禮來公司 (LLY) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Eli Lilly third quarter conference 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 teach.

If you should require assistance during the call, press 0 and star.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to Director of Investor Relations, Simon Harford.

Please go ahead, sir.

Good morning, afternoon, or evening, wherever you might be listening and thank you very much for joining us to Eli Lilly company's third quarter 2002 earnings conference call.

I'm Simon Harford, Director of Investor Relations for the company.

Joining me for the Q&A are Achar, Executive Vice President and CFO and also on the call are my colleagues Heidi Straub and Craig from the Investor Relations team.

Each of you should have received the press release and the materials are for this call on the e-mail or website.

Following our third quarter performance review, we 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 judgment at this time.

For example, we made assumptions concerning the company's efforts to resolve the good manufacturing practice issues and their potential -- potential impact on the company.

We have also made assumptions of the timing of launches of new products.

Actual results may differ materially due to various factors.

In particular, the time of the GMP issues will depend on the ability of the company to demonstrate to the satisfaction of the FDA, the quality and reliability of the manufacturing controls and procedures.

The company's results may also be effected by the continued growth rates on newer products, by the uptake Zyprexa following its launch -- Xigris following its launch last year.

There are no guarantees in the pharmaceutical business.

For more information on these and other factors that may effect our results, you may see exhibit 99 to form 10-Q and 10-K.

Access a live webcast at www.lilly.com.

In addition to a live webcast, an internet-based replay will be available at www.lilly.com under webcasts and presentation until November 7th, following today a -- today's call.

Before I discuss the results of the third quarter, let me just start by saying while we have had many interactions with the FDA during the third quarter, we have not yet heard anything definitive back from the agency in Washington concerning our manufacturing issues.

And what actions they wish to pursue.

As a result, we have no new news to report on this topic during today's conference call.

I would like to take a moment to review some of the key events that have taken place in the last three months.

The European committee for [inaudible] or products issued a positive opinion for Cialis, an investigational -- Cialis, an inhibitor for the treatment of erectile problems.

The CMPP recommended approval should be granted.

Lilly with a European launch of ciales in the first half of 2003.

Also related to Cialis, yesterday filed a file and lawsuit following the issuance of a U.S. method of use patent attempting to block the anticipated sale of Cialis in the U.S.

We're committed to defending our rights in this U.S. Litigation.

Previously Pfizer's European method of use patent was held invalid in the European patent office and the UK court of appeals.

Lilly received an approvable letter from the U.S.

Food and drug medication for a treatment for ADHD in children, adolescents and adults.

Approval is contingent upon [inaudible] discussions and submission of additional data and analyses from either existing studies or a potential new study.

While Lilly continues to plan for final FDA approval in spring of 2003, approval timing is [inaudible] upon further discussions with the FDA regarding the additional data requested.

The European commission granted marketing authorization for Xigris in all 15 states of the Europe open union.

It's approved for the treatment of adult patients with severe sepsis with multiple organ failure when added to best standard of care.

Last week, Lilly launched Xigris in 10 of the European countries.

Lily received an approval letter from the FDA for Cymbalta for depression, upon [inaudible] discussions and resolution for the company's manufacturing issues.

Lilly and Amylin signed a global agreement to collaborate on the development and commercialization of Amylin's compound AC2993.

A potential first in class treatment for Type 2 diabetes.

AC2993 is currently in phase 3 clinical trials with a submission to the FDA anticipated as early as 2004.

I would like to turn your attention to slide 3 as I summarize our financial results for Q3.

During the third quarter there was one normalizing item, the special one-time charge involves R&D writeoffs of $84 million related to the recent collaboration with Amylin Pharmaceuticals inc.

The one-time charge equates to 5 cents a share and has not been included in normalized earnings of 68 cents.

Worldwide sales for the quarter declined by 3% it 2.786 billion dollars, excluding worldwide sales of the Prozac line, the top line grew by 7% in the third quarter.

Gross margin as a percent of sales was 80.1%, a decline of 80 basis points over q3, 2001.

Total operating expenses declined 7% due to a 6% decline in SG&A, and a 7% decline in R&D investments, as a results, operating income was flat.

Nonoperating income and deductions represented in net contribution of $52 million.

The normalized tax rate remained at 22%.

On the bottom line, Q3 normalized diluted earnings per share, were in line with consensus of 68 cents, which represented 3% increase compared to earnings per shear of 66 cents in the third quarter of 2001.

