禮來公司 (LLY) 2006 Q4 法說會逐字稿

Welcome to the Eli Lilly & Company fourth quarter and 2006 financial review. [OPERATOR INSTRUCTIONS] As a reminder today's call is being recorded.

I would now like to turn the conference over to the Manager of Investor Relations, Mr. Jim Greffet.

Good morning and thanks for joining us for the Eli Lilly & Company fourth quarter 2006 conference call.

I'm Jim Greffet, Manager of Investor Relations; and I'm joined today by John Lechleiter, Lilly President and COO; and Derica Rice, Lilly CFO.

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 through February 28, 2007.

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

John Lechleiter will now provide a review of our 2006 priorities and how we performed against them.

Thanks, Jim. 2006 was a year of achievement for Lilly.

We delivered on our sales and earnings projections.

We addressed uncertainties with regard to Zyprexa, we made substantial progress on the pipeline, we continued to improve productivity, and with the ICOS acquisition, we completed the second largest acquisition in Lilly's history.

In 2006, our top sales priorities were to stop the Zyprexa erosion in the U.S., to accelerate Cymbalta sales, to drive the growth of our newer products and to reenergize our insulin.

So how did we do?

First, the reorganization of our U.S. neuro science sales force and improved patient focus stabilized Zyprexa's retail prescription volume and hospital share.

For the year, Zyprexa sales increased 4%, both in the U.S. and internationally.

Second, in the U.S., Cymbalta benefited from the sales force reorganization as well as branded DTC advertising which underscores its strong efficacy in treating depression.

Cymbalta gained over 2 percentage points of new prescription share in 2006, even with the introduction of a new generic SSRI.

Worldwide sales increased 94%.

Third, our newer products grew 47%.

They generated over $3.8 billion in sales and now account for 24% of total sales, up from 18% in 2005.

Along with the near doubling of Cymbalta sales, Alimta grew 32%.

Forteo grew 53%.

Worldwide Cialis revenue grew 28%.

And Byetta, which achieved over $400 million in sales in its first full year on the market has become the fourth most prescribed branded pharmaceutical used to treat type II diabetes, measured by new prescriptions.

EU approval is also important since Lilly receives 80% of the economics outside the U.S.

While we are not satisfied with our insulin performance to date, we are determined to regain leadership in this market.

We have restructured our U.S. sales force.

We have increased our sales force size by 40% through the use of a contract sales organization.

Those reps, by the way, will be in the field within weeks.

And we have increased our presence in leading hospitals and teaching institutions.

We also plan to launch three new pen devices in the U.S. in 2007, led by the first in class Memoir Pen that incorporates sophisticated electronics to recall the last 16 doses.

We know that the overall trends for Humalog will not change overnight.

However, some U.S. share market trends are improving.

Between January 2005 and June 2006, Humalog lost 2.2 percentage points of share.

Humalog's share has been stable since June 2006, ending a lengthy period of decline.

Importantly, eight of our top ten international affiliates now have a positive Humalog growth trend.

In 2006, we achieved or made significant progress on each of our achieved or made significant progress on each of our top priorities.

We also took decisive action with infrastructure to position Lilly well for the future.

Finally, we delivered strong financial results, delivering sales growth within our guidance set at the start of the year, and EPS near the top of our guidance range.

With that summary of the year, Jim will now take a closer look at our key achievements over the past three months and our detailed financial results.

Slide 3 summarizes key decisions and events in the past three months.

In business development, on January 29, Lilly completed the acquisition of ICOS Corporation for approximately $2.3 billion.

The acquisition brings the full value of Cialis to Lilly and enables the Company to realize operational efficiencies in further developing, marketing, and selling this product.

We expect the acquisition to be accretive to earnings beginning in 2008.

Also in January, Lilly licensed from OSI Pharmaceuticals its gluco kinase activator, GKA program for the treatment of type II diabetes, including the lead compound, PSN 010.

Lilly received an exclusive license to develop and market any compounds derived from the GKA program.

We also had some significant legal and regulatory achievements.

The United States Court of Appeals upheld an earlier ruling affirming the validity of Lilly's patent on Zyprexa through 2011.

In late November, Lilly and partner Amylin received European Commission authorization to market Byetta as a treatment for type II diabetes.

In addition, in late December, Lilly and Amylin received U.S.

FDA approval for Byetta as an add-on therapy to improve blood sugar control in people with type II diabetes who have not achieved adequate control on a TZD.

We also submitted a new drug application to the FDA for Evista for the reduction in risk of invasive breast cancer in post-menopausal women with osteoporosis and post-menopausal women at high risk for breast cancer.

Evista is currently indicated for the treatment and prevention of osteoporosis in post-menopausal women.

We took several actions to improve our operational efficiency.

We decided to close a manufacturing facility in Basingstoke, England and research and development sites in Belgium and Germany.

We stopped construction on the planned insulin manufacturing facility in Prince William County, Virginia, and offered a voluntary exit program for up to 250 employees at the Tippecanoe manufacturing site in Lafayette, Indiana.

