Eli Lilly and Company, Q4 2019 Earnings Call, Jan 30, 2020 - NYSE:LLY

NYSE:LLY

Here is a detailed summary of what Kevin Hern, Vice President of Investor Relations at Eli Lilly and Company, has said during the Q4 2019 Earnings Call:

1. Opening Remarks:

   • Introduced the call and welcomed participants.
   • Mentioned that he is the Vice President of Investor Relations.
   • Announced the presence of other executives including Dave Ricks (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).
   • Noted the presence of Kim Macko and Mike Czapar from the Investor Relations team.

2. Forward-Looking Statements:

   • Reminded listeners that the call would include projections and forward-looking statements based on current expectations.
   • Mentioned that actual results could differ materially due to various factors.
   • Directed listeners to refer to the company’s SEC filings for more information on risks and uncertainties.

3. Non-GAAP Financial Measures:

   • Clarified that the discussion would focus on non-GAAP financial measures.
   • Explained that the financial measures exclude contributions from Elanco during 2018 and 2019.
   • Noted that earnings per share are presented as though the full disposition via the exchange offer was complete on January 1, 2018.

4. Introduction to Q4 Results:

   • Passed the call over to Dave Ricks for a summary of the Q4 results.

5. Transition to Q&A Session:

   • Thanked Dave Ricks and provided instructions for the Q&A session.
   • Requested the operator to provide instructions for participants to ask questions.

6. Response to Questions:

   • Directed questions to appropriate executives, including Patrik Jonsson, Josh Smiley, and Dan Skovronsky.
   • Assisted in clarifying questions that were difficult to hear.

7. Closing Remarks:

   • Passed the call over to Dave Ricks for closing remarks.

   • Thanked participants for attending the call and expressed appreciation for their interest in Eli Lilly and Company.

   • Invited participants to follow up with the Investor Relations team for any additional questions.

   • Provided details for accessing the replay of the call.

David A. Ricks, the Chairman, CEO, & President of Eli Lilly and Company, provided opening remarks and closing comments during the Q4 2019 earnings call. Here’s a detailed summary of his statements:

Opening Remarks

• 2019 Performance: Noted that 2019 was a solid year for Lilly, highlighting the strong Q4 financial results and the company's momentum.
• Q4 Revenue Growth: Mentioned that revenue growth accelerated in Q4, increasing by 8% versus Q4 2018 (9% in constant currency). This growth was entirely driven by volume, contributing 10 percentage points despite headwinds from the loss of exclusivity of Cialis and the global withdrawal of Lartruvo.
• Newer Medicines: Emphasized that newer medicines represented 46% of revenue this quarter and were the main growth drivers.
• Productivity Agenda: Noted progress on the productivity agenda, with operating income growing 10% versus the previous year.
• Operating Margin: Highlighted that the non-GAAP operating margin was 26.3%, an improvement of 40 basis points versus Q4 2018. He also mentioned targeted strategic investments made in Q4 to enhance future growth opportunities.
• Pipeline Milestones: Announced multiple pipeline milestones, including positive Phase III trial results for baricitinib in atopic dermatitis, the submission of selpercatinib in the U.S. and Europe, the FDA granting selpercatinib priority review, and the submission of tanezumab for osteoarthritis pain in the U.S. in collaboration with Pfizer.
• Cash Flow and Shareholder Returns: Noted that the company put strong operating cash flow to work, returning approximately $900 million to shareholders via share repurchase and dividends.
• Dividend Increase: Mentioned a 15% dividend increase for 2020, marking the second consecutive year of a 15% increase.
• Acquisition of Dermira: Announced the pending acquisition of Dermira, a company focused on developing new therapies for chronic skin conditions, which would enhance Lilly's Phase III pipeline and complement existing efforts in atopic dermatitis.

Closing Remarks

• Summary of Progress: Summarized the progress made in Q4 2019 and the full year, emphasizing impressive Q4 performance, strong worldwide prescription trends, and a solid position entering 2020.

• Financial Guidance: Reiterated the company's position of strength as it enters 2020 and the next decade, focusing on sustained growth driven by a balanced portfolio of new medicines and limited patent exposure.

• Investment Opportunities: Highlighted the company's pursuit of new medicines for significant unmet medical needs and sizable business opportunities.

• Thank You Message: Concluded the call by thanking participants for their interest in Eli Lilly and Company and inviting them to follow up with the Investor Relations team for additional questions.

