禮來公司 (LLY) 2002 Q4 法說會逐字稿

Good morning, thank you for standing by and welcome to the Eli Lilly & Company 4th quarter results conference call. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session, and instructions will be given at that time. If you need assistance during the call today please press the zero followed by star. As a reminder, today's call is being recorded.

At this time I'd like to turn the call over to Executive Director of Investor Relations, Mr. Simon Harper. Please go ahead, sir.

Good morning, afternoon or evening, wherever you may be listening. Thank you for joining us for the Eli Lilly & Company 4th quarter 2002 earnings conference call. Joining me today is Charles Golden, Executive Vice President and CFO as well as my colleagues Craig Hartmann and Heidi Sprowls in the Investor Relations team.

Each of you should have received the related earnings press release and supporting materials for this call by E-mail or on the website. Following our 4th quarter performance review, we will take your questions and end the call promptly at 9:00 a.m. eastern time.

During this conference call, we anticipate making projections and forward-looking statements. These estimates are being made based upon our best judgments at this time, for example, we have made assumptions concerning the company's assets to resolve the good manufacturing processes used and potential impacts on the company. In particular, the timing and nature of the resolution GMC issues will depend on the ability of the company to demonstrate to the satisfaction of the FDA the quality and reliability of its manufacturing controls and procedures. We have also made assumptions about the timing of global launch of new products, including Cymbalta, Cialis, OFC, [INAUDIBLE]. The company's results may also be affected by the continued growth rate of our newer products, including Zyprexa, [EFISCAR], and Gemzar; by the sales uptake of our recently launched products Xigris, Forteo, and Strattera; and by the impact of exchange rates. Actual results may differ materially due to various factors. There are no guarantees in the pharmaceutical business. For more information on these and other factors that may affect our results, you can see exhibit 99 to our forms 10K and 10Q.

You can access a live web cast of this conference call at WWW.lilly.com. In addition to the live webcast, and internet-based replay will be available on our IR website, and the webcast and presentations until February 20, following today's call.

I would like to take a moment to review some of the key event that is have taken place in the last three months. The 4th quarter was a very productive one for Lilly. We received three product approvals, submitted five [INAUDIBLE] for regulatory review, and entered into a major strategic commercialization alliance. In late November, the FDA approved Strattera, the first non-stimulant for Attention Deficit Hyperactivity Disorder. On the same day the FDA also approved Forteo for the treatment of osteoporosis and post-menopausal women who are at high risk for fracture and to increase bone mass in men with Primary Hypogonadal Osteoporosis who are high risk for a fracture. Last, Lilly received marketing authorization from the European commissions for Cialis for the treatment of erectile dysfunction. As Lily recently announced, we have begun shipping the products to European distributors and expect to have the products available and begin promoting Cialis in the EU within the next few weeks. The CPMP also issued a positive opinion in December for Forteo, called Forsteo with an "S" in Europe. We expect to receive EU marketing authorization in the spring for the treatment of established osteoporosis in post-menopausal women at high risk of a fracture.

Submissions in the 4th quarter to the FDA included Duloxetin for stress urinary incontinence, and OFC for treatment of bipolar depression. Lilly also filed the first part of a rolling U.S. submission for Alimta on malignant pleural mesothileoma. We expect to complete the submission for Alimta in the fall of 2003. Lilly filed a European dossier seeking an additional indication for Gemzar for the treatment for unresectable, locally recurrent, or metastatic breast cancer in combination with Paclitaxel. We also submitted Zyprexa for the long-term treatment for bipolar disorder in the United States and Europe.

In December, Lilly and Boehringer Ingelheim announced a worldwide development and marketing agreement for Duloxetin for the treatment of stress urinary incontinence. The companies were also jointly commercialize Cymbalta in markets outside of the United States. Both of these agreements exclude Japan. This collaboration contributed $49 million pretax or 3 cents per share after tax to Lilly earnings through the 4th quarter of 2002, primarily through the reimbursement for research and development expense. The companies over time intend to share equally in ongoing developments and marketing costs of Duloxetin.

Now I would like to turn your attention to slide three as I summarize our normalized financial results for the 4th quarter and year. Worldwide sales for the quarter grew 4% to $2.956 billion. For the year, sales were $11.077 billion, a 4% decline. Gross margin as a percentage of sales was 80.8%, an 80 basis points improvement compared to Q4, 2001. Full year gross margin declined by 90 basis points to 80.4% of sales.

Total operating expenses increased 2% for the quarter. This slight growth in total OpEx resulted from 4% growth in SG&A expense and a 3% decline in R & D investment. For the year, total operating expenses declined by 1%, which was a result of flat selling, general, and administrative expense, and a 4% decline in research and development expense. Operating income grew 13% compared to the 4th quarter of last year. Full year operating income was $3.328 billion, a decrease of 11%. Non-operating income for the quarter, was a contribution of $51 million, and a contribution of $214 million for the full year. The tax rate remained at 22% for the quarter and year.