The combination of infrastructure decisions and other asset impairments resulted in fourth quarter 2006 charges of 450 million, or $0.31 per share.

In addition, we settled the vast majority of remaining Zyprexa product liability claims.

While Lilly believes the claims are without merit, we took the step because it is in the best interest of the Company, the patients who depend on Zyprexa, and their doctors.

The settlements cover over 18,000 claims and resulted in a charge in the fourth quarter of 2006 of 495 million pretax, or $0.42 per share.

Finally, we had two important developments in the pipeline.

First, in late December, Lilly closed the enrollment of a Phase III study of Enzastaurin for the treatment of recurrent gleoblastoma after an external data monitoring committee determined the study would likely not meet its primary endpoint.

However, other Enzastaurin trials, including a Phase III study for the treatment of non-Hodgkin's lymphoma and earlier phase studies for a number of tumor types, including gleoblastoma, are ongoing.

Second, in mid-January we announced, along with our partner, Daiichi Sankyo, that enrollment had been completed in the TRITON study, a Phase III head to head study comparing Prasugrel versus Clopidogrel in patients with acute coronary syndrome undergoing percutaneous coronary intervention, or PCI.

Let's move now to a review of 2006 financial results.

Slide 4 shows a summary of the adjusted financial performance for Q4 and the full year.

For the quarter, worldwide sales grew 9%, to 4.245 billion.

Gross margin was 76% of sales.

A decrease of 80 basis points compared to the fourth quarter of 2005.

Total operating expenses increased by 8%.

This increase in total operating expenses resulted from an increase of 10% in SG&A and growth of 6% in R&D.

Operating income increased 8%, and other income and deductions contributed 102.7 million in the fourth quarter.

The tax rate on an adjusted basis was 19.9% for the quarter.

A lower rate relative to earlier quarters in 2006, due to the passage of the U.S.

Federal R&D tax credit in late 2006.

Finally, Q4 adjusted earnings per share were $0.85.

Adjusted earnings per share were $0.80 in Q4 last year, this represents 6% growth in adjusted earnings for the quarter.

For the year, sales grew 7%.

Gross margins improved 110 basis points.

Total operating expenses increased 7%, which yielded a 13% increase in operating income.

Adjusted earnings per share was $3.18, near the top of the guidance range established at the beginning of 2006 of $3.10 to $3.20.

In 2006, we made further strong gains in improving productivity across the Company.

Adjusted operating income per employee showed a strong increase for the second straight year.

For information we have provided a reported earnings statement on slide 5.

Details about our reported earnings are available in our earnings press release dated today, January 31, 2007.

Slides 6 and 7 show a Q4 and full-year reconciliation of the items that were adjusted from reported earnings to help investors better understand our ongoing business.

For the fourth quarter, 2006 earnings were adjusted to exclude the 495 million Zyprexa product liability charge as well as the 450 million in charges for the announced plant closures and other asset impairments. 2005 earnings were adjusted to exclude 172 million in charges for asset impairments, restructuring, and other special charges, and 22 million for the cumulative effect of an accounting change due to the adoption of a new accounting rule, FIN 47.

The full year adjustment on slide 7 include the items above as well as the 1.1 billion product liability charge taken in Q2, 2005.

Slide 8 recaps our earnings per share performance and growth over the past three years, including a comparison to our guidance.

As you can see, 2006 continued a trend of delivering EPS growth among the best in the industry and within the guidance provided.

As we move to a more detailed discussion of specific products, we will focus on six products or groups of products that represent 64% of our global sales for the year.

Zyprexa, Cymbalta, diabetes care, Cialis, Forteo, and Alimta.

This group also includes the majority of the new product portfolio.

Additional discussion on the performance of other products can be found in our press release dated today, January 31, 2007, as well as the supplementary slides at the end of the presentation.

Overall, eight of our top ten products, including Zyprexa, had sales growth in 2006, and three of those products, Cymbalta, Alimta, and Forteo, had double-digit sales growth.

Slide 9 shows worldwide Zyprexa sales increased 12% to 1.157 billion for the quarter.

Sales in the U.S. increased 19% to 551 million, primarily due to the effect of pricing with volume similar to last year.

This volume performance is a reflection of our continued efforts to stabilize the brand.

The price benefit was partially due to the transition of certain low-income patients from Medicaid to Medicare in 2006.

As slide 10 shows, the Zyprexa prescription volume trends in the U.S. have improved during 2006, with volume is largely flat.

This stability is reducing the gap in yearly comparisons.

In January 2006, the three months moving average volume was down 19% versus 2005.

By the end of December, this difference had narrowed to 7%, thus improving the year on year comparison.

Q4 Zyprexa sales outside the U.S. were up 7% to 606 million due to increased demand and favorable exchange rates.

Slide 11 shows stable Zyprexa market share trends from major O-U.S. markets.

