禮來公司 (LLY) 2008 Q3 法說會逐字稿

Welcome to the Q3 2008 earnings conference call.

(OPERATOR INSTRUCTIONS.)

Hosting today's call we have Director of Investor Relations, Phil Johnson, Please go ahead, sir.

Good morning.

And thanks for joining us for Eli Lilly & Company's third quarter 2008 earnings conference call.

I'm Phil Johnson, Executive Director of Investor Relations.

I' m joined today by our Chief Executive Officer, John Lechleiter, our Chief Financial Officer, Derica Rice, and by Ronica Fletcher and Nick Lemon from the IR Department.

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

The replay, the supporting materials and the pod cast will be available on our website through November 21, 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 alone or following the completion of the ImClone acquisition 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, the state of the financial markets and the impact of exchange rates.

Also , the ImClone acquisition is subject to a successful tender offer and antitrust clearance, and may be subject to ImClone systems shareholder approval.

None of which can be guaranteed.

For additional information about relevant risk factors, applies refer to both Lily's and ImClone's Form 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.

Now , let me turn the call over

Thanks, Phil.

The third quarter was a very successful quarter for Lilly.

Our underlying business performed very well with sales as well as earnings per share, excluding significant items, both growing 14%.

Sales growth was driven by a robust 6% increase in volume; and the increase in volume was consistently strong across all major geographies.

We also grew sales faster than both the cost of goods and ongoing operating expenses.

Importantly, we made significant progress executing on our strategies, creating value for shareholders by accelerating the flow of innovative new medicines that provide improved outcomes for individual patients.

Before providing my usual update on our pipeline, I would like to briefly highlight some of the key areas of activity that support this strategy.

I believe this will provide insight into how past actions support our strategy, and help you understand where we're headed in the future.

Across Lilly, we're becoming more patient-centered and customer-focused.

In research and development, for example, we're using our AME technology to design and tailor therapeutic antibodies.

We'r e structuring Alimta trials to identify patients who can benefit most from this valuable cancer therapy.

And , as we did just last week, we're launching a new Forteo pen delivery system custom-made for ease of use by elderly patients.

In sales and marketing, we're providing our sales representatives with tools and resources aimed at meeting the unique needs of individual doctors.

And we continue to lead the industry in providing external stakeholders with greater transparency about our business, having recently announced plans to disclose payments to physicians in the U.S.

Second, we're moving more aggressively into biotech.

Biotech therapeutics are attractive for a variety of reasons.

They often lend themselves to tailoring.

They carry a higher probability of technical success than small molecules, and have tougher standards for generic substitutions.

We have a long-standing presence in biotech which is relatively unique in major pharma.

Currently, nearly a quarter of our sales come from biotech products, making us the fifth largest biotech company in the world.

Biotech products also comprise nearly one-third of our clinical stage pipeline today.

We aim to increase that proportion over time, entirely consistent, by the way, with our acquisition of ImClone.

Third , throughout the Company, we're becoming faster, leaner and more efficient.

We are systematically using six sigma to improve the efficiency and effectiveness of our operations, delayering management and methodically reducing headcount and the fixed portion of our expenses and by working with business partners in new and creative ways.

Fourth , we are expanding our global scope and reach.

We aim to capitalize on opportunities to expand our presence in the world's fastest growing markets.

And increasingly, we will access capabilities, ideas and capital from beyond Lilly's walls in diverse geographies such as China and India.

Acquisitions such as AME, and SGX also provide us greater access to important US research centers like San Diego.

Finally, over time, we will selectively diversify our business.

Now , this doesn't mean we will become a conglomerate or that we'll venture outside our core areas of expertise.

It does mean that through end licensing and acquisitions, we will look for ways to deepen or build upon our current therapeutic area presence and expertise.

We'll also look for new ways to tailor our medicines to more precisely meet defined needs.

Within that context, let's review the major events that have occurred only since our last earnings call.

All of which are aligned with the efforts I just outlined to become faster, leaner, and more efficient, and more patient and customer-focused.

As part of a series of actions we are taking to restructure our research and development organization, we sold our Greenfield elaborates site to Covance in a ground breaking deal.

Under the terms of this multiyear deal, Covance will conduct preclinical toxicology work for Lilly as well as expanded early-stage clinical work, and Phase II/III clinical trial support.

Covance has demonstrated they can expedite early-stage development time lines and improve efficiency, enabling Lilly to lower drug development costs and speed the flow of new medicines.

We have also initiated a strategic review of our Tippecanoe manufacturing facility in Lafayette, Indiana.

A range of options are being considered, including continuing site operations with a revised mission, selling these facilities, or ceasing operations.

Over the past three months, we have made targeted acquisitions and end licensing deals to strengthen our discovery capabilities, as well as to deepen our presence in two key businesses; animal health and oncology.