Let me now turn the call over to Heidi to discuss these results in more details beginning with our key growth product.

Thank you, Simon.

Zyprexa sales results are sewn on slide 4.

Sales total $940 million in the quarter, up 20%, a result of 18% in the U.S., 20% growth in international market.

Outside of the U.S., we continue to see good growth, mainly in schizophrenia, though we have approval for bipolar mania as well.

In the UK, the national institute for clinical excellence recommended Zyprexa and other atypicals for first line usage.

In Japan, strong growth of 39% occurred during the quarter despite the receipt [inaudible] change.

In the U.S., Zyprexa share of total springs increased to 28% in September.

Importantly, Zyprexa's U.S. cash shear was 44.2%.

IMF cash dollar growth was 29% high there September than in the same month last year.

Most importantly, in September Zyprexa new scrip shares passed Risperdal to reach 29.1%.

Zyprexa's dependable efficacy is the reason we continue to capture and contain new patients in schizophrenia despite a crowded market.

During [inaudible] -- anticipated launch phase we expect Zyprexa scrip growth could slow down given a psychiatrist to experiment with new treatment options; however, we remain convinced the efficacy of Zyprexa will continue to make it antipsychotic of choice in the schizophrenia segment and we'll be ready for the launch with a leading share of voice.

Bipolar, Zyprexa remains the [inaudible], typical product for the indication of bipolar mania, continues to represent a significant growth opportunity among the adult population in major markets, is greater than that of schizophrenia, although a lower percentage of patients are being treated today.

In september, a new bipolar maintenance study was at the foundation that found Zyprexa was with [inaudible].

Relapse prevention and the only FDA approved treatment for bipolar disorder.

We plan to cement Zyprexa for bipolar disorder within the next 12 months.

Our yearlong study of 448 patients found the Zyprexa patients relapsed as half of those taking lithium. 28% of [inaudible] him patients.

Zyprexa-treated patients had statistically lower rates of hospitalization -- admissions and significantly longer time to discontinuation.

The team leader will talk more about the growth opportunities of Zyprexa at our upcoming annual investment meeting on November 8th.

Gemzar sells -- sales were $197 million for the quarter, up 5%.

Gemzar sales declined 15% in the U.S.

Two factors caused the decline: First, as we discussed in July, and the second quarter of this year, U.S. wholesalers stocked up in anticipation of a price increase that occurred in early June.

Second, underlying demand of 11% in the U.S. was effected by lower prices from complete -- competitors.

Gemzar was up 34% in international markets.

We're on track to submit for the treatment of breast cancer in Europe late this year.

Our phase 3 registration trial and ovarian cancer completed enrollment and we anticipate a submission in Europe in 2003.

Turning to Evista.

Q3 sales remembered 219 million dollars or 19% growth.

U.S. sales growth accelerated to 11% in the third quarter.

Sales benefited from the stopping of the estrogen plus progestin portion of the women's health initiative.

As a result, Evista shears of total scrip in November jumped to 8.6% compared to 7.2% in June 2002.

More importantly, total scrips grew 16% and 24% in September compared to the same month last year.

For the prevention and treatment of osteoporosis, Evista, a nonhormonal therapy might be an alternative for those women who have been taking hormones to reduce the risk of osteo product.

Growth accelerated to 51% in Q3.

International markets with particularly strong growth include France, up 168%.

Germany, up 68%, and mexico, up 59%.

We anticipate a launch in Japan, a significant market opportunity in 2003.

Sales for global diabetes care, including Humalin, Humalog and Actos grew 7% in the quarter to 571 million.

Humalin - Humalog grow by 40% to $214 million.

The decline in Humalin sales in previous quarters was turned around with the product showing 1% growth to $257 million driven by overseas demands.

Lilly's revenue from Actos was $82 million for the quarter, representing a decline of 14%.

Despite Actos increasing lead over Avandia as showed by the U.S.

Total scrip share to 9.4% in november, -- november, the revenue quarters declined in october, specifically the decline in the third quarter is driven by two factors: The timing of the incentive payments earned and lower detail fee income.

As provided in the agreement with Takeda, Lilly earned an incentive payment during Q232 this year, last year, the incentive payment was in the third quarter.

In addition, Lilly earned less detailed fee next in the third quarter.

Neither of these factors will be present in the fourth quarter and we expect a return to strong revenue growth.

