禮來公司 (LLY) 2003 Q2 法說會逐字稿

Welcome to the Eli Lilly and Company's 2nd Quarter Earnings call.

Now I'd like to turn the call over to your host, Mr. Simon Hartford, head of Investor Relations.

Please go ahead.

Good morning, afternoon or evening whereever you may be listening, and thank you for joining us today for Eli Lilly's 2nd Quarter Earning conference call.

Joining me today is John Lechleiter, Executive Vice President, Pharmaceutical Products and Corporate Developments.

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

Following our second quarter performance review, we will take your questions.

During this conference call, we anticipate making projections and forward-looking statements.

These estimates are being made based upon our best judgment at this time.

For example, we have made assumptions concerning the company's efforts to resolve the good manufacturing practices used and their potential impact on the company.

In particular, the timing and the nature of the resolution of the GMP issues will depends upon 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 launches of new products, including (inaudible).

The company’s results may also be affected by the continued growth rate of (inaudible) and others by the sales uptakes of our recently launched products (inaudible) 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 it in Exhibit 99 to the company's latest Form 10k and 10q.

You can access a live web cast of this conference call at www.lily.com.

In addition to the live web cast, an internet-based replay will be available on our website under “web cast and presentations” until August 22 following today's call.

Before we begin, let me remind you that the conference call and all content herein is the exclusive property of Eli Lilly and Company and may not be reproduced, distributed, modified, broadcast or displayed directly or indirectly in whole or part in any medium, including transcript, without first obtaining the written permission of Eli Lilly and Company.

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

Lilly received an approvable letter from the U.S.

Food and Drug Administration for Symbiax for the treatment of bipolar depression and recently filed with the FDA at the complete response to the letter.

The company expects final regulatory approval in 2004.

On July 10th, Lilly received FDA approval in advance of the (inaudible) date to market Zyprexa as a safe and effective combination therapy to either Lithium on Depakote for the treatment of bipolar mania.

This represents another important milestone for Zyprexa in the treatment of bipolar depression.

Lilly unveiled the global effort with the World Health Organization, the U.S.

Department of Health and Human Services Center for Disease Control and Prevention, Brigham and Women’s Hospital an affiliated Harvard Medical School, Purdue University and several companies in developing nations, to increase the number of trained personnel and drugs available to treat the expanding crisis of multi-drug resistant tuberculosis.

Lilly's total financial contribution to this effort will be approximately $70 million dollars until 2006.

FDA investigators concluded the reinspection of the company's drug product and injectable facilities in Indianapolis and issued a Form 483 as part of the inspection process.

Lilly and the FDA are still in the review process.

As promised, when Lilly has a thorough understanding of the outcomes of the inspection, a further update will be provided.

Forteo was granted marketing authorization by the Europe commission.

Forteo is the first bone formation agent to receive regulatory approval across all 15 member states of the EU for treatment of osteoporosis in post menopausal women.

Gemzar, in combination with Taxal, was approved in Finland for the treatment of patients with (inaudible) breast cancer who have relapsed following chemo therapy.

Finland represents the first EU approved of the breast cancer indication following our submission in 2002 .

Now I would like to turn your attention to Slide 3 as I summarize our financial results for the second quarter.

Worldwide sales for the quarter grew a strong 11% to $3.088 billion dollars.

Gross margins as a percentage of sales was 79.2%.

A 190 basis point decline compared to Q-2, 2002.

Total operating expenses increased 9% for the quarter.

This increase in total Opex (ph) resulted from a 14% growth in SG&A expense and 1% decline in R & D investments.

Operating income grew 9% compared to the second quarter of last year.

Non-operating income for the quarter was a contribution of $29 million dollars.

The tax rate remained at 22% for the quarter.

Finally, Q2 diluted earnings per share of 64 cents was the result of strong global performance of Zyprexa (inaudible) as well as our new product launches. 64 cents represents a 5% increase compared to earnings per share of 61 cents in the second quarter of 2002.

Consistent with Lilly's past reporting practice and in line with the SEC's Regulation G, Slide 4 shows a reconciliation of the unusual items that affected our reported results but were normalized out of earnings in order to help investors better understand our on-going business.

There were no unusual charges in the second quarter of this year or last year.

Year to date, a 23 cent charge was normalized from earnings in the first quarter for acid impairment restructuring and other special charges which we discussed during last quarter's earnings call.