We completed the acquisition of SGX Pharmaceuticals.

SGX brings unique capabilities in structured guided drug discovery.

This acquisition also bolsters our presence in San Diego, a key market for scientific talent.

In animal health, we continue to build our global presence by acquiring from Monsanto the worldwide rights to the dairy cow supplement Posilac, as well as the product's supporting operations.

We entered into a collaboration and worldwide licensing agreement with Deciphera Pharmaceuticals, involving four different project areas involving selective or multikinase targeted B [rath] inhibitors.

Most notably, we announced our offer to acquire ImClone Systems.

This strategic combination would create one of the leading oncology franchises in the biopharmaceutical industry, offering both targeted therapies and [on litiagent], plus a pipeline spanning all phases of clinical development.

It provides the opportunity to generate additional value from Erbitux from both existing and potential new indications.

It supports our strategy to further increase our focus on biotechnology, and brings a state-of-the-art development and commercial manufacturing facility.

Finally, with three pipeline assets that could be in Phase III testing in 2009, it can help Lilly meet the challenge posed by patent expirations in the middle of the next decade on several currently marketed products.

We've also made progress in accelerating the flow through our internal pipeline with successes in the third quarter centered on new indications for key products.

We received FDA approval of Alimta, in combination with cisplatin for first line treatment of locally advanced and metastatic nonsmall cell lung cancer.

Consistent with our goal of improving outcomes for individual patients, we generated compelling data for the use of Alimta in patients with nonsquamous cell histology.

We also submitted Alimta in the US and Europe for histology-based use in the maintenance treatment of nonsmall cell lung cancer.

The data generated in the maintenance trial reinforced the utility of Alimta in treating patients with nonsquamous nonsmall cell lung cancer.

In addition, this trial fulfilled our FDA commitments from the original accelerated approval of Alimta in second-line nonsmall cell lung.

Last December, I spoke of our efforts to eliminate what we term the drug lag that has historically seen medicines reach Japanese patients years after they reach American and European patients.

I am pleased to report that we simultaneously submitted to Tedalafil in the US and Japan as a treatment for pulmonary arterial hypertension oar PAH.

The European commission approved Cymbalta for the treatment of generalized anxiety disorder.

Also in Europe, we received a positive opinion from the CHMP for olanzapine long acting injection, known as Zypadhera.

We also made progress towards resolving major uncertainties in our business.

The UK Patent Corp.

just recently issued a ruling upholding the validity of our Zyprexa patent in the United Kingdom.

We resolved a multistate investigation involving 32 states and the District of Columbia related to the sales, marketing and promotion of Zyprexa.

Finally, we significantly advanced discussions to resolve the ongoing investigation by the U.S.

Attorney for the eastern district of Pennsylvania related to past US marketing and promotional practices for Zyprexa.

The centerpiece of our strategy is to accelerate the flow of innovative new molecules.

So let me wrap up my remarks with our usual update on our pipeline.

Slide 5 shows a snapshot of our clinical pipelines of mid October and the flow for the first nine months of this year.

You can see that we now have 49 new molecular entities in development.

So far this year, eleven new molecular entities have are entered stage one testing, placing us on track to achieve our goal of 15 NME's entering the clinic this year.

Also , 4 NME's have advanced into Phase II testing, and one compound, the gamma secretase inhibitor for Alzheimer's disease has moved into Phase III.

We recently initiated our second pivotal trial for this molecule.

In addition, we have seen movement in a number of important line extensions or new indications of currently marketed products, including the approval of Alimta in first-line nonsmall cell lung cancer and Cymbalta in fibromyalgia, as well as the submission of Alimta for maintenance therapy of nonsmall cell lung and Cymbalta for the management of chronic pain.

One aspect of drug development to be expected is attrition.

And we are committed to making timely go, no-go decisions and terminating molecules quickly that do not show promise.

This year, we have terminated development on ten new molecular entities, six in Phase I and four in Phase II.

Importantly, the net flow so far this year is positive.

More compounds have entered the portfolio than have been removed from it.

We expect four additional compounds to be added to the front-end of our pipeline before year-end, and the proposed acquisition of ImClone will serve to bolster our mid to late-stage pipeline with five additional's antibodies in development.

I am confident in the strength of the pipeline and the flow we are generating.

This pipeline, along with our business development efforts, will place Lilly in a solid position to deal with the patent expiration challenges of the next decade.

I'll now turn the call over to Phil, to review the

Thanks, John.

We posted a solid results in Q3 with volume driven sales growth, an increasing gross margin percent, and leverage between sales and ongoing operating expenses.

Our Q3 results set us up well for a strong finish to the year.

