禮來公司 (LLY) 2002 Q2 法說會逐字稿

Welcome to the Eli Lilly Company 2nd Quarter results conference call .

At this time, all participants are in a listen-only mode. Later , there will be an opportunity for questions, instructions will be given at that time.

If you should require assistance during the call, please press zero than star.

And as a reminder, this conference is being recorded.

I would now like to turn the conference over to ou r host, Director of Investor Relations. Mr. Simon Harper.

Please go ahead.

THank you very much for joining us for Eli Lilly & Company's 2nd quarter earnings conference call.

Each of you should have received the related earnings press release and the supporting materials for this call by email or from our website.

We are joined today by Sidney Tauren, Chairman, President and Chief Executive Officer, Charles Golden, Executive Vice President and Chief Financial Officer, and Pedro Granadillo, Senior Vice President with responsibility to manufacturing and quality.

Sidney, Charles, and Pedro will provide an udate on manufacturing and guidance following our second quarter performance review. After the prepared comments, the management on the team will take your questions. During this conference call, we anticipate making projections and forward looking statements. These estimates are being made based upon our best judgements at this time.

For example, we have made assumptions concerning the Company's efforts to resolve the good manufacturing practice issues identified in the lastest form 483 and market warning letter and their impact on the Company. We have also made assumptions about the timing of the launch of new products.

Actual results may differ materially due to various factors. In particular the timing and the nature of the resolution of the GMCissues will depend on the ability of the company to demonstrate with satisfactionof the FDA the quality and the reliability of its manufacturing control group procedures.

The Company's results may aslo be affected by the continued growth rates of our newer products, by the uptick in Digrees following its recent launch, and by the impact of exchange rates. As you know, there are no guarantees in the pharmacutical business. For more information for these and other factors that may affect our resluts, you can see exhibit 1999 throughout forms 10K and 10 Q. You can access a live bwebcast of this call at www.investor.lilly.com. In addition to the live webcast, and internet based replay will be available at the IR website under the same webcast under webcast and presentation until July 26th, following today's call.

Before I discuss the results for second quarter, I will review some of the key events that have taken place over the past 3 months. On April 29th, Lilly recieved an approvable letter from the FDA for the [inaudible] for male erectile dysfunction. Final FDA approvable is subject to concern at clicincal pharmacology studies and label discussions.

We think the reason the timeline for completion of the clinical pharacology studies and regulatory review will enable Lilly Icon to launch in the 2nd half of 2003 in the US and potentially eariler in Europe. This is obviously subject to certain manufacuring conditions that Pedro will address in a moment.

During the last quarter we completed regulatory discussions with the FDA concerning the language and risk managment programs to insure appropriate use of the product.

As a result once the manufacturing recieves the resolve, we will be ready for the launch.

The PPNP in Europe issued a positive opinion for the approval of Digrees in Europe. Digrees can be indicated for adults which can be affected by multiple organ failures when added to the best standard of care. Digrees has now been approved in 9 countires including the United States. We expect to get final approval in as many as 25 countries in 2002. We launched the product in Austrailia, Israel, and Argentina in the second quarter.

In May, we presented important clinical data on many of our products in the late stage pipeline at some of the major medical conferences. In a plenary session at ATCO, landmark present [inaudible] demonstrated saftey and ethocacy in malignant growth in [inaudible]. Recently Lilly and FDA reached an agreement to make it available on an expanded access or compassionate use basis for medically eligible patients with malignant melonoma.

At the ACA the new clinical data that is involved [inaudible] was shared in the field of depression. ADHD is the premeire bipolar disorder. Our strong presence at the ACA this year, is evidence of our wells leadership in the Europe guide. We also presented positive pahse 3 data for incontinence and data demonstrating effectiveness for dialisys at the AUA in May. We also shared importantant phase 2 results in diabetics at the American Diabetes Association forf PKB inhibitor. Last, but certainly not least, we announced this morning that we have entered an agreement with Twin Towers to assist in the commercialization of [inaudible] in the US. This strategic partnership issures that we maximize the initial sales and marketing support in order to optimize the launch and fully realize the significant value of this antidepressant in a higly competeive market. This argreement combines our strong significant sales and marketing effects with Twin Towers successful track record of building higly effective contract sales forces.

Under the agreement, Twin Towers will provide at its expense more than 500 sales represents to supplement its sense of mini sales to the promotion following product launch for five years.

Quintewell,'s will make marketing stones to Lilly in dollars payable in the quarter 2002.

An additional $18 million will be paid in stages for an approval or approval letter and launch the product.

In marketing pages will commence the significant marketing efforts by Lilly.

Lilly will pay Quintel in sales and related indications over the five year promotion period and a reduced royalty over the subsequent three years.

I would like to turn your attention to slide 3 as I summarize our familiar results for the sales performance.

Worldwide sales for the course have declined 9%, $2.75 billion.

Excluding worldwide sales of Prozac Daily, the 11% in the quarter.

Gross margin as a percent of total sales 81.1%, and a decline of 180 percentage points over Q2 last year due to the erosion of Prozac sales.

Operating expenses were flatby general and ad -- specific controls and the decline indeed, from lower compensation and fewer late-stage molecules in phase iii clinical trials.

Non operates income and deductions represents a net contribution of $55 million.

The tax rate remained at 22%.

Diluted, a share of 61%, representing a decline of 21% because of the erosion of Prozac sales.

We have no write offs in the quarter.

Let's look at these results in more detail beginning with our key growth product.

Zypraxa sales are on slide 4.

They totaled $75 million up 23 1/2%, this is a result 21% growth in the U.S., and 28% growth in international markets.

Zyprexa's dependable to capture in patients with scissowen frommia, despite an increasingly crowded antipyschotic market.

Zyprexa share of total springs in the U.S. Increased to 27.7% in June.

Very importantly, the cash was 44%.

Ims cash dollar growth was 23% higher June than in the same months last year.

Likes it foundational use in Schizophrenia, we expect-- expect that to be used in all phases of Bipolar disorder, mainly Depression.

Unlike any other drug, bipolar represents a significant growth opportunity of bipolar disorder among the adult population in greater markets is greater than schizoenphrenia, although a lower percentage of patients are being treated today.