Now, let me discuss sales performance.

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

As Slide 5 demonstrates, our top line growth of 11% benefited from a 3% increase due to price.

A 5% increase due to exchange rate and an increase in volume of 3%.

The 5% exchange rate benefit was driven primarily by the strengthening of the Euro and the Yen.

Sales of the leading growth products Zyprexa (inaudible) grew 17% in the quarter and grew 12%, excluding the benefit of exchange rate.

Strattera, (inaudible) sales and Forteo contributed sales of more than $100 million dollars.

Now, I will turn to Zyprexa.

The results are on Slide 6.

Sales grew 15% to $1.045 billion dollars in the quarter and grew 10% globally, excluding exchange rates.

U.S. sales grew 2% and sales outside the U.S. were up a very strong 45%.

We are extremely pleased with our global Zyprexa sales for the quarter which exceeded $1 billion dollars for the first time.

Outside the U.S., our very strong sales were driven by continued use in schizophrenia and increasing use in bipolar mania in major markets.

All top five European markets, Japan, Canada and Australia grew at least at strong double digit rates.

Competitive pressures contributed to slower sales growth in the U.S..

In the United States, total Zyprexa scripts grew 4% in Q2 compared to the same period last year.

The company expects continued competitive pressures in the U.S. which will likely result in some additional market share loss in the coming months, although we still expect continued growth in total U.S. prescription volume.

As part of our effort to address these pressures, and limit further market share declines in the United States, we are doing the following.

A, beginning mid-June, fully launching the Zydex rapidly dissolving formulation to all customers with a complete range of dosage forms.

B, beginning mid-July, promoting Zyprexa in combination with Lithium or Depakote for bipolar mania.

C, leveraging our brand promise to provide more detailed answers to physicians on the topics of diabetes and schizophrenia patients for multiple roots, including knowledgeable endocrinologists, a medical letter to physicians from Dr. Allen Briar, and focus training, and, D, reorienting sales rep details for even more share (inaudible) .

On Slide 7, you can see (inaudible) sales were $255 million for the quarter, up 16%.

U.S. sales increased 2% and international sales were up 37%.

U.S. sales growth was negatively impacted by wholesaler stocking in the second quarter of 2002.

Moving on to Avista, Q-2 sales grew 19%, to $224 million dollars.

U.S. sales grew 14% and international sales were up 31%.

On slide 9, we report the performance of our diabetes care franchise, which is made up of primarily of (inaudible).

Q2 sales of the franchise grew 4%, to $640 million dollars.

Humalin decreased 1% to $256 million dollars.

Humalog grew by 24% to $254 million.

And Actos revenue declined 17% to $116 million.

Underlying Actos, product sales grew strongly with total script growth of 11% in Q2.

The decrease in Actos revenue to Lilly is due to contract terms with Tekata.

Remember, Lily share of revenue from the agreement with Tekata will vary quarter to quarter based on contract terms.

Lilly’s Actos revenue will not necessarily track with product sales.

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

Tigra (ph) sales were $36 million in the second quarter, up 60%.

U.S. sales grew 20% to $25 million.

Outside the U.S., sales were $11 million dollars.

A launch of Strattera for ADHD continues to exceed our expectations.

Strattera sales were a robust $75 million in the second quarter and after six months, Strattera is the most successful ADHD product launch.

We continue to see excellent acceptance by patients’ payers and all physician specialties.

As a result, Strattera reached 1 million total prescriptions during its first 6 months in the market.

As of June, the total script share reached 12.9%.

Unlike the stimulants that have experience a decline in total script in the first part of the summer vacation period, Strattera script remains constant.

Our message is that ADHD does not occur just in the school year and as a non-stimulant, Strattera does not require a summer hiatus, seems to be resonating with physicians and parents.

In addition, the efficacy demonstrated in clinical trial continues to be demonstrated by numerous feedback reports from both adult patients and parents about how pleased they are with regard to their children's response to Strattera.

Strattera is being promoted to all specialties treating ADHD, and our direct to consumer campaign with television advertisement has now begun.

Adult and child psychiatrists as well as neurologists have contributed close to half of the prescription volume, with the other half coming from pediatricians, primary care physicians, and others.

At this stage, adult usage accounts for about 25% of our script, in line with the overall ADHD market.