Joshua L. Smiley, the Former Executive Officer of Eli Lilly and Company, provided the following information during the Q4 2019 Earnings Call:

1. Financial Overview:

   • Revenue increased 8% or 9% in constant currency.
   • Gross margin as a percent of revenue declined 70 basis points to 79.9%.
   • Excluding the impact of FX on international inventories sold, gross margin as a percent of revenue was 79.6%.
   • Gross margin percentage decreased by approximately 50 basis points compared to Q4 2018, driven by unfavorable product mix and the negative impact of price on revenue.
   • Operating expenses grew 6% versus the previous year's quarter.
   • Marketing, selling, and administrative expenses were flat as cost containment and productivity measures offset investments in key growth products.
   • R&D expenses increased 14%, reflecting higher development expenses for late-stage assets, including tirzepatide, selpercatinib, and mirikizumab.
   • Operating income increased 10% compared to Q4 2018 as sales growth outpaced expense growth, resulting in an operating income as a percent of revenue of 26.3% for the quarter and 27.2% for the full year.
   • Other income and expense was income of $206 million this quarter compared to income of $31 million in Q4 2018, driven by investment gains on public equities.
   • Tax rate was 12.6%, a decrease of 300 basis points compared with the same quarter last year, driven primarily by an increase in net discrete tax benefits, including tax benefits from the resolution of U.S. and foreign audits.
   • Net income increased 26% while earnings per share increased 31% due to a reduction in shares outstanding from share repurchases.

2. Revenue Growth Analysis:

   • Worldwide revenue grew 9% in constant currency during Q4, driven by strong volume growth of 10% partially offset by price.
   • U.S. revenue grew 7% compared with the fourth quarter of 2018.
   • Volume growth of 8% was led by Trulicity, Taltz, Verzenio, Jardiance, and Emgality.
   • Excluding Cialis and Lartruvo, volume grew over 15%.
   • Pricing was a 1% drag on U.S. revenue growth this quarter.
   • Revenue in Europe grew 12% in constant currency, driven by impressive 15% volume growth, partially offset by the negative effect of foreign exchange and price.
   • In Japan, revenue grew 7% in constant currency driven entirely by volume growth, somewhat offset by a modest pricing headwind.
   • Revenue in the rest of the world increased, led by 44% growth in China on the same basis.

3. Volume Growth Contributions:

   • New medicines delivered nearly 15 percentage points of growth this quarter, continuing the strong trajectory seen throughout 2019.
   • Brands that have experienced loss of exclusivity provided a drag of over 400 basis points driven primarily by Cialis.

4. Key Growth Products:

   • These brands generated over $2.8 billion in revenue this quarter, making up 46% of revenue.
   • Trulicity grew faster than the market, posting an increase of 32% in total prescriptions during the same period.
   • SGLT2 inhibitors accelerated their trajectory as total U.S. prescriptions for the class grew nearly 20% versus last year's quarter.
   • Taltz continued to have strong growth as U.S. total prescriptions grew nearly 40% versus Q4 2018.
   • Emgality continued its U.S. leadership in share of market for new-to-brand prescription at over 47%.
   • Verzenio U.S. total prescriptions grew over 46% versus Q4 2018.

5. Financial Guidance:

   • Updated non-GAAP guidance to reflect the impact of the planned acquisition of Dermira and recent strong business performance.

   • Increased revenue range by $100 million to include QBREXZA and to reflect strong prescription trends.

   • Updated SG&A guidance to account for the addition of the Dermira sales force and the commercial expenses to support QBREXZA.

   • Maintained all other line items and confirmed the non-GAAP earnings per share range of $6.70 to $6.80 and operating margin target of 31%.

   • On a reported basis, the impact of the Dermira acquisition will have an impact of $0.21 on earnings per share for 2020, which is now expected to be in the range of $6.18 to $6.28.

Daniel M. Skovronsky, the EVP, Chief Scientific Officer, and President of Lilly Research Laboratories & Lilly Immunology, discussed several topics during the earnings call:

1. Pipeline Progress:

   • The submission of selpercatinib in the U.S. and Europe.
   • Initiation of Phase III trials for selpercatinib in patients with RET fusion+ non-small cell lung cancer or RET-mutant medullary thyroid cancer.
   • Submission of tanezumab in the U.S. for osteoarthritis pain.
   • Submission of higher doses of Trulicity for type 2 diabetes in the U.S. and Europe.
   • Submission of baricitinib for atopic dermatitis in Europe and Japan.
   • Addition of lebrikizumab for atopic dermatitis to the Phase III portfolio pending the closure of the Dermira acquisition.
   • Initiation of a Phase III study of tirzepatide in obesity and a Phase II study of tirzepatide in NASH.
   • Initiation of Phase II for their checkpoint agonist, CD200R, in immunology.
   • Initiation of Phase I for four assets and termination of three early-stage oncology assets.
   • Internal data readouts from two Phase II trials of pegilodecakin in combination with immunotherapy agents in patients with non-small cell lung cancer, CYPRESS 1 and CYPRESS 2, which were negative.

