禮來公司 (LLY) 2006 Q2 法說會逐字稿

Welcome to the second-quarter 2006 earnings conference call.

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

Later we will conduct a question-and-answer session; instructions will be given at that time. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Mr. Jim Ward.

Please go ahead.

Good morning and thanks for joining us for Eli Lilly and Company's second-quarter 2006 earnings conference call.

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

I'm joined today by Jim Davlin and Jim Greffet from the IR team as well as John Lechleiter, Lilly President and COO.

You can access the earnings press release and supporting materials, a live webcast and an Internet-based replay of this conference call at lilly.com.

The replay and supporting materials will be available on the Web until August 18th.

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; government investigations; governmental actions regarding pricing, importation and reimbursement; change in tax law and the impact of exchange rates.

For additional information about the factors that affect our business refer 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's not intended to be promotional and it's not sufficient for prescribing decisions.

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

Lilly and Alcon signed a long-term agreement to co promote Arxxant in the U.S. and Puerto Rico.

The agreement is subject to FDA approval of Arxxant which is currently under regulatory review as an oral medication to reduce the risk of vision loss associated with diabetic retinopathy.

Gemzar was approved in the U.S. for treatment of recurrent ovarian cancer in combination with carboplatin.

Gemzar, which recently celebrated its 10th anniversary in the U.S., is already approved in the U.S. for treatment of breast, lung and pancreatic cancers.

Lilly submitted Arxxant for the treatment of diabetic retinopathy in Europe.

Lilly submitted a supplemental new drug application to the FDA for Cymbalta for the treatment of generalized anxiety disorder.

Lilly initiated a Phase III clinical trial to study Enzastaurin as a maintenance therapy to prevent relapse in patients with diffuse large B-cell lymphoma, the most common form of non-Hodgkin's lymphoma.

Enzastaurin, a targeted oral agent, is also being studied in Phase III trials for the treatment of relapsed glioblastoma multiforme, an aggressive and malignant form of brain cancer.

Lilly announced that it is discussing the future of three European facilities, including proposals to close the sites, which include two research and development sites and one manufacturing site.

Any closures would be subject to consultations with employee representatives at the effected sites and then approval by the Lilly Board of Directors.

No final decisions have been made at this time.

If the sites are closed the majority of the 900 employees would be laid off and Lilly would need to take charges that would like to be significant.

Lilly announced that it will be extending its patient assistance program, LillyAnswers, through the end of this year to qualifying patients currently participating in the program to help bridge the gap in coverage for people who need Lilly medicines but are not yet enrolled in Medicare Part D. Lilly is also asking for an opinion on a proposed outside Part D patient assistance program which would expand assistance beyond the end of this year to Medicare patients for Forteo and Zyprexa.

Jim Davlin will now discuss results for the second quarter.

Thanks, Jim.

As shown on slide 3, worldwide sales for the quarter grew 5% to $3.867 billion.

Gross margin was 77.7% of sales, a 1.5 percentage point increase compared to the second quarter of 2005.

Total operating expenses increased by 5% for the quarter.

This increase in total operating expenses resulted from an increase of 8% in SG&A and growth of 2% in R&D expenses.

Operating income increased 12% after excluding the $1.1 billion product liability charge principally related to Zyprexa taken in Q2 2005.

Other income and deductions was a contribution of $47 million in the second quarter.

The tax rate remained at 21% for the quarter.

Finally, Q2 diluted earnings per share were $0.76.

Adjusted earnings per share were $0.67 in Q2 last year.

This represents a 13% growth in earnings for the quarter.

For your information we've provided a reported earnings statement on slide 4.

Details about our reported earnings are available in our earnings press release dated today, July 21, 2006.

Slide 5 shows a Q2 and year-to-date reconciliation of the items that were adjusted from reported earnings to help investors better understand our ongoing business. 2005 earnings were adjusted to exclude the $1.1 billion charge which I explained previously.

A summary of the geographic breakout of the effect of price, rate and volume on our sales for the quarter is found on slide 6.

Topline growth of 5% was the result of an increase due to price of 3%, a 1% decrease from exchange rates and a 3% increase in volume.

For the quarter worldwide Zyprexa sales increased 2% to $1.1 billion.

Sales in the U.S. declined 1% to $543 million due to lower underlying demand versus last year offset by higher prices.

