禮來公司 (LLY) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2008 earnings call.

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

Later we will conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to our host for today, Phil Johnson.

Please go ahead.

Good morning, and thanks for joining us for Eli Lilly and Company's first quarter 2008 earnings conference call.

I am Phil Johnson, executive Director of Investor Relations.

I am joined today by our Chief Executive Officer, John Lechleiter, our Chief Financial Officer, Derica Rice, the leader of our U.S.

business, Deirdre Connelly, and Jim Greffet, Manager of Investor Relations.

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

The replay, the supporting materials, and the podcast, will be available on our website through May 23rd, 2008.

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, patent disputes, government investigations, governmental actions regarding pricing, importation, and reimbursement, changes in tax law, acquisitions, business development transactions, and of 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 product and pipeline is for the benefit of the investment community.

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

Now let me turn the call over to John.

Thanks, Phil.

Good morning.

The overarching purpose of our call this morning is to summarize our financial results for the quarter, and they are good results, but let me start by reiterating three of my top priorities as CEO.

First, speeding the flow of innovative new products through our development pipeline.

Second, more effectively engaging our customers, patients, healthcare providers, and payers alike, and third, improving quality and productivity across the board.

Lilly's success in the years to come will be based on our ability to execute on these priorities, and I intend to see that we do.

These mandates are so important that I will begin each of our earnings calls this year, by giving you an update on our progress.

After my update, we will review financial performance and take your questions.

Let's start with advancing the pipeline.

On Slide 2, you will find a summary of our achievements in the first quarter.

After advancing a record 16 new molecular entities into the clinic in 2007, Steve Paul and his team set their sights on moving another 15 NMEs into the clinic in 2008.

They are on pace to achieve this ambitious goal, with three molecules having begun Phase I testing in the first quarter.

In addition to stocking the pipeline with innovative molecules, we must move these molecules through clinical testing, at a pace that enables us to effectively meet the challenge posed by our patent expirations in the next decade.

During the first quarter, we moved two molecules into Phase II clinical trials, and we moved one, our gamma secretase inhibitor for Alzheimer's disease into Phase III.

We also continued to supplement our own innovation with collaborations, Including the recently announced agreement with Transition Therapeutics, for their gastrin-based therapies for Type II diabetes.

In addition, we closed the deal with BioMS Medical, giving Lilly exclusive rights to a molecule already in Phase III testing for secondary progressive Multiple Sclerosis.

Furthermore, we had a number of successes on the regulatory front.

The FDA approved Cialis for once-daily use.

In the first quarter, European regulators gave a positive opinion for Alimta for first-line non-small cell lung cancer.

And in early April, we received marketing authorization.

We also received marketing authorization in Europe for Forteo for GIOP, or steroid-induced osteoporosis, and we received an approvable letter for Forteo in the U.S.

for this indication.

We launched Cymbalta in Canada and France.

Australian regulatory authorities approved Cymbalta, and Cymbalta was submitted in Japan by our partner Shionogi.

We launched the Humalog KwikPen in the U.S.

We received notice that the FDA granted priority review to prasugrel, and we submitted prasugrel in the EU.

Finally, along with Amylin, we submitted the application for a monotherapy indication for Byetta.

We remain very excited about the prospects for this First-in-Class molecule, and are working closely with Amylin to maximize it's value to patients.

In Phase III, development of Arzoxifene continues for the indications of prevention of osteoporosis, and risk reduction in invasive breast cancers, many we are still blinded to the Phase III data in the ongoing five-year GENERATIONS trial, the overall event rate for invasive breast cancer is lower than expected.

Consequently we will defer the primary analysis for submission to a slightly later date, allowing additional events to occur.

As a result, we now expect to submit Arzoxifene in the fourth quarter of 2009, rather than earlier in the year.

Rounding out the pipeline we are reminded that there is risk in developing First-in-Class, Best-in-Class medicines as shown on Slide 3.

We terminated development of AIR Insulin, and received a 'not approvable' letter for Zyprexa long-acting injection.

Despite these challenges, our pipeline, especially the mid-stage is as strong as ever.

As I give this update each quarter, I expect there will be variability in the progress.

Some quarters will almost certainly be better than others.

For example, our plans indicate that movement of molecules into the clinic will be weighted to the back half of the year.

But I can assure you there is clarity throughout Lilly that advancing the pipeline is priority one.

Moving to Slide 4, the second priority is more effectively engaging our customers on all fronts, patients, healthcare providers and payers.

Again, there is much to report here.

In the quarterly results, you will see continued improvement in Humalog performance.

Our solutions-based approach integrates Humalog therapy, patient support, and tools to improve patient outcomes.

Some examples.

Our Nutrition in the fast lane series to enable more sensible choices in fast food.

The Small Steps videos outlining the little things that patients with diabetes can do to improve their control, and our engagement with advocacy groups to build disease awareness and improve patient outcomes.