Let's start our more detailed review of third quarter results on Slide 6, with sales volume trends for the quarter.

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

The 14% growth in sales in Q3 is comprised of 6% from volume, 4% from for foreign exchange rates and 3% from price.

The volume growth of 6% in Q3 continues solid volume performance and was achieved despite the drag from the entry of generic versions of Zyprexa in Canada and Germany, and of Actos in Canada.

Excluding these situations, volume growth would have been over 2% higher.

On Slide's 7,you can see how our major products contributed to worldwide volume growth of 6%.

All of our growth products are contributing positively with Cymbalta leading the way and Alimta assuming an increasing role.

As in prior quarters this year, you will see the Zyprexa shows a volume decline, reflecting the impact of generic entries in Canada and Germany.

We will now review the sales performance of selected products and then discuss the income statement.

Slide 8 shows worldwide Zyprexa sales have increased 2% in Q3 to $1.19 billion.

Sales in the US increased 3% too $556 million, driven by higher net effective selling prices, partially offset by lower demand.

International sales were up 1% to $634 million, due to the favorable impact of exchange rates, partially offset by decreased demand and lower prices.

Demand outside the US was unfavorably impacted by generic competition in Canada and Germany, offset by solid growth in Japan and several other European markets.

Moving to Slide 9, Cymbalta sales in the third quarter were $716 million, up 40% compared with the third quarter 2007.

US sales increased 34% to $597 million, primarily due to increased demand and to a lesser extent, higher net effective selling prices.

International sales totaled $119 million, an increase of 73% driven primarily by higher demand and to a lesser extent, the favorable impact of foreign exchange rates.

Higher demand outside the US reflects both increased demand in established markets, as well as recent launches in new markets.

On Slide 10, Humalog sales grew 19% to $433 million.

US sales increased 13% to $245 million, driven by higher demand and to a lesser extent, increased selling prices.

Sales outside the US increased 28% to $188 million, driven by strong demand and the favorable impact of foreign exchange rates.

Slide 11 shows growth rate in total prescriptions for Humalog in the US over the past two and a half years.

As you can see, total prescriptions were declining through early 2007.

Growth finally hit positive territory in mid to late 2007, and has accelerated significantly during 2008.

The positive demand trend reflects the numerous efforts to accelerate Humalog in our largest market, including the recent launch of the Humalog quick pen.

While we're encouraged by the growth in total prescriptions, we remain committed to increasing not just the absolute number of prescriptions, but market share in the rapid-acting and mixture segment of the analog insulin market.

Slide 12 shows Cialis sales which were up 21% in the quarter, reaching $377 million.

Sales in the US were up 20% to $140 million, due to higher prices and to a lesser strength, increased demand while sales outside of the US increased 22% to $237 million, driven primarily by the favorable impact of foreign exchange rates and increased demand.

Moving to Slide 13, Alimta sales in the third quarter were particularly strong, coming in at $314 million, an increase of 46% over Q3 2007.

US sales increased 35% to $149 million, due primarily to increased demand.

Sales outside the US were up 58% to $165 million, due to increased demand and to a lesser extent, the favorable impact of foreign exchange rates.

Ronica?

On Slide 14, Humulin sales for the quarter were up 12% to $272 million.

US sales increased 5% to $95 million, driven by higher net effective selling prices.

International sales increased 16% to $177 million, due to the favorable impact of foreign exchange rates and increased demand.

Slide 15 shows worldwide Byetta sales for the quarter were $201 million, a 22% increase.

Lilly reports half of the gross margin for US sales in Byetta plus sales with pens to Amylin and 100% of international sales.

Total Byetta revenue recognized in Lilly's income statement was $109 million, a 25% increase.

Slide 16 shows quarterly Forteo sales of $193 million, up 7% over Q3 last year.

US sales declined 6% to 117 million, due to changes in wholesale buying patterns, partially offset by higher net effective selling prices.

International sales of Forteo were up 36% to $76 million, due to higher demand and a favorable impact of foreign exchange rates.

Slide 17 shows the revenues for the products Lilly has launched this decade, Alimta, Byetta, Cialis, Cymbalta, Forteo, Strattera, Symbyax, Xigris and Yentreve.

These products collectively grew 28%, reaching $1.9 billion or 37% of our sales.

Before looking at the rest of the income statement, let's look at Slide 18 which shows the impact of price, exchange rates in volume on the sales results.

As mentioned earlier for the quarter, Lilly's sales growth of 14% was driven by volume impact of 6%, a favorable foreign exchange impact of 4%, and by a 3% impact from higher net effective selling prices.

As John mentioned earlier, volume growth was strong across all geographies.

In a challenging market, animal health posted strong volume gains as we saw a positive impact from our efforts to expand sales in emerging markets like Brazil and China and continued growth in companion animal health sales.