In the U.S. pay rate of share losses declined as numerous interventions take hold.

Slide 8 shows trends for Zyprexa new prescription volumes in the U.S.

An encouraging trend is visible with new prescriptions in consistent ranges since the start of the year.

A similar trend is also seen in total prescriptions.

Q2 Zyprexa sales outside the U.S. were up 5% to $572 million, 6% excluding the exchange rate impact.

Slide 9 shows stable marketshare trends and positive volume growth rates for major OUS markets.

On slide 10 Cymbalta sales in the second quarter were $310 million, up 92% compared with the second quarter of 2005.

On a sequential basis Cymbalta sales increased 33% from Q1.

U.S. sales were $270 million, an increase of 79%.

Q2 sales overseas were $41 million.

Cymbalta is now launched in over 45 countries outside the U.S. and we expect launches to continue throughout the year.

Slide 11 shows U.S.

Cymbalta share trends for the first half of the year and significant initiatives in the promotional effort.

During the second quarter Cymbalta gained almost 100 basis points of new prescription share.

This gain is more than twice the share gained during the previous six months.

A similar inflection is seen in the total prescription share.

Turning now to slide 12, Strattera sales increased 17% to $144 million in the second quarter.

The increase was due to reductions in U.S. wholesales inventory levels during the second quarter of 2005 offset partially by a decline in demand in the U.S.

Worldwide Evista sales were $276 million, a 5% increase compared to Q2 of 2005.

U.S.

Evista sales were up 7% to $175 million due to higher prices.

Sales for Evista overseas increased 2% to $101 million due to increased demand offset partially by lower prices and the unfavorable impact of foreign exchange rates.

Slide 14 shows quarterly Forteo sales of $146 million, up 43% over Q2 of last year.

U.S. sales were up 43% to $101 million.

International sales of Forteo were up 45% to $45 million.

Jim Greffet will now provide the results for the rest of the portfolio.

On to slide 15.

Q2 diabetes care revenue increased 5% to $702 million.

Our diabetes care franchise revenue is primarily made up of Humulin, Humalog, Actos and Byetta.

Total Byetta sales for Q2 were $99 million, a 46% sequential increase from Q1.

Lilly reports half of the gross margin from U.S. sales of Byetta plus sales of pens to Amylin.

The sum of these two items totaled $52 million.

We continue to expect the cartridge supply constraint to be resolved during the third quarter.

Global Humalog sales grew 8% to $321 million due to higher prices and increased demand outside the U.S. partially offset by a decline in demand in the U.S.

Actos revenue was down 12% to $93 million.

Lilly's Actos revenue is based on the terms of the agreement with Takeda and varies from quarter to quarter.

As a result Lilly's Actos revenue will not necessarily track with product sales.

Recall that our promotion arraignments for Actos in the U.S. are entering a sunset phase.

In Q1 of this year Lilly completed its sales detail requirements for Actos in the U.S.

From Q2 forward Lilly will receive only royalties on Actos product sales in the U.S.

Beginning in October of this year these royalties will follow a stepdown schedule for the next three years as defined by our contract with Takeda.

The arrangements for Actos promotion outside the U.S. continue unchanged.

Humulin sales for the quarter were down 12% to $220 million driven by a decline in demand due to continued competitive pressures.

On slide 16 you'll see Cialis sales for the quarter.

Total global sales were up 22% to $233 million in the quarter.

Cialis sales in the Lilly territories that our recorded in Lilly's revenue line were $51 million.

Sales in the Lilly ICOS joint venture territories were $183 million.

Sales in the U.S. were up 32% to $94 million.

As a reminder, Lilly records 50% of the operating results from the Lilly ICOS JV territories which are North America and Europe in other income and deductions on an after-tax basis.

On slide 17 you can seen Gemzar sales were $344 million for the quarter, flat versus last year.

Gemzar sales in the U.S. declined 3% to $150 million.

Outside the U.S. sales grew 3% to $194 million due to increased demand offset partially by lower prices and the unfavorable impact of foreign exchange rates.

Moving now to Alimta; you'll find the results on slide 18.

Alimta sales in the second quarter were $153 million, an increase of 38% over prior year.

U.S. sales increased 26% to $88 million.

Sales outside the U.S. were up 56% to $65 million.

Slide 19 summarizes the quarterly sales amounts and growth rates of our leading pharmaceutical products plus animal health.