Xigris sales were $21 million in the quarter, essentially flat with the second quarter, although the performance of Xigris has been below expectations this year, we're still confident in the long-term of the product and continue to overcome two hurdles for the product: Patient identification and the perceived risk benefit profile of Xigris.

The executive Vice president, of Pharmaceutical Operations, Gerhard Mayr, will talk more about the steps we're taking at our annual investment community meeting.

During the quarter, a number of events took place that should help Xigris sales go forward and enhance the profit product.

First, Xigris was the first and only new medical product to be granted new technology status for the centers of medicine and [inaudible] & services under the provisions of the benefit improvement act of 2000.

As of October 1st, 2002, this decision will allow hospitals that use Xigris with life-threatening severe sepsis to receive additional reimbursement.

Second, Lilly launched the largest ever study to investigate treatment for severe sepsis.

The phase 4 trial called address will study the effectiveness of Xigris and 11,000 severe adult patients with a lower risk of death.

It should help raise awareness of sepsis identification.

Third, following the European commission's approval for Xigris.

In eu, at the 15th society of intense medicine, Lilly demonstrated the cost-effectiveness of Xigris as a treatment for adult patients with sepsis.

Analogy seize for France, Germany and the UK demonstrated despite the difficulties of diagnosing and treating patients with severe sepsis, use of Xigris could save significant years of life for patients and is a good value for the money.

Now, I will turn the call over to Craig to review the income statement.

Thank you, Heidi.

Slide 9 summarizes the sales amounts and growth rates of our leading pharmaceutical products and animal health for the quarter.

In addition to the products we already discussed, anti-infective declined 23% to $125 million.

ReoPro declined 95% to $92 million, Humatrope increased 8% to $83 million, and Actos decreased 65% to $25 million in Q3.

Also, worldwide sales of animal health products decreased 6% when compared with the same quarter last year.

U.S.

Sales growth was negatively effected by lower demand as well as wholesaler buying patterns in Q3 of last year.

The next slide provides the geographic breakout of the effective price, rate, and volume of sales growth for the third quarter.

As this slide demonstrates, the 3% top line decline for the quarter was the result of a 1% reduction due to price, a 1% increase due to exchange rates, and a decline in volume of 3%.

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

Gross margin in the third quarter as a percent of sales was 80.1%, a decline of 80 basis points over Q3, '01.

The decrease was due in part to the decline in Prozac sales and higher inventory losses offset partially by a favorable sales mix of other higher margin products and favorable manufacturing from increased volume of product manufactured.

Looking at slide number 12, you can see that SG&A was $811 million in the quarter, a decline of 6%.

The decline in SG&A expense was attributable to reimbursement of prelaunch marketing support from [inaudible] as part of the commercialization agreement preannounced, as well as lower underlying marketing expense due in part to less Prozac promotional expenses.

These reductions were offset in part by continued investment and prelaunch activities for our new products.

The underlying administrative expense increased due in part to costs associated with litigation.

R&D expense hope on slide 13 was $527 million or 19% of sales. 7% decline was do you to lower late stage trial costs.

Our continued to leading investment relative in our size reflects the eighty-one [inaudible] commitment to the side of our strategy.

Overall outbacks declined 7% for the quarter.

Slide 14 summarizes the third quarter nonoperating income and deductions.

In Q3, other income and deductions resulted in a net contribution of $52 million compared to a net contribution of $34 million in Q3, 2001.

Interest expense declined due to lower interest rates.

Other income increased primarily due to income recognized in the fourth quarter up front and milestone payments from [inaudible], as well as income recognized from InterMune, related to the outlicense agreement.

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

To summarize our financial rules in the third quarter, the top line was down 3%, excluding world live Prozac daily, sales increased 7%.

The gross margin declined by 80 basis points, operating expenses declined by 7% and fully diluted normalized earnings per share increased by 3% to 68 cents.

On slide 16, you can see the reconciliation between diluted earnings per share as reported of 63 cents and diluted normalized earnings per share of 68 cents.

The one-time charges that totaled five cents were for process research and development resulted to our recently announced collaboration with Amylin Pharmaceuticals.

Simon will discuss our earning outlook for the remainder of this year and 2003.

Thanks, Craig.

Now with three quarters behind us, I would like to update you on our full year 2002 expectations for key elements of the income statement.

Previous guidance for the full year with earnings per shear of $2.60 to $2.62.

We are now comfortable with a range of $2.55 to $2.57.

