Lilly Says Volume Growth Strategy, Launches Working Despite Price Pressures
Executive Summary
Trulicity, Taltz grew in the first quarter, but below analyst consensus estimates. Company points to price decreases as holding down growth.
Eli Lilly & Co. painted a bright picture of its strategy to grow via business volume and product launches on 30 April but first quarter sales growth for a pair of those newer products, Taltz and Trulicity, fell below analyst consensus estimates. The Indianapolis pharma told its first quarter 2019 earnings call that pricing pressures are constraining growth but insisted that its overall strategy is delivering.
Lilly said worldwide pharmaceutical revenue grew by 3% year-over-year to nearly $5.1bn. Prescription volume increased by 7% during the quarter worldwide, but pricing pressure resulted in a 3% drag on overall growth as rebates, the introduction of an authorized generic version of Humalog and other price factors roughly cut in half the benefit of 6% volume growth for US revenues, which totaled nearly $2.9bn. (Also see "Signs Of Change? Lilly, Merck, Janssen Report Slowing List Price Growth In 2018" - Scrip, 25 Mar, 2019.)
US pricing pressure has been expected to be a big headwind for the industry more broadly in 2019. (Also see "Industry's Drug Pricing Power Is Running On Fumes " - Scrip, 7 Feb, 2019.)
Chief financial officer Joshua Smiley pointed out that first quarter 2019 was the ninth consecutive quarter in which Lilly recorded business volume growth in each of its major geographies: the US, Europe and Japan. While pricing issues affected performance in all three geographies, Lilly’s global business is progressing on the strength of its eight designated key growth products, the exec said.
Those eight products – Taltz (ixekizumab), Trulicity (dulaglutide), Jardiance (empagliflozin), Basaglar (insulin glargine injection), Emgality (galcanezumab-gnlm), Verzenio (abemaciclib), Cyramza (ramucirumab) and Olumiant (baracitinib) – yielded aggregate 14.8% volume growth during the first quarter, the company said, while products that have gone off-patent, including Cialis (tadalafil), posted a 5.3% decrease in volume.
Those eight products yielded a more than 100-basis point increase in contribution to growth compared to the fourth quarter of 2018, Smiley said. (Also see "Lilly Sees New Product Gains, But Older Drugs Still Limit Growth Potential" - Scrip, 6 Feb, 2019.) Together, they generated nearly $2bn in sales, accounting for 39% of Lilly’s product revenue.
Growth, But Not As High As Anticipated
Trulicity, with sales of $880m, up 30% year-over-year, and Taltz, with sales of $253m, up 72%, nonetheless came in $69m and $58m below consensus estimates, respectively, according to Credit Suisse analyst Vamil Divan. Basaglar and Cialis, despite last year’s entry of generic competition, were the only Lilly drugs that exceeded consensus, he wrote.
But Smiley indicated that US business is thriving – if one takes the current pricing environment into consideration.
“US revenue increased 30%,” he said. “Like last quarter, Trulicity, Taltz, Verzenio and Basaglar were the key drivers of 6% volume growth, partially offset by price. Excluding Cialis, volume grew nearly 15% in the U.S., highlighted by diabetes products delivering nearly 17% volume growth.”
“Consistent with our 2019 financial guidance, U.S. price declined 3% driven by increased utilization of patient affordability programs mainly for insulin and Taltz, adjustments through estimates from rebates and discounts and higher contracted rates primarily related to Trulicity, which were partially offset by favorable segment mix across the portfolio,” Smiley continued.
Morgan Stanley analyst David Risinger noted that Trulicity US net sales increased 26% year-over-year, but that occurred in comparison to 40% growth during the fourth quarter of 2018. In a 30 April note, he reported that the company told him Trulicity’s domestic net price during first quarter 2019 was largely the same as during fourth quarter 2018.
Total prescriptions increased 44% year-over-year during the first quarter, but Lilly cited three factors that constrained the GLP-1 agonist’s home-market growth: an increase in rebates intended to drive greater formulary access, a decision by Lilly to increase reserves to cover rebates and discounts, and a patient mix during the quarter that sifted toward lower net-price segments including patients under the Department of Veterans Affairs health care system.