As you can see from the charts on slide 20, the revenues from Lilly's nine newer products -- Alimta, Byetta, Cialis, Cymbalta, Forteo, Strattera, Symbyax, Yentreve and Xigris -- were $920 million in Q2 or 24% of our sales.

In addition, Cialis sales from the JV territories were an additional $183 million for the quarter.

Now let's look at the rest of the income statement.

Gross margin as a percentage of sales in the second quarter was 77.7%, an increase of 1.5 percentage points over Q2 2005.

The increase was primarily due to the favorable impact of product mix and foreign exchange rates partially offset by higher manufacturing-related costs.

Looking at slide 22 you can see that SG&A was up 8% to $1.2 billion for the quarter.

The increase was primarily due to increased marketing expenses in support of newer products.

R&D expense, shown on slide 23, grew 2% to 775 million and was 20% of sales.

The year-on-year increase is primarily due to increased discovery research expenses.

Slide 24 summarizes the second-quarter other income and deductions.

Total other income and deductions resulted in a net contribution of $47 million in the quarter.

Slide 25 shows a significant reduction versus prior year in our year-to-date other income and deductions.

As for the tax rate, it remained at 21% for the quarter.

Jim Ward will now provide our financial guidance.

For the third quarter of 2006 we expect EPS of $0.77 to $0.79.

For the full year 2006 we now expect sales growth at approximately the low end of the previous guidance of 7 to 9% growth.

We continue to expect gross margins to improve modestly, total OpEx to grow in the mid single digits and other income to contribute approximately 175 to $275 million.

Excluding future material unusual items, such as the charges related to the three potential European site closures discussed above, EPS is expected to be $3.10 to $3.20 for the year which is an 8 to 11% growth over 2005 adjusted EPS.

This concludes our financial review for the second quarter and we will now take your questions.

Operator, first caller, please.

(OPERATOR INSTRUCTIONS).

Chris Schott, Banc of America.

Just two quick questions with regards to your guidance for the year.

First, relative to your prior 7 to 9% sales growth guidance, what specifically has changed that -- you're looking toward the lower end of that range?

And then secondly, on your gross margin guidance, we've had two straight quarters of very strong gross margin performance.

At what point would you feel comfortable raising that range for the year that calls for modest gross margin improvement?

Thanks.

Chris, this is John Lechleiter;

I'm going to take your first question and Jim Ward is going to take your second question.

I think the reason we talked about coming in at the low end of that 7 to 9% range is primarily because of expectations we might have had at the beginning of the year for a little faster growth in our insulin franchise and also with Zyprexa.

Having said that, we're obviously very pleased to see the prescription trends for Zyprexa in the U.S., both new prescriptions and total prescriptions, staying pretty flat through the first six months of the year.

Outside the U.S., if you take away the exchange rate and price hits that we've taken in some countries, we had 8% volume growth for Zyprexa in the second quarter, 17% in Japan alone which is our second most important market.

And Chris, in terms of gross margin; we're very pleased with how things have trended the first-half of the year and we're keeping a very watchful eye on how our routine scheduled maintenance shutdowns go.

The first one in the first-half of the year went extremely well and you see the positive gross margin as a result.

We have two more scheduled shutdowns remaining this year.

And should those go even better than expected we'll keep a close eye on the gross margin percentage, but right now we're comfortable with the guidance that we've established.

Next caller, please.

Roopesh Patel, UBS.

Thanks.

My question is actually for John on Cymbalta.

I was wondering if you could give us a rough sense for how much of the share gains in the second quarter were driven from the formulary wins in Medicaid of Texas and California and Medco as opposed to changes in the selling message and other marketing initiatives that Lilly undertook at the beginning of the quarter?

Thank you.

It's very difficult obviously for us to break that down.

We grew in terms of market share more in the second quarter -- about as much in the second quarter in terms of share as we had the preceding six months.

We think it's a combination of things.

Clearly broader formulary access, including the ones you site, were very, very important.

But we also believe our direct to consumer branded advertising campaign, salesforce realignment and a new message around the product is also helping as well.

I think physicians are beginning to recognize that Cymbalta offers some significant advantages compared to other products.

And so I believe it's a case of Lilly really starting to fire on all cylinders.

One clarification, John.

You had mentioned that our gains in the second quarter were as much as the previous six months.