Finally, Q4 diluted earnings per share with 68 cents, which represents a 13% increase compared to earnings per share of 60 cents in the 4th quarter of 2001. Full year normalized earnings per share were $2.65, a decline of 8% compared to $2.76 in 2001. For your information, we have provided a reported earnings statement on slide four. Details about our reported earnings are available in our earnings press release dated today, January 23, 2003. Slide five shows the unusual items that affected our quarter results. But the normalized out of earnings in order to provide a clearer picture of our ongoing business. In the 4th quarter of 2002, there were no unusual charges. For the year, a 5 cent charge with normalized earnings for required in process research and development. The charge was related to the license from Analin Pharmaceuticals of AT 2993, a central treatment for type II diabetes currently being studied in phase III clinical trial.

Let me hand the call over to Craig Hartmann, who will discuss sales performance of our currently marketed product.

Thank you, Simon.

I'll start with our leading product, Zyprexa. The results are on slide six. Sales totalled %989 million in the quarter, up 10%. U.S. sales grew 6%. Sales outside the U.S. were up 19%. U.S. sales growth was negatively affected by both the reduction of inventory at wholesalers during Q4 and buildup of inventory in Q4 in 2001.

Underlying demand in the U.S., though, remains strong as Q4 total prescriptions grew by 19%. We anticipate normal wholesaler purchasing patterns to resume in Q1, which will cause reported U.S. sales for Zyprexa to be more reflective of the solid, underlying demand seen throughout 2002. For the full year, global Zyprexa sales grew impressively by $602 million or 20% to $3.689 billion. U.S. sales were up 16% versus last year, to $2.533 billion. Total prescriptions for Zyprexa in the U.S. continued to grow strongly in 2002, up 19% after six years on the market. Over 12 million patients have now been treated with the product. Zyprexa commanded 44% of anti-psychotic cash share in December. We believe it holds this position because it has the best combination of dependable efficacy and safety among anti-psychotics and mood stabilizers.

Many of you have asked us about the effects of the launch of Aripitrozol on Zyprexa sales in the U.S. in the schizophrenia segment. So far the level of experimentation with this new product among psychiatrists is within our expectations. We expect clinicians to welcome this new option initially because schizophrenia is a complex and difficult disease to treat. But as we've seen over the past several years, dependable efficacy will continue to drive their preferences.

Sales outside the U.S. grew 27% for the full year to $1.156 billion. This is the first Lilly product to top the one billion dollar threshold in markets outside the United States. We believe there are still significant growth opportunities for Zyprexa in markets outside the United States as switching away from older drugs to A-typical agents continue in the treatment of schizophrenia. In addition to the growth in sales driven by switching to A-typicals outside the U.S., we are making progress in bipolar disorder and with new formulation. All these opportunities will fuel Zyprexa's continued global growth. Zyprexa benefited in 2002 from continued growth in bipolar mania. Zyprexa is the only anti-psychotic approved as a mono therapy for bipolar mania in both the U.S. and Europe. We're working to establish Zyprexa as the first therapy to serve in the foundational treatment in all three phases of bipolar disorder: bipolar mania, depression, and bipolar maintenance. To that end we filed submissions in the U.S. and Europe in the fourth quarter for an indication for maintenance for long-term treatment of bipolar disorder. We also filed OFC, the olanzapine/fluoxetine combination in the U.S. in the fourth quarter. OFC could be the first approved therapy for the treatment of bipolar depression. Indications in all three phases of bipolar disorder will allow Lilly to establish Zyprexa as a foundational treatment in bipolar disorder, which has a higher prevalence than schizophrenia, but is under-diagnosed and often unrecognized today.

In terms of new formulations, we'll be able to introduce Zyprexa intramuscular in both the U.S. and Europe once we successfully pass the manufacturing inspection. We continue to be focused on the development of a four-week Depo formulation, which we expect to submit for approval in 2005.

