Eli Lilly and Company (NYSE:LLY) Q3 2023 Earnings Call Transcript
Eli Lilly and Company (NYSE:LLY) Q3 2023 Earnings Call Transcript November 2, 2023
Eli Lilly and Company beats earnings expectations. Reported EPS is $0.1, expectations were $-0.11.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Lilly Q3 2023 Earnings Call. At this time all participants are in a listen-only mode [Operator Instructions]. I would now like to turn the conference over to your host, Joe Fletcher, Senior Vice President of Investor Relations. Please go ahead.
Joe Fletcher: Good morning. Thanks everybody for joining us for Eli Lilly and Company's Q3 2023 Earnings Call. I'm Joe Fletcher, Senior Vice President of Investor Relations. And joining me on today's call are Dave Ricks, Lilly's Chair and CEO; Anat Ashkenazi, Chief Financial Officer; Dr. Dan Skovronsky, Chief Scientific and Medical Officer; Anne White, President of Lilly Neuroscience; Ilya Yuffa, President of Lilly International; Jake Van Naarden, President of Loxo at Lilly; Mike Mason, President of Lilly Diabetes and obesity; and Patrik Jonsson, President of Lilly Immunology and Lilly U.S.A. We're also joined by Michaela Irons, Mike Springnether and Lauren Zierki of the IR team. During this conference call, we anticipate making projections and forward-looking statements based on our current expectations.
Actual results could differ materially due to several factors, including those listed on Slide 3. Additional information concerning factors that could cause actual results to differ materially is contained in our latest Form 10-K and subsequent Forms 10-Q and 8-K 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's not intended to be promotional and is not sufficient for prescribing decisions. As we transition to our prepared remarks, please note that our commentary will focus on non-GAAP financial measures. Now I'll turn over the call to Dave.
David Ricks: Thanks, Joe. In Q3 Lily continued the progress we made so far this year. We delivered strong financial results continue to advance our R&D pipeline and invested in our future through several business development transactions. As you can see on slide 4, we continue to make progress against our strategic deliverables this quarter. Excluding revenue from the olanzapine portfolio, and COVID-19 antibodies, revenue grew 24%. Our new products and growth products combined contributed approximately 17 percentage points toward volume growth, with over 12 percentage points coming from our growth products. Last week, we announced that the FDA approved Omvoh for the treatment of moderately to severely active ulcerative colitis in adults.
This marks Lilly's first approval in the U.S. for a type of inflammatory bowel disease. And it's important for Lilly's growth in its immunology portfolio. In addition to the FDA approval for Omvoh, we had several other important pipeline updates since our last earnings call. Specifically Jardiance was approved by the FDA for the treatment of adults with chronic kidney disease, at risk of progression. And we reported positive Phase 3 results from the VIVID-1 trial which evaluated the safety and efficacy of mirikizumab for the treatment of adults with moderately to severely active Crohn's disease. In Q3, we announced that the FDA issued a Complete Response Letter for lebrikizumab based on inspection findings at a third party manufacturer. The letter stated no concerns with the clinical data package, the safety or the label.
We will continue to work with the third party manufacturer and the FDA to address the findings to make lebrikizumab available to patients as quickly as possible. In terms of business development, we once again had a very active quarter. In Q3, we completed the divestiture of the olanzapine portfolio, which will further enable us to focus on our current and new product launches. The financial impact of this transaction is reflected in the Q3 results. Additionally, within the quarter, we completed the acquisition of two clinical stage companies, adding to our Phase 2 portfolio, DICE Therapeutics and Versanis Bio as well as the acquisition of Emergence Therapeutics and Sigilon Therapeutics. We also announced that we reached an agreement to acquire POINT Biopharma, which, if approved, has the potential to expand our oncology capabilities into next generation radioligand therapies.
And lastly, we distributed over a $1 billion in dividends this quarter. On slide 5, you'll see a list of key events since our Q2 call, including several important regulatory clinical and other updates we're sharing today. Now let me turn the call over Anat to review our Q3 results.