It's actually twice as much that we gained in the second quarter as compared to the previous six months.

I was a little conservative.

David Risinger, Merrill Lynch.

I have a number of questions.

First of all, in terms of the third quarter of '06 you're suggesting EPS growth of 5 to 8%, that's down or that's a deceleration from 13% in the second quarter.

If you could just explain that.

Second, just wanted to get your perspective on the sustainability of U.S. selling prices increasing 8% year-over-year.

And third, if you could comment on steps taken in Germany with respect to diabetes products and the implications for Eli Lilly?

Thanks very much.

David, I'll start off with your first question.

Nothing significant changing really in terms of third quarter versus the first-half of the year.

You're correct in terms of the deceleration of growth, but it's primarily a strong compare that we had in Q3 '05.

In terms of the steps in Germany being taken, probably (multiple speakers) would like to take that.

Two questions I think, David; the sustainability of an 8% price increase.

I think that that PRB that we showed you with the U.S. growth coming primarily from price is a reflection of price increases we've taken throughout the preceding 12 months, the net impact of that and also the impact of converting patients from Medicaid to the Part D plan and net effect of selling price which obviously reflects negotiations we've had with third-party providers.

So I think me our goal is to obviously try to drive volume increases and we're confident that that will be more of a mix going forward.

With respect to Germany for Humalog, we're monitoring the situation there very, very carefully.

Obviously we believe that our Humalog offers advantages relative to what you might call base insulin and at this point in time we can't really give any guidance in terms of how that's going to impact our business there.

We can say though, however, David, that in Germany we have launched a new pen device which should be very helpful in winning customers over to Humalog as well as we have significantly increased the promotional effort behind Humalog in Germany as well as other major European markets.

Next caller, please.

Tim Anderson, Prudential Securities.

Going back to your earlier comments on sales guidance, you mentioned Zyprexa and insulin franchise.

And I'm just wondering on Zyprexa -- I guess we can presume that six months ago or seven months ago when you gave that guidance you had expected that that franchise would do better and would that have been in international or U.S. markets?

My guess is that it's probably U.S.

On Alimta -- a second question on Alimta in the U.S. -- hoping you can talk about whether that product is living up to your expectations.

For the last four quarters now it seems like it's flattened out a fair amount and I'm wondering where it goes from here?

On the question with respect to the sales, yes, I think you're correct.

As we put our plan together and provided that guidance, I believe in December, it was our expectations it would actually do better even than we're even doing today with Zyprexa primarily in the U.S.

With respect to Alimta, I think overall we're very pleased with the trends that we see.

I think you're aware that we have -- our next significant indication coming is the first-line non small cell lung with the product.

It's a product that's proven to be very combinable with other therapies.

So we don't believe that the trends that we're seeing the last few quarters are cause for alarm.

Next caller, please.

James Kelly, Goldman Sachs.

Good morning.

Two questions if I may.

First, on Zyprexa, any sense of where this product is being used?

Whether it's in sort of a first-line or a second line indication and how that has matched with the change in the marketing message that was brought out over the last several months?

And then secondly, with the guidance for the operating expenses going up in the mid single digits, can give us a sense for SG&A and R&D for the rest of the year?

Which one might be running a little higher than that or a little lower or both about the same?

Thank you.

Jim, I think with Zyprexa I think we've got particular strength in core schizophrenia and I think that the basic message that we're giving to prescribers for both schizophrenia and bipolar disorder is to really focus on Zyprexa as the drug of choice to treat what we call the urgent patient.

This would be a person with either schizophrenia or bipolar who when the physician recognizes they need to take immediate action because the illness has reached a point where maybe it's jeopardizing the person's job or relationships, their ability to keep living where they're living or to avoid hospitalization.

We know Zyprexa works quickly, it's dependable.

We know that many more patients tend to stay on the product longer and this seems to be, as we talk to physicians -- this really resonates.

This is the type of patient they would say, you know, that makes sense.

And my experience with Zyprexa is such that that's the right patient.

So I think that that -- kind of getting back to the core value of the product and I think we're particularly getting good traction in schizophrenia.

And then Jim, in terms of OpEx guidance, we prefer to keep the two together, R&D and SG&A.

However, I can tell you that SG&A should be growing a bit faster than the R&D line.

However, having said that, the R&D invested will still allow us to remain at the top of industry as a percentage of sales.

Next caller, please.