In a more traditional example, in the first quarter we announced the partnership with Sanofi-Aventis to expand Cialis promotion to urologists, especially for the new once-daily indication.

For Forteo, we have made significant progress in gaining improved access in Part D plans, with reasonable copays and sensible prior authorization requirements.

By working collaboratively with the Part D plan, we now have 75% access.

In our U.S.

operations, we continue to measure effectiveness in engaging our customers, using an approach called Customer Value Metrics, or CVM.

Through CVM, we systematically collect feedback from our customers to understand Lilly's performance versus the competition in delivering value.

Using this approach, we better understand the evolving needs of customers, and how we can improve.

As a result, we have improved several of our sales and marketing practices, and we are seeing results.

As one example, our CVM scores have significantly increased with psychiatrists, showing they now perceive Lilly as a leader in answering product-related questions effectively, tailoring our communications to their needs, and providing relative information, to enable them to treat their patients in the most appropriate way.

I will now turn the call over to Derica who will recap our strong financial results for the quarter, beginning with a review of progress on our third priority, productivity.

Derica?

Thanks, John.

Let me begin on Slide 5, by focusing on our productivity and flexibility agendas.

We continue to make good progress on both fronts.

Starting with productivity, let me begin with this chart, that shows the trends and sales growth versus operating expense growth, and the gross margin percentage.

As shown here, Operating Expenses represent the sum of R&D and SG&A.

Furthermore, sales and operating expense growth is on a pro forma basis, as if we owned ICOS as of January 1st, 2007.

The line represents the growth margin percentage over time.

The bars represent the spread between sales growth and OpEx growth.

During the periods in which sales are growing faster than OpEx, the bars are positive, and vice versa.

One of the ways we have highlighted the benefits of our productivity initiative is through the operating leverage on our income statement, growing sales at a faster rate than costs and expenses.

For Q1, the 12% growth in pro forma sales is three percentage points higher than the growth in pro forma operating expenses.

While this shows substantial leverage on operating expenses, the Q1 growth and cost of sales was 18%, well above the sales growth.

Consequently, the gross margin percentage declined slightly from 2007.

Now on the surface, these results may appear inconsistent with our productivity objective.

However, I would like to provide some perspective on the effect of foreign exchange rates in these results.

When we consider exchange rates, a different picture emerges as shown on Slide 6.

This analysis is particularly relevant this quarter, given the movement in rates.

If we remove the impact of exchange rates, sales grew 7%, almost entirely from volume.

Costs of sales grew in the low-single digits, and operating expenses grew less than sales.

Thus, as you can see the underlying performance continues to show operating leverage and the positive effect of our productivity initiatives.

In addition, our bottom line is largely hedged against movements in currency exchange rates.

Our productivity efforts continue to drive decreases in our infrastructure and headcount.

We have reduced on-board headcount by over 5,500 people, or 12%, since the peak in mid-2004.

Last week, we announced a further streamlining of our manufacturing operations, and selected areas of Research and Development in Indianapolis.

We expect the voluntary exit program we are offering will reduce headcount by up to 500 people.

This announcement continues the trend of headcount reductions already achieved.

Going forward, we will continue to undertake productivity initiatives across the entirety of our business.

Along with prudent management of working capital, these productivity improvements are also producing robust cash flow.

In addition, we continue to implement programs to increase our flexibility as shown on Slide 7.

In the sales force, we are using a number of tools to increase our flexibility.

John already summarized our collaboration with Sanofi-Aventis for the promotion of Cialis.

We have discussed our use of contract sales organizations supporting Cymbalta and our insulin products.

We are also expanding the use of a variety of flexible staffing arrangements, including contractors and fixed-duration employees.

These approaches provide a greater level of flexibility to adjust the sales staff and broader workforce, to match the needs of the business during a time of significant change.

In R&D, we recently announced expanded collaborations with Nicholas Piramal and Suven Life Sciences, adding molecules, adding additional molecules to these development arrangements.

As part of our Fit Net strategy, these arrangements increase our flexibility and reach, enabling us to develop more molecules without expanding Lilly infrastructure.

These are just some of the examples of how we are improving productivity and flexibility throughout Lilly.

Now let's move to Slide 8, and the specific results for the quarter.

The Q1 results met our expectations, and we are tracking to our EPS guidance for the year.

The solid business fundamentals continue.

The 12% growth in pro forma sales reflects 6% from volume, 5% from exchange rates, and 1% from price.

This slide summarized price and volume trends back to the year 2000.

The volume growth of 6% in Q1 continues solid volume performance.

This volume growth was achieved despite the drag from generic Zyprexa entries in Canada and Germany.

Furthermore on Slide 9, you can see how our major products contribute to their overall volume growth.

Led by Cymbalta, all of our growth products are contributing positively to volume growth.

You will notice that Zyprexa shows a volume decline, reflecting both the impact of generic entries in Canada and Germany, as well as the inventory build in the U.S.

during Q4 2007, that depressed Zyprexa volume in the first quarter this year.

