禮來公司 (LLY) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the Eli Lilly and Company second quarter results conference call.

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

And later, we will conduction a question-and-answer session, with instructions to be given at that time.

If anyone should require assistance during the conference, please do press star, then zero.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Executive Director of Investor Relations, Mr. Jim Ward.

Please go ahead.

Good morning, and thank you very much for joining us for Eli Lilly and Company's second quarter 2004 earnings conference call.

I'm Jim Ward, Executive Director of Investor Relations.

I will be taking the reigns from Simon Hartford, who has now moved into my previous role, as CFO of the European operations.

I appreciate Simon introducing me to many of you over the last few months, and I look forward to furthering Simon's tradition of providing answers that matter.

Today, I'm joined by my colleagues, Craig Hartman and Heidi Straub.

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

Following our performance review, we will take your questions.

During this conference call, we anticipate making projections and forward-looking statements that are based on management's current expectations, but actual results may differ materially due to various factors.

For example, our results may be affected by competitive developments, the timing and success of new product launches, regulatory and legal matters, including the outcome of the ongoing Zyprexa patent litigation, government investigations, governmental actions regarding pricing, importation, and reimbursement, and the impact of exchange rates.

For additional information about the factors that affect our business, you can see Exhibit 99 to our forms 10-K and 10-Q.

In addition, the information we provide about our products and pipeline is for the benefit of the investment community.

It is not intended to be promotional and is not sufficient for prescribing decisions.

You can access a live webcast of this conference call at Lilly.com.

In addition to the live webcast, an Internet-based replay will be available on our IR website under "webcasts and presentations", until August 19 following today's call.

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

Evista was launched during May with our comarketing partner, Chugai, in Japan, as the first serum for the treatment of osteoporosis in post menopausal women.

In May, the FDA approved Gemzar in combination with [INAUDIBLE] Taxol for the first line treatment of patients with metastatic breast cancer.

In the United kingdom, Strattera was approved in June and launched in July.

This marks the first European approval of Strattera.

The European Committee for Medicinal Products for human use recommended in June to the European Commission that approval be granted for Alimta in combination with cisplatin for the treatment of malignant pleural mesothelioma and as a monotherapy for second line non-small cell lung cancer.

Marketing authorization by the European Commission is expected later this year.

The FDA extended the action date for completion of its review of Cymbalta.

FDA regulations mandate that the extension be three months long, setting the new action date in late September.

Based on ongoing discussions with the FDA, however, we believe the agency is likely to complete its final review before the new action date, and we continue to expect approval and launch of Cymbalta this summer.

In late June, Lilly and Amylin Pharmaceuticals submitted a new drug application to the FDA for regulatory approval of Exenatide, the first in a new class of medicines for the treatment of type two diabetes.

We are enthusiastic about Exenatide's first in class mechanism.

In our registration study, Exenatide lowered blood glucose levels and reduced body weight for type two diabetics who previously failed on oral therapies.

The filing of post trial briefs related to the Zyprexa patent case was completed in May.

We continue to expect a ruling from the U.S.

District Court of Southern Indiana later this summer, although we're not aware of a definitive timeline.

It is our understanding that the court will issue a press release indicating the timing of Judge Young's ruling.

We do not know when this press release will be issued.

We ask that investors please refrain from calling the court to ask when the judge will rule.

While we can make no guarantees about success in this case, we remain confident that our proposition of matter patent is valid, and we fully expect to prevail.

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

Bold white sales for the quarter grew a robust 15% to $3.556 billion.

Gross margin was 77.6% of sales, a 160 basis points decline compared to the second quarter of 2003.

Total operating expenses grew by 17% for the quarter.

This increase in operating expenses resulted from 12% growth in SG&A, and 26% growth in R&D.

Operating income increased by 5% compared to the second quarter of last year.

Other income and deductions contributed $42 million in the second quarter.

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

Finally, Q2 normalized diluted earnings per share of 68 cents, represents a 6% increase compared to earnings per share of 64 cents in the second quarter of 2003.

The increase in earnings was the result of strong sales growth, offset partially by cost of goods sold and R&D expenses increasing at a greater rate than sales.

For your information, we have provided a reported earnings statement on slide four.

Details about our reported earnings are available in our earnings press release dated today, July 22.

Slides five and six show a reconciliation of the items that were normalized from reported earnings to help investors better understand our ongoing business.

In the second quarter of 2004, we incurred a charge for asset impairments totaling $109 million pre-tax, or 8 cents per share after tax.