Anat Ashkenazi : Thanks Dave. Slide 6 summarizes financial performance in the third quarter of 2023. I'll focus my comments on non-GAAP performance. We're pleased with the strong financial performance this quarter, highlighted by continued acceleration of revenue growth, representing robust momentum in our core business. Q3 revenue increased 37% versus Q3 2022. Excluding revenue from the olanzapine portfolio and from the COVID-19 antibodies, revenue increased 24% in Q3. This represents a quarter-over-quarter acceleration of revenue growth, driven by Mounjaro and the continued strong performance of Verzenio and Jardiance. Gross margin as a percent of revenue increased to 81.7%. Gross margin in the quarter benefited from the divestiture of the olanzapine portfolio, the absence of COVID-19 antibody sales in Q3 2023, and higher realized prices partially offset by increases in manufacturing expenses.
Marketing, selling and administrative expenses increased 12%, primarily driven by higher expenses associated with new product launches and additional indications, as well as compensation and benefit costs. R&D expenses increased 34%, primarily driven by higher development expenses for late stage assets and additional investments in early stage research. This quarter, we recognized acquired IP R&D charges of $2.98 billion, which negatively impacted EPS by $3.29. In Q3, 2022, acquired IP R&D charges totaled $62 million, or $0.06 of EPS. Operating income decreased 71% in Q3, driven by acquired IP R&D charges, partially offset by higher revenue associated with the divestiture of the olanzapine portfolio. Operating income as a percent of revenue was approximately 6% for the quarter, and reflected a negative impact of approximately 31 percentage point attributable to acquired IP R&D charges.
Our q3 effective tax rate was 84.6%. This represents an increase of approximately 74 percentage points compared to the same period in 2022. The increase in the effective tax rate was primarily driven by the non-deductible acquired IP R&D charges incurred this quarter. Other than the impact of acquired IP R&D, the underlying tax rate was consistent with previously providing guidance. At the bottom line, we delivered earnings per share of $0.10 in Q3, a 95% decrease versus Q3 2022, inclusive of an increase of $1.22 of EPS associated with the divestiture of the olanzapine portfolio and a negative impact of $3.29 from the acquired IP R&D charges. On slide 8, we quantify the effect of price rate and volume and revenue growth. This quarter U.S. revenue increased 21%.
When excluding revenue from the olanzapine portfolio and COVID-19 antibodies, U.S. revenue grew 32% driven by robust growth of Mounjaro, Verzenio and Jardiance. Net price in the U.S. increased 13% for the quarter driven by Mounjaro, access and savings cards dynamics. Excluding Mounjaro, net price in the U.S. decreased by high single digits. As mentioned in prior earnings calls, we expected Mounjaro access and saving card dynamics to have a meaningful impact on reported U.S. price changes in the second half of 2023, which was evident in Q3. Europe continued to post robust growth against this again this quarter. Excluding revenue from the olanzapine divestiture, revenue was up 7% in constant currency driven by volume growth of 11% primarily from Verzenio, Jardiance and Taltz.
For Japan, Q3 revenue decreased 16% in constant currency. Excluding Mounjaro, which had a one time upfront payment associated with the sales collaboration agreement in the base period, revenue in Japan decreased 3% in constant currency, driven primarily by customer buying patterns related to [indiscernible]. Moving to China revenue increased 20% in constant currency with volume growth of 25% partially offset by price decline. Volume growth in Q3 was driven by Tyvyt and Verzenio. We're encouraged by the growth we have seen this year in China. Revenue in the rest of the world increased 23% in constant currency, as volume growth of 28% was driven by Mounjaro, Verzenio and Jardiance. Slide 9 shows the contribution to worldwide volume growth by product category.
As you can see the new product and growth product categories combined, contributed approximately 17 percentage points of rolling growth for the quarter. The absence of revenue from COVID-19 antibodies compared to the base period was a headwind of nearly six percentage points to volume in Q3. This headwind will abate as COVID-19 antibody sales were minimal after the third quarter of 2022. Lastly, revenue from the sales of rights to the olanzapine portfolio delivered nearly 22 percentage points of growth this quarter. Slide 10 provides additional perspective across our product categories. First, I would like to highlight Verzenio, which saw worldwide sales growth of 68% in Q3, driven by robust volume growth. The continued positive momentum is driven by the early breast cancer indication with steady performance in the metastatic indication.