Moving to Slide 10, before Jim provides the detailed results for each product, let me comment on operating expense trends for the quarter.

R&D grew 4%, and SG&A grew 13%.

There are a couple of factors to consider in these results.

For R&D, the growth in Q1 of this year is affected by the conclusion last year of the TRITON study of Prasugrel, as well as charges in Q1 of 2007 related to Arxxant.

These factors serve to understate the underlying trends in R&D spend.

For SG&A, the Q1 growth rate was elevated by several factors.

First, we continued to make significant investment in Q1 behind our key products including Cymbalta, Cialis, and Humalog.

We believe these investments are key to driving continued growth of these products.

Second, foreign exchange rates added significantly to SG&A growth.

Compared to R&D, the geographic distribution of our SG&A costs make them more susceptible to changes in currency exchange rates.

Finally, increased legal costs also contributed to year-on-year growth in SG&A.

These costs include a $15 million settlement with the state of Alaska.

Now, let me turn the call to Jim to give a more in depth review of results.

Jim?

Thanks, Derica.

Moving on to review of financial results for the quarter, worldwide pro forma sales grew 12% to $4.808 billion.

We will begin with a review of the sales performance of selected products, and then discuss the other lines of the income statement.

Slide 11 shows worldwide Zyprexa sales increased 1%, to $1.12 billion.

Sales in the U.S.

decreased 5% to $499 million, due primarily to lower demand.

International sales increased 6% to $621 million, due to the favorable impact of exchange rates.

International demand decreased slightly, as the impact of generic entries in Germany and Canada, more than offset increased demand in other markets.

Moving to Slide 12, Cymbalta sales in the first quarter were $605 million, up 37% compared with the first quarter 2007.

U.S.

sales increased 32% to $511 million, due to increased demand.

International sales totaled $94 million, an increase of 69% over the prior year.

Slide 13 shows worldwide Byetta sales for the quarter were $169 million, a 15% increase driven by demand.

Lilly reports half of the gross margin from U.S.

sales of Byetta, plus sales of pens to Amylin, and 100% of international sales.

Total Byetta revenue recognized in Lilly's income statement was $83 million, a 16% increase.

Neither Lilly nor Amylin is satisfied with the performance of Byetta, and a number of efforts are being implemented to sustain and improve Byetta performance, particularly in the U.S.

First, sales territories are being aligned, to improve accountability and coordination across the Lilly and Amylin teams, and to improve the reach and frequency of customer contacts.

Second, and effort is being made, to better address the needs of specialists and primary care physicians.

Market research indicates that perception of Byetta's efficacy, particularly with primary care physicians are less than what has been demonstrated.

Reinforcing Byetta's efficacy in glycemic control is key.

Third, peer to peer programs will help reinforce control glycemic efficacy.

Both Lilly and Amylin continue to place significant resources behind this First-in-Class product, to address performance that is inconsistent with what we believe to be it's true potential.

On Slide 14, Humalog sales grew 20% to $407 million.

U.S.

sales increased 13% to $239 million, driven by higher demand and increased prices.

Sales outside the U.S.

increased 31% to $169 million, driven by increased demand, and the favorable impact of foreign exchange rates.

Slide 15 shows growth trends in Humalog new prescriptions and total prescriptions since 2006.

Two trends on this graph are particularly encouraging, as we continue the efforts to reaccelerate Humalog performance.

First, overall Humalog volume grew for the full year 2007, which was the first time annual Humalog volume grew since 2004.

Second, through the first quarter of 2008, we see accelerating growth in both new and total prescriptions.

These trends reflect the sustained efforts behind Humalog, the introduction of several new pen devices, and more effective engagement of our customers on all fronts.

On Slide 16, Humulin sales for the quarter were up 14% to $258 million.

U.S.

sales increased 9% to $93 million, driven by higher prices.

International sales increased 17%, due to the favorable impact of foreign exchange rates and increased demand, partially offset by lower prices.

Slide 17 shows worldwide Cialis sales, global sales were up 27% in the quarter, reaching $337 million.

Sales in the U.S.

were up 25% to $123 million, due to higher prices and increased demand, while sales outside the U.S.

increased 28% to $214 million, driven by increased demand and the favorable impact of foreign exchange rates.

Moving to Slide 18, Alimta sales in the first quarter were $247 million, an increase of 32% over Q1 2007.

U.S.

sales increased 17% to $122 million, due primarily to increased demand.

Sales outside the U.S.

were up 50% to $125 million, due to increased demand, and the favorable impact of foreign exchange rates, partially offset by lower prices.

Slide 19 shows quarterly Forteo sales of $185 million, up 21% over Q1 of last year.

U.S.

sales were up 10% to $118 million, primarily due to increased volume, caused by variations in wholesaler buying patterns and higher prices.