Forteo sales in the U.S. were $14 million in the second quarter, up from $4 million in the Q1.

Our initial promotional focus was and rheumatologists and others specialists who treat those who are diagnosed with at least one osteoporotic fracture.

We are pleased with the early uptake in the U.S. in terms of both prescriptions and sales.

The launch is right on track with our expectation.

We are especially encouraged by physicians' perception of Forteo as a highly effective agent, and by the positive reimbursement environment.

The vast majority of patients have access to Forteo either through third-party insurance or through the Lilly access (ph) program.

In addition to the approval in the European Union, Forteo also recently gained regulatory approval in Brazil, Argentina, Australia, and South Africa.

On Slide 13 you will see Sealis(ph) results for the quarter.

Sealis sales reported in Lilly's revenue line was $16 million dollars, which represents sales in the Lilly-only territory.

Sealis sales in the European Union, a joint venture territory, will be announced on August 5, the day of ICOS’s conference call.

As a reminder, the Lilly ICOS sales are not recorded in Lilly's sales line, but rather as part of the joint venture’s income statement along with related expenses.

For the JV territories, Lilly records its 50% share of the joint venture operating in the miscellaneous section of other income and deduction.

Sealis is now approved in 44 countries.

Our launches in Europe and Australia have been particularly successful.

It quickly captured average market share of 20% - 30% within a couple of months.

As predicted, while there was some flattening in May due to those patients who tried the product once, latest market shares for June in key markets show resumed growth.

For example, in Germany, each week in June, Sealis share gained, resulting in approximately 3% percentage points of market share growth from 26% at the end of May to 29% at the end of June.

Recently, Lilly ICOS submitted its complete response to the Sealis approvable letter to the Food and Drug Administration.

The FDA advised Lilly ICOS that it had accepted the submission as complete.

Lilly remained poised to launch up to 4 additional products at the end of 2004.

Including on this list is Simbalta (ph) - a potential new product for the treatment of depression.

The approval is dependent upon the successful resolution of manufacturing issues, a review of the additional data in the complete response, and final labeling.

Until we learn more from the FDA, our best estimate, the U.S. regulatory approval, remains the fourth quarter of this year.

As we have said in the past, the manufacturing process for Simbalta is complex.

Therefore, to ensure sufficient inventory levels are in place to satisfy market demand, the company plans a full-scale launch of Simbalta in the U.S. in the first quarter of 2004, assuming that final regulatory approval is obtained.

In the European Union, we expect a submission by the end of the year.

Lilly will jointly commercialize Simbalta with (inaudible) internationally, except in Japan.

In addition to Simbalta, the company remains on track for approval in 2004 for Symbiax and for Duloxatine (inaudible), as well as (inaudible).

Regarding Sealis, Lilly ICOS remains on track for approval in the U.S. by the end the year.

Turning now to the income statement, Slide 14 summarizes the quarterly sales and growth rates of our leading pharmaceutical products plus animal health.

As you can see, the Prozac family of products declined 10% to $175 million dollars.

Reopro decreased 7% to $95 million, and Humatrope increased 10% to $91 million.

In addition, anti-infective declined 19% to $116 million.

Also worldwide sales of animal health products increased 3% to $167 million.

Slide 15 shows a decrease in our gross margin for the quarter.

Gross margin as a percentage of sales for the second quarter was 79.2%, a decrease of 190 basis point over Q2 of last year.

As expected, this decrease was due to cost associated with quality improvement, as well as growth in capacity in Lilly's manufacturing operation.

Looking at slide 16, you can see that SG&A was $1.043 billion dollars for the quarter, an increase of 14%.

The increase in SG&A expense was attributable to marketing expenses in support of the new product launches, and increased incentive compensation.

R & D expense showed on slide 17 was $543 million or 18% of sales.

Our investment in R & D decreased 1% for the quarter, primarily due to fewer expenses, late stage clinical trial, increased reimbursement for certain R&D expenses from collaboration partners, offset partially by increased incentive compensation.

Slide 18 summarizes the second quarter non-operating income and deductions.

Total other income and deductions resulted in a net contribution of $29 million in the quarter.

Non-operating income and deductions declined primarily due to less interest income and increase of miscellaneous expenses in the second quarter of 2003, offset partially by increased income from the out license of marketed products, and partner products and development.

