禮來公司 (LLY) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Eli Lilly & Company Q2 2009 earnings call.

(Operator Instructions)

I would now like to turn the conference over to our host, Vice President of Investor Relations, Phil Johnson.

Please go ahead.

(Technical difficulties)

will be available on our Web site through August 21, 2009.

(multiple speakers)

In the second quarter we again generated strong financial results, including volume driven revenue growth, leverage between revenue and total expense growth, robust EPS growth, and strong operating cash flow.

As you will see this our operating leverage and robust earnings growth was not due to foreign exchange.

As we did in the first quarter, we again delivered a leverage and robust earnings growth on a performance basis.

This financial performance provides the resources necessary to build a robust pipeline to drive future growth, to effectively deal with the patent explorations coming in the next decade, and to respond from a position of strength to an increasingly challenging healthcare environment.

Before turning the call over to Derica to kick off our discussion of Q2 results, I will quickly run through some of the key events since our last earnings call.

Our top priority is advancing the pipeline; and while we had a number of achievements in this regard, none was bigger than the US FDA approval of Effient for the reduction of thrombotic cardiovascular events, including stent thrombosis in patients with acute coronary syndromes who are managed with an artery opening procedure known as percutaneous coronary intervention.

Later in the call, Steve will discuss Prasugrel in more detail, as well as provide you with a pipeline update.

Staying with regulatory approval, the FDA approved Alimta as a maintenance therapy for locally advanced or metastatic non-small lung cancer, specifically for patients with a nonsquamous histology, whose disease has not progressed after four cycles of platinum-based first-line chemotherapy.

The European commission granted approval for the use of Alimta as a monotherapy for maintenance and treatment of patients with other than predominantly squamous cell histology, and locally advanced or metastatic nonsmall cell lung cancer whose disease has not progressed immediately following platinum-based chemotherapy.

And Alimta received regulatory approval in Japan as first and second-line treatment of non-small cell lung cancer.

In terms of regulatory submissions, along with Amylin and Alkermes, we submitted a new drug application to the FDA for Exenatide once weekly, and its application was accepted for review.

We remain excited about the opportunity for this molecule, and we are very pleased with the top-line data just announced for the Duration-3 head-to-head superiority study versus insulin glargine.

In Duration-3, Exenatide once weekly produced superior reductions in HbA1c and weight as well as less hypoglycemia.

We also resubmitted the supplemental new drug application for Cymbalta for the management of chronic pain.

In clinical trial news, we began enrolling patients in two separate but identical phase III clinical trials of solanezumab, an anti-amyloid beta monoclonal antibody being investigated as a potential treatment to delay the progression of mild to moderate Alzheimer's disease.

The trials will each include a treatment period that lasts 18 months, and are expected to enroll a total of 2,000 patients, age 55 and over, from 16 countries.

On a legal front, the US district court for the Southern District of Indiana issued a preliminary injunction to prevent the launch of a generic launch of Evista by Teva Pharmaceuticals until the court renders its final ruling.

We anticipate that a final ruling could come sometime this year or early next year.

We have significantly advanced discussions with the Attorney General's for several states that were not part of the Eastern District of Pennsylvania settlement, seeking to resolve their Zyprexa-related claims.

As a result in the second quarter, we incurred a special pre-tax charge of $105 million, and are presenting the currently probable and estimable exposures in connection with the state's claims.

Discussions are ongoing, and it is possible that additional charges may occur in the future.

Now let me turn the call over to Derica.

Thanks, Phil.

As I have done on previous calls, I will focus my comments on the proforma non-GAAP results, which we believe provides insight into the underlying trends in the business.

This view assumes we own ImClone as of January 1, 2008, and excludes certain items, such as restructuring charges, asset impairment and other special charges.

Moving to slide 8, let's take a look at our Q2 income statement before discussing the impact of foreign exchange on our Q2 results.

On a proforma non-GAAP basis, you can see that we generated leverage between revenue and total expenses.

As second quarter revenue grew 1%, while operating income grew a robust twenty percent.

Leverage between revenue and total expenses was driven by a 4.6 percentage point expansion, and our gross margin percent and by operating expense, defined as a sum of R&D and SG&A, growing in line with revenue.

