禮來公司 (LLY) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Eli Lilly & Company first quarter results teleconference.

At this time, all participants are in a listen-only mode.

Later we will conduct a question and answer session with instructions given at that time.

If you should require assistance during the call, please press zero, then star, and an operator will assist you.

As a reminder this teleconference is being recorded.

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

Please go ahead, sir.

Good morning, afternoon, or evening wherever you may be today.

I apologize that we're starting a couple of minutes late.

Due to technical difficulties.

Joining me today are Charlie Golden, Executive Vice President and Chief Financial Officer, as well as my colleagues, Craig Hartman and Heidi Straub from the Investor Relations team.

Each of you should have received the related earnings press release and the supporting materials for this call via e-mail or on the web site.

Following our first quarter performance review, we will take your questions as well.

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 have made assumptions concerning the company's efforts to resolve good manufacturing practices and that potential impact on the company.

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

We have also made assumptions about the timing of global launches of new products, including Cymbalta, [INAUDIBLE], and distressed urinary incontinence and, the company's results may be affected by the continued growth rates of our newer products including Zyprexa, Evista and Gemzar by the sales update of the Xigris, Forteo and Cialis and by the impact of the 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 of the company, to the company's latest form 10-K filed in March, 2003.

You can access the live web cast of this conference call at www.lilly.com.

In addition to the live web cast, an Internet-based replay will be available on our IR web site under web cast and presentations, until may the 20th, following today's call.

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

Strattera was launched in the United States, the first U.S. prescriptions of Forteo occurred following its December 2002 launch and one month sampling.

Lilly Cialis in the European union as well as in Australia and New Zealand, the FDA informed us of a six-month review time following our recent submission of the full response to the Cymbalta approvable letter.

In the period since we received the approvable letter in 2002, we have collected additional safety efficacy and product development data which were included in the full response.

Cymbaltas final approval is subject to successful completion as you know of the manufacturing inspection.

Therefore, at this point in time, we believe a realistic time line to complete the regulatory approval process for Cymbalta is the fourth quarter of 2003.

And finally, Lilly filed its European submission for Duloxetine for the treatment of stress urinary incontinence.

In terms of manufacturing, we recently received a letter from the FDA in response to our detailed improvement plan that we submitted last October.

This letter is part of the ongoing feedback and dialogue with the agency and summarizes in general terms the FDA's expectations for bringing our facilities in Indianapolis into compliance.

In the letter, the agency acknowledges certain positive steps and comments on timelines for improvements in various areas.

Consistent with prior discussions with the agency, and what we have shared with you, the letter addresses improvements for facilities and equipment, controls for aseptic control processing, process validation and control, laboratory operations and quality systems.

We continue to implement the action items contained within our plan with a great sense of urgency and will remain in close contact and cooperation with the agency regarding our progress.

While the FDA acknowledges in the letter that it will take time to achieve sustainable compliance, the agency also notes that our progress against the commitments in the plan will be a major consideration in determining compliance during subsequent inspections.

The next major milestone in the process will be the inspections of building 100 and building 105.

We are ready for a re-inspection of building 100.

And it is finished and continue to expect to be ready for the re-inspection of building 105 with Zyprexa intramuscular is manufactured sometime later this year.

Ultimately, the agency will determine how and when to inspect the facilities.

We will continue to provide updates as appropriate.

Now, I would like to turn your attention to slide three as I summarize our normalized financial results for the first quarter.

Worldwide sales for the quarter grew a robust 13% to $2.889 billion.

Gross margin as a percentage of sales was 78.5%.

And 80 basis point decline compared to Q1 of '02.

Total operating expenses increased 13 % for the quarter, this increase in total operating expense resulted from an 18% growth in SG&A expense and a 5% increase in R&D investment.

Operating income grew 10% compared to the first quarter of last year.

Nonoperating income for the quarter was a contribution of 24 million.

The normalized tax rate remained at 22% for the quarter.

Finally, Q1 normalized diluted earnings per share of 61 cents was the result of robust sales growth across several of our key products. 61 cents represented 5% increase compared to earnings per share of 58 cents in the first quarter of 2002.

For your information we have also provided a reported earnings statement on slide four, details about our reported earnings are available in our earnings press release dated today, April 22, 2003.

Also, consistent with Lilly's past reporting practice, and in line with the SEC's new regulation G, slide five shows the unusual items that affected our reported results, but were normalized out of earnings in order to allow investors to better understand our ongoing basis.

In the first quarter of 2003, a 23 cent charge or $354 million was normalized from earnings for asset impairments restructuring and other special charges.

As previously disclosed in December 2002, the company initiated a plan of eliminating approximately 700 positions worldwide in order to streamline its infrastructure.

While a substantial majority of affected employees were successfully placed in other position notice company, severance expenses were incurred in the first quarter for those employees who elected the severance package.

The restructuring and other special charges, which are primarily voluntary severance expenses were 53 million dollars or three cents per share after tax in the first quarter.

In addition, as part of the company's previously disclosed ongoing strategic review, the company made decisions during the first quarter of 2003 that resulted in the impairment of certain assets primarily manufacturing assets in the United States.