Chris Shibutani, JPMorgan.

Two questions.

First on Cymbalta, if you could update us a little bit in terms of where some of the additional indication opportunities are from a timeline standpoint, the anxiety as well as fibromyalgia, but also comment a little bit about any of your -- any changes to enthusiasm you have about some of these kind of incremental one-off indications given the shift in focus to the pure depression message that you seem to be having success with there.

Does it temper your enthusiasm about how you might market some of these additional indications?

But timelines would be helpful.

And my second question is on the Zyprexa litigation.

At the end of last quarter you had stated that you were still comfortable with the remaining reserve to cover expenses.

Is that situation -- can you just provide us with an update on what your thinking is there in particular in regard to what was viewed then as a flurry of late filing cases?

Thanks.

Chris, this is John.

I'm going to cover the first part of your question and Jim Davlin is going to talk about the Zyprexa litigation.

First of all, specifically where are we with these additional indications?

We filed, as you know, for approval of GAD with the FDA and we've got the PDUFA date for that GAD filing the first quarter of next year.

We continue to study the drug in Phase III for the treatment of fibromyalgia.

We've not given any more information in terms of a filing date there.

I think that these two indications and possibly others, none of which we've ever -- we've talked about to date, but as we go forward we look at additional potential indications for the product.

I think they're going to fit very well in this broad manifold that Cymbalta sort of staked out -- an antidepressant that's broadly effective, it treats the emotional symptoms as well as physical symptoms.

Keep in mind that about 15 to 20% of our scripts today are in the area of the he DPNP.

We do think we can differentiate from Lyrica and from some of the other products in that space.

So I don't think further development along the pain axis is going to take anything away from the depression focus.

And if anything I think it will enhance the perception that this is a product that for many patients is going to -- because it has that broad effectiveness -- is going to deal with some of the other comorbidities that often accompany depression.

Chris, this is Jim Davlin.

And with respect to Zyprexa litigation, we're comfortable with our current remaining reserves based upon the information that we've been able to gather with respect to the new cases.

And our intention is to vigorously defend these cases.

We believe that the statute of limitations and other litigation defenses should dispose of many of these cases.

Jami Rubin, Morgan Stanley.

John, can you reconcile for us the difference between U.S.

Zyprexa sales, the minus 1% sales decline and volume declines which are about 15%.

So just reconcile the difference there.

And also, wondering if you can confirm whether or not you've been in discussions yet, completed negotiations with some of the HMOs regarding Medicare Part D price concessions for 2007?

So if you could talk about how those discussions are going, how you would anticipate discounts for that book of business, the PDP book of business to differ from 2006?

Jami, first to answer your second question first.

I think it's too early to talk about negotiations with the HMOs.

Those are going to take place at the end of the year.

I think with respect to reconciling prescription volume with the reported 1% decline in sales, I think you're really seeing a difference between price increases with the product and also the lack of indexing for those patients who may have switched over from Medicaid to Part D with Zyprexa.

Tony Butler, Lehman Brothers.

Good morning.

John, could you spend a minute exploring SG&A a little bit more, not so much in the quarter but in a forward-looking basis?

For example, I had the impression that Lilly would attempt to keep SG&A as a percent or year-over-year growth lower than overall sales growth.

And yet that seems to be creeping up on a sequential basis certainly and also on a year-over-year basis.

So could you help explore with us the idea -- are we adding more reps or is it simply just the increased marketing for DTC around Cymbalta?

Thanks a lot.

Tony, we're clearly trying to put our investments where our opportunities lie.

I think it is our goal to try to grow total SG&A at a rate that's lower than sales.

Having said that, we have invested -- we have put more investment behind Cymbalta.

We have sustained investment in Zyprexa.

We're in the process of trying to reaccelerate our worldwide insulin franchise including the introduction of some world-class new pen delivery devices both in the U.S. and around the world.

At the same time we're seeing outstanding productivity gains across the Company by virtue of the Six Sigma program that's now entering its second year.

So obviously when we can find ways to reduce costs in other parts of the business we have the wherewithal to place the investments where we most need them.

The other thing I want to point out is from a peak about two years ago in terms of our employee base around the world we've come down in terms of numbers of employees about 9% over that two-year period by managing attrition.

So we're very, very focused on productivity, at the same time the products that are going to fuel -- be the engines of our growth are going to get the investment that they need and deserve.