In May, Lilly reported findings that Zyprexa managed the symptoms of bipolar depression.

We expect to submit OFC for bipolar depression by the end of this year.

In June, the American psychology reported -- [ indiscernible ] the market leader for treating acute mania.

No other medicine has beaten in treating.

They launched acute mania of Zyprexa.

Now, our study completed in July found the Zyprexa inside the leg yum.

To the unsurpassed gold standard in relapsed prevention in the FDA approved treatment in bipolar disorder.

We plan to submit that for bipolar disorder in 2003.

Our year long study of over 400 patients found that Zyprexa is better than Lithium for patients with bipolar disorder with half the length of relapse.

This is established Zyprexa is the best foundation for patients with bipolar disorder because it treats the high, helps to manage the lows and is superior in preventing bipolar episodes.

Gemzar sales $219 million for the quarter, of 36%.

Gem zar sales grossed in -- gemzar sales grossed in the U.S. By 46%, by solid underlined demand and U.S.

Wholesaler stocking in Q2 of this year due to anticipated price increases.

The comparison was effected by U.S. wholesaler inventory reduction in the second quarter of last year.

We expect to access inventries to return to normal levels by the end of the third quarter, excluding wholesale buying patten, the sales in the U.S. would have been 29%.

Gemzar growth continues to be good and largely by using the nonsmall lung cancer, data from three studies provided that acts on in may, with the com estimation -- combination of gemzar in lung small cancer.

The Gemzar combination showed better survival with the response rate than Gemzar alone.

This combination was also shown to have comfortable efficacy and better tolerability than the combination of Gemzar &.

We're on track to submit the treatment of breast cancer late this year, a phase iii registration trial in ovarian cancer completed enrollments, and we anticipate a submission in Europe in 2003.

Turning now to Evista, Q2 sales reached $188 million or 13% growth.

U.S. sales grossed 5%, negatively effected by wholesale negligent quarter.

Excluding the wholesaler buying patent, wholesales in the U.S. would have been 9%.

This is a share of -- 7.2% in June, compared to 6.9% in December of last year.

Recently researchers for the national institutes of health stopped the estrogen, progestin for women's health initiative.

A clinical trial designed to help the major health benefits and risk of the most commonly -- commonly used pill in the U.S. for women.

This arm of the trial was stopped because of apparent increased risk in invasive breast cancer as well as coronary heart disease, stroke, and pulmonary embombism in participants.

There were benefits of effort pro -- estrogen and projettin in the study, but the overall health risk outweighed the benefits according to an article that was published in the July 17th issue of the Journal of the American Medical Association.

Evista, a nonhormonal therapy, might be an alternative to many post menopausal women currently taking hormones.

Indicated for both the prevention and treatment of osteoporosis and post menopausal women, Evista maybe an alternative for many post menopausal women.

Evista is a selective estrogen receptive ovulateor acting through estrogen receptives restoring bone markers to premenopause levels and to significantly reduce the risk of osteoporosis fractures in menopausal women.

Steams as a designer, estrogen, Evista is not an estrogen, an estrogen-replacement therapy or a hormone-replacement therapy.

It belongs to a separate class of drugs and has a unique profile.

Evista additionally has a favorable effect to lipids, doesn't stimulate breast tissues and is not associated as a gastrointestinal side effect.

We continue to be pleased with Evista's solid performance in overseas markets where growth is 44% in Q2.

We -- the launch of Japan in 2003.

Sales of global diabetes care, including huge ulin, and humalog, grossed to $615 million.

Highalin grew 45s for% to $2.5 million, to $258 million.

Lilly's revenue from that is $140 million for the quarter, representing a gross rate of 4 period of time.

Acts on growth in the second quarter was negatively effected by stock in Q2 of last year.

They have sent the wholesaler stop in program.

Acts on prescription in the U.S. is steadily increased to 9.2% in June, overtaking evandia.

Zig rise sales were $23 million in the quarter.

Those sales, performance is below our own expectations so far this year.

We are still confident in the long-term potential of the product.

We're making the necessary investments and adjustments to increase the use of this great therapy globally for patients with severe sepsis and high risk of death.

We continue to work, overcome two primary hurdles in use of the product.

Patient identification and the perceived risk benefit profile of zig rise.

To effectively address these issues,

we're taking several actions.

First, we're beginning to provide with clinically-based criteria for patient identification.

For example.

We're pointing out physicians and nurses that if a patient is on appropriate antibiotics and has aggressive attendance, it should signal them to consider the diagnosis of severe sepsis and in the right situation with xigris.

Second, we're continuing the control of the targeted audience, the providers in the medical itu to include also physicians and nurses that routinely treat patients with severe sepsis.

We have expanded our efforts with infectious disease, and where it makes good business sense, we're calling upon health care professionals in the surgical ICU, trauma ICU and other key specialties such as hematologist, oncologist, and emergency department physicians.

Third, we recognize the need to augment the current clinical data available on xigris and the scientific flip to -- see it as a life-saving treatment option.

We will provide data of patients in enrolled in prowess and safety and mortality data versus historical benchmarks from enhanced, our open-label safety trial at the American College of Chest Physicians Meeting In November this year.

Hospitals are currently not reimbursed appropriately when they treat patients with severe sepsis, including when they use Xigris, although the price of xigris has not been reported as a hurdle to using the product, recently the center for medicare medical services created a new diagnostic code for severe sepsis, which will become effective in October 2002.

This code will allow them to track actual hospital costs of the treatment of patients for severe sensis and allow CMS in the future to fully evaluate the potential changes to the GRD system to achieve appropriate investment to hospitals treating patients with the disease.

It's important to know that potential change in the sepsis and the GRD will take several years.

In the short term, we're working to overcome the hurdles necessary for approval from cms for new technology reimbursement of we should be able to provide an update by the end of the third quarter on the status of our application for this special decision.

If we're successful, then the new technology reimbursement would bridge the gap in hospitals under the DRG reimbursement plan, and can finally, that will potentially be an editorial-type letter that will appear in the sounding bird of the New England Journal of Medicine in the coming weeks.

We understand the office to be a few members of the October 2001 advisory panels who opposed recommending approval for the product.