Jardiance continued its strong 2023 performance with worldwide revenue growth of 22% for the quarter. As you heard earlier in Q3 Jardiance was approved by the FDA for the treatment of adults with chronic kidney disease at risk of progression. In Q3 we saw worldwide Trulicity revenue decline 10% as volume growth in the U.S. was more than offset by lower prices driven by changes to estimates for rebates and discounts in both periods, as well as unfavorable segment mix and higher contracted rebates. In international markets, Trulicity volume continues to be affected by measures we have taken to minimize potential disruption to existing patients, including communications to healthcare professionals, now [ph] to start new patients on Trulicity. Moving to slide 11, we continue to be pleased with the strong performance of Mounjaro, as more type 2 diabetes patients benefit from the medicine.
Mounjaro revenue grew to just over $1.4 billion globally this quarter, up from $980 million the previous quarter. In Q3, we continued to make progress in expanding access to Mounjaro. As of October 1 access for patients with type 2 diabetes in the U.S. reached 78% in aggregate across commercial and Part D, including 85% access for commercial patients. This expanded access gives more patients the opportunity to start therapy on Mounjaro for type 2 diabetes. As communicated last quarter, since the $25 non-covered copay card program expires on June 30, we now consider all prescriptions paid. As a reminder we define paid scripts as those prescriptions outside of the $25 non-covered copay card, but inclusive of the $25 covered copay card. We expect Mounjaro net price will continue to benefit from the higher percentage of paid prescription, but will also continue to face a headwind for more rebated volume as access improves.
Looking forward to the end of the year with increased access we expect to continue to see overall growth in prescription trends. In terms of Mounjaro supply, we're continuing to make progress in our manufacturing expansion agenda. Given strong demand, we continue to experience tight supply throughout most of Q3, which impacted results for the quarter. Most recently U.S. product shipments have increased and inventory levels at U.S. wholesalers have improved with all doses of Mounjaro now listed as available on the FDA shortage website. While supply constraints have eased in the U.S., outside the U.S. Trulicity and -- outside the U.S. to Trulicity and Mounjaro supply remains tight, which materially impacted performance in these regions. With device assembly online at RTP, we are on track to achieve our goal of doubling capacity by the end of this year from where we were a year ago, and are gradually increasing production each quarter.
We're also continuing to focus on other parts of the supply chain, as demand is expected to remain high and production bottlenecks may shift over time. As we mentioned in last quarter's earnings call, we are moving forward with different presentation of Mounjaro to reach more patients around the world faster. We have launched with a single dose vial in Australia, and plan to launch in other markets outside the U.S. in the coming weeks and months. The introduction of a single dose vial presentation in these geographies is intended to serve as a bridge to a multi-dose quick pen, which we expect will be available starting in 2024. We're also preparing for potential launch of tirzepatide for obesity in the U.S. this year. Our auto injector capacity and output continues to increase.
And we look forward to bring tirzepatide to more patients in the months and years ahead. On slide 12, we provide an update on capital allocation. In the first nine months of 2023, we invested nearly $12 billion in our future growth through a combination of R&D expenditures, capital investments and business development outlays. In addition, we've returned nearly $4 billion to shareholders in dividends and share repurchases. Slide 13 presents our updated 2023 financial guidance. Guidance for the first four line items including revenue, gross margin percent, marketing and selling and administrative expenses and R&D expense is unchanged. I would note that we are trending towards the higher end of our estimates for gross margin and the top end of our ranges for operating expense categories.
You'll see that we've updated guidance for acquired IP R&D charges, OID, tax rate EPS, to reflect the inclusion of IP R&D charges for completed transactions through Q3, and year-to-date results on equity investments and GAAP guidance. These updates do not include the effect of potential charges associated with pending or future business development transactions after Q3. We will provide our initial 2024 guidance when we report Q4 results. Now I will turn the call over to Dan to highlight our progress in R&D.