As part of our previously disclosed ongoing review of our manufacturing and R&D strategies, we made decisions in the second quarter that resulted in the impairment of certain assets.

This review did not result in any closure of facilities or layoffs, but certain assets located at various sites were affected.

A summary of the geographic breakout of the effective price rate and volume on our sales for the quarter can be found on slide seven.

Top line growth of 15% was driven by a 3% increase due to price, a 4% increase due to exchange rates, and an increase in volume of 9%.

The 4% exchange rate benefit was driven by dollar weakness compared to last year, especially versus the Euro.

Now, I will turn the call over to Craig.

Thank you, Jim.

I will review the performance of our key neuroscience and oncology products, starting with Zyprexa.

Zyprexa sales grew 16% to $1.212 billion for the quarter.

During the second quarter, U.S. sales increased 7% to $696 million.

Sales outside the U.S. were up 31% to $516 million.

U.S. total prescription volume for Zyprexa was down nearly 13% in the second quarter as a result of strong competition in both schizophrenia and bipolar disorders and concern among some physicians about weight gain and the risk of treatment emergent diabetes.

U.S. sales increased during the quarter due to a reduction in reserves and a buildup of inventory by wholesalers.

Following a routine review, the reserves were adjusted due to lower-than-anticipated rebates associated with decreased sales volume.

Excluding the adjustment to reserves, and the wholesaler stocking, U.S.

Zyprexa sales would have declined during the quarter.

Zyprexa has been used in 15 million patients since its launch in 1996.

We remain very confident in Zyprexa's dependable efficacy, which is a key advantage.

We believe that Zyprexa is the best option for patients with moderate or severe schizophrenia or bipolar disorder, where the risk/benefit calculation is clearly in Zyprexa's favor.

Sales reps in the U.S. are now focusing their efforts on helping physicians identify the patients that will benefit the most from Zyprexa.

In schizophrenia, we will emphasize Zyprexa's long term efficacy and positive outcomes for the moderately and severely ill.

In bipolar disorder, we believe Zyprexa represents the best treatment option for bipolar patients with mixed episodes.

We are just beginning to share key clinical data showing that Zyprexa is superior to Lithium, the current gold standard, in preventing relapse into mania, and equivalent in preventing relapse into depression.

Despite these changes, we are making realistic assumptions about our ability to alter current prescription trends in the near term.

As a result, we are forecasting sales in the U.S. to decline in the second half of this year.

We believe that over the long-term, Zyprexa's dependable efficacy will continue to be a substantial advantage for capturing and maintaining market share.

Turning to Zyprexa's performance outside the U.S., sales grew 20%, excluding the benefit of exchange rates.

This strong international performance is primarily driven by rapid conversion from older agents to atypicals, but also was helped by the new bipolar maintenance indication, and the launch of the rapid-acting intramuscular formulation.

Excluding the benefit of exchange rate, the highest growth rates of Zyprexa in some of our top markets were: Japan, 41%, Mexico 39%, United Kingdom 35%, Germany 29%, and Canada 18%.

We expect Zyprexa to continue to deliver strong unit growth internationally for the foreseeable future.

For the full year, global Zyprexa sales are expected to grow.

Symbyax sales for the quarter were $8 million.

While this represents a drop in sales from $34 million in the first quarter, recall that approximately 30 million of the Q1 sales represented higher-than-expected initial stocking of the product.

Since launch in January, we have seen stronger-than-expected uptake of Symbyax among primary care physician, and 50 to 60% of the PCPs and psychiatrists who have prescribed Symbyax once have prescribed it again.

We're very pleased with these repeat prescription rates.

Our goal now is to increase the trial rate among target physicians.

We will continue to highlight to physicians that Symbyax is the only safe and effective treatment in bipolar depression, offering rapid and robust efficacy for this difficult to treat population.

Strattera sales were $179 million in the second quarter, up sequentially from $141 million in Q1.

In June, Strattera's share of total prescriptions was nearly 19%.

We continue to build Strattera's presence in both the child and adult markets.

In the child market, our end of school campaign has reinforced that now is the right time to try Strattera.

Despite the traditional summer drug holiday in the ADHD market, new patient starts on Strattera remain steady.

In June, Strattera's share of the child and adolescent market was 21%.

And Strattera is the share leader, at 25% in child and adolescent patients who have switched or restarted on therapy.

In the adult market, Strattera has a leading share among branded products written by PCPs.

In addition, since our focus has shifted to treatment naive patient, Strattera has become the treatment of choice for newly-diagnosed adult patients.