This review did not result in any closure of facilities but certain assets located in various manufacturing sites were affected.

These asset impairment charges incured in the first quarter were 150 million or 7 cents per share after tax.

As you may remember in August, 2001, Lilly licensed from Isis Pharmaceuticals Affinitak, a small cancer drug candidate and entered into a research collaboration to discover antidrugs, in conjunction with this agreement Lilly made an equity agreement in Isis and committed to a loan from the four year research collaboration.

In addition, Lilly made a loan to Isis to fund the building of a manufacturing suite for Affinitak.

Recently, results were reported from Affinitak's first phase III trial which will delay any potential future submission.

In light of this first quarter development, and in view of the current market climate as it relates to Isis's stock price, in accordance to generally accepted accounting principles Lilly has recorded certain charges primarily related to the impairment of ISIS related assets on Lilly's balance sheet and has written the assets down to current fair market value.

The assets include the equity investment in collaboration loan which is tied to ISIS's stock price as well as the construction loan.

The ISIS related charges incured in the quarter were 187 million, or 13 cents per share after tax.

Lilly is continuing to follow patients currently enrolled in the second phase III study.

But has suspended further enrollment in this and other studies of Affinitak pending a review upon completion of the second phase III trial.

Lilly and ISIS are continuing their research collaboration to discover drugs in the oncology and inflammatory and metabolic disease.

In summary, total asset impairments restructuring and other special charges incured in the first quarter of 2003 were $354 million, or 23 cents per share after tax.

Now, let me hand the call over to Craig Hartman to discuss sales performance.

Thank you, Simon.

I will start by summarizing the geographic breakout of the affect of price, rate and volume on our sales for the quarter.

As slide six demonstrates our top line growth of 13% benefited from a 2% increase due to price, a 4% increase due to exchange rates, and an increase in volume of 7%.

The 4% exchange rate benefit was driven primarily by the strengthening of the euro and the yen.

The sales of the leading growth products, including Zyprexa, Gemzar, Evista and Humalog, grew 16% in the quarter, including a 5% interest point benefit from exchange rates.

At current euro and yen levels we would not anticipate the exchange rate benefits for the remainder of 2003 to be as significant in year on year comparisons as what we reported in Q1.

Now, I'll turn to Zyprexa, the results are on slide seven.

Zyprexa sales grew 17% to $958 million in the quarter.

U.S. sales grew 9% and sales outside the U.S. were up 34%.

Zyprexa posted U.S. sales growth despite a new market entrant and ongoing budget pressures with state Medicaid programs.

The strong sales outside the U.S. were driven by continued use in schizophrenia, increased use in bipolar mania in major markets such as the U.K., Spain and Germany and exchange rates.

On slide eight you can see Gemzar sales were $234 million for the quarter.

Up 18%.

U.S. sales grew 15% and international sales were up 23%.

U.S. sales growth rate benefited considerably from an inventory workoff by wholesalers in the first quarter of 2002.

Moving on to Evista on slide nine, Q1 sales grew 20% to 214 million dollars.

U.S. sales grew 9%, and international sales were up 60%.

Total prescriptions in the U.S. grew 10% for Evista in Q1 compared to the same period last year.

International sales were driven by strong demand for the products in France and Spain and exchange rates.

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

On slide 10, we report the performance of our diabetes care franchise which is made up of primarily Humulin, Humalog and Actos.

Q1 sales for the franchise grew 26% to $633 million.

Humulin increased 3% to $241 million.

And Humalog grew 40% to $249 million and Actos revenue climbed 80% to $133 million.

The increase in Actos revenue to Lilly is due to strong growth in underlying product sales and to the contract terms of ta Qaeda which resulted in a favorable comparison relative to the first quarter of last year.

Remember Lilly's share of revenue from the agreement with ta Qaeda will vary quarter to quarter based on contract terms.

Lilly's Actos will not necessarily track with product sales.

As a result it is difficult to make quarterly comparisons for Actos revenue.

Progress sales were 36 million dollars in the quarter, up 63%.

U.S. sales grew 22% to $27 million.

Outside the U.S., sales were 9.2 million dollars.

We realize it will continue to be a long March to reaching the ultimate potential of the product.

A launch of Strattera for attention deficit hyperactivity disorder has exceeded our expectations.

Strattera sales were $55 million in the quarter.

Following its January launch in the U.S.

Stocking related sales in the first quarter were about $18 million.

As of March, the monthly total script share reached 8.3%.

In the first three months following its launch, Strattera reported more scripts than any other neuro science new chemical entity launch in history, including Lexapro.

Sales have been driven equally by the efforts of our neuro science and primary care sales groups and by the robust body of data underpinning the product.

At the time of the launch we completed eight acute placebo controlled clinical studies.

In each, Strattera was significantly superior to placebo in reducing ADHD symptoms.

This is unprecedented for you a neuro science drug.

The initial focus is on physicians who currently treat ADHD in children and adults.

The adult and child psychiatrists as well as neurologists have contributed close to half of prescription volume, while pediatricians have contributed approximately a quarter of the early volume.

At this early stage, adult usage accounts for about 25% of the scripts.

In line with the overall ADHD market.