We are encouraged by the Zyprexa trends, especially in the U.S. 2006 marked a turning point for this franchise with the stabilization of U.S. volume and the resolution of a number of uncertainties with the U.S. patent and product liability.

In 2007, we expect to see worldwide sales of Zyprexa remain stable.

In mid-2007, we also expect to submit the application for the depo formulation.

This formulation will be a once monthly injection and an important new tool to aid compliance for people suffering from schizophrenia and bipolar disorder.

On slide 12, Cymbalta sales in the fourth quarter were 424 million, up 85% compared with the fourth quarter 2005.

The U.S. sales increased 77% to 376 million due to strong demand.

As shown on slide 13, we continue to see share gains for Cymbalta.

The branded DTC campaign is building awareness and Cymbalta's efficacy in addressing the emotional as well as painful physical symptoms of depression is showing results for patients.

Beyond the current indications for depression and DPNP 2007 has two important catalysts for Cymbalta.

We expect an FDA action on the generalized anxiety disorder submission in the first quarter, and we expect to submit an application for fibromyalgia later this year.

Cymbalta launches outside the U.S. continue.

Sales outside the U.S. were 48 million in the quarter.

As slide 14 shows, Cymbalta is now launched in many major markets outside the U.S. with faster uptake with each successive launch.

For the full year, Cymbalta topped 1 billion in annual sales, reaching blockbuster status in only its second full year on the market.

In 2006, Cymbalta generated 1.3 billion in sales, up 94% compared with 2005.

On to slide 15.

Q4 diabetes care revenue, primarily made up of Humalog, Humulin, Byetta, and Actos increased 4% to 782 million.

Total Byetta sales for Q4 were 137 million, an 8% sequential increase from Q3 driven by strong demand.

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 69 million.

Global Humalog sales grew 14% to 352 million, due to higher prices in the U.S., and increased demand in both the U.S. and international markets.

Actos revenue was 90 million, a decrease of 65 million, or 42%.

Recall that our promotional arrangements for Actos in the U.S. are in a sunset phase.

In the fourth quarter, Lilly received royalties of 42 million based on historical U.S.

Actos sales.

Lilly will receive these royalties for the next three years.

Each year, beginning in Q4, the royalty rate will step down as defined by our contract with Takeda.

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

Humulin sales for the quarter were up 4% to 257 million, driven primarily by increased prices in the U.S. and increased volume outside the U.S., partially offset by decreased prices outside the U.S.

Excluding Actos in the U.S., worldwide diabetes care revenue increased 17% in the quarter.

Slide 16 shows the U.S. new prescription share of market trend for Humalog.

After losing share almost every month for 18 months, Humalog share has been stable since July 2006.

Lilly is committed to growing our diabetes care franchise.

In addition to the increased sales force, we expect to launch three new insulin pen devices in the U.S. this year.

For Byetta we are excited about the recent label expansion to include TZDs as well as upcoming launches in European market.

Slide 17 shows Cialis sales for the quarter.

Total global sales were up 28% to 269 million in the quarter.

Cialis sales in the Lilly territories that are recorded in Lilly's revenue line were 55 million.

Sales in the Lilly-ICOS joint venture territories were 215 million.

Sales in the U.S. were up 30% to 106 million.

As a reminder, through 2006, Lilly recorded 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.

Following the acquisition of ICOS in 2007, all future revenue and expenses associated with Cialis post acquisition will be reflected in Lilly's income statement.

Slide 18 shows quarterly Forteo sales of 172 million, up 46% over Q4 of last year.

U.S. sales were up 52%, to 124 million.

International sales of Forteo were up 31% to 48 million.

Strong Forteo sales were driven by increased demand, access to medical coverage through the Medicare Part D program, and decreased utilization of the Company's U.S. patient assistance program, LillyAnswers.

On slide 19, Alimta sales in the fourth quarter were 171 million, an increase of 26% over the prior year due to increased demand.

U.S. sales increased 9% to 95 million.

Sales outside the U.S. were up 56%, to 77 million.

In the U.S., Alimta has taken over the top spot in the second-line treatment of non-small cell lung cancer.

We are also excited about the recent approval of Alimta for malignant plural mesothelioma in Japan only six months after our application was filed.

Slide 20 shows the revenues from Lilly's nine newer products, Alimta, Byetta, Cialis, Cymbalta, Forteo, Strattera, Symbyax, Yentreve, and Xigris, were 1.1 billion in Q4, 26% of our sales.

Before looking at the rest of the income statement let's look at the impact of price, exchange rates, and volume on the overall sales results.

A summary of the geographic breakout is shown on slide 21.

For the quarter, Lilly sales growth of 9% was the result of favorable price impact of 6%, exchange rates of 2%, and volume of 2%.

Total pharmaceutical sales, excluding animal health, increased 10% during the quarter.

Keep in mind that U.S. volume growth was adversely affected by the sunset provisions of the Actos contract.

Excluding Actos, U.S. volume grew 5%.

Slide 22 shows the breakout of the effective price, rate, and volume for the full year 2006.

