Will Eli Lilly's Stock Outperformance Continue?
Eli Lilly has been on a tear with the stock increasing 37% since late March. More broadly, the stock has doubled over the last five years as the company has grown top line strongly while also expanding margins. The company has guided to a 5% revenue CAGR from 2015 to 2020, and analysts expect significant growth to come from a number of growth drivers in the Diabetes segment.
Diabetes key to achieving longer-term revenue growth targets
Diabetes is a key determinant of the company’s future trajectory given its significant portion of the company’s total revenue (about one third of revenue and potentially as high as a half of net income). The diabetes franchises will see some losses from Sanofi's Humalog biosimilar that could threaten revenue (Humalog generated about $2.9 billion in revenue in 2017). However, they see a number of other growth drivers that could more than offset this, driven primarily by Trulicity and Jardiance.
Before jumping into Eli Lilly’s diabetes products, I’ll first give some background on diabetes. Diabetes is a disease in which glucose in the blood cannot be processed by the body’s insulin. There are primarily two types of diabetes - Type 1 and Type 2. Type 1 diabetic patients do not produce insulin and must rely on insulin therapy. Type 2 diabetic patients do not make, or use, insulin well. There are about 30 million patients in the US with diabetes, with type 2 patients making up about 90% of that.
There are several treatment options for Type 2 diabetes. The two of interest to us for the purposes of this article are SGLT2 inhibitors and GLP-1 RA.
SGLT2 inhibitors - this class of oral drugs turn off a protein, enabling sugar to be excreted through urine. This improves A1C reduction, weight loss and blood pressure. Eli Lilly owns Jardiance, which is currently the market leader with Astrazeneca’s Farxiga and Johnson and Johnson’s Invokana behind it.
GLP-1 RA - These drugs act on gut hormone receptors to increase the production of insulin. GLP-1s are normally secreted when food is detected in the small intestine. GLP-1 then 1) decreases appetite in the brain, 2) slows the emptying of the stomach, and 3) stimulates insulin secretion from the pancreas and suppresses glucagon secretion. These effects lead to potential weight loss and A1C benefits. Patients usually receive a weekly injection. Eli Lilly owns Trulicity, which is currently the market leader and competes with a variety of drugs (the biggest competitors being Novo Nordisk’s Victoza and Ozempic).
An increasingly important topic among diabetes drugs is its efficacy in improving cardiovascular (CV) outcomes. Diabetes is associated with an elevated risk of CV disease, the leading cause of morbidity and mortality in the patient population. Diabetes drugs are expected to show no negative impact on CV health at a minimum, and as more drugs show it, a benefit on CV outcomes is increasingly becoming the expectation.
With Upcoming Threats to Trulicity, REWIND Results Increasingly Important
Trulicity is Eli Lilly’s primary growth driver in the coming years with expected growth from $2 billion in 2017 to an expected $4+ billion by 2022, making it a significant part of Eli Lilly's plans to grow at 5% longer-term. Trulicity's growth is expected to come largely from GLP-1 class growth, which is seeing 26% y/y growth. Bulls argue that the class as a whole will continue to grow given its weight loss, A1C reduction, and compliance benefits.
However, there are a few concerns. One of the chief concerns is competition from Novo Nordisk’s Ozempic, which has several key points of differentiation from Trulicity. Ozempic trial results showed that Ozempic had superior A1C and weight loss benefits to Trulicity. Share gains have been limited to date (due in part to limited payor access), but it’s early. Many investors believe that Ozempic will eventually take share from Trulicity over time given its superior clinical effect.
Another concern is the potential for an upcoming oral semaglutide. As mentioned previously, GLP-1s are weekly injectables. Novo Nordisk recently released data from its phase 3a PIONEER 2 trial, which showed positive results for a once daily oral GLP-1. Numerous key opinion leaders and analysts believe that the oral semaglutide poses a disruptive threat to injectable GLP-1s as well as other classes of drugs like the SGLT-2s (with the only wrinkle being some material side effects such as nausea). Novo Nordisk seems on track to file the drug in 2019 and come to market in 2020, and investors expect this to pose a competitive threat to both Jardiance and Trulicity.