Strattera is now reimbursed in 42 states, we believe consumer education for adults with ADHD and parent whose children may have the disorder will be an essential part of helping people make educated choices.

As a result, we recently began selected direct to consumer advertising in journals and publications to highlight to parents the availability of a new treatment option.

We think the next nine to 12 months will be crucial to the long-term success of Strattera.

We anticipated that the product attributes in clinical data would result in physicians trying Strattera, driving the strong performance initially.

Importantly, Strattera has yet to go through an annual cycle in the ADHD market.

Which has historically been a very -- has been very seasonal in nature.

As such, Lilly would need to demonstrate to physicians and parents that a summer hiatus is not recommended, or necessary with Strattera.

Outside the U.S. we are waiting regulatory decisions in a number of countries, including Australia, Canada, and New Zealand.

We expect to file our submission in Europe during the second half of 2003.

Now, I'll turn the call over to Heidi Straub to discuss Q1 results for Forteo and Cialis as well as the income statement.

Thank you, Craig.

Forteo sales in the U.S. were $4 million in the first quarter.

Following its December, 2002 launch.

Since launch, Forteo sales have been $10 million.

As a reminder patients initiating Forteo treatment are provided one month samples.

By the end of the quarter we had detailed approximately 7,000 of the 8,000 targeted physicians.

At this early stage of the launch, the sales uptake for Forteo is in line with our expectations.

However, the Forteo uptake curb will be shaped by a couple of key challenges.

The lack of a sense of urgency among many physicians to put patients on the drug, the time required in the physician's office to train patients how to use Forteo and the initial hurdle of taking an injection.

On slide 14, you will Cialis see results for the quarter.

During February and March.

Cialis was launched in the European union as well as Australia and New Zealand.

Cialis sales recorded in Lilly's revenue line were $5 million which includes initial stocking in Australia, England and Saudi Arabia, the Lilly-only territories.

Cialis sales in the European union a joint venture territory will be announced on April 30.

As a reminder, the Lilly ICOS joint venture sales are not in the revenue line, rather they are part of the joint ventures income statement.

For the joint venture territory, Lilly records its portion of the joint venture income or loss in the miscellaneous section of other income and deductions.

Lilly is encouraged by the early results and feedback indicating that the marketing messages for Cialis are resinating well, not only with patients, but also with physicians.

We are pleased by Cialis's unique European label.

For example the Cialis label confirms the broad period of responsiveness by highlighting the efficacy may persist up to 24 hours post dose.

Additionally, the Cialis label says it can be taken without regard to food.

The lack of food interaction and broad period of responsiveness are desirable characteristics that our market research indicates are valued by men with erectile dysfunction.

In modeling Cialis sales during the initial launch period please keep in mind the historical launch patterns for other erectile dysfunction therapies.

Past launches have been characterized by strong initial sales during which men experiment with newly available treatment options.

Followed by a return to a more consistent and sustained level of sales.

We anticipate a similar launch pattern for Cialis.

Turning now to the income statement.

Slide 15 summarizes the quarterly sales amounts and growth rates of our leading pharmaceutical products plus animal health.

As you can see the Prozac family of products declined 19% to $150 million.

ReoPro increased 2% to $93 million.

And Humatrope increased 9% to $85 million.

In addition, antiinfectives declined 29% to $122 million.

Also, worldwide sales of animal health products increased 3% to $173 million.

When compared with the same quarter last year.

Slide 16 shows a decrease in our gross margin for the quarter.

Gross margin as a percentage of sales in the first quarter was 78.5%.

A decrease of 80 basis points over Q1 of 2002.

As expected, this decrease was due to incremental ongoing costs to ensure quality improvements, as well as growth and capacity in Lilly's manufacturing operation, offset partially by a favorable sales mix of higher margin products.

Looking at slide 17, you can see that SG&A was $950 million for the quarter, an increase of 18%.

The increase in SG&A expense was attributable to increased underlying marketing expenses for new products, increased incentive compensation, and costs associated with certain pending litigation.

R&D expenses shown on slide 18 were $530 million or 18% of sales.

Our investment in R&D grew 5% for the quarter.

Primarily due to increased incentive compensation.

Slide 19 summarizes the first quarter nonoperating income and deductions.

Total other income and deductions resulted in a net contribution of $24 million in the quarter.

Nonoperating income and deductions declined primarily due to less income from outlicensing of development stage products, and less miscellaneous fee income in the first quarter of 2003.

Offset partially by increased income from partner products and development.

As a reminder, outlicense of marketed products includes the sale of trademarks primarily in markets outside the U.S.

The outlicense of development stage products includes income from outlicensing deals.

Partnered products and development consists of income from the Quintiles and Boehringer-Ingelheim deals.

For the first quarter, the miscellaneous line includes Lilly's 50% of the operating results from the Lilly ICOS joint venture, as well as gains an losses from the transactional hedging program, miscellaneous license fee income and various other items.

Since sales for the joint venture territories and the operating results for the JV will not be announced until April 30th, the day of the ICOS quarterly financial conference call, Lilly has combined the operating results from the JV in the miscellaneous line.

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

The reported tax rate was 17.6%.

Now, turning to the balance sheet, during the quarter, accounts receivable decreased by $15 million.