Total Lilly sales growth of 7% was the result of increases due to price of 4% and volume of 3%.

For the full year, exchange rates did not have an appreciable effect on sales.

As we have discussed, both the decline in Actos in Q4, as well as the difficult comparisons of Zyprexa volume in the first three-quarters of the year, depressed overall U.S. volume growth.

Now, let's look at the rest of the income statement shown on slide 23.

Gross margin as a percentage of sales in the fourth quarter was 76%, a decrease of 80 basis points compared to Q4 2005.

The decrease was primarily due to the impact of foreign exchange rates and lower production volume due to scheduled facility shutdowns, offset in part by higher product prices.

Overall, operating expenses increased 8% in the quarter.

SG&A was up 10% to 1.3 billion for the quarter.

The increase was primarily due to increased marketing investments in support of key products, primarily Cymbalta and the diabetes care franchise and an increase in litigation related costs.

R&D expense grew 6% to 858 million and continued at an industry top tier 20% of sales.

Slide 24 summarizes fourth quarter other income and deductions, which contributed 103 million in the quarter.

The increase from prior year is due primarily to increased Lilly-ICOS joint venture income.

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

The overall decrease in other income results from an increase in net interest expense and a decrease in out-licensing income, offset partially by increased Lilly-ICOS joint venture income.

The adjusted tax rate was 19.9% for the quarter, reflecting the passage of the U.S.

Federal R&D tax credit with the rate for the full year at 20.7%.

Turning to slide 26, you can see that Lilly generated almost 4 billion in operating cash flow in 2006, more than double the operating cash flow from 2005.

Also during 2006, 2.8 billion in long-term debt was repaid.

Working capital improved, and capital expenditures for the year totaled 1.1 billion.

Return on assets, shown on slide 27, which is based on reported net income, improved in 2006 to 11.2%, reflecting our improving operational results.

Slide 28 provides a summary of financial guidance.

Our income statement guidance for 2007 is unchanged from the guidance we provided at the analyst meeting in December.

As a reminder, this guidance includes the effect of the ICOS acquisition in all lines of the Lilly income statement in 2007 compared to the 2006 income statement without ICOS.

When evaluating growth rates, keep in mind that a portion of the sales and operating expense growth results from the acquisition.

Annual sales should grow in the high single to low double digits over 2006.

Gross margin as a percentage of sales is expected to improve slightly.

Total OpEx is expected to grow in the low double digits, reflecting the inclusion of all Cialis operating expenses and increased marketing and selling expenses in support of Cymbalta, Zyprexa, and the diabetes care franchise, as well as continued strong investment in research and development.

Other income should contribute less than 100 million, a reduction from 2006 due to the removal of the Lilly ICOS joint venture after tax profit.

We also expect the adjusted effective tax rate to be approximately 22%.

Adjusted earnings per share is expected to be $3.25 to $3.35, which includes an expected $0.10 cent per share dilution resulting from the ICOS acquisition.

This dilution includes a number of components.

First, interest expense will be incurred on approximately 2.3 billion of incremental debt related to the acquisition.

We expect the interest rate on this debt to be approximately 6%.

Second, the capitalized intangible assets reflecting the value of the tadalafil molecule will be amortized over the 11 years remaining on the patent life.

We expect the dilution from these two items to be $0.15 to $0.18 per share.

Third, we expect to incur other integration related costs.

These three items will be offset partially in 2007 by the incremental profit gained from full ownership of the molecule.

We expect the net effect to be approximately $0.10 dilution per share.

We expect continued strong cash flow in 2007, an increased dividend, and capital expenditures of approximately 1.1 billion, flat with 2006.

Note that the capital expenditure guidance is a reduction from the 1.3 billion guidance provided in December.

For the first quarter of 2007, we expect adjusted earnings per share of $0.77 to $0.79.

This includes the expected dilution from the ICOS acquisition which we expect to disproportionately affect the first half of the year as integration-related costs are incurred.

Note that this adjusted guidance excludes the estimated unusual charges related to restructuring and acquired in-process research and development, and any other future material unusual items.

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

Operator, first caller, please.

Thank you. [OPERATOR INSTRUCTIONS] First, Chris Shibutani with JP Morgan.

Two questions.

On Cymbalta can you give us an update where you think the opportunities are?

The formulary access had been stronger, particularly the mid point of the year.

As we look out to '07 do you see some relative opportunities there continuing at the same pace?

Remind us of what the anxiety indication for GAD.

Then a question on the diabetes, the sales force increase, can you comment about how you see the relative use of internal hires versus using of contract sales and kind of how you see that mix contributing to the incremental sales effort for the diabetes franchise?

Thank you.

Great, Chris.

This is Jim.

Thanks for the two questions.

Those are both fairly in John's realm, so we'll let John take both of them.

Thanks, Jim.

With respect to Cymbalta where as we said in New York we're pleased with the formulary access we have achieved to date.

As we look ahead to 2007 we expect to see the same level of access and to see discounting in 2007 very similar to 2006.