International sales of Forteo were up 45%, to $67 million, due to higher demand and the favorable impact of foreign exchange rates.

Slide 20 shows the revenue from the products Lilly has launched this decade, Alimta, Byetta, Cialis, Cymbalta, Forteo, Strattera, Symbyax, Xigris, and Yentreve.

On a pro forma basis, these products grew 26%, reaching $1.7 billion, or 35% of our sales.

On a reported basis, sales of these products grew 33% in the quarter.

Before looking at the rest of the income statement, let's look at the impact of price, exchange rates, and volume on the sales results, a summary by geography on a pro forma basis is shown on Slide 21.

For the quarter, Lilly sales growth of 12% was driven by a volume impact of 6%, and a favorable impact of 5% from exchange rate, and 1% from price.

For your information, Slide 22 shows the impact of price, rate, and volume on a reported basis.

For the quarter, Lilly's reported sales growth of 14% was driven by a volume impact of 8%, a favorable exchange rate impact of 5%, and a favorable price impact of 1%.

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

Slide 23 shows the pro forma income statement.

Gross margin as a percentage of sales in the first quarter was 76.9%, a decrease of 130 basis points compared to Q1 2007.

As discussed earlier, this decrease was due to the impact of foreign exchange rates, offset in part by manufacturing expenses growing at a slower rate than sales and by price.

Operating expenses including Marketing, Selling and Administrative, and Research and Development expenses increased 9% in the quarter, or 3% less than sales.

Marketing Selling and Administrative expenses were up 13% to $1.6 billion.

This increase was primarily driven by increased marketing expenses in support of two products including Cymbalta, Cialis and Humalog, the effect of foreign exchange rates, and the increased legal costs including the settlement with the state of Alaska.

R&D expense grew 4% to $877 million, or 18% of sales.

The increase was primarily due to increases in discovery research and late stage clinical trial costs, offset by lower prasugrel clinical trial costs, and the first quarter 2007 write-off of Arxxant inventory, as a result of the U.S.

FDA's approvable decision, and the withdrawal of the Arxxant application in Europe.

Other significant items decreased from $451 million in Q1 2007, to $233 million in Q1 2008.

The 2008 amount includes the $145.7 million charge, primarily related to the decision to terminate the development of AIR Insulin, and the $87 million charge related to acquired in-process R&D associated with the BioMS Medical in-licensing transaction.

The 2007 amount includes a $123 million charge, primarily related to manufacturing site closures, and a $328.5 million charge related to acquired in-process R&D associated with the ICOS acquisition, and the OSI in-licensing transaction.

The Q1 2008 effective income tax rate reflects a discrete benefit of $210.3 million, resulting from the conclusion of a substantial portion of an IRS audit for the years 2001 through 2004.

For your information, we have provided a reported earnings statement on Slide 24.

Slide 25 shows first quarter other income and deductions, which contributed $20 million, an increase of 3 million.

Slide 26 shows the significant items affecting net income.

These items include the $210.3 million after tax benefit, or $0.19 per share, from the resolution of the Company's IRS tax audit for the years 2001 through 2004.

The $145.7 million pretax charge, or $0.09 per share, for asset impairments and restructuring primarily related to certain wind-down costs, associated with the termination of the AIR Insulin program, and the $87 million pretax charge, or $0.05 per share, for acquired in-process Research & Development from a compound acquired from BioMS Medical.

You can see the impact of these items on earnings her share for this quarter on the table.

The table also shows the impact of similar items from 2007 for comparison purposes.

Now, let me turn the call back over to Derica to update you on our financial guidance.

Derica?

Thanks, Jim.

As shown on Slide 27, our 2008 earnings guidance is now $3.90 to $4.05 per share, the change from earlier guidance, results from the tax benefit of $0.19 per share, resulting from the resolution of the IRS tax audit.

A $0.09 per share charge related to the asset impairments and restructuring primarily related to the termination of the AIR Insulin program, and a $0.05 per share charge related to the in-licensing transaction with BioMS Medical.

Absent these items, our expected 2008 earnings per share would have remained in the range of $3.85 to $4.00 per share.

Note also that this guidance does not reflect potential charges related to the recently announced voluntary exit program.

Slide 28 shows our line item financial guidance.

Excluding the effect of the resolution of the IRS tax audit, the estimated effective tax rate has been revised to approximately 22%, from the previously stated 23%.

This reduction is the result of a more favorable forecast of the mix of income between domestic and international operations, and the alignment of practices with the conclusion of the IRS tax audit.

No other elements of our previous issued line item guidance have been changed.

As discussed on past earnings calls, we no longer provide quarterly financial guidance.

We realized that financial estimates will be produced by those following our stock, however, we will not comment on the accuracy of these estimates.

This concludes our review for the first quarter, and we will now be happy to take your questions.

Our first question will come from the line of Jim Kelly from Goldman Sachs.

Please go ahead.

Thank you and good morning.