In addition, Q3 benefited from the timing of customers buying ahead of price increases in the U.S.

Now, let's look at the income statement.

To facilitate our analysis of our results, we are providing two distinct views of the income statement.

One view shows our reported results' according to's generally accepted accounting principles.

This view reflects our earnings from the Lilly ICOS joint venture, net of PACs and OID up to and including January 2007.

After that date, all ICOS and Cialis related revenues are shown in the respective line items of the income statement.

This is view also includes charges taken for significant items.

The pro forma non-GAAP uses GAAP methodology to restate our results as if Lilly had owned ICOS as of January 1, 2007.

In addition, this view excludes the impact of charges taken for significant items.

We will focus on the pro forma non-GAAP results as we feel it provides better insight into the underlying trends in our business.

Slide 20 shows the income statement for Q3.

Sales grew 14% to $5.2 billion.

Gross margin as a percentage of sales in this quarter was 77.8%, an increase of 0.8 percentage's points compared to Q3 2007.

This increase was due to higher net effective selling prices, as well as manufacturing expenses growing at a slower rate than sales.

Marketing, selling and administrative sense expenses were up 12% to $1.6 billion.

The increase, primarily driven by increased marketing and selling expenses included prelaunch expenses for [Effian], marketing costs assaulted with Cymbalta and Evista, the impact of foreign exchange rates, and increased litigation-related expenses.

R&D expense grew 13% to $953 million or 18% of sales.

The increase was primarily due to increased late-stage clinical trial and discovery research costs.

The total of marketing, selling, administrative and research and development expenses increased 12% in the quarter, two percentage points lower than sales.

You can see that the expansion of our gross margin percentage, and the leverage between sales and operating expenses drove a robust 20% increase in operating income.

The adjusted effective tax rate on pro forma non-GAAP basis was 22% for the quarter.

Net income and fully diluted earnings per share showed strong growth of 14%, slightly below the operating income growth rate due to lower other income and the slightly higher tax rate.

Slide 21 shows third quarter other income deductions which decreased by $47 million to $3 million, primarily due to lower out licensing income offset partially by lower interest expense.

Other income was also modestly impacted by the recent financial crisis.

While our investment exposure to the Firm's most impacted was not large, our other income line for Q3 does include a $10.9 million writedown of certain investments.

Slide 22 shows our reported EPS as well as significant items affecting net income and earnings per share.

These items include charges totaling $1.477 billion related to the pending Zyprexa investigation with the U.S.

Attorney for the eastern district of Pennsylvania, as well as the resolution of a multistate investigation regarding Zyprexa, involving 32 states and the District of Columbia.

These charges decreased earnings per share by $1.33.

A charge of $182 million or $0.11 per share for asset impairments and restructuring primarily related to the sale our Greenfield, Indiana site, and a $28 million charge for acquired in-process R&D associated with the SGX acquisition.

This charge decreased earnings per share by $0.03.

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

For information we have provided a reported earnings statement on Slide 23.

Details about our reported earnings are available in our earnings press release dated today, October 23, 2008.

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

Thanks, Ronica.

Slide 24 provides a summary of our full-year 2008 guidance on a pro forma non-GAAP basis.

Compared to our prior guidance, you will notice that we have narrowed our guidance range from $0.15 to $0.05.

In addition, we have raised our guidance for earnings per share from a range of $3.85 to $4.00 to now a range of $3.97 to $4.02 per share.

We are also revising two other aspects of our 2008 full-year financial guidance.

Specifically, we are increasing our guidance for gross margin as a percent of sales and we are reducing our guidance for the contribution of other income.

Pro forma sales are still expected to grow in the high single to low double digits.

We now expect substantial improvement in gross margin as a percent of sales for the full-year 2008 compared to 2007 on the order of magnitude of a full percentage point.

Our previous guidance had been for modest improvement.

This change is largely driven by weakening foreign currency and continued tight control of manufacturing expenses.

Marketing, selling and administrative expenses are still expected to grow in the high single digits.

And we still expect research and development expenses to grow in the high single to low double digits.

As a result, operating expenses are still expected to grow in the high single digits; importantly, I might add, at a slower rate than sales.

Therefore, we expect to deliver positive leverage between sales and ongoing operating expenses, as well as between sales and cost of goods sold.

Other income deduction are now expected to contribute approximately $50 million.

This is a change from our previous of less than $100 million.

We still expect tax rate to be approximately 22%, excluding the impact of significant items and to be approximately 23% on a reported basis.

Capital expenditures are still expected to be approximately $1.1 billion.

Please note that our revised guidance does not reflect the impact of our proposed acquisition of ImClone systems.