Lilly Diabetes president Enrique Conterno said the pharma sees significant reason for optimism concerning Trulicity, however. “We continue to be very excited about the underlying business fundamentals of the product,” he said. “When we look at volume growth, we are basically the beneficiary of very strong share growth. We're now sitting at 46%, which is an all-time high for Trulicity, and with the tailwind of very significant class growth now sitting at 30%.”
All told, diabetes companies are experiencing pricing pressures across the board, the exec added, but Lilly sees both positive and negative signs for its franchise. “Our [Trulicity] price this quarter was comparable to our price in quarter four of 2018,” Conterno said. “Now, what we basically see in terms of pricing relative to quarter one of 2018 is high rates when it comes to managed care and rebates; growth in highly rebated segments, whether it's the Department of Defense, VA and so forth; and then we also had a negative impact due to changes in the estimates for rebates and discounts.”
In Europe, Lilly saw 9% volume growth offset partially by foreign exchange and pricing issues, while in Japan, Verzenio, Trulicity and Cymbalta (duloxetine) drove 7% volume growth, but the government’s mandated price decreases that went into effect in 2018 created a 6% drag on growth, the exec noted.
“We ended quarter one on track with our plans for the full year,” chairman and CEO David Ricks told the call. “We've invested in our future growth while delivering strong volume growth across the business.” He noted that oncology franchise growth accelerated in the US, Japan and China. “Our international markets grew volume by 9% as global launches of key brands continue across our major geographies,” he said.
Increase In Expenses May Be Short-Term
Another factor that concerned market analysts was Lilly’s higher-than-expected expenses during the first quarter, although BMO Capital Markets analyst Alex Arfaei said on 30 April that the increase in expenses was driven primarily by “seemingly one-time issues.”
Smiley reported that total operating expenses rose 12% year-over-year during the quarter, with “selling and administrative expense increasing 13% driven primarily by increased investment to support our recent launches, including [direct-to-consumer] campaigns to drive awareness for Emgality, Verzenio and Taltz.”
R&D expenses increased 11% during the quarter, which the CFO attributed to ramp-up of multiple late-stage pipeline candidates, the addition of the pipeline assets from recently acquired Loxo Oncology Inc. and the recent decision by Incyte Corp. to opt out of sharing development costs for Olumiant. (Also see "Lift-Off For Lilly In Cancer Genetics With Loxo Buy" - Scrip, 7 Jan, 2019.) Incyte’s decision means Lilly will be paying its partner lower royalties on sales of the autoimmune therapy. (Also see "Lilly/Incyte’s Olumiant Breezes Ahead of JAK Pack In Atopic Dermatitis " - Scrip, 5 Feb, 2019.)
One of Lilly’s cost-driving late-stage candidates is NGF inhibitor tanezumab, partnered with Pfizer Inc. (Also see "Lilly Has A Couple Of Controversies To Cover During Earnings Call" - Scrip, 26 Apr, 2019.) The NGF class has been plagued with safety issues, and the two companies revealed on 18 April that tanezumab showed worrying safety signs, including cases of rapidly progressing osteoarthritis, in an 80-week safety assessment in osteoarthritis patients. (Also see "Lilly/Pfizer’s Tanezumab Safety Takes A Hit With Latest Phase III Results" - Scrip, 19 Apr, 2019.)
Lilly wouldn’t clarify the antibody’s future prospects during the earnings call. Chief scientific officer Daniel Skovronsky reiterated Lilly’s earlier stance that it wants to take a deliberate approach in evaluating tanezumab’s risk-to-benefit ratio because of the significant unmet medical need in multiple chronic pain settings. Pfizer made similar comments during it's same-day call.
“We're continuing to analyze the results from that study,” Skovronsky said of the recent safety update. “We're looking at that, though, in the context of all of the available data on tanezumab. Our plan then is to discuss the totality of the data with regulators in the coming months. And that will help us decide on what the next steps are.”