markets that the government plays a role in
And then of course, we did speak about pricing
On that last point, I think we all understand the concern he's raising and of course others are that consumer out-of-pocket costs seem to be growing and growing faster than other payers in the system and how we can do a better job as an industry of getting discounts through to consumers, particularly those in high-deductible plans and government programs
We did not get into elaborate policy detail in terms of the U.S
pricing environment
But I think there will be time for that later, and I left the meeting with some confidence that the people who we'll be working with closely as legislation moves forward have a good grasp of those facts
Your second question was repeal of ACA and the taxes the industry pays
Of course, we haven't seen any specific legislation here
I think the industry said it was basically $100 billion over 10 years that would have been paid in to cover ACA
That's both in terms of the unspecified fee and other concessions in the original 2009 package
I'd be reluctant here to get into specifics on that because we haven't seen the specifics on the repeal or, for that matter, any pay-fors in the replace
But we're preparing for all those scenarios and working closely with policymakers as well as other parts of the industry on good policy that can promote consumer-driven choice and more broadly available medications in these uncovered populations or in the current ACA populations
The final question I think was on the reorganization
And of course, we did announce the reorganization, which removed actually several senior management jobs really to flatten the organization and make sure our executives are as close to the markets that matter and the launches that matter as we go ahead
And that was a primary goal was really to emphasize the importance of these new product uptakes and having our business presidents squarely focused on those and making sure that there's a clear line of sight to the customer for them
We also want to improve our proximity to China, as you mentioned, particularly for drug development, where we can do more I think to speed up our innovation into that market, which has an undeniable long-term opportunity for the sector
We also asked <UNK> take on a broader scope of responsibilities, including payer and so forth, hosting responsibilities for the major markets
So that's already announced and rolling out and I think aligns clearly with our stated priorities
I think the question related to biosimilar – I think <UNK> said Humira from Sanofi, but I'm not aware of a biosimilar Humira program at Sanofi, correct?
Humalog, yes, okay
So maybe <UNK> can handle that one
In terms of business development, I don't see a change in our general approach, which is what we've said for a while, which is we see value in deploying capital on business development where we can really complement our core therapeutic areas, where we're looking at acquisitions or licensing transactions that can bring products into the portfolio to drive growth for the future and to do that with a lot of discipline on value
And so that's what I think we've been saying for years
I do think as we enter this phase coming up, where in our therapeutic areas there appear to be attractive alternatives for investment outside the company as well as inside, we've got a key period to make decisions on advancing assets into Phase 3 over the 1.5 years or so, as <UNK> mentioned
We need to look at both sources of innovation and we'll do that
The CoLucid transaction, which is one we just announced, I think is a good example of that
So I think the rate may be different based on our circumstance as we're growing the company and have perhaps more opportunities to move assets into Phase 2 and Phase 3, but the criteria really isn't different from how we've thought about this in the past
On the Alzheimer's BACE inhibitors, I think we've talked about this for a while, but the Merck program has two distinct studies
The first one is a classic first-generation type design in the sense that they have a mixed, mild, and moderate population and no requirement to have amyloid present to be in the study
And we know from prior studies like this, whether it be Lilly or other sponsors, you can end up with 20% – 30% of the patients who actually don't have Alzheimer's disease
In addition, for the reasons <UNK> mentioned earlier, later probably not better in terms of effect size
So the Lilly program with AstraZeneca and the later Merck program have those features built in
We have two studies with AstraZeneca
So if Merck I think has a positive signal of any sort, I think we'd feel good about that in terms of BACE inhibitors as a target
If there's no signal, I think we'll have to do some thinking
That's how we're looking at that upcoming readout
Maybe <UNK> or <UNK> could add to that
Yes, that makes sense
<UNK>, thanks for the question
We have brought in two senior executives recently
We're excited by both their willingness and excitement to join the company, but also what they can add probably in the very short term
Levi is joining <UNK> <UNK>'s team, really taking the role that <UNK> Gaynor had
So he's got all the clinical-phase oncology portfolio and obviously brings a great skill set to do that
I think in terms of immuno-oncology, he's got expertise in that field among other fields of oncology
And it's probably difficult to say too much about what we hope he'll do, but I think clearly it's a competitive field and having a new look at what we're doing, how we combine products, how we could potentially accelerate our efforts in certain areas is something that we're hoping Levi can help us with
<UNK>ti is a commercial person
She started her career at Lilly, most recently ran Novartis's U.S
And she's coming into the job I was in, which is a go-to-market and drug development job at running Bio-Medicines
I think she's a strong diverse talent that I think is really an industry veteran who understands the U.S
market extremely well
And so when that opportunity came to pull her onto the team, we made that move, and I think it's going to be great to have her
She starts April 1, so you'll start to see her on the road there in Q2.