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

Since sales for the joint venture territories and the operating results of the JV will not be announced until August 5, 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 tax rate, it remained 22% for the quarter.

Turning now to the balance sheet, accounts receivable increased by $14 million dollars from December 2002.

The level of inventory reported on our balance sheet at the end of the quarter increased by $215 million dollars compared to December 2002.

The increase was primarily attributable to the impact of the strength of the Euro to the build-up of inventory for new product launches and our growth product.

Turning now to our financial guidance for the third quarter and for the full year 2003, we are comfortable with an EPS range of 65 to 67 cents for Q-3 and are reconfirming normalized earnings per share expectations 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.

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, the guidance for Q3 excludes future unusual items.

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

Given we now have more clarity for the rest of this year, we are now providing line item detail for our 2003 expectations as follows.

First, we anticipate low double digit sales growth.

We expect gross margin to contract about 200 to 250 basis points for the full year, including the increment long going annual cost of approximately $200 million, compared to 2002 levels as part of our conscious strategy to ensure quality improvement and growth in capacity in our manufacturing operations.

SG&A expenses are expects to grow in the mid-teens.

R&D expenses are expected to grow in mid to high single digits and still be at the top of the industry in terms of percent of sales.

OID should contribute proximately $120 to $140 million in income and the tax rate should remain essentially constant.

Just to summarize our Q2 results, earnings substantially exceeded expectations due to 11% sales growth.

Quarterly Zyprexa sales topped $1 billion dollars for the first time.

Zyprexa, (inaudible) delivered a strong 17% sales growth.

Our successful new product launch of (inaudible) contributed over $100 million dollars in sales.

We are working to launch another four new products by the end of 2004 with promising new clinical data which was presented on all of them during the quarter and, as we just said, we are committed to $2.50 to $2.60 full-year normalized guidance.

This concludes our financial review of a very strong Q2, 2003.

Before we go to Q & A, I would like to remind you that our investment community meeting will take place on Friday, September 5th at the Equitable Center in New York.

In order to gain access to the meeting, it will be important that you have replied to the invitation by August 8th so that you are on the guest list.

In addition, for security purposes, you will need to present a photo ID as well as a business card at check-in.

A continental breakfast will be served for all guests starting at 7:15 a.m. the meeting will start promptly at 8:30 and should be ending at 1:00.

For those of you not attending in person, there will be a web cast as well as dial-in numbers.

With that, please join John Lechleiter and myself to take your questions.

Operator, first call, please.

Thank you.

We'll go to the line.

C. J. Sylvester with UBS.

Simon, I know you laid out four measures you were taking to kind of stabilize that.

Outside of the new indications with Lithium and Depakote, how has that message changed?

Second, is there any stocking or destocking has occurred in the quarter to give us the 2% growth in the U.S.?

And the other issue relates to what are truly competitive pressures coming from Abilify and what are the type of political Medicaid pricing pressures that you may get.

I'm going to have John answer most of your questions.

Let me just comment briefly on the topic of the 2% growth in the U.S..

There was no impact from the stocking during the quarter.

John?

C. J., let me make sure that I cover everything that you ask.

First of all, we continue to believe in the substantial body of scientific evidence that supports the -- the Askazine (ph) safety profile for this product.

They have been used in over 11 million patients.

The message that we are communicating broadly to our physician customers, centers around the following point.

There is an epidemic of diabetes in the U.S. population with about a 2 to 4 fold greater rate of diabetes among patients who have serious mental illness.

This is irrespective of drug treatment.

The available data do not establish a causal link between diabetes and Zyprexa, or any other antipsychotic for that matter.

We conducted studies that showed that Zyprexa did not decrease pancreatic insulin relief, or unlike certain other medicines, have a direct impact on insulin sensitivity.

The fact is that head-to-head clinical studies, and epidemiology studies, don't show any consistent or clinically significant difference in the risk of diabetes among patients treated with different atypical anti-psychotics, despite differences in their respective weight gain profiles.

In a comprehensive analysis of our own data which covers studies, many of them over a year long, involving thousands of patients, elevated baseline random glucose levels and presence of multiple risk factors for diabetes were significant predictors of treatment-emergent diabetes, whereas weight gain and anti psychotic drug assignment, whether Zyprexa or any other drugs we may have studied as a comparator were not predictors.