Daniel Skovronsky: Thanks Anat. This quarter, we had significant pipeline progress as well as a high volume of activity at the major medical congresses, where we presented new data on multiple products across all of our therapeutic areas. Starting with oncology, since our last earnings call, we announced top line results from the LIBRETTO-531 study evaluating Retevmo versus physicians' choice of multi kinase inhibitors as an initial treatment for patients with advanced or metastatic RET mutant medullary thyroid cancer. As we presented at ESMO the study met its primary endpoint demonstrating a 72% improvement in progression-free survival compared to Cabozantinib or Vandetanib. These data should establish Retevmo as the standard of care for the initial systemic treatment of patients with progressive advanced RET mutant medullary thyroid cancer, and we have work to do to ensure that all of these patients are identified and properly diagnosed.
We also shared detailed data from the Phase 3 LIBRETTO-431 study at ESMO in October, showing that Retevmo more than doubled progression free survival compared to chemotherapy plus Pembrolizumab in patients with advanced or metastatic RET fusion positive non-small cell lung cancer. We hope these data in addition to others recently published, for other driver positive lung cancers will help accelerate genomic profiling at lung cancer diagnosis to guide initial treatment selection. The results of LIBRETTO-531 and of LIBRETTO-431 were each simultaneously published in the New England Journal of Medicine. Also at ESMO we should landmark five year results from a pre-planned interim analysis of the Phase 3 monarchE study, evaluating Verzenio in combination with endocrine therapy, compared to endocrine therapy alone, in patients with HR positive HER2 negative no positive early breast cancer at a high risk of recurrence.
The impact of two years of Verzenio treatment is observed well beyond the treatment period, reducing the risk of long term recurrence by 32% at five years. These data reinforced two years of Verzenio plus endocrine therapy as the standard of care for high risk early breast cancer patients. Lastly, we shared data on imlunestrant, our oral SERD being studied in Phase 3 as a single agent and in combination therapy. The data shared included the first clinical data for imlunestrant in combination with everolimus or alpelisib as well as updated monotherapy from the Phase 1 EMBER study in patients with ER positive HER2 negative advanced breast cancer. We hope that imlunestrant could be an important future endocrine therapy backbone, in certain settings of breast cancer.
And these new data show that the medicine can be safely combined with other agents utilized with endocrine therapy in advanced breast cancer. Looking earlier in oncology pipeline, we shared preclinical data on three of our new pipeline agents at the triple meeting on molecular targets in cancer therapeutics in October. We shared preclinical data for first, a highly potent inhibitor of KRAS G12D, that is selective against wild type KRAS. Second, a highly potent and isoform selective pan-KRAS inhibitor, with activity against a broad spectrum of the most common activating KRAS mutations, and high selectivity of a wild type H RES and N RES. And third, a fully human monoclonal anti-Nectin-4 antibody conjugated to a topoisomerase I inhibitor. These programs are among the next slate of oncology agents we expect to enter the clinic over the next year.
They represent years of focused work to create potentially differentiated molecules against exacting target product profiles. Turning to our diabetes and obesity portfolio, in Q3, we announced the FDA approval of Jardiance for treatment of adults with chronic kidney disease at risk of progression. In the EMPA-KIDNEY Phase 3 trial Jardiance significantly reduced the risk of kidney disease progression and cardiovascular deaths in adults with CKD. This approval adds to the treatment options for the more than 35 million adults in the U.S. affected by chronic kidney disease. Since our last earnings call, we presented detailed results from the SURMOUNT-3 Phase 3 clinical trial at the obesity weight conference in October, with the results simultaneously published in Nature Medicine.
Also in October, we presented detailed results from the SURMOUNT-4 study at EASD. These results will be subsequently published in a top tier peer reviewed medical journal. Data from these Phase 3 trials of tirzepatide showed that participants achieved up to 26.6% total mean weight loss. The detailed results from these studies clearly show the importance of continued therapy for sustained weight management, and that if approved, tirzepatide could be an important part of obesity management, for those having difficulty maintaining weight loss with diet and exercise alone. Our pipeline, as shown on slide 14, now includes a high dose tirzepatide NILEX in Phase 2, since we have initiated a study exploring higher doses of tirzepatide in participants with type 2 diabetes and obesity.