Year to date, the adult segment of the market is growing at over 30%, and we continue to see a steady increase in the number of physicians treating adult ADD.

In June, Strattera's share of the adult market reached 15%.

I will turn now to our oncology portfolio and slide number 10.

Gemzar sales were $293 million for the quarter, up 15%.

U.S. sales decreased 2% in the quarter, primarily due to wholesaler destocking during the quarter, and competitive pressures.

International sales were up 34%.

European sales for Gemzar are driven by its use as first-line treatment for non-small cell lung cancer, as well as the ongoing launch of the metastatic breast cancer indication.

In addition, following the Phase III data presentation at Afco [PHONETIC] in early June, we launched Gemzar for the treatment of ovarian cancer in Germany and several other European countries.

On slide 11, we report Alimta sales for Q2, its first full quarter on the market.

Sales were $18 million dollars.

This represents a sequential increase from Q1 sales of $12 million, which included initial wholesaler stocking of about $7 million.

We launched Alimta in February for the treatment of treatment of malignant pleural mesothelioma, a cancer of the lining of the lungs.

We are pleased by the early update on Alimta as the FDA-approved treatment option for mesothelioma.

On June 24, we announced that the CHMP issued a positive opinion for Alimta for two separate lung cancer indications, Mesothelioma and second line non-small lung cancer.

We expect to launch Alimta in Europe for both indications in the fourth quarter.

And we expect to launch Alimta for both indications in Australia this quarter.

On July 27, our second line lung cancer submission for Alimta will be the subject of an FDA advisory panel discussion.

In a non-inferiority study, Alimta demonstrated similar survival and an improved safety profile versus Taxoter [PHONETIC] in second line lung cancer patients.

We remain optimistic that we will lawn this indication in the U.S. later this year.

Now, I will let let Heidi review the performance of the remaining products.

Moving now to our osteoporosis portfolio, on slide 12, you will find the results for Evista.

Evista sales grew 24% in Q2 to $277 million.

U.S. sales increased 6% to $171 million.

U.S. sales growth, which was driven primarily by a price increase in the fourth quarter of 2003 and inventory destocking in the second quarter of last year, was partially offset by declining prescription volume.

Sales outside the U.S. were up 68% to $106 million, due primarily to the launch of Evista in Japan.

In the U.S., Evista continues to be negatively affected by a decline in the prevention of osteoporosis segment, and strong competition from other bone agents in the treatment arena.

We are implementing two key interventions to address this situation.

First, our primary care and specialty sales forces, who were previously promoting either Evista or Forteo, will now detail both products.

Our pilot program demonstrated that this portfolio approach allows us to more effectively leverage the strength of each product and create synergies between the two.

Second, we will help our customers think differently about osteoporosis.

Physicians understand the importance of both bone resorption or loss and formation of quality new bone in treating osteoporosis.

Since Forteo addresses both resorption and formation, it has a strong efficacy image among physicians.

At the same time, many physicians believe bone mineral density is the best measure of efficacy.

Yet this measure does not account for the formation of quality new bone.

Other bone agent's mechanisms only shut down bone resorption.

We will highlight to physicians that Evista maintains both bone strength and bone quality.

And as a result, delivers solid long-term fracture outcomes.

Outside the United States, strong growth this quarter was driven by the recent launch in Japan, as well as continued solid global performance across Europe and other regions of the world.

In particular, the initial success of the Forteo launch in Germany also improved prescription trends for Evista in that market.

Global Forteo sales in the second quarter were $65 million, up sequentially from $41 million in the first quarter.

U.S. sales were $57 million and international sales were $8 million.

We continue to be very pleased with the launch trajectory of Forteo.

Turning now to our diabetes care portfolio, on slide 14, we report the performance for the franchise, which consists primarily of Humalog, Humulin, and Actos.

Q2 sales for the franchise grew 5% to $675 million.

Humalog grew by 12% to $285 million.

Humulin increased 1% to $259 million.

Actos revenue decreased 3% to $112 million.

Xigris sales were $49 million in the second quarter, up 35%.

U.S. sales grew 17% to $30 million.

Outside the United States, sales were $19 million, up 75% from the second quarter of 2003, when we were still launching in many international markets.

Turning now to Cialis, the results are on slide 16.

Total worldwide sales were $137 million, of which $32 million relates to Lilly territories, and is reported in Lilly's revenue.

Worldwide sales of Cialis in the first quarter were $108 million.

In the second quarter, sales in the joint venture territories were $105 million.