Primarily due to lower sales in March versus December of 2002.

The level of inventory reported on our balance sheet at the end of the quarter increased by $89 million, compared to December, 2002.

The increase was primarily attributable to buildup of inventory for new product launches and our growth products.

Now I will hand the call back to Simon to discuss financial expectations.

Turning now to our financial guidance for the second quarter and the full year 2003, we are comfortable with an EPS range of 59 to 61 cents for Q2 and a reconfirming earnings per share expectation of $2.50 to $2.60 for the full year.

The full year earnings guidance excludes the asset impairment restructuring and other special charges that were incurred during the first quarter of 2003.

In response to the recently issued SEC regulation G, the company notes that if the first quarter unusual items were not excluded, then the reported earnings per share guidance for 2003 would be $2.27 to $2.37.

In addition, our guidance for Q2 and the full year excludes future unusual items.

However, the company is not aware at this time of any material unusual items that will occur in the remainder of 2003.

Let me remind you of some of our assumptions behind our normalized earnings guidance of 2.50 to 2.60 for 2003.

Given it is difficult to predict the precise timing of approvals for products currently under regulatory review, the guidance range reflects a sales estimate for the basket of those new products that are currently under 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 investment.

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 global Zyprexa sales.

Given the robust sales growth for many key Lilly products during the first quarter and the encouraging launches particularly of Strattera and Cialis, our guidance range assumes any upside in sales will be reinvested back in successful new product launches.

As we mentioned in January, gross margin for the full year will include incremental ongoing annual costs, of approximately 200 million compared to 2002 levels as part of a conscious strategy to ensure quality improvements and growth and capacity in our manufacturing operations.

These costs will be partially offset by positive product mix.

Our normalized tax rate assumption in 2003 is 22%, unchanged from 2002.

Just to summarize, our Q1 results reflect the strength of our currently marked products, and the start of delivering on the pipeline.

Sales increased 13% for the quarter, the highest growth we have seen since the Prozac patent expiration some seven quarters ago.

Zyprexa, Gemzar, Evista and Humalog all delivered strong double-digit sales growth even excluding exchange rates.

New product launches of Strattera, Cialis and [INAUDIBLE] have been encouraging.

We are making good progress on our manufacturing plan to improve our Indianapolis facilities.

And as we just said, we are committed to 2.50 to 2.60 full year normalized guidance and any upside from performance will be invested right back into the new product launches.

This concludes our financial review of our very strong Q1, 2003.

And now, Charlie Golden CFO and the IR team will take your questions.

Bill, the operator could we please have the first caller.

Thank you.

Ladies and gentlemen if you wish to ask a question, please press the one on your touch tone phone, you can hear a tone indicating have you been placed in queue and if you pressed one prior to the announcement we ask that you please do so against at this time.

You may remove yourself from the queue at any time using the pound key.

If you are using a speaker phone, pick up your hand set before pressing the numbers.

Once again, if you do have a question or comment, please press one on the touch-tone phone at this time and one moment for the first question.

First line will open is Scott Kay with Banc of America.

Please go ahead.

Hi, good morning, thanks for taking my call.

Kind of a two part question.

The first one very easy, very quick, price increases from the quarter, if you could just note those.

And then regarding Cialis overseas, I just want to get a sense, I think I got a sense of the pricing strategy, and looking at just a couple of markets, the U.K. and Germany specifically, I know U.K. kind of partially reimburses ED drugs and Viagra is now being reimbursed, I kind of want to know if you have timing on getting the reimbursement.

And then pricing strategies in general because it seems like Cialis is priced at least 50% less than Viagra and la Vedra so any comments on that would be great.

Thanks.

Maybe I can take the first question, Scott, in terms of price increases during the quarter.

There was a 5 1/2% increase for Evista and a 5% increase for Humatrope.

Those were the two major ones.

In terms of Cialis in Europe and in terms of reimbursement I am not specifically aware of the exact details on reimbursement in the U.K. market.

What I can say is in the vast majority of markets it is obviously not reimbursed, hence why it was so easy to roll out fairly quickly across the European union markets.

And in terms of the pricing, pricing structure for Cialis in Europe is approximately 7 cents per -- 7 euros, excuse me, per tablet.

Next caller, please.

The next line will open is Tim anderson at prudential.

Please go ahead.

Hi.

Couple of questions.

On Cymbalta, are you guiding for full approval in fourth quarter or just to have a regulatory response?

And if you get full approval, would you still anticipate launching before year end?

And I'm wondering also how the stress urinary incontinence plays into it as well, if you would get approval ahead of it, would you be prepared to launch.

And on Zyprexa, can you just walk through international sales dynamic, it seems like the product is doing very well there and rising sequentially and I just want to make sure that is reflective of demand and also just talk about Japan and what is going on there with Zyprexa.

Thanks.

Charlie, maybe you could take the question on Cymbalta and SUI and I will talk about Zyprexa.

Tim, we are guiding to fourth quarter approval, basically, on Cymbalta for depression.

And depending on when in the fourth quarter we get that approval, will depend on when we launch, but obviously we will try to do it just as quickly as possible.