We expect the office opinion to be limited to the concerns they raised at the advisory panel including concerns about the risk benefit profile, the protocol amendment by the FDA and the cell line change among other things.

All of these concerns were thoroughly analyzed in detail by the FDA as well as other global regulatory bodies.

In each case, the opinions were found to be baseless, and xgi, ris won approval and integrity of the prowess study.

The opinion of these physicians in no way reflects the opinion of the majority of physicians across the country that Xigris is, in fact, a great breakthrough treatment in the treatment of severe sepsis for patients at high risk of death.

Slide 9 summarizes the sales and growth rate for our leading pharmaceutical products plus animal health for the quarter.

In addition to those products I have talked about, we -- declined 8%, $108 million, and cimatrope declined $183 million in Q2.

Also worldwide animal health products in the second quarter were $162 million, an increase of 4% when compared with the same quarter last year.

The next slide provides the geographic breakout of the impact of price brake of volume in the quarter.

This slide demonstrates the 9% top line decline for the quarter, which results the 1% reduction of the price, no exchange rate in the decline of volume of 8%.

The next slide number 11 shows a decrease in our gross margin for the quarter.

Gross margin in the second quarter is a percentage of sales with 81.1% decline of 170 basis points over q2, 2001.

The decline was a result of the erosion of Prozac sales.

Looking at slide 12, you can see that SG&A was $916 million for the quarter, an increase of 2%.

The modest gross in SG&A expense was attributable to general and administrative expense controls and lower incentive compensation.

Selling and marketing expense for the quarter grew 6%.

Gross and selling and marketing expenses on track in the second quarter as important investments were made to maintain key growth product momentums, including continued investment in Zyprexa's share of lead of voice.

R and D expense showed on slide 13 declined 3% to $545 million, or nearly 20% of sales.

The decline in R and D expense is the result of lower compensation expense and lower late stage clinical trial cost.

Our leading industry investment relative to our size reflecting our continued commitment to the innovation side of our strategy.

Overall operating expense was flat for the quarter, primarily driven by lower general and administrative costs and a slight decline in R&D.

Slide 14 shows the nonoperating income and reduction.

In Q2, other income and reductions resulted in the net contribution of $55 million compared to a net contribution of $41 million in Q2, 2001.

Interest expense declined due to lower interest rates.

Other incoming primarily due to income recognized during the quarter from the outlicensing of certain legacy products.

As for the tax break, it remained at 22% for the quarter.

To summarize, our financial results in the second quarter, the top line was down 9% excluding worldwide Prozac daily sales, increased 11%.

Gross margin declined by 170 basis points, operating expenses were flat and fully deuted EPS for time by 20% to 61 cents.

Given the heightened concern about levels of excess inventory in the wholesale distribution channel in the pharmaceutical industry, I would like to comment on the level of accounts receivable reported on the balance sheet in the second quarter.

Accounts receivable has reached $249 million since the end of 2001.

This increase was as a result the timing of payment from customers on higher sales in the month of June versus the month of December.

By a revaluation of the accounts receivable due to the appreciation of the Euro and the Yen versus the dollar, in southern Europe which have longer terms.

The change in accounts receivable, therefore, is not the result of high levels of overaccess inventory among wholesalers.

This concludes the review of our financial performance for the quarter.

With that, let me hand it over to Sidney for an update on our manufacturing situation and the outlook for 2003.

Thank you, Simon, and good morning, ladies and gentlemen.

As many of you are aware, we have recently concluded the reinspeckedz of our facilities in Indianapolis that were effected by the warning letter we received in 2001.

In addition, our products has recently driven a large number of preapproval inspections at our manufacturing and developing facilities globally.

As you know, the FDA typically issues a form 483 inspection report summarizing its findings at the conclusion of its inspection.

We have received the associated 483 for each of the nptions and have prepared -- for each of the inspections and prepared and submitted our responses for the FDA.

We have been in contact with the FDA to understand the progress we have made in our upgrade operations.

While we have feedback and have had cooperative interaction with the district office, we don't have hard news from the FDA yet on the next course of action.

We believe that we will have the agency's response within the next two to three months.

Pedro Granadillo has been leading the effort to in response to the FDA and will let you know how the manufacturing could launch product launches.

Thank you, Sidney.

We recently concluded inspections at eight of our facilities globally.

It's important to emphasize that it's routine to receive inspections periodically at all of our FDA-regulated facilities.

We have 22 manufacturing sites around the world, 12 of which are regulated by the FDA.

Of the 12, eight are involved in launching our new product pipeline.

Most of these recent inspections were either preapproval inspections or periodic general inspections.

Specifically, -- GMT inspections.

Specifically, we had Paies, or proapproval inspections for Cialis and Bolta in Lafayette Indiana.

For Forteo, and for Stratera at our drug product facility in Puerto Rico.

We also had general GMD inspections at our bulk manufacturing facility in Puerto Rico and our injectable facility near Italy.

The number of observations for the inspections outside Indianapolis range from zero to a maximum of 16 at one site.

We have no reason to believe, based on the investigator's comments that anything would stand in the way of approval for the products that are manufactured at these sites; however, it's very important to stress that the final decision for new product approval resides with the central offices of the FDA.

Our sterile injectable facility in Indianapolis, which was subject to the warning letter we received in March of 2001, was also recently reinspected.

In addition, a general GMD inspection of our dry product facility in Indianapolis, as well as a small injectible facility in Grownfield Indiana were conducted.

The dry products facility is where Cialis and Simbolta are made.

This inspection did not include the facilities in Indianapolis where Forteo is made.

However, 483 responses associated with the previous inspections in the Forteo facility were verified by the inspectors.

We had four investigators for approximately six weeks at these facilities that resulted in a 483 with 50 observations for the Indianapolis site and at 10 observation 483 for the site in Greenfield.

We're currently working with the FDA Detroit office in responding to these observations as well as the broad range of changes that we're making and will continue to make over the next several years.

These changes are all part of our global GM3 improvement plan that we have discussed with you previously.

Our discussions with the agency continue to be very constructive, and I believe that we have a good understanding of the issues that the agency concerned about and they have a good understanding of what we're doing to address them.