Risk for diabetes should, therefore, be considered among patients with serious mental illness regardless of medication choice.

This is the fundamental, at a high level, composite of the way we look at this and the basic message that we are communicating in all of our communication supported by a growing body of evidence and solid published data.

I think our confidence in Zyprexa remains very, very high.

As Simon mentioned, the Zytus (ph), the relaunch of the Zytus preparation in the U.S., the fact that we are the only drug labeled and indicated for combination therapy with either Dipakote or Lithium in bipolar mania.

We now have an approvable for Symbiax (ph) that we received in the quarter and we have, as you know, under review currently applications for the use of Zyprexa in the maintenance phase of bipolar disorder.

Zyprexa, the rapid-acting intra-muscular form, is approvable in the U.S. and approved in Europe subject to our completing, our working through our manufacturing issues in building 105.

We continue to work on a (inaudible) formulation and other new indications as well.

I might add, you asked about the U.S., just to kind of reinforce a point Simon made.

Outside the U.S., 45% growth, taking exchange rate out, 28% growth outside the U.S.

We had our best quarter ever in Japan, $33 million dollars in sales this quarter in Japan, 25% growth.

We see a bright future for the product.

We recognize the competitive state is -- competitive space is getting more and more intense.

The challenge we face is not just defending Zyprexa versus (inaudible) but really continuing to differentiate Zyprexa as the drug treatment of choice in this category versus all the other atypicals.

We go to Tony Butler of Lehman Brothers, please go ahead.

The reintroduction of the form of (inaudible), John, why was that stopped and why is it now being relaunched?

I do have a second question, it’s around Exanotide (ph).

Can you comment surrounding the phase 3 data that may or may not be presented at the European diabetes meeting.

Can you comment on the status of that additional trial?

Thank you very much.

Tony, can you just quickly, what was your question again on Exanotide?

Are there not additional phase 3 data which may or may not be presented at the European diabetes meeting, which I believe is next month?

Thank you.

In terms of the Zygus formulation, what we did in June was launch this product finally in the United States.

Up until now, to be quite frank, we didn't have enough supply of all dosage formulations in the U.S. to do a full launch and that has now taken place.

If you look at the Zygus formulation, it is relevant to probably about 15% of total Zyprexa patients, typically those in institutions and mostly likely to spit out a tablet or capsule formulation.

And what we saw in the pilot studies that we did over a recent period of time, there was about an incremental 30% usage in that population in the pilot studies.

And in terms of Exanotide, John.

John, Tony, we're going to be completing the first of the so-called three amigos trials for Exanotide, and we'll present that data in due course.

At this point, I'm not certain if we're going to be presenting that at the European meeting.

If you are referring to the IDF meeting in Paris, I don't think we're going to be in a position to present at that point in time, but we are very much on track with the development of Exanotide.

If I could just make one comment, I realize, I didn't answer the last part of your question about access.

We continue to have a very positive story around access with Zyprexa.

There are only three states where there has been any limitation in terms of prior authorization placed on the drug and, in fact, nearly half the states now have some kind of a provision really limiting restriction of access to mental health drugs in general.

So we continue, I think, to do very well in terms of making sure that Medicaid patients, for example, have access to the very best treatment.

And I would just add in addition to that, if you look at those three states, Maine, Kentucky and West Virginia, they represent something like less than 1% of our Medicaid sales and less than 3% of our overall Zyprexa sales in the United States.

Next caller, please.

Thank you, we have a question from Mara Goldstein with CIBC.

I'm hoping you can just clarify or maybe explain something.

The company confirmed the guidance for the year, 2.50 to 2.60 for this year and also gave comfort level with a third quarter in the 65 to 67 range.

So, for Lilly to come in at the low end of expectations would mean, I think, a very disappointing fourth quarter.

Could you maybe talk about that a little bit?

Yes.

That's an excellent question.

Basically, the situation at this point in time is that we want to continue to monitor the exact timing of approvals.

Obviously, we have given certain predictions for the rest of the year for Sealis and Symbalta.

We need to be cautious given that things can change.

So that's one item on the expense line which could vary a little bit.

The other item, quite frankly, is we want to continue to monitor, as we have said, the Zyprexa market share data over the next couple of months.