And regarding SUI, that essentially is trailing, in terms of the way it's being handled and our submission and so on, so we would expect that to be subsequent.

We wouldn't expect that to be before depression.

And in terms of Zyprexa international sales, as you saw they were up a strong 34%, that does include some rate, but nevertheless still up very strongly in terms of underlying demands. as we said overall, Zyprexa as well as the other major products have strong double digit growth even without exchange rates and that is really being driven by quite frankly not only the conversion from sort of typical to atypicals in Europe, the schizophrenia, and also by the bipolar mania indication which has been very encouraging in Europe.

In the Japanese market, we had about $23 million worth of sales in Q1.

Which was a 5% increase over the same quarter last year.

So those sales are beginning in Japan to start sequentially picking up again.

And clearly we did have some impact from the label change last year.

Next caller, please.

The next line we'll open is Mara Goldstein at CIBC.

Please go ahead.

I was wondering since we are now one quarter into the year if you might have just a better idea of how the gross margin will play out through the rest of the year given you're not expecting anything back from the FDA until at least sometime in the quarter.

Charlie?

Yeah, Mara, I think that the gross margin is really playing as much as we expected I think, Simon commented on another $200 million which will be very important to our quality improvements but that will have an impact, of course it will be negative on the gross margin but I don't think we have any surprises or anything that we didn't expect relative to the gross margin.

Thank you.

Next caller, please.

Next line is Barbara Ryan at Deutsch Banc.

Please go ahead.

Hi, Barbara.

Good morning.

Just a brief question on Cymbalta.

Can you tell us or explain to us what the nature of the data that the FDA requested in the approvable letter and whether we might see the pain study presented at APA at the latter part of May, and whether that has also been submitted to the FDA.

Barbara, maybe I can talk a little bit about the -- what we've submitted.

We haven't really gone into any specific details.

All we were asked to do, quite frankly, was to submit some additional data that became available, general data around safety efficacy and product development data.

It's important to understand that we've obviously had a six-month period now since the approval letter, and if you have delays in an approval as we have had, given the manufacturing situation, new data has become available since that approvable letter as part of our ongoing sort of information that we are collecting, and it's really just related to that, but more specific than that, we have not need.

I would also point out just to reassure you that the FDA did not ask us to conduct any additional studies, anything like that.

This is purely sort of supplemental datas that has become available and Heidi, I don't know, can you comment on the pain --

Barbara, I'm assuming you're asking about the diabetic neuropathy data and yes, that will be presented at the APA, it will be in the Monday session on May 19.

Okay?

Next caller please.

The next line we'll open is Carl Sideen at J.P. Morgan.

Please go ahead.

Thank you very much.

Couple questions if I could, Simon.

One is on foreign exchange, you told us very precisely what the impact was on the top line.

I am wondering if you or perhaps Charlie could comment whether or not any of that benefit fell to the bottom line.

I am assuming there were some negative impacts on your major cost lines but that was not mentioned when you detailed any of them so if you could tell us what if any benefit you think foreign exchange had to the bottom line.

And on Cymbalta, can you tell us when the -- when precisely the six month clock started, and I know that you have said inspection of building 100 is up to the FDA.

But is it reasonable to assume that preapproval plant inspection will happen sometime within this six month window?

Thanks.

Let me maybe first take the question on Cymbalta.

We submitted the full response as we said in our press release, recently.

So we're not giving the exact date quite frankly, to be very blunt, we've had sort of experiences in the past that if you put out a date, it causes an amazing amount of volatility in the stock around the day of the announcement so we haven't disclosed that exactly.

In terms of preapproval inspections I mean obviously we would anticipate that there will be a preapproval inspection for Cymbalta before Q4, hence why we put out the data in anticipation that we will get approval sometime in the Q4 time frame.

And Charlie, in terms of exchange rates, on the bottom line?

Yeah, Carl, not as much as obviously as on the top line.

You pointed out that foreign exchange rates affect our costs in the negative sense and in other words raise them as we translate the foreign costs into U.S. dollars.

But also keep in mind that in terms of proportion of our sales, 60% is in the U.S.

Only 40% is outside the U.S.

And also, if you think about the way we price our products generally outside the U.S., particularly in areas like Europe, we obviously are not recovering as much as we are in the U.S.

And therefore, proportionately, the profitability outside the U.S. is relatively less.

So all of those things sort of translated down to the bottom line, would tell you that, you know, it has a relatively minor effect on the bottom line.

Next caller please.

The next line we'll open is Steve Skalow low of S.G. Cohen.

Please go ahead.

I have three brief questions.

First, the 200 million in incremental cost to the gross margin margin did we see a [INAUDIBLE] amount of that in Q1 like 50 million or is that allocated differently.

Secondly, the only nonoperating contribution to P&L from partnering sources I would imagine were relatively small contributions from AI Pharma, BI in gailen but not Quintile, is that correct?

And then thirdly, what's the nature of the certain pending litigation expenses reflected in the SG&A in the quarter that wasn't there last quarter to my knowledge?

Charlie, maybe you can answer the first, and I'll try and figure out the --

Just a second.

I would say, Steve, probably relatively proportional.

In other words a lot of costs that we're incurring, you know, the elements that generate those costs are in place.