The increase in the gross margin percent, from 77.5% to 82.1%, is primarily due to the favorable impact of cost of sales due to the impact of changes in the value of the US dollar on international inventories sold in the period, specifically changes in the foreign currency value of the US dollar, resulted in a substantial addition to the cost of sales in Q2 2008, while producing a small reduction to cost of sales in Q2 of 2009.

Breaking operating expense into its component parts, operating expense growth of 1% is comprised of a 5% increase in R&D expense, reflecting increased activity as we continue to build and advance our pipeline, and a 2% decrease in SG&A expense.

Moving down the income statement, you'll see that a slight improvement in other income and deductions was offset by a modestly higher effective tax rate.

As a result, growth in net income and EPS was 20% and 19% respectively.

Slide 9 shows our reported income statement while slide 10 provides a reconciliation between reported and proforma non-GAAP EPS.

Additional details about our reported earnings are available in today's earnings press release.

Now let's talk about how foreign exchange affected our Q2 results.

Let me give you the punch line first.

Excluding the impact of exchange rate movements, we grew revenues faster than both cost of goods sold and operating expenses, driving significant leverage at strong 16% operating income and EPS growth.

Let's walk through what's going on one step at a time starting with revenue.

As you can see, on slide 11, total revenue growth of 1% on a proforma non-GAAP basis, includes a negative impact of foreign exchange of 6%.

As to the negative impact of foreign exchange, revenue grew 7% in performance terms.

This revenue growth was driven by volume growth of 4%, followed by price growth of 3%.

Slide 12 presents the price rate volume analysis on a reported basis.

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

The table on slide 13 shows the year-on-year growth of select line items on our proforma non-GAAP income statement, with and without the impact of foreign exchange rates.

The numbers in the first column are straight from our proforma non-GAAP income statement.

I'll focus my comments on the second column of numbers, which strips out the impact of foreign exchange rates on our proforma non-GAAP results.

First, you will see the 7% revenue growth I mentioned earlier.

Next, you'll see that after the impact of FX, cost of sales increased only 3%, as a result of our cost containment efforts, as well as strong production volume output.

In total, operating expenses grew 5% in performance terms, below, our 7% revenue growth.

Performance growth and operating expenses were driven by an increase of 4% in marketing, selling and administrative expenses, and an increase of 7% in R&D expenses.

Thus, excluding the impact of foreign exchange, we drove improvement in the gross margin percent as well as operating leverage, with revenue growth outpacing operating expense growth.

Robust performance growth in revenue and control of total expenses allowed us to leverage 7% revenue growth into 16% operating income growth.

You may recall that in Q1, we drove 19% operating income growth, excluding the impact of FX.

Comparing the increases in operating income an EPS with and without the impact of FX, highlights that the vast majority of the growth over Q2 2008 was driven by performance.

In fact, rate contributed approximately $0.03 per share to our Q2 EPS growth, while the other $0.15 came from pure performance.

Now hopefully this analysis provides you with a better understanding of the impact foreign exchange had on our Q2 results, and underscores the strong underlying financial performance we generated in the quarter.

Slide 14 shows the year-on-year growth of select line items of our reported income statement, both with and without the impact of foreign exchange rates.

Now, what do our Q2 financial results mean for the remainder of 2009, and, therefore, for our 2009 financial guidance?

Moving to slide 15, let's first discuss the impact of foreign exchange rates.

If exchange rates remain at current levels for the rest of 2009, the fluctuation exchange rates in Q3 and Q4 of 2008 would negatively impact the year-on-year comparisons for international revenue and margins in Q3 of 2009, while the impact of Q4 in 2009 would be small.

Substantial benefit of FX-related to international inventories sold that was seen in the first half of the year, would not be repeated in the second half as any addition or reduction to the cost of goods sold would be minimal.

Year-on-year comparisons would, however, be impacted by the additional cost booked in Q3 of 2008, and the significant reduction in costs booked in Q4 of 2008.

In terms of operational performance, first we expect to see continued volume-driven revenue growth.

However, we may see more significant erosion of Gemzar sales as generics penetrate international markets.

Second, we expect to see upward pressure on our operating expense growth in our second half due to various factors, including the ramp-up of US and international practical launches, anticipated higher DTC spend, the advancement of our pipeline until later and more expensive stages of development, and potential milestone pavements.