As a result of the upcoming threats, investor attention has been focused on the upcoming results from its REWIND trial examining CV outcomes, which is expected in 4Q18. This trial, if successful, is key to keeping up with Novo Nordisk’s Ozempic and Victoza. A variety of outcomes are possible, but the company will likely need to show at least no additional harm (and maybe a CV benefit) in order to fend off the competitive threat from Novo Nordisk. Investors appear to disagree on whether the stock needs to show no harm (the easier outcome to achieve) or a CV benefit (the harder outcome to achieve) in order for the stock to rally.
A number of key opinion leaders have voiced concerns around the likelihood of positive results (a CV benefit) after a closer examination of the REWIND trial design. In particular, experts believe the patients used in the study have a lower history of prior CV disease, and lower A1C levels as well. This may make it more difficult for the study to show statistical significance in reducing CV outcomes. Consensus opinion for a positive outcome from the trial has declined over time, as a result. Results will come out in 4Q18 and investors are closely watching developments here as the outcome can significantly alter the growth trajectory of Trulicity.
Jardiance is the SGLT-2 category leader with roughly 40-50% of the market. The drug has fewer adverse events than Invokana and Farxiga, and therefore is expected to continue to take share from competitors. However, results in 2Q were weaker than expected due to pricing pressure (particularly from Invokana). With pricing pressures potentially continuing, and the upcoming oral semaglutide, Jardiance revenue estimates have been revised down by the street.
Looking ahead, Jardiance will produce interim results for heart failure in late 2018, which will be important for maintaining share vs. competitors. Farxiga will also produce CV outcome data, which is expected to provide a potential boost to the class as a whole if positive. Eli Lilly will also look to begin a chronic kidney disease trial at some point this year.
Other tidbits within Diabetes include an update on the GIP/GLP-1 combo and Tradjenta. Management noted that they will move the GIP/GLP-1 combo into phase 3 trials and will present phase 2 data at the EASD conference in early October. With respect to Tradjenta, the drug was the first DPP-4 (another class of type 2 treatments that involves slowing the inactivation of GLP-1) to show a positive CV outcome, and Eli Lilly could potentially file later this year or early next year.
Beyond Diabetes, Lilly has Several Other Important Drivers that Investors Are Discussing
The pain franchise will see several upcoming developments in the back half of the year. Galcanezumab (Emgality) will have an upcoming action date in late 3Q or early 4Q for prophylactic treatment of chronic/episodic migraines. As discussed in my article on Teva’s developments in migraine headaches, there are several players here in this space, but investors do see galcanezumab as having enough points of differentiation, including a 100% reduction in migraine cases in clinical data, to stand out from Amgen’s Aimovig and Teva’s fremanezumab.
Other catalysts within the pain franchise include lasmiditan and tanezumab. Lasmiditan is an 5-HT1F receptor agonist for acute migraines that the company has high expectations for, and investors expect to see an NDA filing in 2H18. Tanezumab should see readouts over numerous indications next year (including osteoarthritis, chronic lower back pain, and cancer pain).
Eli Lilly is also in the process of divesting Animal Health. The IPO is expected to generate anywhere from $9 to $14 billion in cash, and will occur in 2H18. This could add a sizable cash position that could be used for additional M&A activity, potentially to bolster its oncology portfolio.
Eli Lilly has several upcoming developments; REWIND results could be the biggest
Eli Lilly has several upcoming developments throughout the company, including in its diabetes franchise, pain franchise, and an upcoming IPO for its Animal Health segment. Perhaps the most important catalyst to keep an eye on, based on investor debates and discussion, are developments within the Diabetes segment. Specifically, watch for REWIND results in 4Q18, which could either provide a sigh of relief to the market or send the stock down significantly on Trulicity growth concerns.