So Cymbalta remains well positioned in commercial books of business and also in the Part D plan.

The action date for GAD's first quarter this year.

So coming up later this quarter.

With respect to the diabetes sales force, we have obviously a sizable portion of that sales force today are Lilly people.

We have chosen to augment that sales force, increase it by 40%.

That's going to go in motion literally in the next couple of weeks, by using a contract sales organization, an organization that we have been partnered with on Cymbalta frankly, since we launched the product we have been very pleased with the results, and we think this gives us greater flexibility down the road, as we introduce new products into the diabetes care space or make decisions to change promotion frequency for particular products.

Something else to think about, even though it's a CSO the increment was diabetes they are being put through training just as if they were Lilly employees and getting the full gamut of messaging on our product so we think that they are going to be as trained, as capable of having meaningful conversations as internal Lilly folks.

Next question, please.

Tim Anderson with Prudential Securities.

I have a question on one of your pipeline products which is Prasugrel.

In trying to think about the timing of data release, my understanding is that you may not be using electronic data capture which would mean analyzing the data could take months after the last patient is in, in July.

And I'm wondering if you can comment on that timing and confirm whether that is correct, and talk about your confidence level in being able to present the data at one of the major medical meetings in the back half of the year.

Thanks, Tim this is Jim.

I will take a shot at that.

So we have acknowledged even earlier in January that we have completed enrollment to the tune of about 13,600 patients in the TRITON head to head study.

As you probably know the protocol provides that a minimum treatment period of six months of therapy so you can advance forward from mid-January or so six months.

That would provide us with last patient visit.

The case report forms being used in that trial are paper, so advance and then consider the cleaning of the data, the accumulation and the data analysis puts us mid-year or a little bit later to have that study closed out.

Clearly our desire, we hope that that study will meet its endpoint and show superiority, our desire would be to maximize the value of that data at a major medical meeting.

Although we haven't committed to what meeting that might be.

Likewise, we'll look at the data when we get it and understand what the timing falls out and provide an update to Wall Street as necessary.

We are sensitive to breeching any of the protocols of the medical meeting.

We don't want to divulge the data in great detail before the meeting and compromise our ability to release at that point.

Next question, please.

Roopesh Patel with UBS.

Thank you.

A couple of questions.

First, on Zyprexa, if I look at fourth quarter U.S. sales growth of 19% I can't reconcile it to the 8% prescription volume decline that IMS reported for the quarter, and then the 10% price increase.

I was wondering if could you offer some clarity on that?

Then separately just wanted to clarify if there have been any additional Zyprexa lawsuits that have been filed since the last settlement was announced.

If so, how many and what's the count presently that's not included in the settlement.

Thank you.

Thanks for the question, Roopesh.

John, why don't you take the second one, then we can talk about the volume issues as well.

Yes, the situation with respect to the Zyprexa lawsuits that are either filed and not settled, or in the pipeline, hasn't changed in any significant way since we made the announcement earlier this month, and I think we said somewhere in excess of 1,000 or so cases remain.

So that situation remains stable.

With respect to -- I'll start on the other question, let my colleagues add in.

In Zyprexa volume in the fourth quarter of this year decreased very, very slightly, about 1%, a little over 1% in the U.S.

The other thing to think about, from the graph we showed in the call text, which is maybe what you're referring to Roopesh, keep in mind two things.

One, that's based on IMS data, which is an audit, so it's a subset of the actual volume that may have been going into the market.

Secondly, as the graph shows, it's a three-month moving average so that delta that we show at the end of the year we have done some averaging to smooth that out and that might be why you are seeing a difference between that 7% and what our true volume was, basically flat for the quarter.

Next caller, please.

That's from Jim Kelly with Goldman Sachs.

Please go ahead.

Good morning.

I wanted to ask Derica if he would spend a little more time talking about how Eli Lilly is changing the capital intensity of the business.

We have seen a couple of signs of this in the recent weeks with the decrease in the CapEx, change of the Prince William facility, and some of your comments here, but I wanted to hear from Derica as to what are some of the next steps that we can be looking towards.

Was this more of a one-time step, and just where Lilly is heading on capital intensity from here?

Thank you.

Thanks, Jim.

I guess to reflect on that, the reduction that you saw in our capital projections for 2007 going from 1.3 billion down to 1.1 was essentially the effect of the decision we made to discontinue the building of our Prince William facility in Virginia.

What allows us to be able to make these kinds of decisions, essential driven by the productivity improvements that we achieved in many of our manufacturing operations.

So it's allowed us to go back and reassess our utilization of our capacity and what we're seeing is that due to those productivity gains that we're getting much more efficient use, and we don't need to build capacity at the rate that you have seen historically.

So that's what's allowing us to bring it down, and I expect that to continue going forward.

Next caller.

David Risinger with Merrill Lynch.

Thanks very much.

I had a couple questions.

First, with respect to Zyprexa, to go back to the question earlier, it seemed like there was a bigger difference in reported sales growth versus underlying RX plus list price increase performance in the fourth quarter than in prior quarters.