With the -- within the joint venture territories the U.S. sales of Cialis were $51 million.

For more information on the financial results of the joint venture, please see the Lilly ICOS press release issued earlier today.

We continue to be pleased with the sales performance of Cialis.

In a very competitive U.S. market, we have been successful in capturing patients who have switched from Viagra.

We're also focused on motivating new patients to enter the market and ask for Cialis.

To do this, we will continue our investments to build on the momentum of the launch.

For example, we have recently refreshed our DTC advertising campaign.

The message that Cialis allows couples to choose the moments that are right is clearly resonating with both prescribers and patients.

Additionally, we have so confident in the profile of Cialis that we have initiated the Cialis Promise Program.

Through this offer, men with erectile dysfunction who have never used Cialis can get a free trial.

If they like Cialis, they can get a second trial free.

If they're not satisfied with Cialis, Lilly ICOS will pay for a trial of a competing oral ED product as prescribed by their doctor.

We expect this program to generate more prescriptions, because once men try Cialis, we are very confident that most of them will want to continue it.

Slide 17 summarizes the quarterly sales amounts and growth rates of our leading pharmaceutical products, plus animal health.

As you can see, sales for the Prozac family of products decreased 26% to $130 million.

Humantrope grew 13% to $102 million.

And ReoPro increased 8% to $102 million.

In addition, anti-infective increased 2% to $119 million.

Worldwide sales of animal health products increased 8% to $180 million.

As you can see from the charts on slide 18, in the second quarter, the top line contribution from Lilly's six newer products -- Xigris, Forteo, Strattera, Cialis, Symbyax and Alimta -- was $350 million.

The combined sales from the newer products represents 10% of Lilly's sales in the second quarter, compared to only 5% of sales in the same quarter of 2003.

With that, let me hand the call back to Jim to discuss the rest of the income statement.

Thanks, Heidi.

Slide 19 shows a decrease in our gross margin for the quarter.

Gross margin as a percent of sales in the second quarter was 77.6%, a decrease of 160 basis points over Q2 2003.

The decline was primarily due to investment in the company's manufacturing technical capabilities and capacity, as well as the impact of foreign exchange rates, offset partially by a favorable product mix.

Looking at slide 20, you can see that SG&A was 1.17 billion for the quarter, an increase of 12%.

The increase was primarily due to selling and marketing expenses in support of the new and anticipated product launches, the effective exchange rate, and increased incentive compensation and benefits.

R&D expense, shown on slide 21, grew 26% to $684 million, representing 19% of sales.

Our investment in R&D increased, primarily due to increasing clinical development expense, as we continued to make progress with our pipeline.

In addition, R&D growth was also affected by increased incentive compensation and benefits.

Slide 22 summarizes the second quarter, other income and deductions, for the current quarter and last year.

Total other income and deductions resulted in a net contribution of $42 million this year.

The difference from last year is primarily driven by lower interest expense.

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

Turning now to our financial guidance for the third quarter and total year 2004, we expect earnings per share to be 67 or 68 cents for the third quarter, and are reconfirming full-year normalized EPS guidance of 2.80 to $2.85.

This guidance excludes a substantial one-time charge for acquired in-process R&D, related to the AME acquisition of 33 cents that was incurred in the first quarter of 2004, as well as the asset impairment charge of 8 cents that was incurred in the second quarter.

The company notes that if the AME related charge and asset impairment charge were not excluded, the reported EPS guidance for 2004 would be $2.39, to $2.44.

In addition, our guidance for Q3 and the year excludes future material unusual items.

At this time, we are not aware of any such items that will occur in the remainder of 2004.

For the year 2004, we continue to expect low double digit sales growth.

As we stated earlier, Zyprexa sales in the U.S. are expected to decline in the second half of the year.

However, we continue to expect strong international sales growth for Zyprexa.

For the year 2004, global Zyprexa sales are expected to grow.

In addition, for the full year, we expect gross margins to decline approximately 150 basis points compared with the prior year, due to less favorable than anticipated product mix, and the impact of exchange rates on products sold in inventory.

SG&A is expected to grow in the single digits.

This represents an improvement from our prior guidance, as we begin to leverage the significant investments we have already made in the U.S. to support new product launches and our established products.

Research and development expenses are expected to grow in the mid-teens, enabling us to remain at the top of the industry in terms of R&D investment as a percent of sales.

We now expect other income to contribute approximately 200 to $250 million.

This increase reflects a higher level of confidence around business development deals expected to be executed this year.