Finally, on Slide 25, you will find a reconciliation from pro forma nonGAAP EPS guidance to reported GAAP EPS guidance.

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

Operator?

(OPERATOR INSTRUCTIONS.) Our first question is from the line of Tony Butler, Barclays Capital.

Please go ahead.

Thanks very much.

John , it would appear that Gemzar, Strattera and Evista may have actually peaked in sales.

I'm curious, in fact, if you are reducing marketing and selling cost in those -- for those particular products.

That's the first question.

The second question is, the Alimta sequentially growth is extremely impressive.

I'm curious again if that's primarily in the second line indication, thus supporting even higher growth, not withstanding the first line.

I think first of all, when you look where Gemzar is in its life cycle, it's pretty amazing that we're still in double-digit growth.

I think that reflects the fact that there's frankly a range of tumors that the Gemzar did treat around the world that go beyond lung, obviously.

With Strattera, I think that the fact that we recently got a maintenance indication for that product in the US is positive.

With respect to Evista, obviously we're still in the relatively early days of promoting the product for the two approved indications that includes two types of breast cancer risk reduction.

You can expect we're going to make investments that are commensurate with the opportunities here.

Strattera is still fairly early on in the OUS projectory.

And I think with Gemzar, we really get a complementary retail of have product, because as we're calling on oncologists, each one of our sales reps really essentially has Gemzar and Alimta in the bag.

Wit h respect to Alimta, I think there's probably -- some of that growth probably does reflect youth in first line, not withstanding that we did not begin to promote that obviously until we got the indication, I think, at the very end of September.

But it's clearly -- I think the data and the [noncamous] technology is going to make Alimta increasingly the drug of choice in treating that type of tumor in a first line setting.

As John mentioned, we did receive approval for the Alimta in the first line nonsmall cell lung.

We have submitted, but not yet received approval in the maintenance indication.

Also before we continue the call, I want to let you know that we have been joined by Dr.

Steve Paul, the head of our research laboratory.

He is available for your questions as well.

Nex t caller, please.

The next question is from the line of Bert Hazlett, BMO Capital Markets.

Please go ahead.

Thank you.

I've got a couple of questions.

First , what do you expect in terms of current operations, the impact of Cialis QD is?

As Cialis is becoming a bigger product for you folks, what do you expect in terms of the trade-off between pricing and volume growth for QD?

Secondly, in terms of the pipeline, [Darucatide] for second air progressive MS, when should we see data for that?

And if you could, maybe if Dr.

Paul could give us an update on the Gemzar program.

What are the gating issues there to be able to replace Gemzar over the long

Bert, I'll take your first question on Cialis QD.

W e think we've got the two forms of Cialis priced right.

The cost per week of therapy for the QD is going to be the equivalent to a person taking the -- the price for a week of therapy as a once a day is going to be equivalent to -- I think, three times -- three individual uses of the PRN product.

I don't think we're really looking at a negative situation in terms of any trade-off.

At the same time, we we've seen -- since the launch of the once a day, pretty decent growth in terms of not only that individual product format, but the current 5-milligram -- what am I trying to say, the episodic use version of the product as well.

This is is Derica.

I would add to John.

Since we got the once-a-day indications, our Cialis share market increased by about 0.8 percentage points.

Subsequently, since we launched our DTC TV ads around once daily, we've increased about another 0.6 percentage points.

In total, about 1.4 percentage points of share market increase during that time period.

We have been quite impressed.

We've been able to get the balance right between the once daily in terms of the pricing relative to the, as John said, the episodic use for the normal usage.

You said that much more eloquently than I did.

We'll have Ronica handle the Darucatide question and Steve the Gempro question.

(inaudible) When you look at first secondary progressive indications, hopefully we should have some data on that trial by the second half of 2009.

Recently, we just had a 200 patient interim analysis on that, plus several data (inaudible) news that were positive.

With regards to the relapsing and remitting, the mind-set trial is due to have data by the end of this year.

And hopefully by Q1 we'll have data presented externally.

That's where we stand with both the Darucatide indications.

And Bert, Steve Paul.

On Gempro, this is the oral version of Gemzar.

What I can say at this point, the compound is on track.

Recall l that we're developing it for a slightly different strategy and indication as we treat cancer, thinking more as a maintenance drug moving down the path.

The development strategy is a bit different, obviously.

And hopefully, we'll be able to provide a bit of an update for you later this year.

Thank you.

Next caller, please.

The next question is from the line of Seamus Fernandez, Leerink Swann.

Please go ahead.

Thanks very much.

Just wondering, can you give us some -- a little bit of feedback on the deal with Amylin that you recently signed.

Was this entirely a new deal that hadn't been previously negotiated?

Or if this was a change to an existing deal, can you give us some feedback and color on the changes to the structure of the deal?