The main things that came from the most recent inspections in Indianapolis are as follows: Quality oversight and technical stewardship has not yet reached the desired level of rigor.

Our quality systems are more complex than they should be.

Manufacturing deafiations investigations are focused on ensuring product safety and ethocacy and not sufficiently in preventing the deviations from reoccurring.

And lastly, reliable execution is not as robust as it needs to be.

It's very clear in hindsight, that we needed to make deeper changes at our site in Indianapolis sooner than we did.

We had begun doing just that, towards the end of last year after the second 483 in November.

But we had not yet seen the full impact of the changes when the FDA began their inspections in April.

Let me recap some of the activities we have undertaken.

As you know, we made a number of changes in early January in the senior leadership roles both in manufacturing and quality in the level and in Indianapolis.

These changes, coupled with the changes made in 2001, give me confidence that we have the right leadership in place that understands what needs to be done, but more importantly, knows how to make the necessary changes.

We have hired 55 scientists from outside of Lilly to provide more technical and quality oversight in our operations, thereby addressing a primary concern of the FDA.

In addition, we have hired over 250 professionals into our manufacturing and quality organization.

These individuals bring over 2400 years of experience into our operations here in Indianapolis.

We're also simplifying our quality systems so that they're easier to follow and put in greater emphasis on the front line supervision of daily operations.

At the result of these changes and many others, we're confident that we will ultimately meet the agency's expectations as well as our own.

We're already seeing the impact outside of Indianapolis as evidence by the recent inspections.

In addition, while I was disappointed with the inspection result in Indianapolis, they largely confirmed that we're working on the right things.

We believe we just need more time for the new leadership and technical talent as well as the new war processes to impact the daily work on the shop floor.

As I mentioned earlier, there is no final decision by the FDA as to the outcome of the Indianapolis inspections; however, because the FDA issued a combined 483 for the injectible and dry products plant in Indianapolis, it's possible that the FDA may not approve any new products manufactured at this facilities until these deficiencies are addressed and the warning letter is lifted.

We believe we will have the core concerns of the FDA addressed at our facilities in Indianapolis, and we will be prepared for reinspection in the early part of 2003.

The new product that our impacted or could be impacted by this are Zyprexa Interhusband Coolar, Simbolta and Forteo.

We believe Cialis shouldn't be impacted by these issues as we have capacity that will be coming on line that should take manufacturing of the critical path for product launch.

In addition, Stratera, Olympta and OSC shouldn't be impacted by these issues because none of the manufacturing will occur at the Indianapolis site.

Let me remind you again, as you will recall from the text in the warning letter, the FDA reserves the rights to withhold approval of new products at any manufacturing site.

I would also like to briefly mention an additional item that may have some visibility.

As a result of the in additions, we did initiate the voluntary recall of 37 lots of product.

Manufactured at our Indianapolis and Greenfield facilities due to the possibility that a small number of vials could have defects such as low level of particulars or small vial cracks.

This recall is a precautionary measure only and is primarily around our legacy products and loss of gemzar.

There have been no reported complaints or adverse health events associated with these issues, nor do we anticipate any.

The financial impact of this recall is negligible.

While I tried to give you my best assessment of our current status, I do want to stress very clearly that all decisions related to new product approval or any further regulatory actions are ultimately in the FDAs hands.

We do not know for sure how long it will be before we have resolutions of the issues in Indianapolis.

But we will continue to work with the agency and we will update you in the coming months as we have more news.

Now, I'll turn it over to Charlie.

Let me now provide you with the third quarter and full year 2002 income-statement guidance.

The third quarter, we're comfortable with the range of 67 cents to 69 cents per share, excluding unusual items.

For the full year, 2002, we're comfortable with the consensus and the range of $2.60, $2.62 earnings per share, excluding unusual items.

Our guidance is impacted by the removal of Zyprexa Antimuscular, Forteo, and the year end stocking for the Simbolta launch from the 2002 sales plan; however, the strategic partnership with Quintel that we described this morning and other business development, should add approximately 3 cents per share to other income and deduction and help partially offset the removal of the new launch product sale.

Here is our line-item detail.

First, we anticipate slightly declining sales for the full year.

We expect gross margin to contract roughly in the range of 100 to 150 basis points for the full year.

SG&A expenses are expected to grow in the low single digits.

Underlying marketing and selling expenses will increase more strongly as we maintain the marketing momentum for our current growth products.

R and D expenses are to be flat, but still at the top of the industry in terms of % of sales.

Nonoperating income should contribute at least $250 million in income assuming the anticipated business development occurs.

The tax rate to remain constant at 22%.

Let me now turn to next year.

As you know, our previous 2003 guidance was for teens EPS growthing, assuming resolution of the manufacturing issues following the recent inspections.

As Pedro said, that is clearly not yet happening.

Let me be very frank.

Previous experience has taught us to be cautious about our assumptions for the timing of the resolution of the manufacturing issues.

Accordingly, we cannot provide with you a forecast for 2003 until we have more clarity.

It's very important to add that in any scenario, we expected to deliver a growth in the next year assuming no significant financial penalties related to our FDA manufacturing issues or other unusual items.

We have not included the possibility or assumptions about a consent degree, which is always one of the options available for the FDA.

In the next few months, we anticipate not only having feedback from the FDA on their next steps concerning the manufacturing situation, but also have the do for action dates coming up for Sentera and Simbolta.

All of this should provide clarity so that we can provide you with guidance for 2003.

Now I'll turn the broadcast back to Sidney.

Thank you, Charlie.

Although I'm profoundly disappointed with the results of the Indianapolis inspections, given they could potentially delay getting valuable new product to market, we continue to gain a much better understanding of how our manufacturing and quality measures up to the FDAs expectations.

We have had eight assessments at eight of our facilities.

Many received inspection reports with limited observations.

We still have more work to do, but I believe we're moving in the right direction with our global quality improvement plan.

Now, we must continue to execute against the plan, especially at some of our Indianapolis facilities where there is significant work ahead of us.

While we continue to strive for a timely resolution of the manufacturing deficiencies, we want to be realistic.

We're not providing 2003 guidance currently because we want to make sure when we provide a guidance, it's realistic and can be delivered upon.