As I said in the prepared remarks, we are assuming, within our guidance, some additional market share loss but we would like to monitor that going forward, and hence the rationale for staying with the 2.50 to 2.60.

Next caller, please.

We'll go to the line of Tim Anderson with Prudential.

Please, go ahead.

Hi.

A couple of questions on Zyprexa.

Without revealing what your average net pricing is in the U.S. on Zyprexa, net of rebate and discount, can you talk about the direction of net pricing, given, you know, the changes in Medicaid and the new competition?

Is it on your guidance for Zyprexa unit growth for the year?

You are saying you expect full -- you are positive script growth, but if you look at the weekly strict script data, your growth is now negative.

If that stays slightly negative or flat, would you still be able to hit the earnings target that you laid out for the year?

In terms of hitting the earnings guidance, as I just said to the last caller, we put in some assumptions that we consider as reasonable at this point in time.

We feel committed to the 2.50 to 2.60.

In terms of overall Zyprexa pricing, all I can say is that Medicaid is an important share of the overall sales, so that gets taken into consideration in the pricing for this product.

Next caller, please.

Thank you, we'll go to Scott Kay from Bank of America Securities.

Thanks very much.

Just following up on Zyprexa, going into a non-retail segment, we are guessing 30% to 40% of the sales come from the non-retail segment.

Is there any way to give an idea if the trends outside of retail are similar to that of retail?

And then just quickly, the (inaudible) you are expecting for SUI approval in '04, and I believe the filing was in Q4 2002, is there any reason that would go past the 12-month Pidufa (ph) date?

In terms of the institutional versus the retail sales, you are correct that institutional sales are somewhere, we don't know the exact figure, but somewhere in the 30% to 40% range.

I think it's reasonable to assume that even though you are seeing for the most part only retail data in IMS (ph), that the institutional figures are of similar in sort of directionally market share wise.

John, in terms of (inaudible) and the 2004 launch?

The guidance we have been given about 2004 for SUI is really based on our assessment of the way that the FDA and this particular division had been handling drug review and approvals.

We are predicting, by saying 2004, that we probably won't on that action date get an approval but, quite possibly an approvable that would require a response, et cetera.

Considering the indication here for SUI and how that's going to be handled.

Next caller, please.

Thank you, we have George Drivas from Deutsch Bank.

Good morning, everyone.

I will make it unanimous, another question on Zyprexa.

I'm sure you are surprised and thanks for taking it.

I'm just wondering, Simon, with some of the comments that you made about scripts in the current quarter, being up 4%, I know that, obviously IMF is not an exact science but those numbers would reflect something like 7%, therefore, implying that the non-audited channels may be lower growing than those we can evaluate and obviously that might be where the pricing pressure is.

You did make some comments about market share losses from here, and if you look at the current script, they would be done year over year in the fourth quarter, at least, you know, in the retail sector based on, again, not an exact science.

Are you expecting that, we have seen some sort of compression growth that's going to expand, because if you continue to lose share, and the market stays at the rate it's been.

You know, that sort of would be inconsistent in tying all those comments together.

I'm just wondering if you can give us some additional color on that.

Yeah.

I think, you know, we'll have to obviously monitor the situation going forward.

I think the point that I would make is, when we talk about sort of being conservative about additional market share loss, I mean obviously what our goal is here to have -- sort of limit the loss to an absolute minimum.

And that's what we are going to try and do, but our guidance certainly reflects some additional loss.

I think, if you look at the scripts for the quarter, the 4% growth in scripts, that’s really where we’re referring to the retail segment when we make that reference.

I'm not entirely sure of what the institutional numbers are.

I imagine that they are not dissimilar.

They may be slightly different given the fact that we are in the moderate to severe group, compared with some others, but we'll have to see.

That's really all I can say at this point in time.

Next caller, please.

A question from David Risinger with Merrill Lynch.

Thanks very much.

I have a couple of questions.

First of all, could you comment on the consistent declines in new Rx's for Avista?

And discuss whether you expect that to change in the future.

Second, could you discuss the incremental selling and marketing expenses that are going to be required for the various new product launches in 2004?

And then, finally, could you discuss the cash flow at Lilly year to date in 2003, and the full year outlook for cash flow?

Thank you.

David, in terms of the market share data for Avista it is correct that, overall, growth has slowed in Q2.

However, that being said, if you look at new scripts for Avista, we have 9.3% market share as of June versus 9% back in March.