And finally, the regarding our tax rate, this should be officially flat at about 22%.

This concludes our financial review for the quarter.

With that, we will take your questions.

Operator, first caller, please.

Ladies and gentlemen, if you do wish to ask a question, please depress star, then one on your touch-tone phone.

You will hear a tone indicating have you been placed in queue, and you may remove yourself from queue at any time by depressing the pound key.

If you are using a speaker phone, please pick up your handset before pressing any numbers.

Again, ladies and gentlemen, if you do have a question, please press star, then one on your touch-tone phone.

We do have a question from the line of Carl Seiden with UBS.

Please go ahead.

Thanks very much.

Thanks, Jim.

I've got three quick questions, if I could.

First, on OID, I know you -- well, I guess you just described the change in OID guidance as having more confidence in business development deals, but I was wondering if you could give us any more color.

It is a doubling in your guidance.

It adds 8 cents to earnings for the year, so it seems like a pretty significant change in confidence.

So any more color there would be great.

Secondly, can you give us more details on the Zyprexa adjustments that you talked about?

I guess the inventory loading is a guess on your part, but the accounting adjustment you took is pretty specific, so why do you actually think U.S.

Zyprexa was down?

And last, on price, the U.S. price increase of 7% was pretty high.

I think last quarter, your U.S. price increase was only 4%.

So for the year over year to change that much in just three month, it seems like something big must be happening in price.

So any comments on that would be great.

Thanks.

Okay.

Thanks, Carl.

This is Jim.

And I will start with the OID portion.

Craig will take the other two segments of your question.

For OID, basically, in our earlier guidance we were a bit conservative, and we're seeing that we are having a faster pace of business development.

I'm not able to go into the specifics of each of the deals, but between the faster pace of business development and a bit more interest income, we're able to deliver the higher other income.

Okay.

Carl, on your second question, regarding the Zyprexa adjustment, without the adjustments to reserve and the wholesaler stocking, we did say that sales would have been down in the second quarter.

We aren't reporting a specific number there.

But I can tell you prescriptions were down 13%.

And we would have had a decline.

On your third question about prices, it is related to the Zyprexa adjustments, you did see in our price rate volume chart that in the U.S., price was up 7%, a significant portion of that was related to the reserve adjustments for Zyprexa.

Next caller.

We do have a question from Jami Rubin within Morgan Stanley.

Please go ahead.

[INAUDIBLE].

Just wanted to follow-up on that question related to the reserve adjustment.

Can you elaborate further on why that was taken?

And secondly, if I understand you correctly, if the reason was because rebates turned out not to be as he high as expected, would you expect further reserve adjustments in the back half of the year?

Thanks.

I will take that question.

Jamie, when we record sales to wholesalers, we also record an accrual for estimated rebates.

That will be paid to payers such as Medicaid, for example.

And in this case, the actual underlying demand was lower than what our original estimate was.

So in other words, we had over-accrued for our anticipated rebates.

So that's why we adjusted the reserve downward which turned out as revenue for Zyprexa during the quarter.

You know, I don't think that we're going into -- in the future quarters, whether or not that is going to happen.

Just that our guidance is that sales are going to decline for Zyprexa in the second half.

And you should also know that, you know, this is all part of a routine review that we do.

Next question, please.

We do have a question from the line of Barbara Ryan with Deutsche Bank.

Please go ahead.

Thank you, mine were covered.

Appreciate it.

Thank you.

We do have a question from the line of Steve Scala with SG Cowen.

Please go ahead.

Thank you.

Your new SG&A guidance suggests a significant slow down in H 2 spending, this is while you're hopefully rolling out Cymbalta and continuing to defend Zyprexa.

Competitors in both markets are increasing their efforts in spending and sales force head count, so this change is not very reassuring.

Can you maybe amplify on your tactics here?

Sure, Steve, I would like to reassure you on that.

First of all, you can be guaranteed that Cymbalta is a top priority for the company and we will be doing everything for a very successful launch of the product.

Also, just to remind everyone, we have had a very high historical investment in SG&A ever since the Prozac expiring, and we feel like we really have an excellent base already laid, and we have the infrastructure well in place for not only Cymbalta and Zyprexa, but all of our new products.

We are working really hard across the company on productivity for sales and marketing.

And we're focusing on efficient use of channels beyond just the sales forces, such as ED tailing -- we've got some great call center work going on -- use of the Internet and we feel like we utilize direct to consumer very efficiently versus our peers.

So we feel that we have everything in place for the remainder of the year to compete effectively.