For the fourth quarter, we expect earnings per share of 68 to 70 cents excluding unusual items.

The reason for the guidance is entering Q4 we know that ReoPro as well as MegaZ are likely to continue to trend lower than anticipated.

At the same time, from an operating expense stand point, there will be a substantial increase in sequential expect tour versus the third quarter, as we provide strong support for Zyprexa in let's of the competitive environment.

In addition, we're doing what is right for the business by continuing our commitment to implement on long-term growth strategy of preparing for several new product launches.

As far as the revised guidance is concerned, we continue to expect slightly declining sales for the full year; however, our sales in the fourth quarter are expected to return to growth and be in the mid-single digits, driven primarily by Zyprexa, Evista, Gemzar, Humalog and Actos.

Now, looking at the rest of the full year 2002 income statement, we expect gross margin to contract roughly 100 to 150 basis points.

SG&A expenses should increase in the low single digits.

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

R&D expenses are expected to decline slightly but remain at the top of the industry in terms of investment as a percent of sales.

Nonoperating income is expected to contribute at least 250 million, assuming other anticipated business development deals occur.

And the normalized tax rate is expected to remain at 22%.

For 2003, due to the uncertainties around the timing of our product launches, and the resolution of our manufacturing issues, we continue to be cautious about our financial assumptions.

Assuming no significant financial penalties imposed by the FDA related to our manufacturing issues or other unusual items, our goal is to deliver some averages growth next year.

As the outlook becomes more have, we will provide more specific financial guidance as appropriate.

This concludes the prepared remarks concerning our financial performance for the quarter; however, before we go to Q&A, I would like to remind you our investment community meeting will take place on friday, November 8th, at the [inaudible] Center in New York.

In order to gain access to the meeting, it will be important that you have replied to the invitation so that you're on the guest list.

In addition for security purposes, you will need to present a photo I.D.

As well as a business card at check-in.

There will be a continental breakfast served for all guests starting at 7:30 a.m.

During which the product team leaders for Zyprexa Xigris, Forteo, Cialis and Cymbalta will post data on their products.

The meeting will start prompt a -- promptly at 8:45 a.m.

And should finish at 1:00.

For those of you not attending in person, there will be a webcast that you can access at www.lilly.com, as well as dial-in numbers that we will provide nearer the time with that, please join Charlie, Heidi, Craig, and me for the Q& A. In order to ensure you all have an opportunity to ask a question, I would like to ask all callers to limit themselves, please, to one question.

AT&T, first caller, please.

Thank you, sir, ladies and gentlemen if you wish to ask a question, please depress the one on your phone.

You will hear a tone indicating that you have been placed in cue.

You may remove yourself at any time by depressing the pound key on your phone.

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

Our first question comes from the line of Barbara Ryan, Deutsche Banc.

Please go ahead.

Good morning, um, Simon, I wanted to ask you about something you said, um, later about the, um, intercom, about 2002 earnings.

It sounded as though what you were saying was the 255 to 257 is depend -- dependent upon another deal, which I think previously you had said the 260, um, was dependent on another deal.

Correct.

Beyond [inaudible].

Is that complied that if there is not another deal by December 30th, those numbers will have to be going down further and that's what's driving, you know, the operating income, which now is at a run rate of $213 million, up to the 250 so that $35 million swing is what you're budgeting for but obviously, you know, may or may not happen?

Yeah, um, Barbara, what we said back in July and is consistent with what we're saying now, between the, um, sort of up-front milestone payment that we received in Q3 from the quintiles dole, which was approximately 20 million in the OID line.

There was some other money for reimbursement, prelaunch expenses and the SG&A line.

Between the approximately 20 million we received from Quintiles and the OID line in Q3, plus, um, some additional potential up-front milestones that we may receive in Q4 based on possible business development deals, there would be, if that happens, approximately 3 cents in the 255 to 257, which would be related to, um, business development deals.

One of those three cents has been realized so far, so you are correct.

If they didn't happen potentially, um, we could be 2 cents below that range.

Next caller, please.

Our next question comes from the line of Carl, Syden, J.P. Morgan.

Please go ahead.

Thanks, Simon, I know you said it's one question only, but if I could ask one quick follow-up on Barbara's, the additional 2 cents that's at risk.

I'm not clear if that is anticipated -- if this is a timing issue from an existing deal?

Is this a milestone that might or might not occur from a deal that is already inked.