On slide seven, you can see Gemzar sales were $261 million per quarter, up 30%. Non U.S. sales improved to 32%. U.S. sales rose 28%. The growth is the result of both solid underlying demands and the buildup of inventory of U.S. wholesalers in the 4th quarter due to the anticipated price increase. We estimate Gemzar's underlying U.S. demand in the fourth quarter to be comparable to the full-year U.S. sales growth rate of 16%. Full-year global Gemzar sales were up 21% to $875 million. This performance was driven by sales outside the United States, which increased by 28% to $393 million. Gemzar sales continue to be driven by the non small cell lung cancer indication, since it was the most commonly used regiment in Europe and one of the drugs to be standard of care in the United States. We are confident in Gemzar's continuing growth because of its consistent, unsurpassed efficacy across multiple tumors and its ability to be combined with many active agents. Underpinning some of our confidence in Gemzar's future growth potential is a fourth quarter submission in the EU. We are seeking an additional indication for Gemzar for the treatment of unresectable, locally recurrent, or metastatic breast cancer in combination with Paclitaxel. Our phase III registration trial in ovarian cancer has completed enrollment, and we anticipate a submission in Europe in 2003.

Turning now to Evista; Q4 sales reached $238 million, up 44%. Evista's solid performance was the result of strong underlying demand in the U.S. where sales grew by 46%. In addition, Evista's sales growth benefited to a lesser extent from the U.S. wholesaler's purchasing pattern. In the 4th quarter, total prescriptions grew 12%, compared to the same period in 2001. Full-year sales grew 24%, to $822 million. Evista sales have benefited from patients switching from hormone-replacement therapy following the announcement of the result of the estrogen plus progestin portion of the women's heath initiative clinical trial. As a result, Evista's U.S. new prescriptions grew 13% in 2002, up from a rate of 7% the previous year. More importantly, monthly new prescriptions have grown faster than Fosamax with the stopping of the WHI trial.

Evista's performance was solid overseas as well, where growth accelerated 37% in Q4. International markets with particularly strong U.S. dollars sales growth included France up 89%, Mexico up 56%, and Spain up 33%. We anticipate a launch in Japan with significant market opportunities in 2003. We expect continued solid global growth for Evista driven by the osteoporosis indication.

On slide nine, we report the performance of our diabetes care franchise which consists primarily of Humulin and Humalog and Actos. Q4 sales for the franchise grew 9% to $599 million. Humulin declined 5% to $254 million. Humalog grew by 23% to $238 million, and Actos revenue climbed 42% to $96 million. Full-year diabetes care sales reached $2.288 billion and grew 8% compared to 2001. Humulin sales were $1.004 billion, a decline of 5%. Humalog grew strongly throughout the year to $834 million, up 33%. And Actos revenues for the year was up 9% to $392 million. The continuing expected growth from Humalog and a decline in Humulin sales as a result of our switching strategy and continued strong competition from Lancing.

Xigris sales were $34 million in the 4th quarter, up 63%. U.S. sales were $27 million, a sequential improvement of $7 million since the 3rd quarter. Outside the United States, sales were $8 million, driven primarily by the launch of Xigris in EU during the quarter. For the full year, Xigris sales were $100 million, and today it's been launched in 29 countries. We still believe in the long-term sales potential for Xigris as breakthrough in biotechnology; however it do not expect sales to suddenly increase in the coming quarter. Xigris has proven to be an important therapeutic tool for the clinical care that can help save lives, and the data we are publishing about Xigris continue to get better. Recently we shared the data from a long-term follow-up study. We found that Xigris sustains survival well beyond a patient's discharge from the hospital. Among the patients we followed who were at high risk of death, a growing population in the U.S., long-term survival was evident even after 2 1/2 years. We are using this data in the market in conjunction with messages that really promote the product's safety and efficacy in the greater than 50% of patients from our follow-up trial. First, Xigris saved the lives of nearly one of every three patients who would have otherwise died, a relative risk reduction of nearly 20%. And second, the physician is eight times more likely to save an additional life and prevent additional serious bleeding again. We'll continue to sharpen our method and generate strong clinical data both in our efforts in the U.S. and to strengthen our European launch.

Heidi Sprowls will now discuss the launch of our two newest launches in the United States, Straterra and Forteo and the details of the income statement.

Thank you, Craig.

We are currently launching Forteo and Straterra in the U.S. following a fourth quarter approval for both products. Initial stocking-related revenue for Forteo was $6 million in the fourth quarter. We have begun promoting Forteo to a group of leaders and physicians who have large osteoporosis practices. This pool consists of dermatologists, internists, and endocrinologists. These 8,000 targeted physicians account for approximately 80% of the 1.5 million diagnosed osteoporosis fracture patients in the U.S. The patients who need new bone and new strength that only Forteo can provide. We are providing initial one-month sample for new patients and insuring physicians understand Forteo's ability to rapidly stimulate of the drug to rapidly stimulate new bone formation, increasing bone marrow density and bone strength to significantly reduce fracture risks.