And third, in addition, shut-downs at our manufacturing plants are more heavily weighted to the second half of the year.

With this context, let's move to slide 16, and I will summarize our 2009 guidance.

Given the strong performance in the first half of the year, we are raising our 2009 earnings per share guidance to a range of $4.20 to $4.30 per share on a proforma non-GAAP basis.

This corresponds to a range of $4.14 to $4.24 on a reported basis.

We also reconfirm our line-item guidance on both a proforma non-GAAP and reported basis.

We continue to expect low single-digit revenue growth on a proforma non-GAAP basis, and mid single digit revenue growth on a reported basis.

Gross margin, as a percent of revenue for the year is expected to increase, driven by beneficial impact of foreign exchange in the first half of 2009, compared to the first half of 2008.

For the second half of 2009, we expect a decrease in gross margin as a percent of revenue.

Marketing, selling and administrative expenses are projected to show flat to low single digit growth.

Research and development expenses are projected to grow in the high single digits on a proforma non-GAAP basis, and in the low double digits on a reported basis.

We expect other income for 2009 to be be a net deduction of between $200 million and $250 million.

And the effective tax rate is expected to be approximately 22%.

Capital expenditures are expected to be approximately $1.1 billion, and we expect continued strong operating cash flow.

Now, let me turn the call over to Nick for our product review.

Nick?

Thanks, Derica.

This quarter we changed the format for the product review.

For those of you looking for the prior information, you will find the qualitative price, rate, volume, product discussion in our earnings press release, and you will find the product sales slides at the end of this presentation.

What we'll do instead is highlight a few products in our portfolio, focusing on what we feel are some of the more important trends.

As you can see on slide 18, and as mentioned earlier, in Q2 we again posted volume-driven sales growth.

This is a trend we've seen for nearly the entire decade.

In the lower chart, you will see the contribution made by select products to our worldwide volume growth of 4%.

Alimta and Cymbalta were the biggest contributors, with Humalog, Zyprexa, Animal Health and Byetta also contributing nicely.

The decline in Gemzar's volumes is a result of generic competition in Europe, while the decline of Evista is due to the out licensing of the product to Daiichi Sankyo in most European markets.

Now let's look to the underlying prescription and share of market trend for Cymbalta, Alimta, Cialis and Byetta.

One of the more common questions we received recently has regarded the impact of the economy in our business, most notably for Cymbalta, and the anti-depressants in the pain marketplace.

Many believe that the downturn in the economy has led to an increase in the use of generic antidepressants.

Slide 19 shows that while the use of generics is increasing, the trend has not accelerated as the economy has suffered.

Slide 20 shows the status of competition amongst the branded selective norepinephrine reuptake inhibitors in the anti-depressant and pain marketplace, Wyatt's Effexor XR and Pristiq, and Lily's Cymbalta.

The red line shows that Cymbalta has surpassed the combined new prescription market share of Effexor XR and Pristiq, a notable achievement for the product in the competitive US markets.

Now on to the oncology marketplace, where Lily continues to make great strides toward establishing itself as a powerhouse.

Slide 21 shows market share trends for the first-line setting of non-small cell lung cancer.

The red line represents Alimta's continued growth in the setting, up to a 21% market share as of May, on the strength of our first-line approval last September in locally advanced or metastatic nonsquamous non-small cell lung cancer.

Alimta's performance continues to provide us with the confidence that we are on the right track, by focusing on targeted therapies.

Alimta continues to grow impressively, even as used in the squamous population falls to near zero .

One other note in the slide is the performance of Gemzar, which continues to hold relatively stable with an 11% market share in the first-line nonsmall cell lung cancer market.

Moving on now to Cialis, our product for the treatment of erectile dysfunction.

Slide 22 shows US new prescription share of market by specialty in the ED marketplace.

Cialis continues to make progress on closing the market share gap from Pfizer's Viagra in the primary care physician's office, represented by the graph on the top of the slide.

In addition, Cialis has surpassed Viagra in the new prescription share in the urologist's office.

We are also pleased with the progress Cialis has made in the European market.

As you can see on slide 23, Cialis passed Viagra in dollar share market in Q4 of last year, aided by introduction of the once daily formulation,Cialis has begun -- from the long time market leader.