Or is this the expectation of inking a new deal, and, um, my new question on Strattera, when you talk about the possibility of an additional new study being required, is that the addiction study the you have talked about or is that the possibility of a different new study and when do you expect clarity on whether or not you have to do that?

Thank you very much.

Um, on those two--part questions, the first one, um, basically that 2 cents will be related to expectation of something that is not signed at this point in time.

As far as the Strattera question, I will hand that to Heidi.

Okay, Carl, the new study we're referencing is not referenced to the existing ongoing of use potential study.

This is additional data the FDA has requested.

In terms of timing, we have submitted our response to the FDA and are waiting to hear back from them.

We don't know exactly when we will be able to give more clarity.

Next caller, please.

The next question comes from the line of Steve Scalda with SG Cowen.

Please go ahead.

Thank you, my question is also on the earnings outlook.

You identified the components of the PNL and, in fact, they're identical to what you said on the Q2 call for sales gross profit margin and SG&A.

R&D you're now saying could decline slightly, and in the past you said it could be flat, and not operating income you're now saying could be more than 250 and on the Q2 call, you said it would be about 250.

So I apologize, but I'm not clear whether shortfall's coming from because the guidance is identical, if not more in the favor of higher earnings currently.

Yes, Charlie, would you like to take that call, please.

Yeah, Steve, I think that there are a lot of moving parts here, the bottom line, and I don't think you're going to be able to trap, you know, the entire change in the guidance in any one of those items and let me just repeat again to emphasize, um, that -- the two major things, at least in my mind, um, that have changed.

Number one, you know, we said we're going to invest in both our currently market of products as well as the new pipeline and we're increasing that over what we had anticipated, um, in -- in the fourth quarter.

Um, secondly, some greater weakness than we anticipated in ReoPro and some of the legacy products which has an effect on our sales but in the ranges we're talking about when we're talking about mid-single digits, that obviously is a range and we can say, um, something like that in the second quarter and third quarter will be slightly different, but those are the two major elements.

Yeah, and I would just reemphasize also, Steve, quite frankly when you talk for example about low single digits, growth and SG&A, which is the same thing we had in July again, within that range you don't have to move very far, and you can, um, move the earnings per share number quite easily, especially also on the sales line, that impact can happen, so, um, that's the reason basically.

Next caller, please.

Our next question comes from the line of C.J.

Sylvester, UBS Warburg.

Please go ahead.

Hi, good morning, um, on Zyprexa I'm trying to get a breakdown in terms of who is really the major prescribers now and how that's changed over the past year or 18 months.

Are we seeing more GP, general practitioner type going into this area, are you looking at that as a source of growth going forward?

Um, what I can say, C.J.

On, that is clearly GPs are playing a bigger role now than they have done in the past.

That's, quite frankly, driven by the fact that we started expanding our GP presence last year, um, so they are playing a bigger role.

Certainly in the schizophrenia arena, but, um, other than that, there hasn't been a great change other than that one factor in the prescribing inhabits.

Next caller, please.

Our next question is from the line of Tim Anderson with Prudential Securities.

Please go ahead.

On the issue of Zyprexa and the, um, the rare diabetes side effect in Japan, the label's changed and you have talked about that in the UK or in Europe, I believe the same thing happened that Zyprexa has been labeled kind of out of line with other products.

You can confirm the same recently occurred in Australia and then in the U.S., um, you know, seems like a likely outcome could be the same, which is that maybe all products get some general label changes but that Zyprexa gets a disproportionate change, and I guess my question after that would be does really -- does any of this really make a difference in markets other than Japan?

Craig.

Yeah, Tim, um, I think that we believe that if there is going to be a label change, that, um, it would be something that would be across the whole spectrum of atypical antipsychotics in the U.S.

We know that the FDA is taking a look at the class and they're conducting a prospective study at the VA hospitals, and, um, we think that based on the evidence that we have seen in many studies, not just the studies that we have funded, um, that there is little or no difference between antipsychotics and risk of, um, diabetes, so we don't think there is going to be a differential between Zyprexa and the other atypicals.

And I think it's fair to say, just to add to that, that we feel very confident at this stage that there is absolutely no rationale for why Zyprexa would be singled out in the United States; um, for a label change, different from the other atypical antipsychotics.

Next caller, please.

Our next question comes from the line of Jamie Rubin with Morgan Stanley.

Please go ahead.