Because the approving programs are ongoing, the additional people and so on.

So I think my answer to that would be you sort of more or less, yes, sort of proportionate.

The third one, about certain pending litigation we obviously don't disclose what we're reserving for on that because it is probably not a good practice in terms of our opponents.

But suffice it to say that we reviewed this every quarter and take a look at the reserves and make sure they're adequate.

And that's all the information I can give you on that and Simon is figuring out the answer to the second question.

In terms of OID, basically what you're seeing on the slide there and the outlines of marketing products as we said in the prepared comments that is essentially sort of -- the assumption of licensing comes oversea, really small stuff in aggregate.

The 22 million in products in product development relates essentially to the vast majority of it is prorata, up from payment amortized for the Boehringer-Ingelheim deal and there is a little bit of Quintiles and other stuff in that number.

But it's very small.

And in terms of your question about gailen, we recognize the sales as a result of that in the revenue line.

Next caller, please.

Next line we'll open is Ken Kulju at CSFB.

Please go ahead.

Thanks, good morning.

Ken Kulju and thanks for taking my question.

First on Gemzar, I know you had a big fourth quarter and also a strong first quarter, I was wondering if you could talk about the inventory and core growth characteristics you are seeing in the Gemzar franchise and is there anything coming out at ASCO that we should be aware of.

Craig, maybe you can comment on Gemzar and, Heidi you on anything at ASCOs.

Thanks, Simon.

Ken, as we mentioned in the call text that there were inventory reductions in the first quarter of last year that contributed considerably to the growth of Gemzar.

In fact, I think it's safe to say that our underlying growth for Gemzar would be in the single digits without that effect year to year.

Heidi?

Yeah, at ASCOs, we will be presenting our best breast cancer registration trials so that will be the most significant item at ASCOs for Gemzar.

Thank you, Ken.

Next caller, please.

The next line we'll open is Tony Butler at Lehman brothers, please go ahead.

Hi, Tony.

Yes, good morning and thanks very much.

Just again three brief questions.

One, Charlie, long term debt has continued to trickle higher.

Can you comment as to whether that pattern will continue this year, perhaps even next?

Second, if I may, there is the comment in the release around four launches or up to four launches next year.

Could you just again remind us of what those four products are?

And then finally, I'm just making an assumption with a six-month review from the FDA, I assume there would be no need for a panel to review the additional data.

Which you all supplied to the FDA.

Is that true?

Thanks.

I think it's very fair to say there is no panel needed for the additional supplemental data for Cymbalta.

In terms of the four products, they are OFC or Cymbiax, Cymbalta, Olympia and Duloxetin for stress urinary incontinence, in addition to the three that we have already launched, Cialis, Forteo and Strattera just recently.

And Charlie on the long term debt.

Tony, as you pointed out the debt has gone up somewhat since the beginning of last year.

In other words a year ago.

It will probably condition to trickle up a little bit.

Not a lot, quite frankly.

And as long as our -- given our guidance, you know, sort of compared to our earnings last year, you know, cash flow is in a good position.

But it will become more robust as we go forward in 2004.

So we will probably have a little bit more debt.

I want to remind you though that the balance sheet is extremely strong, you know, we've got a very solid AA rating and most recently confirmed by the rating agencies as a result of a debt issuance we did so there is certainly no issue there.

Thank you, Tony.

Our next caller, please.

The next line we will open is David Risinger at Merrill Lynch, please go ahead.

Thanks very much.

The first question is with regard to Zyprexa in the U.S.

Can you provide some perspective on when you expect the Zyprexa scripts to begin to grow sequentially?

Again I think they have been pretty much flat since November.

And second, could you please discuss the nonoperating income outlook for the rest of 2003?

Thank you.

In terms of the Zyprexa scripts in the U.S., yeah, it's difficult to say exactly when those scripts will pick up and some of that is tied obviously to seeing how products like [INAUDIBLE] continue to develop although I have to say so far we've been very pleased with the performance of Zyprexa, given competitive launches.

Yeah, obviously there will continue to be, as we have said, sort of state budget deficits, and that will continue to be the sort of challenge we have on an ongoing basis, state by state.

I think it's important to point out that that's been going on for some time now and we have cross functional action teams that basically taylor solutions for each state situation.

And we're very much actively engaged in ensuring that we continue to have strong growth.

I mean we have access in 48 of the 50 states, West Virginia and Kentucky are the two where there is prior authorization lists, but as these come up, we, as I said we try to taylor solutions specific to the state, we're working on trying to do now, for example in Massachusetts.

Next caller, please.

I'm sorry, in terms of the nonoperating forecast.

Charlie?

That's a really tough one to forecast.

As I'm sure you all realize.

I think, you know, we'll have some more income from partner -- from partner products, what happens to interest income, interest expense is probably anybody's guess but wouldn't surprise me if rates stay stable.

That, you know, we'll be a bit below last year in terms of our interest income.

Maybe in the next quarter or two, so those are a couple of the important elements but it is a really hard one to predict as I'm sure you appreciate.

To the extent we, you know, since more compound, that will enter into that line, so, you know, that's about as good an idea as I can give you which I'm afraid is not real clairvoyant.