And then secondly, on Alimta, can you give us a little bit of color on whether or not that product is being used complementary to or in competition with Avastin with the small cell lung cancer indication.

Thank you.

Derica, will you handle the first one?

And John, the second part on Alimta.

On the Alimta deal, really it was a continuation of the ongoing discussion we have been having with Amylin.

As we are working through the successive launch of BID, we concluded much of the needed discussions around that, how we were partner.

Then as we'be preparing for the potential launch of Byetta LAR obviously through the construction of the Ohio facility, we were working through how to work out the arrangements there.

What you're really seeing here is a recent announcement as of this conclusion of those discussions that's been ongoing for some time.

With respect to your second question, we think we're in a good position with Alimta in that first line noncamous histology.

Because the other combination that's often used, that includes Evastin is not indicated per se in that type of cell histology.

We think that the data that underpins that first-line approval is going to be very helpful for us.

We think the other than [camous] histology accounts for maybe 60% to 70% of diagnosed nonsmall cell lung.

Next caller, please.

Our next question is from the line of Steve Scala, Cowen.

Please go ahead.

Thank you.

In the last month, Lilly has issued at least three releases that mention Prasugrel.

The September 26 release stated the review was very far along.

Neither the October 16 or today's release reiterated that language.

Based on all your discussions with FDA, do you still believe the review is very far along which we might interpret as a month or two until approval or was that language intentionally deleted?

And if so, why was it intentionally deleted?

And secondly, on the tax rate of 22%, to my knowledge that excludes the R&D tax credit.

Perhaps you can correct me if that's wrong.

What is the tax rate guidance with the R&D tax credit?

Thank you.

Steve, this is John.

I'll answer your first question quite simply.

Nothing has changed from the press release we issued on September 26, saying review is very far along.

However, I don't think we'd characterize that in any specific way.

For example, I don't think we've acknowledged that that means, as you said, that it's a month or two before approval.

We've been indeterminate on that.

That's the FDA's call.

But , yes, the review is still very far

Steve, this is Derica.

On the tax rate question, Q3 in our first nine months year results did not include the impact of the R&D tax credit.

As you know, on a non-GAAP basis, our effective tax rate is 22%.

Our guidance on a non-GAAP basis of 22% for the year does include the impact of the R&D tax credit.

It also includes our consideration of, as we look at the balance of our US versus OUS operations and our cash needs as we work through various elements of our business.

All that have has been taken into account in terms of our tax rate guidance, whether it's on a non-GAAP basis of 22%.

Thank you.

The next question is from the line of Catherine Arnold, Credit Suisse.

Please go ahead.

Thanks very much.

I have two questions.

First, about Cymbalta.

Could you remind us of the overlap between patients that have depression and fibromyalgia?

In your early experience in that indication, fibromyalgia, are patients coming from newly diagnosed or dissatisfied therapies?

And then secondly, on price.

It seems that this quarter had higher pricing than we've seen in prior quarters.

I'm wondering if you can comment -- is this an anomaly going forward, given the economy and to what extent this helps your gross margin versus underlying productivity efforts.

Thanks.

Thanks, Catherine, let me handle the price question first.

The year-on-year comparison does show a slightly higher price impact this quarter than in some of the prior quarters.

If you do remember, last Q3, there had been an adjustment made to cover Q4 of '06 through Q3 of '07 for Cymbalta.

You're seeing a bit of an uptick the way we report this year's sales as opposed to last year's sales.

It shows up as a price impact.

You'll also see in markets traditionally where we've had a zero or negative, like in our rest-of-the-world grouping, you actually see a price increase this quarter due to a couple of small situations, but that do tilt the balance to be a positive 2% price increase in those regions.

Specifically, with the ruling on the Concerta price, we went ahead and released some price that we had for Strattera.

And secondly, the way we work with accounting on sales in Russia, with those sales coming in more heavily this Q3 of '07, that showed up as an additional price benefit in that particular geography.

For your question on where the patients are coming up, I will need to follow up on that.

We don't have that information here in the studio with us.

And as for your first question, Catherine, can you remind me?

I apologize, I missed that.

On the overlap of patients with depression and fibromyalgia.

This is Steve Paul.

A couple of comments here.

First of all, depression is quite common in patients with fibromyalgia.

There is comorbidity.

But fibromyalgia clearly is a separate syndrome.

It's not actually benefited well by SSRIs.

Let's say, the SNRI's are the treatments of choice in our view.

There is substantial comorbidity.

But, again, it's a condition.

It's a pain condition primarily that's treated with SNRI's and other agents.

But it's not treated effectively just by the traditional antidepressants.