Next let's go to an update on Byetta, the injectable type 2 diabetes product we promote with Amylin.

In August of last year, the FDA provided a safety update on Byetta concerning pancreatitis.

As you can see from slide 24, this update coincided with a drop in Byetta's drop in prescriptions in a growing diabetes market.

After addressing the pancreatitis concern with our customers late in 2008 and early this year, we have been able to refocus our efforts on the efficacy of the product, and which patients are best suited for its use.

As you can see on the top chart, these efforts have resulted in a TRX trend that more closely matches the broader diabetes market.

Encouragingly, the bottom chart shows that we have recently returned to share growth in NRX.

Now let me turn the call over to Steve to update you on our pipeline and key events for the rest

Well, thanks, Nick.

Let me start with a few comments on the FDA approval of Effient.

First and foremost, we are excited to offer this important new option for patients with acute coronary syndromes who are being managed with PCI.

Effient is now approved in the US and Europe, as well as Australia and with a very good label.

We feel that the positive benefit profile, Prasugrel offers a large percentage of ACS PCI patients will be readily recognized by interventional cardiologists and that pairs with the compelling health economics value proposition.

The boxed warning for bleeding risk may necessitate a more in-depth discussion of cross growth benefits and risks with some physicians, particularly in the primary care setting, so that they appropriately weigh the benefits with the risks as opposed to focusing solely on the risks.

As we engage in these discussions, we are armed with convincing data from the TRITON-TIMI 38 trial, a head-to-head superiority trial versus the established standard of care, clopidogrel.

The data generated in the TRITON-TIMI 38 trial provided compelling evidence for patients, physicians and pairs that Prasugrel significantly reduced the combined risk of cardiovascular death, heart attack or stroke in compare to clopidogrel, the current standard of care and did so for a wide range of patient types.

Prasugrel generated a reduction in these events of 18% in patients with unstable angina or non-ST elevation non-elevated myocardial infarction, 20% in more severely ill patients with ST elevation MI, and 30% in diabetic patients.

Prasugrel also produced a 34% reduction in urgent target vessel revascularization, a 35% reduction in subsequent occurrences of the primary composite end point of CB death, nonfatal MI or nonfatal stroke, recalled in our primary composite end point only captured the first occurrence of these events, and a 50% reduction in accident thrombosis.

All these reductions were statistically significant, and we believe clinically very meaningful.

In addition the conversion of Prasugrel into its active metabolite enhanced the ability of a patient to benefit from its antiplatelet effect, does not seem to be influenced by CYP2C19 genotype This is in contrast to the pharmacokinetics of clopidogrel active metabolite which is affected by generic variations in CYP2C19.

As reported in the Plavix label, somewhere between 28% and 64% of patients, depending on ethnic background may not extensively metabolize clopidogrel.

Patients with impaired metabolism of clopidogrel may face an increased risk of death, myocardial infarction and stroke.

Now, in terms of safety, Prasugrel was associated with a significantly higher risk of bleeding events compared to clopidogrel.

Specifically the TRITON-TIMI 38 clinical study, the risk of non (inaudible)TIMI major bleeding, including life threatening and fatal bleeding was higher in patients treated with Effient plus aspirin, 2.2% compared to Plavix plus aspirin, 1.7%.

The risk of bleeding highest in Effient treated patients who were either 75 years of age or older, weighed less than 60 kilograms or who had a prior history of transient ischemic attacks or strokes.

In the US , it is contraindicated in patients with history of prior TIA or stroke, or with active pathological bleeding.

In addition the drug is generally not recommended in patients 75 years of age or older, except for patients in high-risk situations, such as those with diabetes or a history of prior heart attack.

Patients with a prior history of TIA or stroke were 4% of the patient population in TRITON, and patients 75 years of age or older that were non-diabetic and did not have a history of prior heart attack, TIA or stroke were about 7% of the TRITAN patient population.

Thus we feel that the US label contraindicates or generally recommends against the use of Prasugrel in a relatively small percentage of ACS PCI patients.

The label does suggest consideration of the 5 milligram maintenance dose for patient weighing under 60 kilograms to manage the risk of bleeding.