Next caller please.

The next line we'll open is Burt has let at sun trust.

Please go ahead.

Hi, good morning, everyone.

Just a comment on, question on Cialis and a couple of other products.

In terms of Cialis do you still not expect to participate in the May 29 meeting that will discuss QTC for lavetra and Viagra, has there been any change there?

Can you give us the components of Actos growth, the catchup payment that was included this quarter and on Strattera, when do you expect to focus on the adult population and can this perhaps offset some of the seasonality that we see during the summer?

Thanks.

Heidi maybe you can talk first on Strattera and then Craig on Cialis and Actos.

Sure.

Bert, with Strattera we are currently rolling out our adult messages but similar to what we did with the children's market we do not intend to roll out direct to consumer campaign until we have sufficiently detailed the physicians and made sure that they are aware of the product.

So we're not going to be specific on that timing, but we are in fact detailing physicians with the adult messages now.

Great.

Okay.

Regarding your question on Cialis and the advisory panel, we still don't expect to be part of that conversation, Bert, and I think we probably have talked with you that, you know, based on the clinical data we have, we don't see or have any reason to believe that Cialis does prolong the QT interval.

In the overall incidence of cardiovascular events in clinical studies of Cialis were low and comparable to placebo.

The -- in terms of your question about Actos, there was not a catchup payment in the first quarter.

And the timing of that varies by year.

And I think in 2001, it was in the third quarter and in 2002 it came in the second quarter.

But we're not providing any guidance as to when that might occur in '03.

If I could just maybe add in terms of Cialis, I think the other thing that is very important to know, in the case of Cialis, in clinical trials, I mean this drug has been tested out to doses of 500 milligrams.

In addition, we've studied it for up to 21 days at 100 milligrams.

And the recommended doses are in the 10 to 20 milligram range and we've still seen nothing from a QTC promulgation standpoint and we obviously will have to wait and see what happens in in advisory committee but we really don't know much more than you know as to why specifically they're focused on the topics that they are.

Next caller, please.

The next line we'll hope is Jim Kelly at Goldman.

Please go ahead.

Good morning, everybody.

I just had a question on Zyprexa, and the veteran, the VA, I guess the VA is conducting a study looking at the atypicals, and diabetes, and I don't know if there is any update on what the -- how the study is being designed.

Is it all backward looking?

And any sort of early read on what can be coming out of VA with respect to this?

Craig?

Jim, we actually haven't seen the results.

We don't know what the results are going to look like from this study.

In terms of study design, I think they're looking at cost effectiveness of the various atypicals, and maybe a couple of typicals as well.

And looking at -- well the pink sheets actually reported they were looking at diabetes risk.

So in terms of how this is going to affect the market, you know, we have to wait and see the data.

It could be positive, could be negative we just don't know.

Okay.

Thanks, Craig.

Next caller, please.

The next line we'll open is Richard [Belson] at Capital Research, please go ahead.

Hi, Rick.

Good morning.

Good morning.

Could you just comment in general on the the level of wholesale inventories of the various products.

Yeah, Rick, I mean in terms of wholesale inventory levels there really isn't anything very special in any of them.

They're all pretty much currently at normal levels.

In that we do get from time to time some variability from quarter to quarter, and when that happens it is typically washed out within a quarter or so.

But currently they're essentially at normal levels.

Okay.

Thank you.

Next caller, please.

On the next line we'll open is James [Torelli] with Capital Research.

Hi, James.

Good morning, everybody.

Thanks.

Simon, you mentioned in your opening comments that compliance relative to the plan you submitted is on track.

And the question in the FDA's mind I think if I heard you right is sustainable compliance, I'm wondering if you can help us understand what the key remaining hurdles are to sustainable compliance and whether that -- achieving that compliance level is critical to the Cymbalta approvability.

Secondly, can you talk about the cash portion of the 23 cents of nonrecurring items to the extent there is any.

Thanks.

Charlie, I'll hand those questions over to you.

Yeah, James, really, we're sort of on a continuum quite frankly.

There really aren't any surprises here and we just continue to implement the quality improvement program.

Recall that, you know, there were a number of general items that were cited way back in the beginning of all this that related to sort of our systems being more complex than they needed to be, oversight and technical stewardship, being able to find root causes of problems and so on, and we're putting in place and have put in place, quite frankly, things to address those issues and I think the letter which we received which again sort of really formalizes the FDA's response to that plan, really sets their expectations relative to achieving compliance, and quite frankly, our plan is very much in line, with their expectations.

So it's really just a matter of time as we've stated.

We think we're absolutely on the right track.

And by the time we get all done with this, our intent is to have it very much sustainable.

And actually will have top quality position in terms of manufacturing in the industry.

In terms of cash portion of the 23 cents, of the charges.

Yes.

We're doing a quick calculation here.

Hang on just a second.

We'll go to the next caller and we'll come back to that.

The next line we'll open is David Maskowitz with FBR, please go ahead.

Thank you and good morning.

Question on the process, with regard to the FDA, you mentioned that your analyst and investor meeting in New York, that the dialogue with FDA has increased significantly over the last couple of I guess you said a couple of weeks or months.