So just wondering if there was an inventory buy-in in the fourth quarter or some sort of rebate reversal that would have juiced the sales even higher than we saw in prior quarters that were helped by the transition of Medicaid to Medicare?

And then second, Actos was up sequentially by 17% from the third quarter of '06, if you could explain that?

And then finally, on Zyprexa, there was a German patent litigation decision that I thought was going to occur in late January.

Could you update us on that?

Thank you.

I'll take the first one, then Jim if you want to talk about the second one, and maybe John if you want to highlight the third question around the German patent situation.

Regarding Zyprexa and looking at the growth, we saw there was two effects that was driving the Zyprexa growth for the fourth quarter.

We clearly saw continued volume growth outside of the U.S.

In fact, we saw that in six of our nine top international markets we saw good volume growth.

If you look at the U.S., we're still seeing the effect of, one, the NMA, which is the result of less discounting as we have moved patients from Medicaid to Medicare plan Part D. And, yes, there were list price increases that were taken earlier in the year that affects the fourth quarter as well when you look at that time year on year comparison.

That's right.

It's important to note also, that there were not any price increases on Zyprexa in the fourth quarter.

Correct.

Regarding Actos sequentially, you're right, Dave, from Q3 it went from about 35 million up to about 42 million in Q4.

We have entered the sunset provisions of that contract.

There will be -- we have always acknowledged that there's some fluctuation as the terms of that contract play out.

We would expect going forward that number will go down.

One other important point with Actos, in the call text we even acknowledged historical sales.

In previous calls I think we've gotten a lot of questions about how to model out that step-down in the sunset royalty.

Really, the 42 million in Q4 is just that royalty and should be a fairly good proxy for what you should think about in the next three-quarters, then in Q4 of next year it will step down again.

John, you want to talk about the--?

With respect to the German patent we will be back in court in February for the next round there.

And typically in Germany after the hearing concludes an answer is delivered within fairly short order.

Next caller, please.

Chris Schott with Bank of America.

Two quick questions on Zyprexa.

First, obviously saw some price benefit in '06.

When we're looking out to '07 can you talk a little bit more about the price volume dynamics you're anticipating?

Specifically have you seen any fallout among physicians following some of those New York Times articles in late 2006?

On price side fair to assume that some of the gains will moderate in '07 but do you still expect a positive price contribution for Zyprex in the U.S. in '07?

Finally on the Zyprexa depo opportunity what percent of either your current user base or targeted patient population do you think would be a candidate for the depo?

Chris this is John.

I will try to take a stab at these and ask my colleagues to jump in.

We expect in 2007, we are very clear in 2006 part of the benefit that showed up as a price benefit for Zyprexa in 2006 was the one-time impact of MMA and conversion of dual from state Medicaid programs to part B. We do, though, would expect to get some price based on the normal course of business and list price increase has been in 2007.

The volume comparison is getting much better.

In the slide I think we showed we went back to January of '06 and did that -- the year to year volume comparison versus the end of this year.

That's coming down quite a bit so that's really going to help with respect to the overall kind of volume impact Zyprexa has on our total business.

With respect to the reaction to physicians to New York Times story that's been very muted.

I think as we certainly have equipped our sales representatives to respond to questions that physicians might have, this does not seem to be a big concern.

I think physicians who prescribe Zyprexa understand well the benefit/risk equation, and understand clearly that the patients who would stand to benefit most from the product, and we know that for many patients Zyprexa is going to be the best choice.

With respect to Zyprexa depo, the type of patient we imagine would be -- or we believe would be the best candidate for that is going to be a patient for whom compliance with daily oral medication is an issue.

We know a lot of people who use Zyprexa are being treated for schizophrenia and bipolar disorder are accessing treatment with community mental health centers and don't necessarily have a stable environment.

So I think this type of presentation is going to be very helpful for those patients and for physicians who treat them.

Maybe putting some numbers to that, in looking at our own market research we estimate only about 4% of the global antipsychotic market today in terms of dollars are actually met through depo.

So it's an unserved market and probably about $1 billion worth of sales today and the market leader, the depo that's on the market today is likely a two-week payout.

We are hopeful that our depo version will be a four-week payout and be an incremental advantage, especially in this difficult compliance area.

Next caller.

Jami Rubin with Morgan Stanley.

Just to follow-up on that question.

John, sorry to beat a dead horse here.

But just so that I understand Zyprexa U.S. sales were up 3% in 2006.

Can you please break out the volume and price component and if you can give us a sense for when the dual-eligible benefit fully annualizes in 2007, and also on Byetta in Europe, have there been any reimbursement restrictions in some of the European countries as we have seen with other novel therapies that are priced obviously more aggressively than generics?

And if you can talk about what you anticipate the rollout to look like in Europe.

Thanks.

John?

I'll tackle the Byetta and then maybe you can come back and look at the Zyprexa?

Sure.