(multiple speakers)

Information I can share with you in terms of the overall sales of Cymbalta, we would have roughly about 8% of sales coming from patients who are new to therapy that would not have been on therapy essentially in the last year or so, about 6.5% coming from a switch from other product, about 78% from continuing, a little less, the remainder, less than 8%, from either add-on to an existing therapy or a restart of a prior Cymbalta.

Next caller, please.

Yes, our next question is from the line of Chris Schott, JP Morgan.

Please go ahead.

Great, thank you.

Just st a quick question on currency.

Can you talk about the currency impact to earnings in the quarter?

And looking forward, certainly to your exposure to changes in currency.

Also, are your currently getting a benefit on the gross margin side, but how much of a natural hedge is built into your P&L if we do see a strengthening dollar?

Maybe as a different way, what percent of the top line benefit or in fact, from currency falls to the bottom line?

Quickly on the Tippecanoe manufacturing facilities, please remind us what about products are produced there and what type of cost savings could be generated if you on the to close that plant.

Derica can take the currency piece and John, the Tippecanoe question.

Chris, this is Derica.

In regards to the currency impact in Q3, we did see a benefit in Q3 due to currency even though the dollar began to weaken.

If If you recall from our previous quarter's results, as the dollar was weakening significantly or the year over depreciating significantly and rapidly.

While we were getting the tailwind in our sales lines, you will see that we see a disproportion effect in our gross margin line.

That was when we were having to revalue our inventory lines.

Now that you're seeing the currencies go the other way where the dollar is quickly strengthening, you see the opposite effect and that's what's now showing the ops affecting our gross margins line while we're not getting as much tailwind in our sales line.

As we look forward, our inventory turns is about 12 months.

Once the exchange rate stabilizes, we're essentially neutral at the bottom line in regards to FX impact.

With respect, Chris, to your question about Tippecanoe.

It's a large manufacturing site with a mixed mission today.

Small molecule, chemical synthesis, I think is the mainstay is Gemzar -- the manufacture of Gemzar intermediates and Gemzar final product.

We also have some fermentation capacity there that supports our animal health business.

The site originally was a key part of our cephalosporin manufacturing going bask to the '50s, '60s, and '70s.

It is quite a large site.

We're using only a portion of that site today which is why we've said one of options is to reduce the scope of the site mission.

The other option obviously, to try to sell the site or eventually close it down.

If we close it down, we would have to contract out manufacturing of some of the products there, including Gemzar.

I can't speculate on or comment on the potential cost savings there, because we really haven't determined which option we're going to pursue.

We expect in the next six to nine months, we'll get that decision made.

Thanks, Chris.

Next caller, please.

Our next question is from the line of Tim Anderson, Sanford Bernstein.

Please go ahead.

Thank you.

Just going back to the foreign exchange question.

You mentioned when foreign exchange is stabilized and when inventories -- turns normalized.

But with such a rapid change in the strength of the dollar, to me it still makes me wonder if there's going to be a substantial negative impact on '09 EPS if you just keep rates constant from where they are today.

My question is, are you saying that there will be not much of an impact to EPS in '09 if you were to keep rates constant?

Second question on Prasugrel, my understanding is that it might be Lilly who's asking for an FDA advisory committee.

I'm wondering if this is true.

This is Derica.

I'll take the first question.

Regarding currency, if you recall, when we go back and look at the fourth quarter of 2007 where you saw a really rapid increase -- our appreciation in the euro versus the dollar.

You'll see during that period that we had a significant decline in our gross margin percentage.

And that was due to the significant revaluation of our inventories at that time.

Once we worked through those turns, we essentially are neutral.

Then now we're in a period where we're seeing obviously the rates go the opposite direction.

You're seeing that benefit in our gross margin line showing up.

Even if you look at Q2 of this year versus our Q3 results of having 28 percentage points of gross margin benefit.

When we look towards 2009, which we haven't given any guidance, but we are basically neutral at the bottom line.

While we're looking at movement in the top line in our expense base in gross margin, they pretty much net each other.

Tim, on the advisory committee meeting potential -- meeting on Prasugrel, this is obviously entirely up to the FDA.

Let me just say that if there is one, we have not been told if there will be one.

But if there is one, we'll be very prepared.

The data on this product or potential product is very compelling, as you know, and we'll be there if there is one.

My question is, have you asked for one.

No.

Okay.

Thank you.

Thanks, Tim.

Next caller, please.

The next question is from the line of Roopesh Patel, UBS.

Thank you.

Two quick questions.

First for John.

As you look for other opportunities beyond the ImClone acquisition to consumer diversification strategy, I'm curious on your thoughts on the size of deals, the areas of interest and the appetite for near-term earnings dilution.

My second question is on Cymbalta.

It seems US market share trends seem to be flat on a year-to-date basis; don't seem to have noticeably benefited from the approval in fibromyalgia.