Can you talk about the correspondence with FDA, whether or not it's, you know, through various forms of correspondence, phone, e-mail, and are you -- were you having on-site visits from FDA personnel?

And I guess question two, is given that Cymbalta has been pushed back it looks like to the fourth quarter, how would you effectively communicate any manufacturing resolutions?

In terms of the process with the FDA correspondence, I mean we obviously meet with the FDA on a regular basis.

I mean there are about sort of informal and more formal forms of communication, the more formal forms of communication are probably the sort of the formal meetings that we have with them from time to time.

We give them a formal update, I believe, it is on a quarterly basis.

And then there are what I call the more informal types of communication, which are -- which are sort of, you know, telephone conversations, to give updates on where we are at any given point in time.

More specific than that, I can't really be.

In terms of Cymbalta and your question there and communication of once the manufacturing events, inspections have taken place, we will update you when we have something worthwhile to say, worthwhile to say normally would mean probably once the inspection has been completed and we understand the results from that.

But as of this point in time, the agency is not in our facilities.

Next caller please.

The next line we'll open is Edmond [Debler] at Millennium Partners, please go ahead.

Thank you for taking my question.

With regard to Cialis what is the time line in the U.S.

I guess I haven't seen it any place mentioned in the press release.

If you can give us an update on.

That and I think that's my only question left.

Thank you.

Edmond, in terms of the time line for Cialis, what we said is that we anticipate an approval in the second half of this year.

And we will go ahead and launch once we have the approval.

That's basically what the approach is at this point in time.

Just to come back to the topic of what James Torelli asked the cash portion of the 23 cent charge, Charlie.

Let me see if I can break this down into some pieces.

The restructuring related to the elimination of the 700 physicians is basically pretty much all cash.

So that would be about 50 million.

The write-off of the manufacturing assets is not.

It's simply writing off the book value that we have of those assets we can no further use.

And of the Isis, kind of my best estimate is probably that about 80 of that or so is cash.

And it's not immediate cash.

I think that's one important thing to realize that we have some commits commitments we had to fulfill to them overtime, which we are now -- well, essentially writing down from a book standpoint but we still have some cash commitments which we will have to fulfill to them so that is kind of the best guess we can give you right now.

Are there any last callers?

Yes.

The next line we'll open is George Sasic at Dominic and Dominic.

Please go ahead.

On the unusual charges, which resulted in the impairment of certain assets, but did not result in any closures, now does this imply that these facilities were upgraded, modernized?

And if that would be the case, that would be a capital expenditure which would come into a depreciation expense in the future.

Charlie?

What really happened to these facilities and they are just portions of our plant site, and all of these we are impairing basically are being shut down that we no longer have use for them.

So it's really essentially recognizing the remaining book value that we have on our books for those, because we will no longer use them.

And a lot of them relate to things like our seph product, some of the legacy products in which we are phasing out and don't need the capacity which we used to have so it is really old stuff on our books which is really no longer useful.

Okay.

We'll take one last question.

Thank you.

The last question will come from the line of Mario Corso at Leerink Swann and Company.

Please go ahead.

Hi, Mario.

Hi, how are you?

Two questions, on Zyprexa, given that the comparisons in the U.S. get stiffer in the coming quarters, would you expect to see decelerated growth from the 9% in Q1?

Or for that matter, when you talk about Zyprexa growth for the year, are you looking at the annual number?

Are you talking on a quarterly basis?

And then for the firm's overall revenue growth of double digits for the year, do you expect that will be double digits in each quarter of the year?

Thank you.

I'm not quite sure I followed the last question about double digits in each quarter of the year, Mario.

Maybe you can clarify.

I think you've been talking about double digit sales growth for Lilly for the entire year and I'm just wondering if that is supposed to be evenly distributed over the quarters of the year or if you think there will be some quarters that are tougher than others on a revenue basis.

We haven't actually given any formal guidance in terms of sales for the year or for the quarter in total, simply and purely because of given the situation with the timing of launches of new products, it is difficult to know exactly where we should put that range.

Hence why we've stuck more to the bottom line range, around EPS.

In terms of Zyprexa, when we talk about expecting continued robust growth, we expect to see that on a quarterly and annual basis, and that's -- when we talk about that, we're talking about global sales worldwide: With that, Charlie maybe you could just wrap up.

Let me summarize quickly before we leave, I think our first quarter results really do reflect the strength of our currently marketed products and really the start of the delivering on the pipeline we've been telling you is so robust.

Zyprexa Gemzar and Humalog have had double digit sales growth even excluding the impact of exchange rates.

The new product launches, Cialis, Forteo, Strattera have been very, very encouraging I must say, and are really either meeting or exceeding our expectations.

We're making great progress on the manufacturing plant to improve the Indianapolis facilities and I think our dialogue of the FDA is indicative of that.

Finally we're committed to $2.50 to $2.60 full year guidance excluding any unusual items, and really, the upside from any performance that might occur, we're going to invest right back in the launch of this very robust pipeline and the new products that we have.

Thank you, Charlie.

And thank you all for joining us.

We appreciate it very much.

And Frank and Heidi and myself will be available to take your questions by telephone.

Thank you and goodbye.

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