Next caller, please.

We do have a question from the line of Jim Kelly with Goldman Sachs.

Please go ahead.

Thank you very much.

I just wanted to ask a quick question, if you would just elaborate a little bit more on the gross margins, because even with this quarter, since you had that reversal of the rebate, this number is actually going to be -- this quarter is going to be better, I would estimate, than the next two.

Can you talk a little bit more about what is happening there that the costs are going up?

Thanks.

Sure, Jim.

On the gross margin, as I mentioned in the earlier detail, we are having less favorable product mix than initially anticipated.

And we're looking forward to the second half of the year, and have factored that into the new gross margin guidance.

Also, we are experiencing an unfavorable impact from exchange rates.

This is a bit complex; but basically, it is the inter-play of the exchange rate, also our international inventory, and the time lag.

And those coming together are causing us to have a less favorable gross margin than what we had anticipated earlier.

Next caller, please.

We do have a question from the line of David Risinger with Merrill Lynch.

Please go ahead.

Thanks very much.

My question relates to duloxetine SUI.

Could you please confirm that Lilly filed the additional clinical pharmacology studies for duloxetine SUI with the urology division of the FDA in the June quarter?

As I understand it, Lilly responded to the approvable letter that the company received in September of last year and filed that additional data.

Thank you.

Thank you, David.

Actually, we have not commented on anything with respect to the time line for duloxetine suppressor for urinary incontinence, other than our expected approval timing, which is sometime second half of this year, later this year, or the first half of next year.

So we have not made any statement regarding the status of our response to the FDA around that approvable letter.

We do have a question from the line of Robert Hazlett with SunTrust Robinson Humphrey.

Please go ahead.

Thanks, good morning, everyone.

Maybe I missed it.

Could you discuss the expectation for the insulins in particular for the remainder of the year?

They were pretty strong for this quarter.

And again, just given scripts, I would like to have a little bit of color there.

Secondly, in terms of the depression market, there has been some pressures there; again, you're launching into that marketplace.

Can you talk about your expectations for growth for the market in general?

Thank you.

Okay.

Thanks, Burt.

I will the first part of your question, and Craig will take the second part.

In terms of insulins, we did have a strong quarter, primarily around Humalog.

A portion of that was related to the price increase for Humalog.

But for the remainder of the year, we expect our total insulin franchise to be relatively flat.

Bert, on your question about the depression market and what our expectations for growth are, we have not expressed, you know, what our underlying assumptions are for growth in that marketplace.

And -- but we are very enthusiastic about Cymbalta's profile, and our ability to position that drug favorably, you know, as a first line agent.

So you know, we're really enthusiastic about the product itself, and you know, we have high expectations over the long term for the drug.

Next caller?

We do have a question from the line of Tim Anderson with Prudential Securities.

Please go ahead.

A couple of questions.

Reserve reversal covers how many past periods?

Is this just for one quarter?

My understanding of how these things work usually is that you assess the reserves kind of quarter by quarter, and I'm just wondering if this is just one quarter's worth of reversal here.

And then can you just break out by bucket what was due to wholesaler load and what was due to the reserve reversal?

And then can you give us market shares maybe on Zyprexa?

Okay, I will take the first part of the question and then for the market share on Zyprexa, we will have Bob and Craig cover that portion.

The reversal of the reserves associated with Zyprexa, Tim, actually cover two quarters.

So there is a timing lag of roughly six months that we look back through in order to handle that.

And Tim, the second question was --

What portion of the adjustment was related to wholesaler stock was the question, I think he was asking to break the two pieces out.

We -- okay, we haven't broken out specifically what the two pieces are, Tim.

But we explained that primarily the reserve adjustment was the reason for growth.

And we also had a contribution from the wholesaler stocking.

And then Jim, for the last part of your question, you asked about market share for Zyprexa.

If you look at total scripts in June, for Zyprexa alone it is 20.6%.

Symbyax is .8%; so collectively, the franchise is 21.4%.

Again, ladies and gentlemen, if you do wish to ask a question, please press star then one on your touch-tone phone.

We do have a question from the line of Tony Butler with Lehman Brothers.

Please go ahead.

Yes, thank you.

Again, a question on the OID line, Jim.

There are really two.

One is, can you discuss the interest expense; and more importantly, is part of the debt being capitalized?

If so, how much?

And second, while I realize there may be some fuzzy math in the way of the joint venture that ICOS operates, a $22 million loss, assuming a 50/50 JV, would not necessarily equate to what the total loss might have been between the two parties.