Jamie, with respect to the Byetta launch in Europe, we'll go first to those countries in the UK and Germany where we don't have the lengthy complicated reimbursement discussions, then you can expect to see the drug roll out pretty much in order of ease of reimbursement, if that's the way to put it, with the majority of countries launching hopefully by the end of 2007.

So we're just beginning, now that we have received approval late last year, the discussions with the reimbursement authority to ensure that we have maximum access to the product.

There's -- judging from the conversations and the reaction of physicians at the EASB meeting, for example, last year in Europe there's a lot excitement about the product coming to Europe.

Jamie, we don't typically provide product level PRZ in great detail, but Derica, you probably have some comments we can give a little bit more color on Zyprexa.

Sure, Jami, for Zyprexa in the U.S., we did see double-digit, still, volume decline for Zyprexa throughout 2006.

In regards to your dual-eligible question in terms of when do we see the complete cycling in terms of the full-year effect, that essentially takes place in the early part of the first quarter this year.

As you recall, the duel-eligibles, there was essentially an immediate switch from Medicare to Medicare plan D.

Next caller please.

That's Catherine Arnold with Credit Suisse.

Please go ahead.

Thanks a lot.

Please excuse my crackly voice. [Inaudible] from your price volume analysis for the U.S.

Beyond Zyprexa you are very exposed to Medicare Part D. When you think about your 12% price contribution to U.S. total growth could you help us to mention what piece of that was actual list price increases versus change in rebate policy and the change in customer mix with Medicare?

Thanks.

This is Derica.

I will take that question.

We have never really given, broken out, in terms of quantified the impact of the MMA on our 2006 sales growth.

What I can say is that the impact is not insignificant when you look at it versus our volume growth there's also our list price increases.

Trying to remember the second part of your question which was -- remind me.

It was really talking about the mix versus MMA and the list price increases.

I think that really kind of covers the elements of your question.

Let me add a little more to this.

Another analysis we have done is looking at price rate volume for the U.S. for the entirety of 2006.

We have been pretty clear and we acknowledged in the call text that Q4 volume was really depressed because of the Actos sunset provision.

And in the earlier quarters of this year we had some other anomalies with Zyprexa difficult volume comparison as well as the pricing on Forteo especially.

Remember in prior years Forteo was largely being given away through our LillyAnswers and LillyCares program, and now that's a covered benefit.

While we can't quantify it, if you take all three of those issues out of the PRV for the U.S. for the full year 2006 roughly it was equal between price and volume, and that's one of the things that we look at in our guidance for '07.

Remember that we said that volume will be a more meaningful contributor to our overall growth.

Looking at the dynamics of '06 we feel pretty comfortable that that's a good thing to look at going forward.

Next caller.

Steve Scala with Cowen.

Is it correct to say that there was no cost associated with the $42 million in Actos income in Q4, was that a change versus Q3?

It looks like it provided maybe $0.03 per share in the quarter, so maybe $0.12 per share in '07.

Do you agree with that?

And what type of step down occurs after the next four quarters, and then separately, may I ask if the five-year patent term extension for Cymbalta has yet been granted?

I will start and we'll see, Derica, if you want to add a little bit to this.

I'll work from the middle then we'll bounce around a little bit.

The step-down, we haven't quantified what specifically the royalty step-down is other than to say it is three years.

Beginning in Q4 of each year it will step down.

We have just had our first step-down in Q4 of '06.

We'll have another one in Q4 of ;07, and then the last in Q4 of '08.

We have deliberately chosen the words step-down.

This isn't -- it's a step function, it's not a linear function, so I hope that you have a fairly good read with the 42 million in Q4 of this year how to trim that or at least have a reasonable modeling assumption how to trim that starting in Q4 of next year.

So your first question, on the 42 million sales, for U.S. only, that is correct.

Historically in the Actos arrangement for the U.S. we received a royalty and a fee for detailing.

So at the gross margin line there really has never been any cost of product sold for Actos in the U.S.

Internationally it behaves differently.

We do have revenue and costs.

Relative to the five-year extension on Cymbalta, I'm not certain whether we have actually received the extension but our patent folks feel pretty confident that we will be able to receive that patent and even I think in our 10-K filings we have acknowledged the longer term in what we expect to keep as our IP protection.

Next caller please.

That's Seamus Fernandez with Leerink Swann.

Just wanted to know if, Derica, if you could update us on the structure of the international Prasugrel agreement, whether that's been finalized, and if so if could you provide us with some incremental details?

Also, there were a lot of movements among your competitors in terms of tax rates in the quarter.

Can you just help us understand how Lilly is achieving the lowest tax rate in the group?

Thank you.

Okay.

Let me take it in two pieces.

In regards to the Prasugrel arrangement it is a profit sharing outside the U.S. but the final details have yet to be completely defined so we are still in discussions with Sankyo.

So that's all I can say there.

In regards to our tax rate, essentially, our tax rate is driven by our manufacturing strategy and the fact that we have produced many of our higher volume products in low-tax regions.