Earlier in the pipeline, we presented Phase 1 data on Muvalaplin at the European Society of Cardiology Congress with simultaneous publication in JAMA [ph]. Muvalaplin is the first oral agent specifically developed to lower Lp(a) levels. In this Phase 1 study Muvalaplin was well tolerated by participants and resulted in dose dependent lowering of Lp(a) of up to 65%. Muvalaplin is currently in Phase 2. As shown on slide 14, we've advanced our SCAP siRNA into Phase 1 for NASH. We've also completed our acquisition of Versanis and NASH Bimagrumab [ph] in Phase 2. We are excited about the potential combination of Bimagrumab and tirzepatide. Lastly, we're happy to share that since our last earnings call the Retatrutide TRIUMPH Phase 3 core registration trials are now all actively enrolling to pursue simultaneous indications for chronic weight management, obstructive sleep apnea, and knee osteoarthritis.
Turning to our neuroscience portfolio, the FDA has shared with us that the Donanemab review will extend into Q1 2024 needing additional time to complete their review. We've completed submissions in Europe and Japan, and submissions to other global regulatory authorities are either completed or underway. Recently, at the clinical trials on Alzheimer's disease meeting, we presented new insights from donanemab development program during a symposium session. As part of this symposium, we shared ARIA data from a pooled analysis that included more than 2000 participants dosed with donanemab, and explored ARIA E association across a number of baseline variables, highlighting a few key factors most strongly associated with ARIA risk, including baseline amyloid levels, evidence of a prior bleed and high blood pressure.
Interestingly, this data also suggested use of antihypertensives decreased the risk of ARIA. Additionally, we shared analyses from our open label addendum of over 1,000 patients treated with donanemab. These results included a post hoc analysis of patients with no brain tau, and demonstrated similar or even stronger biomarker results than our main TRAILBLAZER-ALZ 2 study. In a separate post hoc analysis from the TRAILBLAZER-ALZ 2 Phase 3 study, related to activities of daily living and independence, in people with early symptomatic Alzheimer's disease we showed that compared to placebo, people treated with donanemab preserved more of their ability to perform many of the items measured, including their ability to make meals, to use appliances, keep appointments, perform pastimes, and be safely left unattended.
We also shared an update on our validation data for our Plasma P tau 217 test for identifying amyloid positive patients demonstrating robust performance of this immunoassay. We expect to have this test commercially available in a phased approach first, as a laboratory developed test by the end of this year. As you recall, we use Plasma P tau 207 to identify pre symptomatic individuals for our TRAILBLAZER-ALZ 3 trial. This is an event driven trial and we have now recruited a sufficient number of qualifying pre-symptomatic participants and expect to have efficacy results within three years. We're excited to announce today that our Otoferlin Gene therapy asset from Akouos has begun dosing patients in a Phase 1/2 trial for hearing loss. In immunology, as Dave noted, we're happy to have FDA approval for Omvoh for the treatment of moderately to severely active ulcerative colitis in adults.
This approval offers new hope for patients, who are searching for an effective option that can offer rapid and lasting improvements. Omvoh will be approved --available to patients in the U.S. in the coming weeks. We were also excited to have the Phase 3 readout for this molecule, mirikizumab in Crohn's disease. In the VIVID 1 Phase 3 study mirikizumab met the co-primary in all major secondary endpoints compared to placebo. Mirikizumab demonstrated clinical remission and endoscopic response for patients with moderately to severely active Crohn's disease through 52 weeks. We were thrilled to see that more than half of participants on mirikizumab achieved clinical remission at one year, and that robust efficacy was seen in both participants who are naive to biologic therapy, as well as participants who previously failed a prior biologic therapy.