Forteo's clinical data show a 3.9% increase in lumbar spine bone marrow density at three months and 11.8% increase at 18 months. As a result in the clinical trials, the risk of repeat fractures was reduced by 65%, and the risk of non-fragility fractures was reduced by 53% in just 19 months. The initial launch period has been in line with our expectations, and we expect to see the first prescriptions in February once significant numbers of patients have used their initial one-month supply. The price of Forteo is $20 per day. We are currently working to gain acceptance on state Medicaid formulary and are targeting to be added to the majority by the end of the 1st quarter. Lilly has set up a premier customer care program, among other services that will ensure that patients who need Forteo have access. Reimbursement specialists will aid patients in working with insurers to determine if patient has coverage, explain the process, and follow-up on claims. If patients are not covered, a reimbursement specialist will assist in finding other sources of funding or an assistance program like Lilly Answers or Lilly Cares.

As we mentioned earlier in the call, we received a positive opinion for Forteo in Europe and expect to receive marketing authorization allowing us to launch the product in the spring of this year. Stocking-related sales for Strattera in Q4 were $3 million. On January 10, Forteo was available at over 36 thousand pharmacies, and our sales force was actively promoting Straterra to general and child psychologists, pediatricians, and primary care physicians. We have a highly competitive share of voice among our competitors in the ADHD market to educate physicians on this new first-line option for ADHD. Initial customer feedback has been positive since the launch. Strattera is an attractive option to those patients who need relief from the symptoms of ADHD. Straterra is not a stimulant, and is not classified as a controlled substance, which enables us to provide samples and allow physicians to fully use those, thereby minimizing the hassle associated with stimulants.

ADHD affects all aspects of a patient's life: school, home and social interaction seven days a week. Our clinical data show Straterra provides full-day relief of ADHD symptoms without causing insomnia in children and adolescents. It reduces ADHD symptoms in children and adolescents beginning in the first week. Furthermore, Strattera is the first and only FDA approved ADHD medication clinically proven safe and effective in adults. Adults represent a significant number of the more than 12 million Americans believed to suffer from ADHD. Over the course of the year we'll begin to build the adult segment of the market in part working with physicians to identify patients who would be most appropriate for the treatment. And recently, we have submitted regulatory applications in a number of countries outside the U.S., including Australia and Canada.

Slide 11 summarizes the quarterly sales analysis for growth rates for our leading pharmaceutical products and animal health. As you can see, the Prozac family of products declined 28% to $163 million. ReoPro declined 6% to $99 million, and Hematrope increased 3% to $83 million. In addition, anti-infectives declined 30% to $139 million in Q4. Also worldwide sales of animal health products increased 4% to $196 million, when compared with the same quarter last year. Excluding exchange rates, animal health sales increased 6% for the quarter. For the full year, animal health products increased 1% to $693 million.

The next slide provides the geographic breakout of the impact of price, rate, and volume on sales growth for the 4th quarter. As this slide demonstrates, the 4% sales growth for the quarter was a result of a 1% increase due to price, a 1% increase due to exchange rates, and an increase in volume of 2%.

The next slide, number 13, shows an increase in our gross margin for the quarter. Gross margin, as a percentage of sales in the 4th quarter was 80.8%, an increase of 80 basis points over Q4, 2001. This increase was due to a favorable sales mix of higher-margin products and increased manufacturing, but was partially offset by the decline in Prozac sales and increased costs associated with GMP improvement in the quarter.

Looking at slide 14, can you see the SG&A was $921 million for the quarter, an increase of 4%. The increase in SG&A expense was attributable in part to increased marketing expenses for anticipated new product launches. For the year, SG&A was flat, compared to last year, as a result of increased marketing and selling expenses, in preparation for new product launches, offset by lower administrative expenses.

R & D expenses, shown on slide 15 were $574 million or 19% of sales. Our investment in R & D fell 3% for the quarter, primarily due to the reimbursement from Boehringer Ingelheim, a potent 2002 duloxetin research and development expenses, and lower late-stage clinical trial costs. For the full year, R & D fell 4% to $2.149 billion. Our continued industry-leading investment relative to our size reflects our continued commitment to the innovation side of our strategy.

Slide 16 summarizes the 4th quarter non-operating income and production. In an effort to provide investors with answers that matter, we have enhanced our disclosure by providing more detail for the other income and investments line on our income statement. In the future we will report actual results in this format on a quarterly basis. Total income and reductions resulted in net contribution of $51 million in the quarter and $214 million for the year.

Outlicense of marketed products includes the sale of trademarks, primarily in markets outside the U.S. for the quarter and the year. The outlicense of development-based products includes primarily income from small outlicensing deals in the 4th quarter, and the outlicensing of [ARITOVANSIN] and royalty income for the full year. Part of products and development consists of the Boehringer Ingelheim deals, both in the fourth quarter and the year. The Lilly ICOS profits and losses line contains the profit and loss from the Lilly ICOS joint merger in which we share 50% of the profits and losses from the JV territory. The miscellaneous line includes foreign exchange gains and losses and other items. As for the tax rate, it remained at 22% for the quarter and year.