In addition, the label encourages physicians to manage bleeding without discontinuing Prasugrel as stopping treatment can increase the risk of subsequent cardiovascular events.

You undoubtedly have many questions about Prasugrel which I will be happy to answer during the Q&A.

We will also be joined by Dr.

Tony Ware, head of our Global Diabetes and Cardiovascular team, and by Javan Collins, who is responsible for Prasugrel sales and marketing in the United States.

Now let me provide a brief update on our pipeline.

In the second quarter, we continue to increase the number of chemical entities and new biological entities in clinical development.

As I mentioned last quarter, the current list of compounds in some stage of human testing at Lilly is larger and more exciting than at any time in the history of the Company.

Our clinical stage portfolio now stands at 66 distinct NMEs, including 26 compounds in phase II and phase III.

And we continue to build a robust biotech portfolio.

In fact, biotech molecules represent half of our late-stage phase II and phase III assets, and almost 40% of our overall clinical portfolio.

As we have made abundantly clear, we are squarely focused on advancing our pipeline, reflected by the arrows on slide 26, since our last formal portfolio update during the first quarter earnings call.

We've initiated two phase III clinical trials on solanezumab, our anti-A beta antibody for the treatment of Alzheimer's disease.

We moved one cancer compound into phase II testing, and we moved six more compounds into phase I testing.

We did terminate development of one phase II compound being studied for hot flashes.

We're building a pipeline that we believe will meet the challenges of the next decade, providing a continuous flow, two launches per year of high-value medicine by 2013.

To this end, we continue to estimate that of the 66 new chemicals and new biologic entities in clinical development, 15 to 20 may reach the market as either best-in-class or first-in-class medicines over the next 5 to 10 years.

Now, let me turn to slide 27 to highlight upcoming potential regulatory and clinical milestones.

FDA action is still pending on the Byetta monotherapy indication and on Byetta labeling.

We await the response to our reply to the complete response letter we received from the FDA on Zyprexa LAI.

Earlier this year, the FDA raised concerns about pharmacokinetic comparability data in our SBLAs for Erbitux in first-line squamous cell carcinoma of the head and neck, and in first-line non-small cell lung cancer.

Pending the outcome of the new PK study, we hope to resubmit the nonsmall cell lung cancer SBLA, and respond to the head and neck cancer complete response letter in the second half of this year.

Other potential milestones this year include submitting our Arzoxifene to the FDA, and presenting data from our large phase III generations trial, reporting phase III results for Dirucotide, in Secondary Progressive Multiple Sclerosis, initiation of phase III trials for ImClone's 11 F8 and A12 for cancer, and initiation of phase III trials for [tasozuam], also for cancer.

The second half of 2009 should continue to be eventful in Lilly research laboratories and across the Company as we continue to advance our pipeline and transform our Company to compete in the coming years.

Now this concludes our prepared remarks.

And now we will open up the call for the Q&A session.

Operator, first

Thank you.

(Operator Instructions)

Our first question comes from the line of John Boris from Citi Please go ahead.

Thanks for taking the questions.

The first question just has to do with the EPS increase of about $0.05 on your guidance range.

It seems as though you did beat the consensus prettily handily in the first quarter by $0.10.

And the first quarter was about a $0.20 beat, so if you could possibly take us through your thought process here on the $0.05 raise, relative to the magnitude of the beat in the initial quarters.

And then the second question just has to do with Effient.

It appeared in the trade at an 18% premium.

Can you just comment on how you plan on -- or what your targets are for meeting drugstore stocking and hospital stocking?

Are there certain percentages of those stores that have been stocked since you put the product into the channel?

Can you give us any commentary on formulary access.

And then just on length of therapy, can you remind us what the length of therapy was out of the TRITAN trial, how long patients stayed on average on Effient therapy?

And in clinical practice, obviously I believe Plavix has a much lower rate relative to what may have been in TRITAN, but how you plan on driving length of therapy with Effient therapy.

Thanks.

I can take your EPS and guidance questions, and then we'll have Javan and Tony outline the questions you've asked on Effient.

Hi, John.

John, we had good strong underlying performance in the first half of the year.

We still expect to continue into the second half, so we still expect volume-driven growth in the second half.