While Pedro mentioned he believes we should be ready for another reinspection at our Indianapolis facilities in the early part of 2003, and that it's reasonable to assume the agency would not hold that product manufactured outside of Indianapolis, we cannot be sure, given the FDA reserves the right under a warning letter to withhold approvals of all funding and drug applications.

Also, while we still very strongly that to get the changes implemented, many of which are culture, we need to do it by ourselves, as Charlie mentioned, we obviously cannot rule out a consent degree, also -- decree.

Let me make it clear the FDA has not discussed such obligations with us.

As a result, we're suspending 2003 guidance temporarily.

We'll make every effort to prepare our facility and launch our innovative products as soon as possible.

We believe we have a strong pipeline of first in class and best in class products that has significant market potential, many of which you have seen data presented on at the number of medical conferences in recent months such as Olympta Cialis and stress at the American Neurological Association, promising neuroscience pipeline products including Osc, Simbolta and Stratera, and the better inhibitor at the American Diabetes Association.

Our enthusiasm for the you new products continue to grow, and we have experienced very limited fallout in our pipeline for several years.

Ladies and gentlemen, when we lost the Prozac patent, we knew it was going to be a challenge.

We have weathered almost 12 months of declining sales since the last of Prozac market exclusivisivity, and we'll begin to so sales growth again shortly.

Nevertheless, we're fully aware the next 12 to 18 months will be a decisive period.

Lilly has the world's best had best late stage pipeline and we're fully committed to bringing the pipeline to patients as an independent company by executing our on decision to become the fastest growing company in the industry once the new products are launched.

Rest assure, you have my commitment that as we go through this decisive period, I will be expecting management accountable for results to implement this vision for you as our shareholders, as well as for our employees.

And with that, let me hand the call back to Simon.

Thank you, Sidney.

This concludes our comments.

In order to ensure you'll have an opportunity to ask a question, I would like to ask all those to limit themselves to just one question, please.

AT&T, could we please have the first caller.

Thank you, ladies and gentlemen, if you would like to ask a question, please press the one on your touch tone phone.

You will hear a phone indicating you have been placed in cue, you may remove yourself from cue at any time by pressing the pound key.

If you're using the speaker phone, please pick up your handset before dialing.

Our first is from Jamie Ruben with Morgan Stanley, please go ahead.

Thank you.

Sidney, earlier in the year, actually your analyst said in December, you predicted that lilly would be the best company, the best pharma company in the upcoming decade and much of that was predicated on high expectations for Xigris. You have had two quarters now with a very disappointing launch.

You can sort of update us on what you anticipate is a realistic, sustainable growth rate for the company going forward based on information you have today.

Thanks.

Thank you, well as we said, we are working very hard at ensuring that Xigris is back on the right track, and I think Simon has mentioned a number of actions that we're taking going from clinical, gathering more clinical data to helping, um, physicians identify the patients through clinical criteria that would be good candidates for Xigris, to ensuring also that we broaden the target group of physicians that we're talking to, so we're gaining experience and, um, that -- those lessons will be applied as we launch the product in other countries, been approved now in eight other countries, the CPMT has given a quality assessment opinion recently, and we expect to have it in about 25 countries at the end of the year.

We fully expect xigris will be back growing and, you know, we believe it continues to, um, fulfill its promises in clinical terms and that it will eventually -- the potential that we have always felt it had, um, the other products clearly need to get to the market for us to get back to the double-digit growth that we had expected, um, I'm not in a position at this same to commit to a long-term growth rate, um, but I do believe that once we get the products on the market, we do have the potential to be -- the fastest growing company in our industry.

Thank you, our next question comes from the line of Steven with Merill Lynch.

Please go ahead.

Good morning.

Sidney, I asked this in the spirit of discussion, so far the this year, shareholders have been given a number of earnings outlook reductions, disappointing delays on manufacturing causing product holdups and today we're learning more about your marketing force, being even in the area of depression being somewhat insufficient in terms of size.

A couple of days ago, Lilly management indicated it plans to be independent.

Help me understand why investors are better off when one merged companies appear to have fewer manufacturing problems, two, merged companies are ending up with more marketing power than independent companies and the bar may be going up with regard to R&D spending.

Isn't yet your obligation to like and list the possibilities first and then decide what is best for shareholders rather than resist the possibilities as a starting posture.

Thanks.

Thank you, um, our strategy of pursuing an independent cause is based on the history of what we see with other mergers and the fact that by having a greater mass to grow, the gross rate is reduced.

If you look at the, um, recent news of acquisitions, and the premium that Pfizer had over the rest of the industry before the acquisition of Lambert and the premium they have today versus the rest of the industry, it's gone down, which indicate that is the growth prospects have gone down with the increased size, and I believe that we'll continue to happen in the future.

So instead, um, we believe that this strategy of pursuing innovation, um, both through sustained high investments in R&D, and I remind everyone we're 20% at the top of the industry in terms of our R&D commitment and in terms of, um, alliances and partnerships with other companies, will provide over the long term the best option in terms of growth for our shareholders.

The best in terms of innovation.

In terms of the short-term challenge that we face, we just have too many products coming at -- at same time in the cns area, between Dulokifoo, Duloxitene, Simbiax and Stratera coming within a short period of time, we felt that by having the health of another organization going at risk and which will allow us to optimize the sales of the product, um, while giving out extremely small part of the future earnings from the product, we are maximizing to our shareholders.

Next caller, please.

Thank you, the next question comes from the line of Carl with J.P. Morgan.

Please go ahead.

Thanks very much.

I understand that it's hard to be explicit on this issue, but, um, if you could offer any further clarification.

On one hand, you made statements based on where we are in manufacturing, it's easy to assume that Stratera, Olympta, and OSC, since they're not effected by the Indianapolis manufacturing should continue to on schedule.

You also said the FDA said not to prove MDAs.

I wonder if you could give us further clarity on your understand with this FDA, um, relative to that issue and, um, for those same products if you could tell us if manufacturing is in no way limiting.

What are your current expectations for when those products are going to be launched.

For some of them, even if they were held up by manufacturing, I would not expect the manufacturing issue to be limiting.