Let me summarize our financial results for the 4th quarter. For the first time since the Prozac patent expiration, our quarterly sales increased, up 4%. Gross margin increased by 80 basis points, operating expenses increased 2%, and fully diluted earnings per share was 68 cents, up 13% over normalized results in 2001. For the year, sales declined 4%. Sales without Prozac increased 8%. Gross margins were lower by 90 basis points, total operating expenses down 1%, and fully diluted normalized earnings per share declined by 8%.

Now, turning to the balance sheet. During the year, accounts receivable increased by $264 million. The increase is primarily attributable to higher sales in the month of December, compared to December of 2001. Additionally, AR was impacted by re-evaluation associated with the euro and Yen. The level of inventory reported on our balance sheet at year-end increased by $435 million compared to December 2001. The increase was primarily attributable to increases in inventory for new products and to a lesser extent the re-evaluation of inventory due to foreign exchange rates.

Now let me hand the call back to Simon for Q1 and 2003 expectations.

Looking ahead, there are several events that may occur in the first half of 2003. We continue to make progress in improving our manufacturing capabilities as witnessed by the Forteo and Strattera approval. We are now preparing for GMC inspection of two of our Indianapolis facilities. We expect the facility to be inspection-ready in Q1, and the facility to be ready sometime later. The precise planning of each of the inspections of these two facilities is to be determined.

As mentioned before, in addition to our launches of Forteo and Strattera, we expect to begin promoting Cialis in Australia and New Zealand within the next few weeks. North America and Europe are part of the joint venture territory, while Lilly ICOS split the profits 50/50. In all other markets, Lilly is responsible for promoting the product and revenues and costs are reported on Lilly's income statement. We have also received an approval for Cialis in Brazil, the 5th largest erectile dysfunction market in the world, and expect to launch the product there in the first half of 2003.

Turning now to our financial guidance for first quarter and the full year of 2003. We are comfortable with a range of 57 to 59 cents for Q1, and $2.50 to $2.60 for the full year. Both ranges exclude unusual items. We anticipate the next 24 months to be an exciting period, given the potentials for up to 4 product launches in addition to Strattera, Forteo, and Cialis. That will be the growth engine for strong, sustained sales in our new growth for the remainder of the decade. In the near term, we will invest appropriately in the launching to insure the long-term success of each of these new products.

Let me share some of our assumptions behind our earnings guidance for 2003. Given that it's difficult to predict the precise timing of approvals for products currently under regulatory review, the guidance range reflects the sales estimates for the basket of those new products that are currently under regulatory review, as well as the incremental marketing and selling activities which would be necessary to launch them. As we gain more clarity on the timing of each new product approval, we will authorize the necessary incremental investments. Accordingly, regardless of whether or not we launch these new products, the guidance range will be applicable.

Our guidance range for the year includes continued solid growth in Zyprexa sales. Although with increasing competitive pressure in the schizophrenia segment, we expect our market share to dip slightly in the near term as we reported in December, and increase in the months to follow. In terms of manufacturing, Lilly has been discussing a comprehensive GMP plan. To be sure this plan is appropriately implemented and the bar is raised on GMP standards, extra investments and resources will be required. Excellent investment in people of processes are also being made to enable the successful delivery of our new pipeline into the future. In addition, we have substantially increased our capital expenditure to support, among other things, Lilly's future. As a result, over time, appreciation from these expenditures will flow through gross margins. As far as 2003 is concerned, gross margin will include incremental, ongoing annual costs of approximately $200 million compared to 2002 levels as part of a conscious strategy to ensure improvements and growth in capacity in our manufacturing operations. These costs will be partially offset by positive product mix.

Our tax rate assumption in 2003 is unchanged from 2002. Our guidance for Q1 and the full year excludes unusual items such as one-time charges associated with restructuring and impairment. In December 2002 the company initiated a plan of eliminating approximately 700 positions worldwide in order to streamline an infrastructure. The individuals affected by the elimination of these positions will be given the opportunity to fill open positions and new positions being created in areas such as sales, manufacturing, and quality. Each affected employee will also have an option to elect a voluntary severance package. Because we do not yet know how many employees will choose the voluntary severance package instead of a new position, we can not currently calculate the expenses associated with the plan. The expenses associated with the plan, however, will be recorded in the first quarter and potentially in the second quarter as costs are incurred.

