Eli Lilly and Co. is depending heavily on newer products as the effects of pricing pressures, competition and the withdrawal of a cancer drug from the market are weighing on earnings.
Products like immunological treatment Taltz, cancer drug Verzenio and diabetes drug Trulicity picked up some of the slack left by the erosion of the older products. Trulicity saw sales volume growth of 42% in the U.S. but dragged due to pricing pressure as a result of rebate reform and payer consolidation, according to CFO Joshua Smiley.
"Given the absolute size of the Trulicity rebate and discount liability, we'll continue to see quarterly adjustments to that liability," the CFO said. "But as we have seen historically, these are difficult to predict — they can be both positive and negative."
Lilly, which reported modest revenue growth of 3% in the third quarter, is still seeing losses from the patent expiration of its best-selling erectile dysfunction drug Cialis. Also, a failed late-stage clinical trial in April for its cancer drug Lartruvo forced the Indianapolis company to withdraw the treatment from the market.
Eli Lilly CEO David Ricks
Source: Eli Lilly
For these reasons, newer drugs accounted for 44% of the company's revenue over the quarter, Lilly CEO David Ricks said on an Oct. 23 earnings call.
The company raised its guidance for EPS in 2019 to a range of $5.75 to $5.85. But Wolfe Research analyst Tim Anderson had deeper concerns that the company's lineup of products was not strong enough to get them there.
"Despite a 'beat and raise' quarter, Lilly shares are under pressure," Anderson said in an Oct. 23 note. "This reflects the weaker performance of various key brands in Q3 (both within diabetes and in other therapeutic areas) that summed to price erosion across Lilly's book of business of -5% in the U.S. (-4% worldwide) year on year."
Analysts also expressed concern for Lilly's outlook in diabetes — representing about half of the company's sales — in light of the announced departure of Lilly Diabetes President Enrique Conterno at the end of the year to be replaced by the unit's vice president, Mike Mason. But Conterno himself showed optimism about the business arm, particularly its primary products Trulicity and Jardiance.
The company is also pursuing tirzepatide as a new diabetes medication that could also stimulate weight loss, and trials are expected to continue into late 2020 or early 2021.
Another product off to a strong start after its 2018 launch is the migraine drug Emgality, executives said. Although it launched alongside two other drugs in its class — Amgen Inc. and Novartis AG's Aimovig and Teva Pharmaceutical Industries Ltd.'s Ajovy — Emgality exited the third quarter with 46% share in the market from new prescriptions in the U.S., Smiley said.
"We have more than half a dozen products that could scale in a significant way, and given our base of pharma revenue, I think that continues to offer a unique situation," Ricks said.
Lilly has also taken steps to bolster its oncology pipeline in 2019, including the $8 billion acquisition of Loxo Oncology completed in February. Treatments gained in that deal, including a blood cancer drug dubbed Loxo 305, are progressing in the clinic, Chief Scientific Officer Daniel Skovronsky said, noting that results from a midstage Loxo 305 study are expected by the end of the year.
Shares of Lilly were down 2.45% to $107.15 as of 12:45 p.m. ET on Oct. 23.
Pricing policy still unpredictable
With dependence on Medicare's Part D for coverage of out-of-pocket costs to patients and rebates paid by the company, Lilly is susceptible to changes being discussed in Washington.
But the Lilly CEO said the outcome remains unpredictable and will likely take a long time. He said that a version of the policies on the table could be a modest positive for Lilly.
"It's important to note to investors, we're promoting changes, in particular, the Part D benefit and affordability measures that can impact the pharmacy counter without throwing the baby out with the bathwater and making whole sale changes to the U.S. system," Ricks said. "Which would obviously be hugely damaging to the business model."