I have a question about the impact in volumes, just taking a look at the comparison from the last quarterly report where volumes, whether it was done on a pro forma or reported basis were slightly higher on a full year basis for 2007.

I am really focusing on some markets like Japan, Rest of World, and Animal Health.

Could you give us some color on those markets, where we don't often see a lot of IMS data and other third party sources?

Thank you.

Go ahead and address your question.

Good morning, Jim.

When you look at our volume growth, especially if you were to look at Q4 2007 to Q1 '08, there are a number of factors.

First of all, overall we still continue to see strong volume growth.

6% is more than half of our total revenue growth, and 12% on a pro forma basis.

Embedded in that 6% is the negative impact of generic thienobenzodiazepine entrants in Canada and Germany which we have been able to offset.

You also had some wholesaler destocking in the U.S.

in both the retail channel, as well as the wholesale channel.

And then you also had some unusual buying patterns in our Elanco Animal Health business in Q4 '07.

But if you were to take those out, you would actually see a fairly solid and pretty much continued sustained effort of volume growth in the business.

If I could, this is John Lechleiter.

I think in Japan we also have the impact of the biannual price decrease, which goes into effect April 1st, which is going to have the impact of depressing volume in the first quarter somewhat there.

We continue by the way to make the point while I am on Japan, to move up in the tables there.

We are now I think either #22 or #23, based on our growth, relative to others in that market, and poised to move into the Top 20 by the turn of the decade.

Thank you, next caller, please.

Roopesh Patel from UBS.

Thanks a lot.

A couple of questions, first on prasugrel, I was just wondering if you could comment on whether or not based on your discussions with the FDA to date, you still expect approval by the June 26 PDUFA date, and any light you can shed on your expectations relative to an Advisory Committee Panel Meeting?

And then separately, if you could also kindly comment on the flattishness we have seen in the Cymbalta trends, and what we should expect going forward?

We will have John handle your first two question on prasugrel, and Deirdre on Cymbalta.

We are very much engaged with the FDA as they continue their review of prasugrel toward the June 26th action date.

It would be impossible for me to speculate on what that action is going to be, except to say that there has been a considerable amount of back and forth between the FDA and Lilly, as one would expect in a priority review period that has shortened down to six months.

We still at this point have no indication that there is going to be an Advisory Committee.

Good morning.

In terms of Cymbalta, first of all, we continue to see Cymbalta growing faster than any other branded anti-depressant in the marketplace.

It makes us obviously very pleased.

There is part of that product that is pain-related, as you know, dTMP.

And we have seen a slowdown of that part of our business with the recent launch.

We have every expectation, given the many opportunities that my fibromyalgia, or pain offers in the future, to recapture our part of that business, and when we launch our fibromyalgia indication.

Next caller please.

David Risinger from Merrill Lynch.

Please go ahead.

Thanks very much.

I have a couple of questions.

First, could you please update us on the Zyprexa depo formulation, just provide a little bit more detail following your discussions with the FDA, in terms of how we should think about that product on a go-forward basis?

Second, could you please provide an update on Byetta LAR manufacturing, and whether that product is being used in the current clinical trials from the new facility, and then finally, on Avista, if you could just walk us through the patent challenge situation with Avista, so that we have the appropriate framework for that?

Thank you.

I will ask John to go ahead and handle the Zyprexa depo and LAR manufacturing question.

Either Jim or I will handle the patent question.

Good morning, David.

When we received the not-approval letter in March, we immediately contacted FDA obviously in an effort to really understand the root of their concerns.

It has to do with these inadvertent intravascular administration issues that tend to cause, or have caused among about 1% of the patients in the clinical trials, essentially a profound sedation, so we need to understand that better.

We do have a meeting scheduled, it has not yet taken place and once that meeting is complete, and we have a better idea how we might proceed forward, we will communicate that.

With respect to Byetta LAR, Amylin is really just bringing up the plant that is going to manufacture the commercial quantities online now.

So our goal in the intervening months is to really make sure that the material that is coming out of that plant, is in fact equivalent to material that was made using the same process but on a smaller scale, and that is one of the things we will need to complete before we file, and the date that we have given remains for the first half of 2009.

On the specific use and clinical trials, Dave, we have not yet put that commercial scale material from the facility in Ohio into our clinical trials.

That may yet happen this year, but has not happened to date.

On your question for the Avista litigation and challenge from both Teva and Barr, we have essentially a couple dates you want to keep in mind.

One is the expiration of the 30-month stay for Teva in November of this year, and then we also have a court date with them in early March here in the southern district of Indiana.

As you recall from some of our past comments, the status of Barr is frankly on hold, since they have not yet provided any description of or physical samples of material.

I do believe as well, that they actually were the first filer in this case, so the status of Teva's recently announced tentative approval for generic of Avista, is I think a little bit unclear at this point in time for that reason.

One other thing just to be absolutely clear on the Byetta once weekly submission timing, it is by the end of the first half of 2009, John said by the first half of '09.