In terms of total scripts, we have gone from 9.4% market share to 9.8% market share.

So overall, we feel reasonably good about that.

In terms of selling and marketing expenses to support the new product launches for -- in 2004, we will talk about earnings guidance for 2004 at a later stage, probably towards the end of the year, on sort of a January earnings call would be my guess, but we have not made any final decision yet.

In terms of cash flow for the full year, we basically expect to have cash flow which will be sufficient to cover all of our operating needs, including share repurchased dividend, Cap Ex and working capitals.

I would have to check for you.

Maybe I can discuss this with you afterwards, but I don't remember off hand the exact cash flow number for the first six months, but I'll get back to you on that.

Next caller, please.

Thank you.

We'll go to Ken Kulju with Credit Suisse Boston.

Thanks for taking the question.

First, on the gross margin guidance, I want to get a better feel for the 200 to 250 basis point adjustment year over year.

How much of that is related to mix and does that partly reflect some of the soft U.S.

Zyprexa trends, and how much of that relates to the higher manufacturing compliance expenses?

And also, just as second question, on the price increase, the 3% price increase overall in the quarter, could you just run through the key product price increases?

Thanks a lot.

Yes, sure, I can, Ken.

In terms of the gross margin, really, the vast majority of it is related to the sort of improving our capacity and improving our GMP compliance, as we said to you at the beginning of the year.

We talked about a figure of $200 million.

I don't know whether that's a little bit more, but that is the vast majority of the rationale for the 200 to 250 basis point decline.

If you look at product mix, realistically, Zyprexa continues it grow nicely.

We saw a billion dollars plus quarter in sales for the first time, so clearly, that's actually benefiting as well as the other products, current growth product, and the new products.

If you look at the new products, they all have pretty attractive (inaudible), specifically the big one so far in the first six months, Strattera.

In terms of price increases, we had a 3% price increase contributing to the 11% in sales.

You know, that was for the relatively modest increase but it was basically driven by a couple of products, things like Gemzoff.

We are investing in new R&D for some of the new indications.

Insulins, where we’ve typically had a much lower price in the United States than we have had in the rest of the world and we are obviously also investing in new facilities.

A couple of other ones being Gemzoff was about 7% in June of this year.

Avista has a 5 1/2% increase in March of this year.

Those are probably the key ones.

Zyprexa had an increase of 3% in November of last year.

Next caller, please.

Thank you.

We'll go to Robert C. Hazlett, SunTrust.

Just sticking with Zyprexa, in terms of the prescription data, over the past several quarters, we have been noticing a mixed shift toward higher doses and now you are talking about focusing on Zidous (ph) which is priced at a premium.

Can we expect this positive mixed shift occurring driving this revenue growth or should we be looking for pick-up in scripts and just very briefly, in terms of Strattera, is that contributing to profitability currently, and if it is not, can you describe when you expect it to be?

Thanks.

In terms of Zydous and Zyprexa scripts and any indication of how you see those going forward.

John?

We have about 15% of the total market currently with Zyprexa would be real candidates for Zydous.

I don't think it's going to necessarily supplant all the current use of the orals.

We think it can help us -- can help with our position, in our share position which we talked about earlier this morning.

Simon?

In terms of Strattera, I'm not sure that it's making money at this point in time.

But relative to where we thought we would be, it's less negative, let's put it that way.

And therefore, that does help with the bottom line versus some of the consensus numbers you see.

Next caller, please.

Thank you, we'll go to Jim Kelly with Goldman Sachs.

On Sealis (ph), you talked a little bit on the European market, about the share gains.

Can you comment on whether the share gains are coming as incremental growth to the overall, the whole overall market there, and if I can add something on to Ken's question about the gross margin, why is this trend expected to accelerate?

If I take a look at how the gross margins have come in the front half of the year, the gross margins have been running at less than 200 basis point.

Is the $200 million dollars exhibiting itself more in the back half of the year?

Thanks.

First of all, we are very pleased with the way Sealis is performing in the markets where we have launched.

We have consistently, across the markets for all three PD5 (ph) inhibitors, are currently in place.

We consistently have the second position only to Viagra.

We do expect to see modest growth in the overall markets at the outset and take advantage of that opportunity.