Thank you, Simon, I was wondering if you could address some of the recent concerns on Actos that have recently emerged on a physician website and, secondly, how do you review your competitive position, [inaudible] clients recent approval of their combination pill .

In terms of Actos, Jamie, our general policy is not to comment on rumors in the marketplace.

What we can say is that Actos remain on the market both in the Europe and -- in Europe and in the U.S.

Now, and we continue to plan for recognition of revenue from Actos in both the Europe and the U.S. through the completion of our agreement with Takeda.

I'm sorry, what was the second part of your question?

The combinations, any impact we expect from the combination from Avandia

In terms of, that the application had been submitted and we were anticipating the launch of that product that we will continue to support Actos and the profile of that product.

Yeah, the one other thing I would add, Jamie, specifically to this drug www.intel.com website is, it referenced a label change, which was made for Actos in July of 2001.

And our labeling is basically in line with that of Avandia.

So, that's really all I can say.

I'm not going to go into the details what have team of website that is.

I think you can figure that out for yourselves.

Next caller, please.

Next question is from the line of David Risinger with Merrill Lynch.

Please go ahead.

Thank you very much.

I wanted to follow up on the Quintiles payment.

It stated publicly it paid Lilly $30 million in the third quarter and expects to pay Lilly $40 million in the fourth quarter.

If you could help us better understand those numbers and, um, whether the majority of the 30 million showed up in the other income and where we should expect a 40 million payment to show up in the fourth quarter.

Thank you.

Charlie.

Yeah.

Those payments are split between OID and SG&A.

We get marketing reimbursement expenses, reimbursement of marketing expenses if you will, as well as the payments that come through, the OID line, so, you can expect to see essentially the payments show up in that line as Simon mentioned in the third quarter, the OID numbers about $20 million, and um, in the fourth quarter, um, may may be evenly split, I think, by nonetheless, they vacillate between those two lines.

Yeah, that's correct.

The vast majority from a Lilly perspective, um, has been recorded already in Q3 between the [inaudible] SG&A, and with the 20 million in OID.

The difference versus Amylin would probably be related that some of that 17 million may refer to that we received debts amortized over time, so that will have some impact between where it lands from a timing perspective.

The majority has been booked between those two-line items in Q3.

Next caller, please.

The next question comes from the line of Bert Hazelet with Suntrust.

Please go ahead.

Thanks, good morning, everyone.

To get some additional clarity on the Viagra patent situation, would you launch Cialis in the U.S. without firm resolution of that patent situation and give us an idea of how you expect the patent debate to play out.

I can answer your question.

At this moment, we're currently evaluating the patent, and um, pending that review, we're really -- we really don't that have that much to say, we know the courts are going to decide exactly what this patent covers.

Keep in mind, that um this, patent stems from the same patent in the UK, that gave rise to the court decision that invalidated those, um, over there, so we think that, um, you know, the courts have to decide this, and it's probably too early for us to talk about our strategy in terms of whether we're going to launch or not.

Yeah, I don't think we want to tip our hand to the competition either at this stage.

Next caller, please.

Our next question comes from the line of Tony Butler with Lehman Brothers.

Please go ahead.

Yes, good morning, thank you.

Um, Charlie, with respect to SG&A, into the fourth quarter and perhaps 2003, Simon mentioned a rise in sales and marketing expense.

Is that based on simple marketing expense and/or is it addition of head count in the fourth quarter, and if I may from that question, what is the decision tree to actually add additional folks in the sales, um, arena?

Thank you.

Okay, thanks, Tony.

Um, it's actually probably less the former addition of people, at least in the fourth quarter, at least the latter what have you mentioned, um, these are things, these are taking steps to prepare for new launches as I mentioned and also, um, promotional material on other field items around the current market of the products, so I think it's primarily that.

As far as looking forward to sort of a decision tree about adding people, um, we have some that we have to add.

We're not going to be real definitive about the numbers for competitive reasons, but, um, those will be essentially added based upon, you know, certain trigger events as the timing of our launch becomes clearer as we understand more about, um, what the FDAs response will be as Simon said.

We don't have anything more definitive on that at the moment.

But when we do, um, that will obviously trigger some events in terms of investment.

The one other thing I would add to what Charlie said, Tony, is Gerhard Mayr will talk a bit at the investment community meeting about conceptually how does he look at trigger points for launching, um, products over the next sort of 12 to 18 months to get prepared for those launches and what will be the type of things that would, um, you would typically view as trigger points to launch those products.

Next caller, please.

