Eli Lilly and Company

Ladies and gentlemen, thank you for standing by, and welcome to Lilly's Q3 2020 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call, please press star, then zero. And as a reminder, your conference is being recorded. I would now like to turn the conference over to your host, Mr. Kevin Hearn. Please go ahead.

Good morning. Thank you for joining us for Eli Lilly and Company's Q3 2020 earnings call. I'm Kevin Hearn, Vice President of Investor Relations. Joining me on today's call are Dave Ricks, Lilly's Chairman and CEO, Josh Smiley, Chief Financial Officer, Dr. Dan Skobronski, Chief Scientific Officer, Ann White, President of Lilly Oncology, Patrick Johnson, President of Lilly USA, Mike Mason, President of Lilly Diabetes, and Ilya Yufa, President of Lilly Biomedicines. We're also joined by Sarah Smith and Mike Sapar of the Investor Relations Team. During this conference 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 noted on slide three. Additional information concerning factors that could cause actual results to differ materially is contained in Lilly's latest form 10-K and subsequent forms 10-Q and 8-K. The information we provide about our products and pipeline is for the benefit of the investment community. It is not intended to be promotional and is not sufficient for prescribing decisions. As we transition to our prepared remarks, a reminder that our commentary will focus on non-GAAP financial measures, which exclude the financial contribution from a line code during 2019 and present earnings per share as though the full disposition via the exchange offer was complete on January 1, 2019. Now, I'll turn the call over to Dave for some opening comments.