Looking ahead, I'm wondering what's going to change that trend.

I was wondering if you could please address that.

Thank you.

Roopesh, this John.

I'll try to answer your first question.

I think that for several years now, we've been very clear, I believe with our investors that our primary use of our cash and our strong balance sheet after funding our internal operations and our internal R&D of course, would be to look for end licensing opportunities or deals like the ones we just announced, that either bring added capabilities, greater geographic presence, or help strengthen our presence in key therapeutic areas, plus take into consideration the challenges we're going to face with the patent approvals in the next decade.

We believe the ImClone acquisition really fits nicely in that context.

We also in the last 15, 18 months, we've made two animal health acquisitions, Ivy Animal Health.

We recently acquired Posilac from Monsanto.

That's a business we're going to continue to build and grow.

On the other end of deal spectrum, we acquired SGX, essentially a company that brings us research tools and technology, based in San Diego.

That deal was under $100 million.

I think ImClone probably defines the large end of the spectrum in terms of the kind of deals we've been looking at.

We're very clear that we don't believe left arm combinations, mega mergers with other major pharma companies, make any sense at all.

But you can expect we're going to be aggressive in pursuing our strategy through a combination of internal -- the organic things, making this pipeline of nearly 50 NCE's that mature, matriculate, and obviously looking for opportunities.

I believe there will continue to be good opportunities out there for us to consider.

Right now, our main goal is to get the ImClone Systems acquisition complete, get that company and its byproduct effectively integrated.

Okay.

Roopesh , this is Derica.

To respond to your question regarding Cymbalta's performance.

Just to remind you, if you look at our Cymbalta share and split of business today, our share of market and the major depressive disorder is about 6.7% and our share of market in pain is about 14.1%.

If you look at the pain side of Cymbalta, we've actually been quite encouraged and pleased with the uptake, given the fibromyalgia launch.

Today, we've seen about a 20% increase in unaided awareness of Cymbalta approval for fybro.

Also if you look at our NX volume, it's in line with [rhumotologists] at about 25% and PCPs at 5%.

If you look on the MDD side or the depression side, we are still -- Cymbalta's still the only branded antidepressant that's growing and gaining share.

What you're seeing on the MDD side is the overall market being depressed as the increase of generic utilization by many other

An additional -- just to add some additional color to Derica's comment.

Another positive trend that we've seen is with our NRX trends versus Lyrica that's been accelerating since the launch.

Some of that gets lost in the competitive nature on the depression side with the generic.

We have time for one more caller, and then we'll hedge on and close up the meeting.

The last question will be from the line of David Risinger, Merrill Lynch.

Thanks very much.

A couple of quick questions.

First , could you update us on the timing of when you'll disclose the [M Bluetooth 3] seizure risk study?

Second, can you update us on what to watch with respect to Evista and Gemzar patent litigation over the next six months please?

Thank

David, this is Steve Paul.

Your first question, we will update you at our December analyst meeting on the seizure risk study.

For the Paragraph 4 litigation we have outstanding, as you're probably aware, we've got Gemzar essentially that's already been ruled on by the judge when she denied our motion for a stay of the 30-month period when she said that Teva would have to give us a 90-day notice before they would launch.

We still have not received notice of their intention to launch.

Therefore, trending towards the pending court date in July of next year.

On Evista, the 30-'s-month stay expires in mid November, just in a few weeks time.

We have filed motions both for a stay of the 30-month period as well as for preliminary injunction hearing.

We're still awaiting word from the court on both of those requests.

I'l l turn it over to John to wrap up the meeting.

Okay.

Thanks, Phil.

Thanks to everyone for your time this morning.

Let me summarize a few of our key points.

Improving productivity at Lilly remains a key focus.

We expect to deliver operating leverage for the year, growing sales faster than our costs and expenses.

Results this quarter demonstrate our ability to use a variety of actions to prudently control our expenses, including a systematic application of Six Sigma.

At the same time, we will continue to invest to maximize the range and value of indications on important growth products such as Alimta, Cymbalta, Cialis, and Byetta.

We remain on track to deliver on our pipeline goals for the year.

We've made significant in the first nine months with solid movement into and through our pipeline.

We've made further progress on executing on our strategy with the announcement of our offer to acquire ImClone Systems, positioning Lilly with an increased focus on biotechnology and helping us to meet the challenge of patent expirations in the next decade.

Our next key pipeline event remains FDA action on Prasugrel.

We continue to working productively with the Agency in our continuing efforts to gain approval for this product.

We remain confident in our data package and the value this medicine would bring to patients.

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

We're not standing still at Lilly.

We're moving, taking actions in accordance with our strategy, all the while insisting on solid operational results even as we build our future.

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

Thank you.

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