Now, if you look at the effect of our tax rate in the fourth quarter versus what we have been giving as guidance for the year, and the fact that we were at 19.9%, it was essentially the effect of the passage of the R&D tax credit, which wasn't reflected in the first three-quarters results.

We'll take one more question, please.

That's from Tony Butler with Lehman Brothers.

Thanks very much, Derica, two questions.

One is, would you -- could you characterize the normalization of ICOS under the Lilly umbrella ex these one-time items as having margins that exceed the Lilly corporate margin, are equal to or less than?

That's the first question.

And the second question is, the absence of the Virginia facility, which I understand was to manufacture Pens, are you actually increasing Pen production elsewhere at one of your existing facilities?

And can you also comment about are you increasing insulin production at -- that is, bulk insulin production at any of your other facilities?

Thank you.

John, I think, is going to take the Pen conversation question, Tony, and I will come back to your first.

Tony, with respect to the decision to stop work on the Virginia facility, some of those manufacturing lines we would have put in there to allow us to increase Pen manufacturing capacity can be -- are portable and can be moved and built into other facilities.

With respect to incremental insulin capacity, we opened up our new plant in Puerto Rico to make more bio synthetic Humalog, so that complements the output from our building here in Indianapolis.

We're also completely revamping a facility in Italy that will also be involved in making final, final product, cartridges and vials of insulin.

So overall our capacity globally despite the decision to close Virginia is growing.

Tony, let me come back to your first question regarding Cialis and the normalization of that as we bring that into the Lilly portfolio.

If you look at 2007, you are going to see kind of the one year distortion of as we bring the full value of Cialis into Lilly and it's reflected through all lines of our income statement we will be comparing to our 2006 base that does not have it.

So if you look at our sales as well as looking at our operating expenses, the 2006 base will not have it there because it was reflected in our OID line.

On a going forward basis you say now how does Cialis compare to the rest of our portfolio from a profitability standpoint and margin standpoint.

You will see that it's very similar to other products that we have in our portfolio.

So I don't see the integration of Cialis on an ongoing basis distorting our margins for Lilly.

In fact, you'll see on the DTC side, it's very similar to what you have seen with Cymbalta today.

Operator we will take another caller.

That will be Scott Henry with Oppenheimer.

Please go ahead.

Thank you for taking the question.

Just a couple issues on the pipeline.

I'm curious, is there any update on Arxxant?

I know you had been appealing that decision with the FDA.

I was curious if there is an update?

And if not when could we expect some sort of update?

Then the second pipeline questions relate to two earlier stage, but important products, the M-glue 2-3 pro drug, kind of the Zyprexa follow-on, as well as the Gemzar pro drug.

I was hoping you could just briefly discuss where those products are today and when could be the next event in terms of them moving within the pipeline.

Thank you.

Thanks, Scott this is Jim.

I will take the second one on the earlier stage stuff, then maybe John you can give an update on the Arxxant appeal.

So the M-glue 2-3, remember that at our December analyst meeting we had talked about the exciting Phase II results that we had seen, but we even acknowledged at that point that we weren't certain whether we have achieved the optimal dose.

So the next step in the process there will be some dose ranging studies that we are going to begin this year.

We haven't provided more specific timing on the studies, but we are pretty excited about the results we have seen thus far so we are going to move posthaste to make sure that that program is moving as best as it can.

Likewise with the pro drug formulation of Gemzar, we haven't provided a lot of specific timing there as well.

We are excited about the pharmaco dynamics that it will offer as an oral formulation as well as an intellectual property protection that it might contain as well.

We intend to move forward with that this year.

Stay tuned for more specific details as the year progresses.

Scott, with respect to Arxxant we're in active discussions now with the FDA working through the process of appealing this.

I would think we would have more to say about this certainly in the first half of this year.

We'll certainly keep you posted as this moves forward.

Let me just now summarize and thank all of you again for joining us this morning.

Delivery on our priorities and solid financial performance in 2006 puts our company on a solid footing for 2007 and is indicative of the improving operational performance across the enterprise.

We have increasing cash flow and a strong balance sheet.

There are a number of important pipeline catalysts in 2007 including the launch of Byetta in Europe, FDA action dates for Cymbalta GAD, and also Evista for breast cancer risk reduction, the expected submissions of the depot formulation of Zyprexa, Prasugrel for acute coronary syndromes with PCI, and Cymbalta for fibromyalgia, to name a few.

The earlier stage pipeline is robust, with a mix of novel approaches as well as established mechanisms of action.

Last year we moved eight new molecular entities into Phase II clinical trials and we expect 15 MMEs to enter the clinic this year, in 2007, followed by 15 more in 2008.

In the face of a number of factors that challenge our industry across the board we at Lilly are methodically reshaping our business to win for the benefit of patients and shareholders alike.

Thank you.

Ladies and gentlemen, this conference is available for replay.

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That number again, 320-365-3844, and the access code, 855482.

That does conclude your conference for today.

Thank you for your participation.

You may now disconnect.