Our next question is from the line of Leonard Yaf with Bank of America Securities.

Please go ahead.

Actually, this is Tim [inaudible] for Leonard.

I wonder if you could discuss through the foreign exchange benefit I saw on slide 10, in Europe, it was plus 11%, I wonder if you could quantify this, and if there is any outlook going forward assuming the current valuation of the dollar.

Charlie?

Um, it was obviously a pretty large effect in Europe, when, you know, this is, you know, due to strength in the euro first a year ago, um -- versus a either.

Going forward it's hard to say, if you can predict exchange rates, I guess you would know, but we don't anticipate any sort of a great movement.

I think you can tell by comparing rates say in the fourth quarter of last year to what they are currently as to what effect we might have, so it really all depend on the movement in the rate, but I really sort of see the rate being stable in here for awhile, but clearly the year-to-year comparison was effected pretty significantly by the change in the euro.

Thanks, Charlie, next caller, please.

The next question is from Ken [inaudible] with CFFB.

Please go ahead.

Yes, good morning.

I wanted to get a better feel for your expectations on Abilify.

You indicated you were expecting a flattening in prescription trends as doctors experiment with that, um, new product.

I was wondering if you could give us your impression on the competitive profile of Abilify relative to Zyprexa on efficacy measures and in a related question, could you comment on the initial response to your DTC campaign for increasing bipolar disease awareness.

Has this translated into, um, more office visits?

Um, let me, first of all, take the question on Abilify.

Basically the reason we have said that we expect a 10 [inaudible] flattening of total scrips, that is what we say what Geodon was launched last year, typically driven by the fact that our experience suggests that psychiatrists will try all new products, um, given the current situation with current therapies available, um, so we're expecting some experimentation.

As far as that product is concerned, quite frankly, um, you know, the data that we have seen to date around efficacy is in our minds, um, questionable, that being said, the reality is you need to wait to see how product performs in the larger populations.

Um, and we will wait to see what that, um, product demonstrates in the marketplace.

But what I can say about Zyprexa is we are absolutely convinced that it will continue to be the number one, um, atypical antipsychotic out there from an efficacy standpoint, um, we believe that very, very strongly, and we believe, given the complexity of this disease state, that at the end of the day will be what will be the deciding factor, um, rather than the sort of side effect profile because Zyprexa has an excellent side effect profile.

So, I think we feel very good about the drug long-term and from a leading share of voice stand point, you know, you heard, um, Charlie and myself refer to continued investments and support for Zyprexa, we will not be budging an inch, um, in that support.

In fact, we won't be budging a yard, a foot or a meter either, um, so we will be very, very strong in our par behind that product.

As far as the, um, DTC campaign are concerned, Craig or Heidi, do you have any comments?

I would say, Simon, you have correctly emphasized dependable efficacy as Zyprexa's biggest advantage, and that is, um, translating into, we hope, soon better treatment for patients with bipolar disorder.

We, have um, landmark data that we shared in September that shows Zyprexa is superior to lithium, at its best in preventing relapse into mania, and that is, um, very important data, and we also have OSC, um, data suggesting it's very effective in bipolar depression, and bipolar represents a very substantial growth opportunity for Zyprexa and Zyprexa, um is going to be a foundation of treatment and so we are doing everything we can to raise awareness for, um, bipolar and, um, we are working, um, on, I know, our sale force, not just calling on psychiatrists, but also on primary care physicians to help raise awareness, um, in this field.

And it's, quite frankly, in DTC specifically, of early days.

Yeah.

We'll have to wait and see.

Next caller, please.

The next question is from the line of Jim Kelly with Goldman Sachs.

Please go ahead.

Good morning.

I'm trying to get my arms around what things changed in your thinking about 2003.

Is it this, um, piece about Abilify, and what that could mean for a prescription trends?

Is it the legacy products, um, because some of those things we -- you mentioned that the, um, temporary flattening was something we have seen in the past.

That should not be a rate of change.

Could you help us think about what is happening in the rate of change.

Is it more top-line driven or bottom-line driven going into 2003.

We're trying to get a handle of when do we have an end of these revisions to the guidance.

Thank you.

Yeah, Jim.

I will ask that question -- pass that question to Charlie.

Jim, I'm not sure really anything has changed since the last time we talked about this in July.

I think what we're trying to do is balance a number of variables.

The key is, um, getting some certitude around our manufacturing situation, and, therefore, when we are able to launch new products.