As I said earlier, we had a positive and broad ranging discussion
And I was impressed with the President's appreciation for what our industry is, which is really a crown jewel of America enterprise in the sense that we invent things, we can change lives in terms of healthcare outcomes, but also we're a great employer and source of economic growth, jobs, and exports
We touched on lots of things, tax, regulation, as well as the healthcare repeal/replace discussion
So there's a number of follow-ups that were cited that will be happening through staff and on the Hill with key members of Congress
The specifics on timing and so forth I'm not at liberty to share here, but I was encouraged overall by the sense a) that there will be changes made, likely rapidly
Most of those will involve the legislative branch
And that there will be follow-up with the White House to make sure we're making progress as we go along
But there's not too many specifics I can share in terms of exact timing
Just overall, I think it was productive to engage the President, educational for both sides, and I think we can go forward and really look at enacting policies that can both help the industry but also healthcare in the United States
Thanks, <UNK>, great question and one we're spending a lot of time on as well
Of course right now, we're working against the prior goal you cited, which is to get our SG&A and R&D total operating expenses as a percent of sales to 50% or less in 2018. So that's the near-term goal we're very focused on
We've reiterated that again in December, and that's obviously an improvement over where we are today and what we're reporting for 2016. I would highlight, although we're at the high end of the ranges in terms of our guidance for the quarter on expenses for R&D and SG&A, year over year good progress in Q4, and we did have some one-time items in Q4 which adversely affected that
That said, I think my overall perspective on this question is we have multiple ways to improve the operating margins of the company
And as we launch new brands and grow the top line, that's clearly one
I think if we can really repurpose investment behind those priorities and maintain a lower growth rate, in some cases much lower growth rate in the middle of the income statement, we can deliver tremendous leverage on the bottom line
You can see that in Q4, putting aside the Street estimates, what kind of leverage is available in the business
And we're aware of where we stand in the industry
I think we're not a single-product company or close to it, like some of the comparables even approaching our size
So that breadth I think does have inefficiency built into it
It has other advantages
We run a global operation
We want to be a global company, not just a multi-market company
That has an implication
But by and large, I think your question is can we improve beyond what we set out in 2018. And I'm personally focused on delivering on the 2018 commitment, and then we'll likely set a goal beyond that for improved operating margins toward the balance of the decade
Sure
Thanks, <UNK>
I think a lot was written about that question
To be honest, we have good relationships with all the major PBMs. Of course, it's a business transaction and we're on opposite sides of the table
They do their job very well
They negotiate hard for rebates and discounts for their customers, most of which are large commercial plans or Part D
And we do our job, which is to sell the value and try to maintain formulary position
There are always tugs and pulls in that and products are listed and delisted, but overall I'd say we have a good relationship with the PBMs. Of course there's only one major pure-play PBM at this point
But Express Scripts and Lilly have a good relationship, and we announced this Blink Health partnership as an example of that, innovating together to try to solve some of the payment problems
I think hypothetically, if we didn't have rebates, would I worry long term about our future? My answer is no
I think we're in the business of making innovative products that help patients
We need to do that in a way that creates value in the healthcare system
How we get paid for that value, there are probably lots of ways
As you know, in international markets many, many places where we have productive and profitable businesses, we don't have PBMs or anything like it and we don't have rebates, and we do just fine
So I think because of the breadth of our portfolio because of our new product mix, because of the company's focus on volume growth across several key markets, I think as <UNK> said in his comments, we have a durable strategy going forward should there be some big disruption, which I'm not sure I see right now