So to be clear, that timing hasn't changed.

Great.

Thanks, Jim.

Next caller, please.

Bert Hazlett from BMO Capital Markets, your line is open.

Thanks, good morning, everyone.

Just a couple of quick ones.

Regarding prasugrel, could you discuss any efforts you have made so far to construct the sales effort, and the status thereof?

Secondly, regarding gross margin, does Zyprexa in Canada and Germany generics have an effect on gross margin?

And maybe you did state it, Derica, but could you discuss the potential for gross margin effects for the remainder of the year?

And then third, was there stocking during the quarter of KwikPen, Humalog KwikPen, and/or Cialis QD?

I am going to ask Deirdre to take your question on the prasugrel sales effort, as well as maybe your last piece on, if we began initial stocking for Cialis once daily, as well as the Humalog KwikPen.

Bert, thank you very much for the question.

Yes, we are absolutely ready for the eventual launch, if the FDA after their review allows us to launch prasugrel, which we are all looking forward to, and our preparations consist of a hospital sales position that has been in place now for two quarters.

So ready to go when we get the product in our bag.

And a primary care division that we have been building in the last few months.

In terms of the initial sales for, Cialis once-a-day, as well as the Humalog KwikPen.

In terms of KwikPen, like John and Jim mentioned previously, the results that we see with our share market with Humalog, we believe reflects the great reception in the marketplace of a KwikPen.

So it has been launched very effectively.

In terms of Cialis --

the Cialis daily is 700,000 stocking, and then the KwikPen is a little bit of stocking, but with a decline in regular pens, so --

Thank you.

Derica, do you want to handle the gross margin?

Sure.

On the gross margin, as you saw our gross margin for the quarter was a decline of 1.3 percentage points.

But if you were to exclude the impact of exchange rate, we actually saw a growth margin improvement in the quarter, and as far as the outlook for the year, I still, while we cannot predict what will happen with exchange rates, in terms of the underlying business fundamentals, we still expect to grow our manufacturing expenses at a slower rate than sales, when it is just on a fundamental basis, the gross margin improvement, excluding the impact of exchange rates.

Okay.

Next caller, please.

Tony Butler from Lehman Brothers, your line is open.

Just again on the same question on KwikPen, was it also launched internationally?

Secondly, Derica, could you provide some range for what FX, the FX contribution for SG&A was in the quarter?

Thank you.

I will have John take your question on KwikPen, then Derica on the SG&A.

Tony, we've not yet launched, we had a few, actually a few early pilot countries that we launched in a year or two ago.

We have not had a major roll-out in another market outside the U.S.

We did get approval this quarter in Japan for the pen, called MirioPen in Japan, and we have a sequence of roll-outs that we will initiate later this year outside the U.S.

Okay.

And Tony, in regards to the FX impact on SG&A, essentially if you look at the 13% SG&A growth, over half of that was due to the impact of exchange rates, and then also a small impact of also the impact of increased litigation costs.

Next caller, please.

From the line of Steve Scala from Cowen, please go ahead.

Thank you.

I have two questions.

What was the first quarter tax rate without the tax benefit and the one-time charges?

Was it 22%, Which would be consistent with the full year guidance?

And secondly, given that the 30-month stay on Gemzar expires in July, and Teva has tentative approval.

What are your range of options here?

Would you say now that you absolutely will not settle this litigation, or would you consider that as one of your options?

Thank you.

John will take will take your first question, and we will have Jim take the second one.

Sure.

In regards to tax rate, our reported tax rate, if you were to exclude, or did not have the impact of the tax settlement, we would be in the range of approximately 22% for the quarter.

Regarding Gemzar, this has been a frequent topic of conversation.

So we talked with our patent folks, and have spent some time with them.

They really sized up our patent to stay with Gemzar.

In comparison to what we have seen in the marketplace with Protonics and others.

At the bottom line, we feel very strong about our protection.

We think we will prevail.

If we did get to point where we are looking at an at-risk launch, we feel confident in our ability to get a preliminary injunction in the patent.

Both as we look through the forecasts of the court review for a preliminary injunction, including the likelihood of winning ultimately at trial.

So their status is, we believe that our footing is sound.

If push came to shove so-to-speak, we would be successful in getting a PI.

Next caller, please.

From the line of Catherine Arnold from Credit Suisse.

Please go ahead.

Hi, thanks.

I have a couple questions.

First of all, on Byetta, I just want to clarify.

My understanding was that the timing was by the end of the first half '09.

However, there was an expectation that that was either going to be reaffirmed or updated, because there were some strategies in mind that might bring some upside to that.

Have I got that wrong?

Are we only going to hear from you if that changes?

On expenses, I wonder if you could just give any color to what you expect in the next three quarters of the year?

Are there unique expenses that we should be looking out for, in terms of SG&A, COGS, or R&D, that would prevent sort of the mistiming of expenses by Street estimates?