Some of the things that was impacting us in the second half that wasn't there in the first half, as I mentioned earlier on the call, was, one, we are -- you are going to see us ramping up our operating expenses to support the launch of Effient in the US, as well as other O US markets.

We'll also see, I anticipate, a higher DTC spend.

We worked on the air pulley in the first half of the year, and then also, as you've heard Steve comment, we are expecting to see an increase in our R&D expense, associated with the advancement of our pipeline to go to the latest stages, which happen to be the more expensive stages of development.

And embedded in there, also some milestone payments.

Some of the things you saw in first half such as the FX benefits and our gross margin, we expect to mitigate and basically be neutral in the second half of the year, and then, likewise, the headwind that we've seen on the international performance, both in sales and our international operating margins, we expect to still be present, but somewhat more muted or dissipated in the second half.

So that's really what's impacting our outlook for the year; but, all in all, we still expect strong underlying business performance in the second half of the year.

John, Javan Collins.

Regarding your question on pharmacies, we are currently contracting the pharmacies for stock redistribution channels.

We expect to have a majority of pharmacy stocked when we launch Effient in the first week in August.

As we look at the other hospitals or managed care organizations, we also begin discussions with hospital managed care organizations.

We have contracts in space with the GPOs, and we expect rapid formulary access across the board, because of the value that we are providing, with regards to the value proposition for the payors.

But also too, in the TRITAN study, the TIMI 38 study, there was a sub-study that was done, and that data was published at the AHA, and that study basically shows that Effient offset the costs of other health care costs.

And as you can imagine we lowered the cost because of lower MIs.

We also lowered the costs because we have fewer recatheterizations as Paul mentioned, but we also have higher costs because of increased bleeds.

And so even with the 18% price premiums, we still have result net savings for the health care system.

Now, with regards to the length of therapy question, in the trial, the trial went to 15 months, the median was 14.5 months.

Our plans and our focus is obviously the primary care physician who is going to be managing that patient over the long term, and really communicating to the patient and as well as the physician, the benefit and the value that the patient gets over the 15 months.

This is important because Effient provides lower events, myocardial events, CB death and stroke not just in the early stage, but also out to 15 months.

Whether you're looking at MIs, whether you're looking at stent thrombosis -- again, as Dr.

Paul mentioned, the study only looked at the first events.

It did not factor in the second events that we know that patients have when they're at risk.

So we feel very good, and we have a great plan in place.

Now you'll have to ask VNS regarding their length of therapy, but we're confident and will be working toward the 15 months that we have on our label.

Okay.

Operator, next caller, please.

Thank you.

And we have a question now from the line of Eric Lo from Bank of America - Merril Lynch.

Please go ahead.

Good morning, guys.

On the Effient, I wanted to get some clarity in terms of the O US ramp that you guys have in the UK and Germany.

What's the reason behind the slow sales ramp that we saw sequentially from Q1 to Q2?

And second question is on cost savings.

Can you update us on what the year to date cost savings initiatives through the Six Sigma savings program has saved you guys?

Thanks Eric.

We'll have Tony Ware take your first questions, and then Derica will answer the second question on the Six Sigma savings for the first part of the year.

This is Tony Ware.

In terms of the sales outside of the US, remember that we were just approved earlier this year.

We are still negotiating with the regulatory authorities to receive full approval at that point.

So this is still very early days for us to really look at those costs.

Specifically in the United Kingdom, until we get a full opinion from the National Institute for Clinical Effectiveness, we don't expect to have significant sales.

Okay.

In regards to the Six Sigma savings, we have never quantified on a quarterly basis, kind of the Sigma savings (inaudible) results.

What I can say is the impact that you are seeing is pretty relevant I think, both on our gross margin line and operating expenses.

So if I just focus you on the slide where I display out operating performance absent FX, and if you see in that 7% performance growth for revenue, 4 percentage points of that were driven by volume.

Our costs of goods sold only increased 3%.

So we're able to basically gain significant leverage on our gross margin line on an operating performance basis due to the productivity improvements that we're seeing from Six Sigma and other measures in both our manufacturing organizations, but also, when you look at our operating expenses, the fact that they only grew 5% versus the 7% that they were getting it in the rest of the line items as well.

So you're seeing the impact of not only Six Sigma, but a whole host of productivity efforts we have going on across the entirety of the organization.