As part of the company's ongoing strategic review of its worldwide manufacturing activities, it is likely that decisions will be made during the first quarter of 2003 and will result in the impairment, primarily of certain U.S. manufacturing assets. The company does not anticipate that this review will result in any closure of facilities. But certain assets located at various manufacturing sites could be affected. Depending on decisions made, costs may be recognized in the first quarter of 2003. As the year progresses and uncertainties around product approvals' timings are revolve solved, we will be able to effectively offer more guidance for our financial performance for 2003.

This concludes our Q4, 2002 financial review. And now Charlie Golden and the IR team will take your questions.

Thank you. Ladies and gentlemen, if you do wish to ask a question, please press the one on your touch-tone phone. You'll hear a tone indicating you've been placed in queue, and you may remove yourself from queue by pressing the pound key. If you are using a speaker phone, you may need to pick up your handset before pressing the one. If you did press the one prior to this announcement, you may need to do so again at this time. Our first question comes from the line of C.J. Sylvester with UBS Warburg. Please go ahead.

Hi. Good morning. Thanks. Two questions, I guess. One for Charlie and the other one deals with some granularity if we can get it on reinspections. Have you heard back from the FDA in terms of what the issues are going forward with the reinspection of the facilities? When do you think we could get clarity on that? And Charlie, in terms of the pension liability that's out there, it looks like you may have to contribute to that. Were there any changes in the pension this year, and do you see yourself making any contributions towards that in 2003?

I'll take the first question in terms of the FDA, and then Charlie will take the pension question. As far as the situation in terms of the inspections are concerned, as we said, we will be ready for an inspection at our products facility this quarter. And later in terms of the facility where Zyprexa IM is. We have been in discussions obviously for a while now with the FDA, talking about a comprehensive GMP plan. The FDA is working through that, and once that is occurred we will hope they will come to inspect us. Whether there will actually be a gate specified up front or whether they will just arrive as they have the right to do, is still yet to be determined. Charlie?

Yes, C.J., on our pensions I think we disclosed last quarter that we were looking at particularly an earnings assumption, and we had decided to lower that by 125 basis points. So, you know, that is a move that fairly common, I think, across industry, given what's happened to the earnings on pension fund. Second important point is the discount rate which also affects, essentially your income statement. That's a generation from a previous year, down to 6.9%. So we feel pretty good about those assumptions. They've fallen off in a reasonable range from what other people are thinking. This kind of thing does have an impact on our pension expense. Just in terms of then pension contributions to round out, we've been making contributions every year. Interestingly enough, we really aren't required to do so, given the status of our pension fund which is pretty well funded. But we do that primarily because, you know, we think it's tax efficient. So we have been putting fairly regularly pension contributions for our fund -- pretty much the maximum we can put in under IRS guidelines.

Thank you, Charlie. The next caller, please?

Thank you. The next question comes from David Risinger from Merrill lynch. Please go ahead.

Yes. Thanks very much. Eli Lilly had communicated guidance in a press release in November to expect some EPS growth, and then there was a quote that read, "Assuming no significant financial penalties imposed by the FDA related to the company's manufacturing issues." Could you comment on a couple of things? First, what has changed since November to lower your guidance? Second, whether the FDA ever imposes financial penalties without a consensus agreement? And third, whether consent decree has crossed the lips of the FDA? Thank you.

Would you like to take that?

Yeah, maybe just to address the first point, David. I think, you know, as we've gone through our planning process, and so on, which we typically do in the 4th quarter, I think we firmed up what we need to do in terms of the investment in our launches, and that's paramount to us. Our investors are telling us that we want to be sure we invest the right amount in our launches, we know that's the smart thing to do. That's pretty well been firmed up, even though the timing of those launches is somewhat indeterminant. The second point that's occurred. I think we've also firmed up the investment we need to make in manufacturing, and that's reflected in the guidance and the impact on gross margin which Simon discussed. So I think those two things as well as wanting to be sure that we keep the right amount of flexibility given, not being able to understand the precise timing of our launches, has really led us to that 2.50, 2.60 range. To answer the questions regarding the FDA, I mean, our interfaces with -- disregarding FDA, our interfaces with them continue to be quite positive. I guess I don't really know whether in the past they've imposed fines or penalties without consents; I can't really say. But we have had no discussions whatsoever about a consent decree with them.

And I would just add to that about flexibility. To be very frank with you, a number of our critique staff last year -- we came down several times with our guidance and we wanted to make sure this year -- obviously, barring any unforeseen major events, that that wouldn't happen. Next caller, please.

Thank you. Yes. Our next question comes from Steve Scallow with S.G. Cohen. Please go ahead.

Thank you. Two questions. First, you provided some detail, but can you remind us how many cents in earnings from 2002 stem from nonoperating sources, including that from Intramune, [inaudible], B.I., and GALEN? I would imagine prospects in 2003 would look a lot better when compared to the operating number in 2002? And secondly, Abilifide looks to have had little impact on Zyprexa so far. So why are you still issuing warnings rather than expressing greater confidence? Maybe you can share some anecdotes of what you're finding in the field.