Is there a way in which you might be able to reconcile that or provide some greater clarity?

Thank you.

Tony, I will take the first portion of your question.

And then Heidi will cover the Cialis portion.

You're absolutely correct, that there was debt that was capitalized, and that is giving us a favorable lowering of our interest expense, and that's contributing to the OID portion.

And then, Tony, for the second part of your question with respect to the joint venture, if you will look at the Lilly ICOS press release and you reference the loss on that press release, you have to factor in the federal and state taxes to link that back to what you show reflected on the OID line for Lilly's financial statements.

Next caller?

We do have a question from the line of C,J.

Sylvester with Schwab Soundview.

Please go ahead.

This is just on OID in regard to these business transactions.

Is that something going forward we should think about as part of ongoing business as we go into 2005?

Secondly, when you look at Zyprexa outside the U.S., Abilify is just rolling out in Germany and the U.S., U.K. so what confidence do you have that Abilify won't have a similar impact in Europe as it does in the U.S.

Those are really the two issues I have for you.

And then in your expectations for 2004, do you assume that does get the second line breast cancer indication?

Okay, thanks, CJ.

I will take the first portion and then Craig will cover the Abilify question.

And Heidi will do the Alimta question.

In terms of OID, no, we are not considering that to be a significant contributor moving into 2005 and forward.

These business development deals primarily are related to 2004, and I would not model that out too heavily in the future.

On Zyprexa, outside the United States, we've said this lots of time, CJ, but we see very rapid conversion from older agents to atypicals.

In the U.S., if you look carefully at the prescription data, 85 or 90% of the prescriptions are for atypical atypical [INAUDIBLE]; but outside the United States in major markets like Europe and Japan, those atypical utilization rates are much lower, in the 20-25% range, generally.

So we know that even though Abilify may be launching here in Europe, that there is still tremendous room for growth, and we see unit growth for Zyprexa into the foreseeable future.

Additionally, we have learned quite a bit in the last year and a half in the U.S. market with the whole topic of weight gain and the perception around the risk for treatment emergent diabetes, and we have implemented many things in Europe that are, we view, are quite effective.

So we don't think we are going to see the same dynamics going forward.

And then Heidi --

Lastly, C.J., on your question about Alimta, as Craig had said in the prepared remarks, we continue to be optimistic that we will be able to launch Alimta for the second line non-small cell lung cancer indication yet this year in the U.S.

Next caller please.

We do have a question from the line of David Moskowitz with Friedman, Billings, Ramsey.

Please go ahead.

Yes, thanks.

And good morning.

A couple of questions.

First of all, Jim, I think you might have mentioned that there was gross margin guidance.

I may have missed that.

Could you repeat what that is?

And I guess just address the lower gross margin and how that plays out throughout the rest of the year?

And also I guess for Craig, we've talked about the last price increase for Zyprexa, I believe it was in October.

Could you repeat what that is?

And you know, give us an indication of what the reversal and rebate might mean in that regard?

Also, on Strattera, could you just talk about what the EU reception is so far on the early approval?

And I guess lastly, could you talk about the inventory on other products; again, products that exceeded our expectations, Humalog, Evista, Forteo -- and also could you just focus on Cialis?

That also seemed to come in pretty strong this quarter in the U.S.

Appreciate it.

Thanks.

Okay.

Okay, I will take the first portion again on gross margin, and then on Strattera, Heidi or I can cover that in terms of the reception in the EU.

And then Heidi again with Cialis.

In terms of the gross margin, what we'e said is that we will have, for the remainder of the year, a 150 basis point decline versus previous guidance.

And just as a reminder, what we've talked about there is that this is due primarily to less favorable product mix, as well as unfavorable exchange rate impact.

I will address your question, David, about the price increase for Zyprexa.

We did that back in October, as you said.

It was about 3 1/2% at the end of October for most of the dosage forms of Zyprexa, and I think you probably missed the first question of the call, which was asking about the U.S. pricing increase of 7%, and we said that a substantial portion of that increase was related to the adjustment to the reserves for Zyprexa.

So Heidi, do you want to talk about the Strattera?

I will actually cover that Having just come from Europe, let me tell you on the Strattera portion, it is a bit too early to tell in terms of the U.K. launch and so forth.

I can say that there was a lot of excellent market preparation for Strattera, especially in the northern markets -- U.K., Germany, Netherlands, the Nordic area -- and there is a great deal of enthusiasm that is already being displayed, especially from the support groups of those who suffer with ADHD, so we're very optimistic that the Strattera launch is going to go well.

