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Morningstar | Slightly Raising Lilly's FVE on Compelling Mid-Stage Diabetes Data; Maintaining Our Novo FVE

Lilly presented compelling phase 2b data for its dual GIP/GLP-1 receptor agonist, LY3298176, at the annual meeting of the European Association for the Study of Diabetes, and we're raising our Lilly fair value estimate to $104 from $100, which incorporates this positive data as well as the recent approval of migraine drug Emgality. While we continue to think Novo's oral semaglutide looks well positioned for a strong launch in 2020, we now believe that Lilly's GIP/GLP-1 will also see strong traction on the injectable side beginning in 2023. That said, we think demand for incretin-based therapy will continue to rise over this time horizon, so we're not making any significant changes to our Novo Nordisk model, and shares of Novo look relatively fairly valued following declines surrounding the release of this data.

We have several questions about the evolution of the incretin market that could affect our market share assumptions going forward, including whether Novo Nordisk prices oral semaglutide at a significant discount to current injectable options, and whether payers opt to prefer generic versions of Victoza and Trulicity on their formularies around the time of the GIP/GLP-1's potential launch (2023-24). Specifically on GIP/GLP-1, Lilly's titrated dosing of its GIP/GLP-1 needs to sufficiently control nausea but maintain efficacy, and there is still uncertainty surrounding the GIP mechanism given previous failures at other firms; that said, potential could expand into the obesity setting, and even into NASH, in the long run. Also, while Novo maintains a wide moat, we note that the firm's exposure to GLP-1 is increasing as Victoza and Ozempic (and soon oral semaglutide) grow strongly relative to pressured insulin and biopharmaceutical businesses; the GLP-1 franchise was 23% of Novo’s total sales in 2017 and should grow to 38% of total sales by 2027.

The GLP-1 market has been growing strongly since the launch of once-weekly therapies (Lilly's Trulicity and Novo Nordisk's Ozempic) and is also benefiting from strong cardiovascular outcomes data for Novo Nordisk's older injectable, once-daily Victoza. The market is heavily weighted toward sales in the U.S., where market growth remains solidly above 20%. With the launch of Ozempic this year, Victoza sales are flattening slightly, but Lilly's Trulicity is still launching strongly with above-market growth.

Lilly's GIP-GLP-1 data surpassed Trulicity's efficacy, but also showed the potential to surpass the efficacy of Novo's Ozempic, the best-in-class option. LY3298176 was tested at several doses and showed A1C reductions of 1.6%-2.4% at the 5mg, 10mg, and 15 mg doses, as well as weight loss of 4.8-11.3 kg at these doses. Trulicity looked weak in comparison, with a 1.1% A1C reduction and 2.7 kg weight loss in its arm of the study. For reference, Novo's SUSTAIN trials for Ozempic (injectable semaglutide) generally showed A1C lowering around 1.5% and weight loss between 5-6 kg, and the SUSTAIN 7 trial specifically showed superiority on both of these measures to Lilly's Trulicity.

We expect Novo's oral semaglutide to perform strongly even if Lilly's GIP/GLP-1 launches in 2023, as the oral market could give the firm greater access to primary care physicians as well as an opportunity to offer a slightly discounted price, and the drug should have a three-year lead in the race to the market. Novo's oral semaglutide has shown slightly lower efficacy than Ozempic (3-5 kilograms of weight loss and 1.1-1.5% A1C reductions), but proved superior to both Victoza and Trulicity (at the highest 14 mg dose tested in PIONEER 4 and PIONEER 10) on both of these measures.