Catherine Arnold, Credit Suisse First Boston.

Good morning.

I was wondering if you could give me some more color on your comment about Zyprexa's stronghold in the urgent patient market, John.

If you could give us a sense for what percentage of the market you see as this population.

And secondly, I'd like to know at this point in terms of Gemzar's use in ovarian cancer, do you have a sense for how much off label use was already in the product sales and what we might expect in terms of that recent approval?

Thanks.

Catherine, to answer your first question, we think as many as 40% of people who seek treatment for schizophrenia or bipolar disorder qualify as this group of urgent patients that I described earlier.

With respect to Gem ovarian, I think the incremental sales are probably not going to be terribly significant.

Yes, there has been off label use; obviously we don't promote that until we get the approved indication.

But we're very pleased to have the indication because it further broadens the range of tumors starting with pancreas, lung, breast, in other parts of the world bladder.

So Gemzar continues to show its versatility in terms of treating a variety of malignancies and being effective in combination with a lot of other chemo and targeted agents.

And just to add to John's point, Catherine, Gemzar for ovarian cancer is currently reimbursed already on the compendia listing within the U.S. and physicians know how effective it can be for use with the ovarian patients and that's why our expectations are somewhat modest.

Next caller, please.

Scott Henry, Oppenheimer.

Thank you for taking the question.

Just a couple small questions.

First, was there any material stocking in the quarter?

Second, I was curious if you have a specific Ruboxistaurin PDUFA date.

And third, with regard to exanatide LAR, it's a little more specific, I want to know if you finalized the particle in the needle size in the current Phase III trial.

Thank you.

I'll go ahead and try to answer these, Scott.

I know Jim will jump in if he's got anything more to add.

In terms of our start and end inventory positions, they're pretty much the same so there wasn't any material stocking that took place in the quarter.

With respect to Ruboxistaurin, we've not given a specific date for that other than to say it's going to be next month.

And with respect to exanatide LAR, we've not given out that information at this point in terms of the particle size, needle size.

And in fact, Scott, we're still in parallel processing the clinical trials for exanatide LAR with the finalization of the needle gauge.

Next caller, please.

Steve Scala, Cowen.

Two topics, please.

First, is it Lilly's understanding that all CNS drugs now require an FDA advisory review and therefore you will need one for is Cymbalta in GAD?

Secondly, would you like to make any observations about Wyeth's data on DVS-233 from the APA and their exploration of lower doses?

And the second topic is could you be more specific about the terms of the Alcon deal on Arxxant?

How will Alcon be compensated and at what level?

And do you still remain highly confident in our Arxxant's approval despite the single study?

Steve, I'll start and then Jim can jump in as well.

We don't have -- first of all, we don't have any information that suggests there's going to be a required advisory committee for new drugs coming out of the neuropharm division.

We certainly have no indication at this point an advisory committee is going to be required for the GAD approval.

We just don't know, but we're not aware of any requirement.

I'm sorry, I can't comment on the Wyeth data from the DAPA.

And with respect to Alcon, I'll let Jim talk about the terms of our agreement, but obviously we're very pleased to be working with the world's leading eye care company.

They're going to be calling on the rentals specialist, the journal ophthalmologist.

Lilly can focused on the diabetologist and the primary care physician who typically sees patients for routine care.

We know it's going to take a partnership collaboration between these different physician groups to diagnose and to treat and we're very pleased to see that Alcon is joining us in this effort.

We don't have any information to offer back on the Arxxant review other than to say that that is ongoing.

Steve, it's Jim Greffet.

We try to take it easy on John by giving him three choices of Jims to pick on and we can all jump in.

With respect to the Alcon deal, we can't provide real specific financial guidance other than to say that this is a long-term arrangement that will last through the duration of the product.

The Alcon reps will call on the eye specialists.

It's contingent on approval by the FDA.

So if we are successful in getting approved Alcon will make milestone and marketing payments to Lilly and then they'll be compensated based on product sales.

Thanks, Jim.

Next caller, please.

(OPERATOR INSTRUCTIONS).

John Boris, Bear Stearns.

Good morning and thanks for taking my questions.

I just have two.

The first one has to do with Arxxant.

Has the FDA scheduled and/or completed a preapproval inspection on the manufacturing facility and where will you manufacture Arxxant?