Thanks, Kevin. Q3 was another important quarter for Lilly and the pharmaceutical industry's progress in developing new medicines to treat COVID-19. I'm very proud of Lilly's work, and we'll go into detail of the promising advancements made this quarter. However, I'd like to start by summarizing our overall business performance. Clearly, this quarter's financial results came in below sell-side analyst projections. While we don't provide quarterly guidance, I'll make a few high-level comments on several factors that did impact our Q3 results, and then Josh will go into more detail later. First, as we've discussed in the past, the impact of price on revenue can be volatile in the U.S. As we make estimates for rebates and discounts, obligations during the coverage gap of Medicare Part D patient assistance programs and other liabilities. During Q3, the magnitude of adjustments was meaningful. predominantly related to our assumptions regarding our obligation during the coverage gap in Medicare Part D for trulicity. While the impact was notable in Q3, this source of volatility normalizes when analyzing our results over the first nine months, as well as for the full year. In addition, while we are encouraged that new prescriptions are trending toward pre-COVID levels, the recovery varies by class. We view this impact as transient. Remain confident in the underlying business and continue to manage our operations to deliver success over the long term. From an operating expense standpoint, we made significant investments in R&D to develop COVID-19 treatments. While we've spoken before about our efforts to develop COVID-19 treatments, we've not quantified that investment level. In Q3, we were fortunate to see positive clinical data from multiple trials, and this activity had an impact of about 12 cents on Q3 earnings per share. Finally, after taking a pause on active promotion in Q2 to respect the impact that COVID-19 had on medical practices, we increased our investments in customer-facing activity and direct-to-consumer marketing in Q3 in order to accelerate our growth. While this did create a step-up compared to our investment level in SG&A in Q2 2020 and versus Q3 2019, we believe our progress in Q3 sets us up for a strong finish to the year and to provide meaningful momentum into 2021. We have a number of opportunities to drive this growth through these investments in our existing commercial portfolio. These include our unique CD indication for trulicity and the recently launched higher doses. pulling through access winds for TALCs and launching the recently approved non-radiographic AxBi indication, and driving increased uptake of Resenio through our differentiated data package, just to highlight a few. Looking at the underlying trends in Q3, we delivered revenue growth of 5% or 4%, excluding the impact of foreign exchange. Despite disruptions on new patient starts from the global pandemic, Volume growth was solid, increasing by 9% versus Q3 2019. Our key growth products continued to be the catalyst for our business performance and made up over half of our revenue during the quarter. International performance in Europe and China was particularly strong, as constant currency revenue grew 9% and 10% respectively, driven by our newest products. For the first nine months of the year, our revenue grew by 6%, driven by 12% volume growth, This growth was delivered during a period of significant disruption. The ways we launch new medicines, execute clinical trials, and manufacture our products have all been meaningfully changed during the pandemic, with some adjustments likely to remain as our business continues to evolve. We are proud of our efforts to ensure patients have access to medicines by maintaining our manufacturing plants in continuous operation and by developing potential new treatments for COVID-19. Operating margin as a percent of revenue was 26.2% for the third quarter. This is a decline of 230 basis points versus Q3 2019, but was depressed by $125 million that we invested in COVID-19 therapies during the quarter. Excluding these exceptional activities, operating margin was 28.4%. We have confidence in our outlook and expect to deliver financial results within our updated guidance range. with all lines at or above our original 2020 guidance, and to achieve our operating margin expansion plans, excluding our investments in COVID-19 treatments. The fundamentals of our business are strong, and we remain well positioned for a period of sustained growth and margin expansion. Turning to the pipeline, in Q3, we made meaningful progress advancing our late-stage pipeline and developing potential COVID-19 treatments. including FDA approval of additional doses for trulicity for the treatment of type 2 diabetes, an important data readout for resenio in early breast cancer, approval in Europe for Illumiant in adults with moderate to severe atopic dermatitis, positive phase 3 results from the ACT-2 trial of baricitinib in combination with remdesivir in hospitalized COVID-19 patients, positive results of our COVID-19 neutralizing antibody monotherapy and combination therapies, And we presented new data on a potential new indication for Jardians in collaboration with Beringer Engelheim. I'm encouraged by our company's efforts to develop potential new therapies to treat COVID-19 and working at unprecedented speed. This work would not have been possible without the tireless efforts of many employees at Lilly and the collaborative efforts across industry, regulators, and government. We continue to utilize external innovation and collaboration to augment our internal capabilities. This quarter, we signed a number of business development transactions, including the global expansion of our Tyvek collaboration with InnoVent. At the same time, we utilized our strong cash flow to return nearly $700 million to shareholders via the dividend. Moving to slides five and six, you'll see the full list of key events since our last earnings call. I would like to welcome Ilya Yufa to our executive team as he assumes leadership for a biomedicine business unit. A 25 year veteran with a tremendous breadth of experience across our organization, from finance, business development and sales, to Six Sigma, ethics and compliance, and general management. Ilya has consistently delivered impressive results in successful larger roles, that, successively larger roles, which have prepared him well to lead Lilly Biomedicine. After serving as general manager of Italy, Since 2018, Ilya has been leading Lilly's largest franchise, U.S. Diabetes, where he played a critical role in the continued success of the market-leading medicine, Trulicity, as well as Jardians, in the two fastest-growing classes in diabetes. Ilya, it's great to have you on our leadership team. I'd also like to thank Patrick for his energy, focus, and execution that he brought to his time as president of Lilly Biomedicines. Given Patrick's strong record of successfully managing Lilly businesses in complex markets around the world, He is the right enterprise leader to lead Lilly USA and our global customer-focused functions during this exciting period of opportunity and growth as we look to continue to deliver new medicines to patients. Before I turn the call over to Josh to review our Q3 results and to provide an update on our financial guidance for 2020, I want to discuss briefly certain events at one of our manufacturing facilities located in Branchburg, New Jersey. Late last year, our Branchburg plant underwent a routine FDA general surveillance inspection. The inspectors identified findings related to data handling, and we received an official action indicated notice, as well as a follow-up inspection this year. We have not received a warning letter or other enforcement letter from the FDA at this time. Given that this plant is among several worldwide that produces Bamlanivimab, or LilySARS-CoV-555, one of our COVID-19 neutralizing antibodies, I want to share more information about our response to these inspections. First, we are confident the issues raised during the inspections did not impact product quality or patient safety for Bamlanivimab or for any other product manufactured at the Branchburg plant. Having said that, we and I take remediation of these data handling issues and our commitment to quality and safety very seriously. We engaged an external firm to conduct a comprehensive independent review of systems at the Branchburg site, and we were working diligently to incorporate suggestions for improvement to our procedures. We have also had this firm perform independent reviews of our manufacturing of Bamlanivimab at Branchburg. to examine our manufacturing batch records and quality documentation to corroborate our own batch release decisions. As we submit for supply of Bamlanivimab from Branchburg for the emergency use authorization we requested, we are confident in the material at this facility and frankly, at all of our sites. Finally, for our neutralizing antibodies, we have a robust global supply chain in place with five active ingredient manufacturing sites worldwide in addition to five additional drug product sites worldwide. Branchburg is one of the active ingredient sites. Once we are approved to do so, our resilient global network is well positioned to begin the supply as we help battle this global pandemic. Now, let me turn it over to Josh.