Its difficult to quantify, but we're also seeing a nice impact of Six Sigma on reducing clinical development cycle time.

So we think this will help us get these products to market much faster.

Operator, the next caller, please.

Thank you.

And we have a question from the line of David Moskowitz from Caris & Company.

Please go ahead.

Yes, thanks.

Good morning.

I have a few questions.

Have you guys given an update for Byetta LAR?

Yes.

We have.

It's March the 5th of 2010.

It's a standard review.

Very good.

And I just want to talk about the interest cost.

It looked very low in the quarter.

I would assume this is attributed to the low financing costs of ImClone.

Can you talk about what those are going to look like going forward?

I'll take that.

This is Derica.

Well, first of all, if you're looking at Q2 versus Q1, recall that as we go through time, we've retired some of the debt, as well as we also do not have in the second quarter, the bridging cost of debt that we had in the first quarter.

So that is impacting the quarter-on-quarter.

If you look at the debt that we termed out, which is about $2 billion, between three-year and five-year, the blended rate was just was just south of 4%.

So I should expect the cost to go up on a sequential basis from here?

To go up?

No.

But you said there were no bridging expenses in this quarter.

In this quarter.

But we're out of -- we did have bridging expense in the first quarter, because we had not turned out the debt yet.

Got it.

That will not be -- it was not present in the second quarter, and obviously will not be present going forward.

Okay.

And this is Phil as well.

On helping the trend over time with regard to interest expense, there's probably around 50% to 60% as my recollection of the debt that is a variable rate.

So a good portion of the expense will move as rates move going forward.

Okay.

Thanks.

That's helpful.

And just on Effient, can you talk about how you're going to be thinking about the short half-life, as a differientator of the product in the field?

I think that the half-life is not as relevant to how this works.

The importance of Effient is how it generates the active metabolite, the half-life apparent compound isn't as clinically relevant.

The advantage that we see with Effient occurs in its very efficiently metabolism, in the fact that it doesn't require, even as nearly as dependent on enzymes in the system, such as the much discussed Tuesday 19 that has been in a lot of the press lately.

Because of this, it makes the onset -- when the metabolite interferes with platelet aggregation faster, and it occurs at a higher rate, meaning it causes a stronger interaction -- interactions with the platelet, and it also is much more consistent in that there are fewer non-responders.

David, I -- the active metabolite is essentially an irreversible inhibitor of the receptor.

So it really is the half-life of the platelet that you worry about.

But it's a long-acting medicine in that regard.

Yes, that's right.

It covers very nicely.

Okay.

Thanks very much.

I appreciate it.

Thanks, David.

Operator, next caller please.

Thank you.

A question from the line of Jamie Ruben from Goldman Sachs.

Please go ahead.

Thank you.

Two questions, both unrelated on Effient.

If you could give us sort of a little bit of color of what you would expect the launch curve to look like.

One of the issues we need to think about is the uptake by managed care, and particularly some PNT committees don't meet for six months.

So if you could give us a sense for what your expectations are for the launch curve and timing of formulary positioning.

And then if I could switch gears a bit, Derica, if you could help us understand how much leverage you have with discretionary spending during the patent cliff years.

Obviously you've got a very deep early stage pipeline, which would presumably would require increases in R&D expenses.

But as we look out 2011 and beyond with, you know, the significant revenue hole, how do we think about modeling those expenses going forward?

Thanks, Jamie.

We'll have Javan answer your first question, and then Derica for the cost question.

Javan Collins.

As you know, we don't provide projections for individual products.

However, we expect to perform extremely well in our indicated population.

Now as we look at the payors, Medicaid Part D, we're focusing on as well as the managed care, and also the big TBM.

Now, these institutions review new products at different time points.

However, we have a plan in place to try to accelerate that.

We did have specific goals, but we're not providing those, and we do expect, as we look at Effient, based upon the value that it provides to patients.

We expect the pull that we expect to have from cardiologists, and also to the health care savings even with the premium, we expect things to move very quickly.

Derica?

Jamie, this is Derica.

We haven't given a lot of detailed guidance in terms of our outlook for the YZ years or the patent cliff years.

But let me at least give you some color commentary here.

One, clearly with the loss of Zyprexa and then subsequently Cymbalta, you will see upward pressure on our cost of goods sold per set.