Thanks, Catherine.

We will have Jim handle your first question on the Byetta timing, and Derica the second on the expenses.

You are right, Catherine, the affirmative statement we have made on the filing times for Exenatide once weekly is by the end of the first half of 2009.

I think in Amylin's Analyst Meeting late last year, they provided sort of a continuum of options.

Remember that one of the key factors influencing the timing, is the reconciliation that we will do with the FDA from the lower scale manufacturing that was done in the clinical trial, to full commercial scale.

The timing that we have given by the end of the first half of '09, really assumes the most robust reconciliation is done.

In the event we are able to get a more streamlined reconciliation agreed to with the FDA, that timing could conceivably be sooner.

We realize this is an important question, so for the time being that is really the state of play.

As we have more definitive timing to provide, based on the developments with the FDA, we will give it to you.

Catherine, on the expense side, I am not aware of any other unusual expense items now in the next nine months.

If you recall, when we gave our guidance for the year, clearly stated that we expect operating leverage, both in terms of our gross margin improvement, as well as expenses being SG&A and R&D growing in total at a slower rate than revenue growth.

As you saw when I took out the FX impact, I think that made it very clear, at least for our Q1 results, that we were able to achieve that leverage, and I fully expect that we will continue to drive towards that same kind of leverage in the last nine months as well.

Once again, not knowing where exchange rates will go.

I think that is also consistent with the guidance we gave for the year, and when I look at our first quarter results, which I think are very solid, in our minds we are very much on-track to achieve the range that we gave for the year as well, on the bottom line.

Catherine, while it is not an issue for 2008 necessarily, as Derica was mentioned, when you get to the year-on-year compare, Q4 of this year compared to Q4 of '07 you should see a significant stepdown most likely in the FX impact, as well as the thank that in Q4 of 2007, we had the confluence of quite a number of investment opportunities that raised the SG&A spend in particular in that particular quarter.

Next caller, please.

Seamus Fernandez from Leerink Swann your line is open.

Thanks very much.

I have a few questions.

First, can you help me better understand if the mix came in better than your expectations?

Can you help me better understand the gross margin percentage printed in the quarter?

It seems to have missed my expectations by a substantial amount.

And I am just wondering why that would occur, were there accruals booked last year that simply were not booked this quarter, that would have come in at 100% gross margin, or what really is the impact in the quarter there?

Then secondly, Animal Health, three companies or at least two companies have reported so far on the animal health businesses, and those are coming in below at least my expectations.

Just wondering if there is some buying patterns if the animal health businesses that we should anticipate on a quarter-over-quarter or year-over-year basis, or is there something structural in the animal health business, that would suggest an economic slowdown would have impact there?

And I will go offline.

Thanks.

Thanks, Seamus.

I will have Derica address both of your questions.

Okay.

In regards to the mix impact, what we saw driving our gross margins and I think I can cover the mix question as well as if we had booked any charges in this response.

Our gross margin decline was entirely driven by the impact of foreign exchange rates.

If you were to exclude that, the impact of foreign exchange rates, we essentially saw a substantial gross margin improvement in the first quarter alone.

If you look, there were no special charges in gross margin, and so forth, it was all exchange rate.

We also, if you look back by the time you get to the bottom line, we have a a natural hedge for the most part in our P&L.

So while exchange rates had a positive impact on sales, it has a negative effect on gross margin, in terms of cost of sales as well as our expense rate.

When you get to the bottom line, you are pretty much naturally hedged.

In regards to animal health, we did see some buying patterns in the fourth quarter in the U.S.

in 2007.

But for the most part, our underlying trends have been very solid that we have seen, and we also had the continued positive effect of the expansion of our companion animal business, most recently with the launch of Comfortis in the U.S.

Seamus, one other comment on the manufacturing expenses and gross margin as a percent of sales.

As Derica mentioned, excluding the impact of foreign exchange rates, we actually would have seen an expansion in the gross margin as a percent of sales, and that really is not due to mix, it is due to the fact that our manufacturing expenses are growing much slower than sales.

We talked in the past year or so about actions we have taken at a plant over in the U.K.

at Basingstroke, also down in Virginia, Prince William County, as well as up in central Indiana, at Lafayette, Indiana.

We are obviously looking to continue our productivity efforts in this area.

We continue to have a strong gross margin going forward, as evidenced by some of the announcements that we talked about just a week ago on the restructuring of our Indianapolis manufacturing operations.

Next caller, please.

John Boris from Bear Stearns, your line is open.

Okay.

Thanks for taking the questions.

First question on prasugrel, can you just chat about where bulk manufacturing is coming from and fill and finish, and whether the FDA has inspected both of those facilities, and whether they have signed off on your CMC section of your NDA?

Secondly, have you built launch quantities, and do the launch quantities include 5 mg, 7.5, and 10-milligram tablets?