Thanks a lot.

Charlie, maybe you would like to take that question.

Um, yeah, thanks, Carl.

Um, I think the, um, first of all with regard to any understanding with the FDA as we've said, they have reached no final conclusion.

It's very difficult to say on this issue, carl, because this statement is there as a matter of form, but also for possible use in the 483, so I can't be anymore explicit on that, quite frankly, um, I think related to, um, the timing of the launch of these products, again, way have not wanted be specific, but clearly, um, recognizing that the dates and sometime to reach approval, you know, they would otherwise be launched in 2003.

Um, the spread of -- probably throughout 2003.

I think that's the clearest guidance we can give you.

Thank you, Charlie.

Our next caller, please.

Thank you, the next question is from Steve with SG Cowen & company.

Please go ahead.

Thank you.

I have a question about the 2003 earnings guidance.

You mentioned you expect growth assuming no significant financial penalties or unusual items, but why wouldn't a penalty or unusual item be considered one time and, therefore, have no impact on your earnings guidance, or are you saying you will have more product recalls, inventory writedowns and higher ongoing spending securities problems than you currently are factoring in?

Obviously 2003 growth is key to your new products.

Everyone understands that, but you're raising these more one-time items as issues with respect to guidance and, at least to me, it's not clear why.

Let me see if I can answer that.

It's possible that if there were additional financial penalties, they would be of a one-time nature without a doubt, so I think your assumption on at least one possibility related to that is the case.

And, again, in this regard, um, I mentioned the possibility of -- of a concept decree, Sidney quickly indicated we had no discussion about that with the FDA, but if financial penalties were to come bi think we're just seeing that, Steve, because typically they could be a one-time event, but there could be also some spreading in future -- in future periods, and, so, it's simply a -- bing somewhat cautious about what we're hypothesizing for 2003.

Thank you, Charlie, next caller, please.

Our next question comes from Barbara Ryan with Deutsche Banc.

Please go ahead.

Good morning, everyone, and, um, my question is for charlie.

Um, I recognize, you know, the difficulty in forecasting here given the factor of new products approval, but if we were to take into account what you have told us about what you expect for the remainder of this year, and we were to take a cautious approach, and assume that there were no new product sales in 2003, um, I would come up with a number of about 275, assuming that the Company continues to, you know, increase SG&A, R&D at healthy rates, obviously looking towards the future from new products introduction.

I wonder if you can comment if that's the realistic starting point.

Obviously, you know, being the best case, worse case scenario in terms of airings being up, but not including benefits from new drugs.

Thanks, Barbara for that question.

You know I can't be specific, but I appreciate your analysis.

Again, I think it's important to understand what we said that in, you know, those scenarios, we will have growth barring the contingencies that I mentioned.

Um, that obviously, um, would include the possibility of no launches in 2003.

Our growth products, our current market growth products are still growing strongly and keep in mind also that, um, we will continue to spend, um, or prelaunch in launch activities, um, in 2003, so as to not, um -- so as to opt male launch those product when is we do launch, so clearly, um, I think you should take a signal -- signal from the fact that we do expect growth say for those contingencies I mentioned.

And I would just add to Charlie's comment that we have often seen a lot of times that people tend to underestimate exactly what it will cost to launch a product and we are very committed to making sure that once these products we know are going to be launched and moving forward with the launch time loin, that we put the right investments behind them.

Next caller, please.

Thank you, our next question is from Tim Anderson with Prudential Securities.

Thanks.

In manufacturing, it's obvious what is happening, the pipeline drugs.

You talk now about base business products and some recalls that have begun.

And I'm wondering is that as bad as it's going to get on the base business drugs or could we see further bad news on, um, you know, big franchises like Zyprexa or the insulins, or Evista.

Vista because they're funding the PNLs today.

On the topic of FDA holding out product approvals, you know, when I have talked to people at FDA, it seems unclear win the organization that they, um, that, you know, there is no unanimity on whether they should hold up drug approvals to be kind of punitive, so I'm wondering are they being punitive in this sort of thing, or is it really just because there are predictions of problems that you guys need to fix?

Thank you.

Pedro, would you like to comment.

Let me take your first part of the question regarding we expect any additional recalls.

The answer to that is no, we're not, um, and i think that quite frankly the -- this particular recall, um, was a bit unusual, and, um, we did indeed, have made the appropriate changes in the standards to take care of the issue, but in none of our other, um, sites that have been inspected by the FDA, including Indianapolis, have we had any discussions at all about any other issues regarding recalls, and i would just also want to mention to you that Zyprexa for example is manufactured in Puerto Rico, and that's the one site that had no observation during the 483.

Actually we didn't get a 483.

There was no observation.

Now, regarding if the agency holding us hostage, um, we have had no indication in any of our conversations with the agency, um, that they, um, are thinking about not approving products that are manufactured at sites outside of Indianapolis, and certainly in the -- in the, um, wrap-up sessions that we had with the inspectors, we know that the inspectors, or the investigators gave a positive response to the issue of new products.

Now, as we said, both Charlie and I have said, it's very, very important to remember that the agency does hold, um, the ability to -- ability to withhold approval if they so choose to do.

Next caller, please.

Thank you, our next we is from Tony Butler from Lehman Brothers.

Yes, good morning and thank you very much.

Um, Sidney, if I wound correctly, there is a possibility at some point in time, be it in 2003 or whenever, that, um, as many as five, maybe even seven new products can come to market from Eli Lilly.

However, that seems to be an incredible number given what would be required for the launch costs and I'm curious that if, in fact, that were to come to fruition that the overall growth prospects, despite the fact that those products may or may not launch at any one particular time, may -- may waiver because you're trying to make some kind of operating income metric occur.

That is to say that you would be spending so much money that the overall opportunities for -- for earnings growth, even make in '04 and perhaps '05 becomes less.

Can you comment on how you think about the magnitude of trying to spend appropriately at a time when I don't think any -- you can't remotely look lack in the industry and say a similar situation -- look back in the industry and say a similar situation occurred.

Thanks.

This is a situation we have faced for awhile.

I think the change now has been most -- the biggest one has been the delay in cialis, making it coincide closely to the launch of the other launch products.