And then to your last question, David, I think you were asking whether or not we had a lot of inventory build on some of the other products that had strong growth rates out there -- and no, we had mentioned in the call, any time inventory was playing a substantial impact in the performance of the product.

So that is not attributable to inventory build.

We do have a question from the line of Mara Goldstein from CIBC.

Please go ahead.

Thank you very much.

I have two questions.

The first is that you referred to competitive pressure for Gemzar.

Would you expand on that?

And then second, my question relates to Cialis and the joint venture.

It appears that promotional spend is growing faster than the market is, at this point.

And I believe that there were comments made at one time to promotional spending decelerating in the second half of this year.

Can you talk about that plan in light of the limited market expansion we've seen thus far?

Mara, I will take that question.

On Gemzar, what we are referring to there when we reference the competitive pressure is really pricing pressure that we're seeing at the community-based oncology practice level.

That's related to changing reimbursement schedules through Medicare.

And we expect this to diminish next year in 2005 when average selling price goes into effect.

And then with respect to the joint venture, what is happening there is we're -- I think all three companies are resourcing these products during the course of these launches to try to raise awareness.

And to interest men who have erectile dysfunction to seek treatment.

And so we are investing as we feel appropriate in the launch of Cialis, and trying to raise awareness and motivate patients to seek treatment; and in particular, ask for Cialis by name.

Next caller?

We do have a question from the line of Mario Courseo with Summer Street Research.

Please go ahead.

Yes, thank you.

Two questions.

In terms of the 280 to 2.85 for the year, I'm assuming that internal forecast for Zyprexa may have been somewhat better than what's being realized.

So I'm wondering what within the product portfolio may be performing better than expected, or is there simply lower spending and increased OID getting earnings into the 2.80 to 2.85 range?

And secondly; is there any update on, you know, where the status of inhaled insulin is at this point?

Thank you.

I will take that first question, Mario, in terms of Zyprexa.

I mean we're not -- we're never in a position to talk about what our internal plan says, but we have consistently said throughout the year, when we talked about our guidance, that we expect Zyprexa to grow globally for the full year, and we still expect that.

So now, we're saying that in the U.S. we expect declines in the second half, outside the U.S., we expect to continue very strong growth, net global growth, for the product.

And in terms of inhaled insulin, we have a product decision that is coming up later this year on that product, and until that takes place, we don't really have anything new to report there.

Next caller, please.

We have a question from the line of Duke Lazukey with Lehman Brothers.

Please go ahead.

Thank you.

I [INAUDIBLE], could you give me how much of the promotional fee late with the Actos?

The second question, according to your 10-Q in May, promotional rate is change quarter to quarter [INAUDIBLE]

Could you give me a detail of the overall copromotional agreement to [INAUDIBLE]?

I can take that question.

We actually do not discuss any of the details of our copromotion agreement with [INAUDIBLE] so we won't be able to provide any more clarity on that.

What we can tell you is it is very difficult to make comparisons quarter to quarter on Actos, because our revenue stream from that relationship is impacted by the specifics of the contract terms.

Operator, if this are no other calls, what we would like to do then is wrap up and have our closing.

Thank you.

We do have another question from Scott Henry with Oppenheimer.

Please go ahead.

Thank you.

Just a quick question on Zyprexa stocking.

I find it counter-intuitive, that the wholesalers would be stocking a product that is having decreasing demand.

Do you have any comments on that?

And as well, do you think we could see some destocking going forward as demand is not up to prior levels?

I would say, first of all, I want to place it in context, the amount of stocking that occurred was not significant.

And it is possible that we would have some destocking through the remainder of the year; but again, we did not anticipate that having a material impact on the sales, and we fully reflected it in terms of putting together our guidance.

Okay.

With that, I would like to wrap up and go into the closing.

Thanks a lot for all the questions today.

For the sixth consecutive quarter, we have delivered strong double digit sales growth.

And for 2004, we expect sales growth in the low double digits.

Over the last 2 1/2 years, Lilly has launched six new best in class or first in class products, which contributed $350 million of sales in the second quarter.

In addition, the JV sales of Cialis represented an additional $180 million.

We're very much looking forward to the approval and launch of Cymbalta in U.S. yet this summer and the launch's entry in Europe later this year.

Finally, the next wave in the pipeline continues to progress.

We just recently submitted Exenatide with our partner Amylin, and we are very enthusiastic about the potential for CS-747, Ruboxistaurin and pulmonary insulin.

Thank you.

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