And second question, on slide 6 -- and this is more for John -- if you look at the volume growth your European operations are obviously generating some really nice volumes and obviously launching similar products but in very, very cost contained environments.

Where in a U.S. your U.S. affiliate is obviously generating flat volume growth.

What are some of the things or disciplines or strategies that you can see the U.S. group potentially deploying here, John, going forward that might be able to help that volume growth going forward?

John, that's a very good question.

Let me go back to the first question with respect to Arxxant.

We're going to be manufacturing both the active ingredient and the dose form itself between here and the U.S. and Puerto Rico.

And yes, we have had the PAI.

To the extent that we know it's complete, done -- in other words, we've had at least one of those sites visited at this point.

With respect to volume growth, I think that in the U.S. we have opportunities in terms of volume growth really across the board.

I think mainly with our diabetes care franchise, with Byetta -- we're on track to get Byetta supply back in shape in the third quarter, as we communicated previously.

In this quarter we saw very good volume growth with Cialis, with Forteo, with Alimta in addition to Byetta and obviously Cymbalta.

So I think there are things that we can learn from our experience outside the U.S. and clearly driving volume growth in the U.S. is a key objective.

I can add a little bit more to that.

Keep in mind that for the second quarter, while our new product portfolio grew substantially and is now almost a quarter of our sales, we still are suffering some pretty difficult compares on Zyprexa in the U.S.

While we're encouraged by the recent trends, if those continue the year-on-year compares for Zyprexa will become easier thus showing a greater impact of that growing new product portfolio in helping with the volume.

Thank you.

Next caller, please.

Stephen Williams, Friedman Billings Ramsey.

Good morning.

Thanks for taking my question.

A couple of issues.

First question relates to the launch of generic Zoloft in the quarter and what you think the impact of that might be on Cymbalta in the second half of the year.

And then the second question relates to Strattera.

Still seeing some pretty weak volumes for Strattera at the script level.

That does seem to be getting slightly worse, maybe that's the market slowdown impacting it.

And then at the international level, sequentially the last three quarters it's been flat.

I wonder if you'd care to comment on how that is doing in international markets?

Thanks.

With respect to Zoloft, clearly the availability now of a third SSRI as a generic could increase pressure on the so called try first strategies that we now see in some of the higher control plans.

About 10 to 15% of managed care lives where typically a patient would be started on a generic SSRI and kept on the drug sort of for a 30-day trial before being switched over.

So there could be a little bit more of that with respect to -- now that Zoloft has gone generic.

However, the fact that Pfizer is no longer going to be putting the promotional effort behind the product means that our share of voice in the marketplace in a relative sense grows.

We continue to advocate for and I think have been largely successful in helping to ensure that there's broad access for all mental health drugs since we know that individual responses can vary so much.

So we don't think that the impact on Cymbalta generic Zoloft is going to be -- is going to drive any real significant -- that we're going to take any kind of significant hit from that.

With respect to Strattera in the U.S., right now we're again focused on what we think is the sweet spot with Strattera, the patient who has co morbid anxiety which for some of the other products is really contraindicated, some of the stimulants.

So I think we're finding the right spot for Strattera.

I think it continues obviously to be unique in the category.

We'll continue to support the product through our neuro science sales force.

Outside the U.S.

I think we've said all along with the exception of a few markets this is really a market development opportunity.

ADHD and ADD are not so well understood, they're not diagnosed, they're often not treated in many countries.

So I think it's reasonable to expect over time you'll see a slower ramp up, but we think the opportunity for the products in a number of countries outside the U.S. is still reasonably significant.

Great, thanks, John.

And thank you for all of the questions and the calls today.

Finally to summarize, in Q2 our portfolio of nine new products contributed 24% of overall revenue and represents a growing portion of total sales.

This portfolio combined with the encouraging trends in Zyprexa and Cymbalta provide the basis for our sales growth guidance.

We continue to be focused on improving productivity.

Global headcount has dropped about 9% from its peak and Six Sigma is being institutionalized throughout all of our operations.

We continue dialogue with the FDA on the review for Arxxant and the rest of our Phase III pipeline is progressing nicely with studies for prasurgrel, Enzastaurin, inhaled insulin and arzoxifene continuing on track.

Finally, with this profile we expect adjusted 2006 EPS growth of 8 to 11%.

Thank you.

Thank you, ladies and gentlemen.

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