Um, but we -- we do intend to produce growth and yet do all the necessary investments, um, for the successful launch of this products.

Um, and, again, I cannot be specific as to the growth rates in either '03 and '04 and beyond, but I do believe once the products are launched, we will be leading the industry in terms of growth.

Now, we have announced this morning that we're getting the help of another organization, um, for the fire power that is needed in view of all of these products, um, in the case of Simbolta, we might do that for another product, potentially in the future so we do put to use both the income and the sales growth in the medium and long term.

Thank you, Sidney.

Next caller, please.

The next caller is Leonard Yaffi with Bank of America Securities.

Go ahead.

Thank you, could you comment on your status of your stock buyback program and given the depressed price in the stock, whether or not you will be relatively increasing the amounts of the buyback, either the current program or the overall amount.

Thanks.

I'll ask charlie to open up.

Yeah, just to recap, we have a $3 billion program announced, um, to date we have purchased about a billion and a half, um, of that.

We continue to purchase in the market, obviously, um, the stock at this low prition is very attractive, um, and so we -- we will proceed with that.

We're not going to announce anything new relative to the $3 billion, but we'll proceed over time to do this, um, you know, within the abilities of our cash flow.

Thanks, charlie.

Next caller, please.

Operator: Our next question is from C.J. Sylvester with UBS Warburg.

Please go ahead.

Thanks.

Regarding the manufacturing, I know we're beating a dead horse here, in terms of going this year and when we thought the issues would be resolved, there was a certain level of confidence that I felt from management that these issues would be resolved by mid-year.

Now you're saying potentially end of the year the results.

What level of confidence do you have that that is the case, or is it something that, you know, each time we go in and following the accident something, the FDA finds something different to point out.

I'm going to start -- [ indiscernible ] pedro wants to add anything.

I think last year when we had the first, um, warning letter in march, um, of last year, there were some 53 items, and I think we went to work putting a lot of resources and consultants, helping us to address each one of those idea items, and we did that by establishing new procedures for each of those items and, then we had a second inspection in November and that's where, I think the shocks came, where -- what we found was the most important observation was the first one that said the quality control department had failed to fulfill itself -- its mission, and that the issue was really not so much the specific items that needed to be addressed, but rather some cultural issues ever the competence and seniority in the job of the people, um -- the technical orientation, um, the habit that we had perhaps too often when we had a deviation focus our efforts on, um, establishing whether the product was safe and efficacious, whether the quality of the product was okay rather than what was the root cause of the deviation and how to address it, and so we made deep changes in the leadership, um, and at this point, in fact, in all management levels, we have changed 60% of our managers and executives in the quality area and more than 50% in the manufacturing area, um, I think all the discussions that we have had with the FDA to date indicate we're now on the right track, that we have the right leadership in place, we have the appropriate amount of technical -- technical expertise in place, and as Pedro mentioned earlier, we have actually hired 300 people, including 50 scientists and moved scientists from other areas of the company like product development into manufacturing and quality, and those things take time to solve, um, perhaps in April, um, it's clear to me that the changes that we instituted at the end of last year had not yet had a chance to, um, um, to -- to produce the result that we wanted, and it's clear also as Pedro indicated, that we should have probably made some of the changes earlier, i.e. last year.

I think based on conversations that I have personally had with the head of the district office in detroit, um, it looks like we're on the right track.

It's just a question of time.

That's the root of my confidence, that we will resolve the problems.

I had a couple of other points to what Sidney said.

One, they're not necessarily finding new issues when they -- when they came through.

I think the themes have been fairly consistent.

I think the point Sidney made, the most important one, the issues need to be resolved at the shop floor, what we have not made as much progress, and the other thing that I will mention is that it's very important to note that in our discussions with the agency in Detroit, I feel very strongly that we do understand what they're expecting us to do, and I believe that they have a very clear understanding of what we are doing to address them.

Thank you, Pedro, Sidney.

Next caller, please.

Operator: The next question is from Ken with Credit Suisse First Boston.

Go ahead.

Yes, good morning.

On a timeline base you indicated resolving some of the manufacturing issues.

You indicated there has as of yet been no discussions on a consent decree.

I want to just get a feel for when do those type of discussions actually commence in do you wait for the early '03 reinspections to occur and then move to a concept decree discussion after you find out that determination or are there plans to perhaps begin moving discussions on a consent decree in parallel with the, um, with the early '03 inspections.

I just want to get a feel for that type of timeline

Okay, would you like to comment?

Yes, Ken, frankly it's not clear, um, the ball is currently in the hands of the agency.

We understand that the district office in Detroit is forwarding their recommendation to the central office, and we understand that, um, the central office will take between two and three months to reach its conclusions and we have to wait for that process to be completed before we have feedback and can realistically assess the next steps.

To proactively pursue a consent degree is something we don't feel is in the right -- in the interest of the shareholders.

The reason is, as I mentioned earlier, we're talking about deep changes being made in our manufacturing and quality systems.

When you, um, operate under a consent decree, typically you have third parties taking part of that responsibility and that's not the way to effect, really, cultural change inside an organization.

It's better, really, if we do it on our own; therefore, that's our preferred route.

But as we said earlier, the final decision is really not in our hands, and we have to wait, um, until we hear back from the agency.

Thank you, Sidney.

Next caller, please.

: Thank you, we have a question from Jim Kelly with Goldman Sachs.

Please go ahead.

Yes, thank you, good morning.

Um just a question on the price component down negative 1.

If you could help me understand, does this have to do with the lilly card?

Is this really just the generic Prozac, I would expect to see that in the volume mixed components.

We haven't seen, at least in our analysis, of the AWP price component there.

And we talked about the anticipated development in other income and deductions is that the quintel's or is there another anticipated developments?

Let me comment briefly on that.

As far as price is concerned in the U.S., we have had some lowering of overall prices due to the fact that we have had special deals around Prozac since it went generic.

That has been driving the transactional police index down somewhat overall.

Um, as far as the old figures are concerned and the research cenchs to legacy, those are related quite frankly to a couple of small products that we outlined in Latin America, specifically Venezuela and Mexico.

Next question, please.

It's from the line of James Terrell with Capital Research.