Helping patients achieve long term clinical remission is a key goal for us in our pursuit of treatments for inflammatory bowel disease. These new data in Crohn's Disease build on the high levels of long term remission seen with mirikizumab for ulcerative colitis, and help reinforce the differentiation of this important potential medicine. This successful Phase 3 trial will be the basis of global regulatory submissions for Crohn's Disease. As Dave noted earlier in Q3, we announced that the FDA issued a complete response letter for lebrikizumab, based on findings at a third party manufacturer. In Q3 we completed the acquisition of DICE and now reflect the two oral IL-17 assets, DICE 853 and DICE 806 in Phase 1 and Phase 2 of our pipeline respectively.
Additionally, two new molecules began Phase 2 studies in immunology this quarter. First, our CD200R monoclonal antibody, known as Ucenprubart for atopic dermatitis, and second, our RIPK1 inhibitor for rheumatoid arthritis. We've removed our BTLA monoclonal antibody agonist from Phase 2 in our pipeline, after the Phase 2a study failed to demonstrate efficacy. Q3 was another productive quarter for R&D at Lilly. I'll now turn the call back to Dave for closing remarks.
David Ricks: Thank you, Dan. Before we get to Q&A, let me briefly sum up our progress in the third quarter. This quarter revenue growth accelerated as our recently launched product portfolio continued to gain momentum, of course led by Mounjaro. Excluding revenue from the divestiture of the olanzapine portfolio and the sale of COVID-19 antibodies in 2022, revenue grew 24%, driven again by Mounjaro, Verzenio as well as Jardiance. By continuing to invest in recent and upcoming launches, late stage medicines and early phase capabilities as well as in business development, we are confident that we have positioned ourselves for growth now and in the coming years, with the opportunity for continued margin expansion. We achieved meaningful advances in our late stage pipeline, with the FDA approval of Omvoh for the treatment of moderately to severely active ulcerative colitis, as well as Jardiance for the treatment of adults with chronic kidney disease, and the positive Phase 3 VIVID 1 results for mirikizumab for adults with moderately to severely active Crohn's disease.
Looking forward, we are expecting regulatory responses before the end of the year on our submissions for pirtobrutinib, and accelerated approval in CLL as well as tirzepatide for obesity. In Q3, we completed several targeted acquisitions, intended to bolster our early and mid stage portfolio. Directly following the quarter we also announced an agreement to acquire POINT Biopharma which will further expand our R&D capabilities in oncology. Lastly, we returned over $1 billion to shareholders via the dividend. A few weeks ago, we announced several leadership changes. Mike Mason, our Executive Vice President and President of Lilly Diabetes and Obesity will retire from the company at the end of 2023 after 34 years with Lilly. In his current role, Mike is overseeing tirzepatide, late stage development and an unprecedented type 2 diabetes launch.
Mike leaves behind an enduring legacy that reflects his deep compassion for patients and his commitment to our people. With this being Mike's last earnings call, I would like to thank him for his many years of outstanding service to Lily and wish him all the best in his next chapter of life. Patrick Johnson will assume leadership of Lilly Diabetes and Obesity. In addition to his current responsibilities as President of Lilly USA Dan Skovronsk, our Chief Scientific Officer and president of Lilly Research Labs will take on the additional role of President of Lilly Immunology from Patrick. And in a related move, David Hyman is assuming the role of Chief Medical Officer for the company from Dan, overseeing the full Lilly portfolio. Leigh Ann Pusey, our Executive Vice President for Corporate Affairs and Communications has decided to leave the company at the end of 2023.
Leigh Ann has left a lasting impact on Lilly and the patients we serve. And we're grateful for her many contributions over the past six years. So as we begin this new chapter of growth for our company, we are very confident that our deep experience of our leadership team will allow us to continue to accelerate our efforts to make medicines and be more effective and more innovative in the years ahead. So now, let me turn the call over to Joe and he'll moderate the Q&A session.
Joe Fletcher : Thanks, Dave. We'd like to take questions from as many callers as possible and conclude the call in a timely manner. So consistent with last quarter we will respond to one question per caller. So ask that you limit to one question per caller. As we'll aim to end the call at 10 am. If you have more than one question you can reenter the queue, and we'll get to your question if time allows. So Paul, please provide the instructions for the Q&A session and we're ready for the first caller.
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