We think we have a terrific opportunity to expand the market based on the fact that we know so many men who are candidates for treatment, have not currently sought treatment, or have dropped out of treatment at some point, up to the time where we launched our molecule, Sealis.

I think the other point that I would reinforce, I think one of our competitors took a little pot shot at us, that the Sealis market share was flattening after the first couple of months.

We have clearly seen in a major market like Germany that would be weekly data.

Granted, it's only weekly data but by the end of May and June, we increased about 3 percentage points, from 26% to 29%.

That's really exactly what we expected to happen.

There will be those one-time experimenters with this type of products, and experience is telling us that it's about month 4 in the launch, which is where those people start to wash out of the system and that, we have seen in Europe, also in France.

The market share, I don't have the exact latest data but I understand it is starting to pick up again and we are doing very well.

Germany, 29% market share versus Levitra at 14%.

U-K, second market, 12% for Sealis, 2% for Levitra.

Third largest is 28% for Sealis, 13% for Levitra.

France, the fourth largest market, 25% for Sealis, and 8% for Levitra.

And in Brazil where we launched on the same day earlier in the quarter, we are doing dramatically better than them.

In terms of the gross margin, I think it is fair to say, Jim, that of the $200 million, yes, more of that is pushed to the back end of the year.

However, that also being said, there are also some sort of inefficiencies had you start out the manufacturing for the new products which need to be taken into consideration.

Next caller, please.

Thank you, we'll go to the line with Jonathan R. Moran with SG Cohen.

The pprescription trend in the depression market have experience a slowdown pretty much since January.

Given your expertise in the category and the importance to Lilly going forward with Symbalta, what is the your opinion for the reason behind the moderation?

John, maybe you can take that and talk a little bit about what Symbalta can do with that.

I don't have a good answer in terms of what you might be seeing in the current market.

I know, as we look at the opportunity for Symbalta, I think there are a huge number of people that are not successfully being treated today or not responding to current therapies, that we think are going to be candidates for this drug.

We are not any less optimistic about Symbalta than we have been all along based on what might be currently happening.

And I think, clearly, the other thing that I would reference is, you know, the other (inaudible) who won't be our only competitor given that we will be going for first line therapy, has continued to grow nicely, and we feel that Symbalta will continue to grow nicely in that respect.

We will take one more caller because I know that there is another conference call starting in a couple of minutes.

Last caller, please.

And we'll go to the line of Mario V. Corso.

Thanks for the question.

Just two quick ones.

Given the strength of Zyprexa internationally, is it your assumption that Abilify will get approved in Europe next year and will you see a similar pattern of competitive outcome there or will there be different factors in play?

And for Symbiax?

Is there anything that can be said about what issues are outstanding at this point?

Thank you.

On your first question, we are anticipating that Abilify will eventual will you get approved in Europe.

We were looking at that country by country and we will be prepared, obviously when that molecule, that product does launch and with the appropriate competitive strategies in place.

In terms of Symbiax, the discussions we are having with the FDA involve providing some addition data they requested in the approvable letter, and obviously completing label discussions with them as well.

I would just add maybe to the Abilify in the EU whenever it does come.

They have been counter detailing along with others on this topic around, sort of diabetes and trying to create a story with weight gain.

That is not as prevalent a topic outside of the United States where the discussion is far more on efficacy at this point in time, given that atypicals have a lower percentage of the market than they do here in the U.S..

With that, I would like to just wrap up, thank John for joining us this morning.

Let me remind you of a couple of key bullet point to take away.

In terms of the Q2 results, earnings substantially exceeded our expectations due to the 11% sales growth.

We are very pleased with the fact that Zyprexa sales topped $1 billion dollars for the first time on a global basis.

Zyprexa (inaudible), Humalog, what we’ve typically called the current growth products, had strong 17% sales growth, and even if you back out exchange rate, they had a 12% increase which we are very pleased about.

And the successful new product launch is Strattera, only the non-JV portion of Sealis and Forteo sales contributed over $100 million dollars.

We are working to get the other four new products launched by the end of 2004 and we are committed, absolutely, to the 2.50 to 2 .60 for the year in terms of normalized guidance.

With that, I would like to thank you all for joining us and we look forward to talking to you later on today.

Thank you, ladies and gentlemen.

This conference will be available for replay after 12 P.M. today, running through July 31st till midnight.

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That does conclude our conference for today.