Please go ahead.

Thank you.

Um, as it reality relates to, um, non Indiana facilities, I wanted to -- Non-Indiana facilities, I want to clarify and try try to distinguish when what might be similar and different.

As it relates to Indiana, you described quality oversight on a level needed, quality complex, to wide and obvious execution, not as robust as it should be.

Which of those issues, if any, has come up in any of the non-Indiana facility citations and is it right to think that any of those might be the link that the FDA uses to determine whether products made in Non-Indiana base sites should or should not go forward.

The second part is you mentioned one sale outside of Indiana having 16 citations.

Could you tell us which cite that -- site that is, and whether again any Indiana-like issues are relevant there.

Yeah, let me comment on the sites outside of Indianapolis and your question about the general themes.

I think it's, um, by the nature of the comment, when we said our quality systems are perhaps a bit more complete -- complex than they need to be, I think that is true across Lilly, and we're working on simplifying them.

Let me tell you what the big difference is between the sites outside of Indianapolis as Sidney mentioned earlier before.

We have very, very deep expertise at those site.

We have a lot of people with a lot of experience that have been doing their jobs for many, many years, and we have have not experienced at those sites the rotations we have experienced in indianapolis, and hence the level of experience that we have in Indianapolis seems to be lower, and that's part of the cultural issue that we need to change here in Indianapolis, and that doesn't apply to our sites outside of the U.S.

In reference to your question of the site that had 16 observation, the was the site in Lafayette Indiana.

Just to add to that, those 16 observations are on three pages to give you the idea of the length.

It's important to know that that was a very good, um, inspections, the -- at the end of the inspection, the inspectors did recommend approval for the paies that they were doing at that particular site.

Thank you, Pedro.

Next caller, please.

Our next question is from Muriel.

Please go ahead.

Thank you.

In terms of the timeline, you talked about action dates, given the current outlook, Duloxetine would be up first and later this year.

I guess it wouldn't be wise to expect anything better than approvable letter.

Beyond then, we're looking at atimoxtine in the spring coinciding with the reinspection.

Is that really the first time an action letter might indicate what the FDA is going to do about product approvals, or would you expect to hear something in discussions before that time frame?

Thank you.

Yeah, um, regarding Duloxetine, you are most likely right, um, I mean there are there is an action letter expected, um, in the third quarter.

It's not clear, as we said earlier, whether the agency will withhold approval of all drugs at the Indianapolis site or the drugs in the injectable plant, um, so it's not clear at this point.

Let's say the best assumption is probably an approvable -- um, Forteo is also a question mark as to whether it will be released or not.

When the agency reaches their decision and Stratera, Atimoxtine, you're correct in terms of the action timing for the FDA.

I remind you, and maybe we're not clear in what we said earlier, but this product is made in the facilities which are outside of Indianapolis, and, so, unless the agency decides to withhold approval on all products, um, manufacturing should not be, um, an impediment to an approval of the drug.

And we will also have the action date for Stratero or Atimoxtine in the next quarter.

The next caller is Howard First with Maverick Capital.

Hi, I had a question on the patents of some of the newer drugs.

What are the patents around Duloxetiin, e and Atimoxtine and when will they expire?

As far as the Duloxetine is concerned, technically the compound patent expires in 2008, but we believe that we have very strong passive protections through the, um, sort of the 2012, 2013 time period, if I remember correctly.

As far as Atimoxtine or Stratera is concerned, we anticipate to have protection through the middle of the next decade.

It will -- the patent expired a couple of years ago, but we believe with the patents we have we will have good protection follow until that period of time.

Next caller, please.

The next caller is Ron Johnson with Sign On Capital. Please go ahead.

Hi, guys, just a quick question in April when you made the original preannouncement bringing down the guidance, you stated you expected to launch Atimoxtine in spring of '03.

Today, you saying you will be prepared for a reinspection during the early part of '03.

Can you try to give us, or quantify in some way, the timing between a reinspection and the back and forth that you assume would happen after reinspection and then, you know, the time that it would take to launch a product or even life a final approval on a product and then launch it post the reinspection, please.

Let me just be clear.

As far as Stratera is concerned, Stratera is not involved in the reinspection.

As Sidney was saying earlier, stratera is produced outside the United States, the bulk is in Ireland and finishing in Puerto Rico. That is totally separate.

The only point that we have been making is we don't know yet whether we will be allowed to launch until the reinspection in Indianapolis has taken place, um, but I will ask pedro to comment on typically from completion of a reinspection to realistically them moving forward, how long that would typically take.

Before we do that, so we're clear on Stratera, Stratera is outside of the United States, three of them have already been inspected, and we have had possibility of outcome.

The one that has not been inspected the plant in Ireland, and that is a very, very good plant that we have.

And the agency may or may not even go into into that plant.

We don't expect to have any problems with the approval of Stratera from the perspective of manufacturing.

Regarding how long it will take after, um, we have had a reinspection, um, clearly it depends on the outcome of the inspection.

Um, if it's a very, very favorabling in, it will be clear very quickly.

If it's not, then we will have to go through the discussions, um, with the agency with the district et cetera for them to go through our responses, et cetera, but I think it's prudent to suggest that you will probably talk about two months minimum.

Thanks, pedro.

We'll take one last caller and then we'll wrap it up.

Our final question is from the line of Myra with CIBC World Markets Corp..

Please go ahead.

Yes, just a point on clarification on the duloxetine, where will you be booking the payments.

Secondary, I apologize yesterday I missed this, can you qualify at all the incremental costs be becoming compliant on the manufacturing.

Okay, um, the -- the, um, transaction with Quintel will be booked in the old line, really.

Okay.

Is where it will primarily show up.

A portion of that will be amortized, but show up in the oid line.

Um, the cost relative to manufacturing, you know, there will be incremental cost relative to remediation, and also some costs related to additional absorption of fixed costs as we kind of hold up, um, launching the new products, yet sort of in a state of readiness, but, um, nothing that is going to be, um, overly significant in terms of, you know, kind of massive changes in our gross margins or % ams.

Thank you.

Thank you, and with that, um, the team will be ready to take your calls one on one following this conference call.

Thank you.

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