Second question, on Alimta, can you characterize the EU roll-out in first-line non-small cell lung cancer, and whether you view that as a material or significant opportunity, and when we might be seeing some contribution from that, and what the roll-out might look like?

Third, on at least a question for John on pricing and rebating at the government level, I think in March there was a Bill passed, the House Bill 1424, mental health parity where they were actually looking for an extra clawback of 5% from the 15.1% to 20.1% price level.

I think there was a Lilly executive that was quoted as saying that that looked like a price controller, or form of a price control that was looking to be put into effect.

Just your thoughts on that going into '09, and whether you see that potentially being more broadly applied to other therapeutic categories going forward?

I will handle your first three questions and have John handle your last one on the price and rebating here in the U.S.

The prasugrel the bulk will be coming from Ube in Japan, and the fill finish will be done here at our Indianapolis facility.

Neither of those two facilities yet have been scheduled for the FDA preapproval inspection.

So those are still yet to come.

Launch quantities, we need to get back to you.

We don't have information right now on the status of the actual stocking and inventory build for the product launch.

And then for EU for Alimta, it is too early to tell right now what kind of uptake that we will see, but clearly this is an important indication for us, and one that we think can be an important advancement, particularly as we look to go ahead and have more tailored medicines, the position that we will have more assurity that we are going to get the impending benefits when they subscribe to their use.

Given the fact that have honed in on the use of this product based on histology.

John?

John, on your question about the mental health parity legislation, there us a House version and a Senate version, and the House version includes a pay for provision that would in effect increase rebates, and we are opposed to that.

But certainly within that legislation, there is very much that we would support.

So we are really trying to see if there is a way to get the right kind of legislation through, that doesn't have this provision in it that you refer to.

We have time for one more call.

That will come from the line of Ira Das from Bernstein.

I am speaking for Tim Anderson.

I have three questions.

First, what is the status of Zyprexa depo internationally?

And should we expect a similar outcome in terms of safety concerns?

The second question is do you have any thoughts on why the FDA Advisory Committee has not been set up for prasugrel?

Third, the PDUFA for Cymbalta in FM is approaching, and this could be meaningful.

What do you expect in terms of regulatory clearance for this product and this indication?

Thank you.

Thanks, Ira.

We will go ahead.

I think John is going to try both the Zyprexa depo question, the FDA Ad Comm, on why they not be asking for that for prasugrel, and the Cymbalta for fibromyalgia, if not we will have Jim help out.

The Zyprexa depo is currently under review in Europe.

At this point in time, it has not been the subject of a CHMP decision, that is still in progress and we are still actively prosecuting that filing in Europe.

With respect to the FDA Advisory Committee for prasugrel, we are really not privy to why the FDA would decide or would not decide to have an Advisory Committee.

What is very clear at this point is that we have no indication from FDA that they will at this point require one.

Ira, it is Jim.

Regarding the fibro PDUFA date upcoming for Cymbalta in the U.S., you are right, we are looking toward a June timeframe that would put us to the 10-month clock from when we had submitted.

As Deirdre had mentioned earlier, part of the explanation of Cymbalta performance today is the uptick that Lyrica has had from their approval for that indication.

We are excited about the prospects that this will provide to Cymbalta.

Furthermore, if you think about the continuum of efficacy that we have already shown with Cymbalta with the bona fide analgesic effect with CPMP, as well as the emotional effects with the major depressant indication, we think that is particularly fitting in a space such as fibromyalgia.

We feel good about the submission package we provide when dialoguing with the Agency.

We are hopeful for approval, and think that it will be a meaningful benefit for the patient and the product.

Thank you.

Let me turn the call now back to onto wrap up the meeting.

Thank all of you for your time this morning.

Let me summarize a few of our key points.

We are delivering on our priorities.

We concluded 2007 with accelerating sales growth, solid fundamentals, robust cash flow, and earnings at the top end of our guidance range, bringing positive momentum into 2008.

This strong performance is broad-based, across products and geographies.

We have a number of important events in 2008 including U.S.

launches now in progress of Cialis for once-daily use, and Humalog KwikPen plus ongoing launches O-U.S.

launches of Cymbalta and Byetta, FDA actions on prasugrel , Cymbalta for fibromyalgia, and Alimta for first-line non-small cell lung cancer.

Submissions of prasugrel in the EU, and Byetta monotherapy now complete, plus Cialis for pulmonary arterial hypertension, and Cymbalta for chronic pain.

And the initiation of Phase III studies for our Alzheimer's candidates, plus others to come in 2008 and 2009.

In my new role as CEO, chief among my priorities are increasing the flow of innovative new therapies from our pipeline, engaging our customers in fundamentally new ways, by focusing on improved outcomes for individual patients, and continuing to reduce our cost base, and improve quality and productivity.

At Lilly today we have a sense of urgency to deliver strong results, while also reshaping the Company to win, for the benefit of patients and shareholders alike.

Thank you for joining us this morning, and I look forward to continuing my interactions with our

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