But I think on either side of that, our model would work well
<UNK> can add anything to that and then maybe the Alimta question to <UNK>
Hi, <UNK>
First of all, in terms of specialty markets and leveraging our U.S
managed care presence, we have a great team
We've got strong relationships, not just with PBMs but with other managed care entities
And I think as a broad-based pharmaceutical company, it's an advantage when we're entering new spaces because we already have that payer connection both for immunology and oral oncology that that base will serve us well
You can add abema [abemaciclib] should we have positive data and be able to submit, but I think it's a strength of the company
Maybe what you're really asking is will we leverage the portfolio to drive more exclusive formulary coverage? I would just say in general, that's not our aim
I think we want to compete with as much open access as possible in as many classes as we can because, as someone launching new products, that's a policy position that makes sense for us
Of course, we have incumbent products too
But all things equal, we would prefer patients have access to as many brands as possible, and we compete based on the differentiation of our products
That's more or less what we try to do across the whole of the portfolio
On BD, I'm not exactly sure what you're getting at there
As I said earlier, it will be an important part of what we need to do going ahead to build out the portfolio and keep upgrading value within the portfolio, whether it be through licensing or M&A
We have a number of very successful licensing arrangements ongoing and in the past
To name a few, of course, the Boehringer Ingelheim arrangement, Pfizer on tanezumab, AstraZeneca on BACE, even the partnering we've done with major oncology firms in terms of combination development with some of our assets I think are all examples of Lilly's open for business on partnerships
There are some specifics around ultra-rapid insulin which I won't go into to here, but I think all partnerships require a shared sense of what the future needs to look like as well as a compelling profile of a product
And when we have those things, we've done very well
If you have information to the contrary, I'd love to hear from you about it
But partnering will be a key part of what we do along with that smaller M&A space, as I discussed, and I think it's a strength of the company
In terms of PBM specifically, that wasn't a centerpiece of the discussion with the President
Of course, pharma has recently put out some work just to put some facts into the picture in terms of what the total drug spend is in the nation and how much of that is innovative, generic, or going into the channel, if you will
I think it's available on their website if you want to look at it
That was referenced in the meeting, and I think it always does surprise people that fully one-third of spending in the U.S
is not going to manufacturers but going to other entities
I think the President was interested in that
Mostly we discussed how to get value to consumers who particularly in the ACA plans or in high-deductible plans have limited formularies
They think they bought insurance and they have limited coverage or are paying a lot of out-of-pocket costs, and how to address that situation
And so PBMs themselves weren't mentioned specifically, and we did discuss channel partners broadly, but more as an educational point
In terms of CoLucid, I'll start there
Obviously, that fits in well with our existing interest in pain and migraine specifically
It is abortive treatment, so people take that when they're experiencing or about to experience a headache
I think it has the key benefits of potentially being labeled for use in patients who have cardiovascular risk factors, which is a major issue with triptans, the major class in that setting, and will fit hand-in-glove with our promotional, commercial, and medical efforts, even future clinical efforts with our potential antibody galcanezumab, for preventing migraine
I guess the question on effect size, I can defer to <UNK> on that in terms of what we hope to see vis-à-vis Amgen
We appreciate your participation in today's earnings call and your interest in Eli Lilly and Company
Driven by new product launches, Lilly is entering a new growth period
The combination of top line growth and margin expansion over the balance of the decade provides a compelling thesis for investors
I look forward to keeping you informed of our progress, and please follow up with our IR team if you have questions we've not been able to address on today's call