In terms of the nonoperating stuff, what we've tried to break out the OID lines somewhat in a more detailed manner than we've done in the past so you can at least see some of the major components. That obviously doesn't capture everything because there is some details still relate to R & D and SG&A lines. That should give you a fairly good guideline of what's making the most variable and the most difficult to understand in the past. Clearly, the big yield last year related to -- from a third-party perspective related to the Ingelheim deal, the Quintile deal, the impact of [inaudible] at the end of 2001. Those are some of the key drivers. And then obviously the delivery of [inaudible] and Sarafem this year, and Abilifide last year, which is in the revenue line, but that would not have made a big difference. In terms of Abilifide Charlie, maybe you'd like to comments.

Sure, with Abilifide, it's really to early to draw any conclusions about what role Abilifide is going to play in the treatment of schizophrenia. We think it's really going to take about 6 to 9 months. So we continued to mention that when we talk about Zyprexa. At the end of the day we know that dependable efficacy, psychiatrists' preferences to these types of products, and we are, in fact, very confident about Zyprexa having the best combination of dependable efficacy and safety. We were pleased with the performance in the 4th quarter. During the year we surpassed $1 billion in sales which is the first ever for a Lilly product.

I would just add to that, Steve, clearly if you look at the December numbers, they showed a slight dip in market share, and that's what we're reflecting in the statement here. But the really important factor, as far as we are concerned is the whole topic of sales growth. And that's what we think we should be measured on, given our new entrance into the marketplace. Not only in Q4, but also for the full year next year. Next caller, please.

Thank you. Our next question comes from Barbara Ryan from Deutsche Banc. Please go ahead.

Good morning and thank you for taking my questions. Charlie, I think last year you had given us some boundaries on gross margins. And I know that given the outlook which is uncertain in terms of the timing of new product launches and obviously your spending, et cetera, I wonder if you could just give us, given that you do have insights into the costs at least on the manufacturing side, some boundaries about what you anticipated in gross margins? Because those were actually higher than I would have expected in the fourth quarter.

Versus the 80.8% in the 4th quarter?

Yeah.

Yeah. I'm with you. We're trying to get some guidance relative to what we're talking about in gross margins. The $200 million is something that will be with us for a while. We expect to have productivity improvement that will offset that, I think for the foreseeable future, that would be a good thing to factor in to the gross margin. And again, I think this is more than I would have anticipated a year ago, quite frankly. When we talk about that, because of the fact that as we have moved through the process of our quality improvement program, also importantly recognized that we need to add capacity in certain areas like the insulins and some of our -- obviously our new products. That has increased that impact on gross margin, and I guess -- you know, we can view that negatively or positively. I quite frankly view it positively, because the investments we're making in gross margin are only going to set us up for the future. Both in terms of quality performance as well as capacity, you know, to increase our production. And, therefore, realize more sales. So I guess the best I can say, Barbara, is to take that 200 million and sort of factor it into your calculations on gross margins. I think Simon also said, we'll have some offset in terms of favorable product mix. So there's a little bit of an offset to that $200 million .

Thank you, Charlie. Next caller, please.

Thank you. Our next question comes from James Kelly with Goldman Sachs. Please go ahead. Sir, your line is open. Please go ahead. We're going to move on, then to a question from Carl Seiden with J.P. Morgan. Please go ahead.

Thanks for taking my question. A couple of follow-up questions that I guess are all guidance related in one way, shape, or form. Simon, you kind of alluded to the track record over the past four quarters where guidance has been a slippery slope. I think your last commentary a quarter ago, is that maybe guidance going-forward because of all the moving pieces would have to be offered on a quarter-by-quarter basis. It seems like you do have all these moving pieces, yet you are giving us this full-year guidance. I'm just wondering what it is that gives you the confidence that this is the right range given to all those moving pieces. Secondly, as a follow-up, I guess, to Steve's question about kind of the one-time payments, can you tell us, of your 250 to 260 range on an EPS basis, what is the expected EPS contribution from milestone payments that you expect to receive in '03? And last, on the last question that was asked on gross margins, I would have thought that a lot of the additional spending required for the GMP issues would have been things that were already done rather than yet to come. Can you characterize in any way what the incremental cost-of-goods spending has been to buff up GMP? And how much is yet to come so we have that as a metric to guess what inning we're in in this thing? Thanks a lot.

Charlie, maybe you could take the first two questions and our confidence on guidance and what's in the 2.50 to 2.60. And then I'll address the GMP spending.