I think our confidence in the current market of products hasn't changed, so those continued to be, you know, a wonderful base to build upon with the now -- with the new launch products.

Um, so clearly, one thing that will determine more definitive, '03 guidance, will be the top-line growth, and, of course, that will be driven by both of those factors that I just mentioned.

On the investment side, of course, our investment as we have mentioned, we are already starting to put some investment into those launches, hence at least part of the reason for our guidance change in the fourth quarter, um, but that will also effect our '03 guidance.

I want to emphasize very importantly that, um, -- and we said this in July -- that the investment in the launch of those new products is going to be very critical, and we're not going to shy away from the investment in those products.

But you put all those factors together and essentially, um, this was the reason why we really can't be anymore definitive than what was said.

We need more certitude, but we know basically that our sort of strategic direction and our tactical direction will be to invest in the new launches for sure.

I think one other thing I would maybe add, Jim, is we will probably give quarterly guidance initially next year until we have more clarity on the situation.

Next caller, please.

Our next question comes from the line of Cal Andressi with MWV Management.

Please go ahead.

Thank you, my questions have been answered.

Thank you, sir.

We'll move on to Mara Goldstein with CIBC World Markets.

Please go ahead.

Thank you.

I wonder first of all, since it was mentioned of the Actos agreement, when exactly is the completion of that agreement.

Secondly, I wonder if you will try to maybe quantify what is meant by some earnings growth next year?

As far as the first question is concerned Mara, 2006 is when the contract expires, um, as far as some earnings growth next year is concerned, I will pass that over to Charlie.

Well, Mara, some earnings growth is just sort of exactly what it says, and I have tried to explain why we can't be more definitive than that, but we do expect our earnings growth, that is what we're dedicated to at this point, that's about as much as I can say on that, I think.

Next caller, please.

The next question is from the line of Abe Bronting with Glenview Capital.

Please go ahead.

Um, there was an article published by Elizabeth Kohler from the FDA about Zyprexa-diabetes related issues, reporting 23 deaths.

In that article the authors state that, um, although many of them hyperglycemic, associated with many of the newer antipsychotics, it says the majority of published cases implicate clozapine or olanzapine.

You seem to indicated that you believe these side effects are more broadly and equally associated with the atypicals.

I wonder if your belief is, based on any additional data that you know about, that has not been published, that is available to the FDA or is it simply your hope that all atypicals will be equally indicted?

Heidi, would you like to respond?

Sure.

With respect to the, um, [inaudible] study, that was actually a retrospective study where he they were going back and examining spontaneous event reports in a bed watch database.

That was not a prospective study, and if you read through the conclusions of the author, you will read in there they indicate even in that study you can't draw any type of conclusions about causality at the result of the study that was conducted and, yes, there have been several additional studies supporting the comparable rates argument, including studies that have been conducted outside of Lilly.

There was a Janssen study conducted in Canada that also came up with support for the comparable rates, um, around risk of diabetes.

Yeah, and I would just add, again, we feel very confident that Zyprexa will not be singled out from a label change perspective [inaudible].

AT&T, maybe we could have one more caller, please.

Certainly, sir, our final question comes from the line of Harlan Sunderling with Columbia Management Group.

Please go ahead.

I'm fortunate.

Good morning.

Charlie, could you give some commentary on your decision-making regarding spending the incremental dollar of SG&A, and R&D, relative to your goal of showing growth in the year 2003.

That is if you were to show a compelling R&D opportunitying or a compelling SG&A opportunity, either to support existing or launch new products, how would you weigh that against the desire to show earnings growth, please?

I think I have tried to indicate that already, we're very much focused on, um, the fact that, really, ours is a long-term growth story.

We have, um, just a momentous pipeline to launch, we know that will require investment, that is an investment in the short-term for what we think is a lot of growth in the long-term, um, as we look as those decisions, we know pretty much what we have to do in terms of launching those products.

The question -- the only question really is the timing, um, of that investment, I think, um, so we have our plans pretty well set, so I would say really it's a matter of timing.

We obviously like to prioritize the investments, which yield us the highest return, um, not only in the long-term but the short-term as well.

We really won't back away from those investments, particularly in the launch of our products, um, that forsake short-term earnings.

Thank you, Charlie and thank you all for joining us today for the third quarter earnings results call.

We look forward to seeing as many of you as possible at our investment community meeting on November 8th at the Equitable center in New York.

Thank you.

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