2. 2019 Achievements:

   • Added four new Phase III clinical programs to the pipeline.
   • Reported twelve positive Phase III or registrational trial readouts.
   • Submitted twelve NMEs or new indications for regulatory review globally.
   • Received positive regulatory action on two new medicines, Reyvow and BAQSIMI, and four important new indications across Trulicity, Taltz, Emgality, and Cyramza.

3. 2020 Goals and Progress:

   • Initiation of additional Phase III trials for selpercatinib.
   • Positive results in the remaining two trials of the baricitinib BREEZE program for atopic dermatitis.
   • Submission of baricitinib for atopic dermatitis in the EU and Japan.
   • Submission of tanezumab for osteoarthritis pain in the U.S. in collaboration with Pfizer.
   • FDA approval of Trijardy, a fixed-dose combination of empagliflozin, linagliptin, and metformin XR.
   • Regulatory approval of Cyramza for first-line EGFR-positive non-small cell lung cancer in Europe.

4. Tirzepatide Clinical Program:

   • Initiation of a cardiovascular outcome study for tirzepatide, assessing it head-to-head against Trulicity.
   • Alignment with the FDA on key design features of the unique study called Surpass-CVOT.
   • The trial will include approximately 12,500 patients with type 2 diabetes and confirmed atherosclerotic cardiovascular disease.
   • The study will measure time to the first occurrence of the composite endpoint of CV death, myocardial infarction, or stroke.
   • The study will assess both noninferiority and superiority of tirzepatide versus Trulicity.
   • Anticipation of completing the study in just over four years.
   • Progression of the Phase III type 2 diabetes program, SURPASS, with four of the eight clinical trials already fully enrolled.
   • Excitement about the potential opportunity of additional clinical programs, including the SURMOUNT Phase III obesity program and the SYNERGY Phase II program in NASH.

5. Baricitinib BREEZE-AD Program:

   • Completion of the final two studies of the BREEZE-AD clinical program, BREEZE-AD4 and BREEZE-AD5.
   • Encouragement by the strong results for the 2-milligram dose in the U.S. trial.
   • Full data package generated from BREEZE-AD shows the potential that baricitinib could offer as an additional treatment option for patients with atopic dermatitis.
   • Over 10,000 patient years of safety data with baricitinib.
   • Recent submission of baricitinib for atopic dermatitis in the EU and Japan, with expected regulatory action late in 2020.
   • Plans to submit in the U.S. later in 2020.
   • Anticipation that baricitinib will be the first oral JAK inhibitor for the treatment of atopic dermatitis.

6. Acquisition of Dermira:

   • Planned acquisition of Dermira, adding lebrikizumab, an injectable antibody targeting IL-13 currently in Phase III trials, to the Lilly pipeline.

   • View of lebrikizumab as highly complementary to their efforts with baricitinib and atopic dermatitis.

   • Large unmet medical need in atopic dermatitis, anticipating physicians and patients will use a range of oral and injectable therapies, similar to current common practice for the treatment of psoriasis.

Patrik Jonsson highlighted the following:

• Taltz's performance in Q4 with total RX growth of approximately 40%

• Maintaining total RX share in dermatology despite increased competition

• Demonstrating superiority in head-to-head trials against IL-23 inhibitors

• Significant acceleration in new-to-brand prescriptions in rheumatology

• Filing for non-radiographic axial spondyloarthritis (nr-axSpA)

• Opportunities in treating patients still on Anti-TNF-Alpha therapies

• Strong results for Olumiant in atopic dermatitis, especially the 2-milligram dose

• Encouraging data on lebrikizumab, an injectable antibody targeting IL-13, in Phase III trials

• Potential for lebrikizumab to be competitive or even best-in-class in atopic dermatitis

• Emgality's leadership in the market for new-to-brand prescriptions, with 80% reimbursement by Q4

• Significant opportunities in primary care for Emgality

• Confidence in Emgality's profile and differentiation in the market

• Excitement about Reyvow's potential in acute migraine treatment, offering complete pain elimination and symptom relief within 2 hours