Carl, I think our confidence relative to that range is really driven by the fact that, you know, we're three or four months closer to it than we were a quarter ago, and talking about what we might do. Even though, again, I would caution that the uncertainty of timing is always there of the launches. But what we've tried to do is put in a construct that will essentially allow us, as Simon said, that even if that assumption could have underlying from what changed, that we have enough room to live with in that guidance. That really comes about through a process that will sort of enable us as we understand better and start to firm up the timing of launches of our products. That will essentially be triggering spend on sort of a gradual basis that we would then be able to trigger spend on these products, knowing that we would realizing sales growth on those products by the end of the year. If the launches get pushed out. Then we wouldn't see as much as early. That's kind of the process which we have internally to be sure we match this guidance. And I think, quite frankly, I guess, I would have to say, although, you know, we still need to have significant dialogue with the FDA, as time goes on, I think we feel a little more positive about our situation on the manufacturing side. Although as Simon said, you know, we still will need to have inspections on the products before they get launched. So I guess those are the factors that in a few months may have changed our minds. Relative to what -- you know, might be in the launch, I think some of these things will be ongoing, and some of them will flop. During the Ingelheim transaction will continue to reflect our income statement in 2002 -- or 2003, so it's difficult to be definitive about that. We'll continue to make this disclosure on a quarterly basis. We'll also seek your input to see how we can, you know, be as current on that as we go forward. We realize that partnership modes which we have gotten into, really, to some extent in the last year and a half is going to be continuing. We view that as a very integral part of our strategy. Therefore, it does change to some extent the income statement. We'll continue to do that, Carl, give you more disclosure. That's about as definitive that I can be about 2002.

As far as the GMP spending is concerned, a lot of what's derived -- what's not only GMP spending, which Charlie said in the 200 million, but is sort of capability enhancement related. We're adding in the quality, organization. We have additional products in there that support our facilities, our utilities and maintenance. Additional funds for future validation, things like the QC lab compliance and our technical services as we move forward with additional new product launches. So those are some of the items which are now being incrementally added to, as well as some of the stuff that expansion of products, like insulin going-forward. In the past, last year we didn't have as much of that, more of it was still related to getting our procedures and processes in line. But now we need to focus on that. To really, ultimately ensure improvement and also growth in our facilities as far as our operations worldwide are concerned. Next caller.

Thank you. Yes, sir. Our next question comes from Jamie Ruben with Morgan Stanley. Please go ahead.

Thanks for taking my question, Charlie. I apologize if other people have tried to get to this question, but I'm still curious to know what you see as the greatest swing factor for guidance in 2003. I would think it would be contribution from sales and profit as opposed to timing of new product sales and investment spending. But if you can kind of rank order, what you see as the biggest swing factors for 2003 guidance. My second question is, since we're not really going to have a handle on the impact from Avilafid for another 6 to 9 months into the launch, just curious to know what sort of -- how conservative you've been with your assumptions. I understand there's good reason to feel good about it, but things can change. And thirdly, you may have mentioned this before, if you can list the products you baked into your guidance for 2003 new products. Thanks.

There's a lot of questions there. Yes, there's no question that the continued growth of our growth products, including Zyprexa, but also importantly Evista and Gemzar and the other ones that we talk about are very important to our guidance. And obviously we make some assumptions that we'll continue to have strong growth in terms of Zyprexa. The fact that Avilifid is there in its very early stages, of course you have to believe that we planned on that in our guidance. As Simon indicated, we do expect some dip in market share over the near term. So that is comprehended in the guidance relative to Zyprexa ad. I guess we've tried to take an approach on the marketed products, we looked carefully at the progress we made last year, recognized, sort of competition that's in the market as well as some of the advantages that will continue to build up as an example. Zyprexa, our submission for long-term maintenance will continue to bolster that area of market that we're building, in bipolar which is, frankly, a bigger market than schizophrenia, which is important to us as well. I would characterize that the assumptions with regard to the marketed products, you know, are a pretty even keel. I wouldn't suggest that they are over-conservative. We've tried to take a middle of the road approach to that.

And in terms of what new products are included in our value.

Right. That's the other part of the question. What we tried to do, since the timing of the launch is uncertain, is to just create sort of a basket of products, if you will, and put into our guidance, as I said earlier, what we think, you know, would be a number for our total new product sales in 2003. That obviously assumes some launch timing. The timing of the products could vary. Some might be sooner, some might be later. Clearly, the ones which were focused on are products like [SIMBOLTA], that's very important in terms of getting that into the market. So we're not going to be talking about the advancement of each product because of the timing issue. That does affect sales of each of those, which were realized in 2003.

With that, there's another earnings conference call about to start at 9:00, so we will close the meeting out now. We will be available to take calls after this meeting. Thank you.

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