You'll also see upward pressure on our tax rate -- effective tax rate.

We lose the efficiency, in terms of the production of Zyprexa and Cymbalta, our manufacturing operations, as well as some of the tax benefits.

What you should also expect to see is that, to the benefit side, obviously if we remove the direct cost associated with those products and likewise, you will continue to see cross organizational efficiencies that we will continue to strive for.

Now, those cross organizational deficiencies are not just waiting until 2011.

You're also seeing us doing that today, hence my earlier comment around the productivity improvements we're seeing in manufacturing even today, as well as even in the SG&A line.

I do not believe we will have exhausted, by the time we get to 2011, all of the efficiency opportunity within the organization.

Even while we're still improving year on year.

Operator, next caller, please.

Thank you.

I have a question now from the line of David Risinger from Morgan Stanley.

Please go ahead.

Yes.

Thanks very much.

I have a number of questions.

I guess first on Effient, can you provide a little bit more color on your expectations for future uptake of Effient.

Second on Effient, could you just talk about whether or not the US FDA approval delay impacted the Trilogy study, and tell us about, the current status of the Trilogy study and when you expect it to report out.

And then, in terms of FX, if you could just tell us the impact on EPS.

And then, finally on Cialis, page 23 of your slide show, it seems like in the past five such six months, the share gain versus Viagra has dramatically increased.

Could you just speak to whether there was something that happened, specifically to drive the Cialis franchise, or whether it's Pfizer just pulling back on resources that's a material driver of the Viagra share loss.

Thank you.

Sure.

We'll have Javan and Tony probably handle the first question that you asked for on Effient.

Derica to talk about the EPS, and then Nick will update you on what's been going on with Cialis.

David, Javan Collins.

With regards to expeditious uptake for Effient, we've got a strong expectation of what we expect the product to do; and again, we expect to perform extremely well in the indicated population.

Also, too, as you look at the update the FDA did to our label, as well as to the label of clopidogrel, you'll see a number of things.

One is you'll see the strong efficacy across a wide variety of patients.

You'll also see the stent thrombosis at over 50%.

You will also see the fact that the pharmacogenetic sub-study that Effient does not have the types of interactions with the cytochrome P450 system, and it's been updated in the clinical label that they have some challenges there.

So we think across the board, as we look at all of the elements, that we are very confident about the uptake as well as the future for if gentle.

David, it's Tony Ware.

Regarding Trilogy, Trilogy, we've change the primary completion date from March 2011 to October 2011.

And that's when we expect that to report out, so its a 7-month delay.

While I don't think that's related to the US FDA delay, that of course is difficult to assess.

We think the major cause for that delay was the slower than expected enrollment.

We saw a lot of patients who had ACS, who otherwise qualified for the study, but they were being screened out based on the original inclusion/exclusion criteria So we have implemented a number of protocol amendments that we think will speed up enrollment for that, and hopefully we'll be able to bring that in and make up for this 7-month delay.

David, Steve Paul here.

I think part of the future success of Effient will depend in part on the implications of the fact that clopidogrel may not be working well in a large sub-group of patients simply because they can't metabolize the drug, actively metabolize.

So if you think the pharmacogenomic study that have already been published, think about the update to their level and our label, somewhere between 30% to 40% of patients may not be getting an adequate dose of clopidogrel, or Plavix.

Data that's been published, not by Lilly necessarily, but by others, suggests that this has significant implications in terms of risk with cardiovascular disease, serious disease, MI, strokes, things like that.

I'm not exactly sure how the story will play out.

There will obviously be the need for more data by others; but to me, it has potentially some very profound implications down the road.

And I'll add to that, too, Doctor Paul, because even at the last cardiovascular meeting, Medco presented data from their database looking at claims data around the interaction that Dr.

Paul is referring to.

So we know that the payors are extremely interested in this, because they want to as physicians -- we all do -- want to ensure that patients are really getting the benefit from the drug such as Effient.

So we're very confident about the future, and I think, too, as to Dr.

Paul's comment, we do expect more and more data to be released from the academic community regarding the differences.

Okay, Derica.

David, in regard to your question around FX impact on results, if you'll recall, just one of the slides that we shared in the deck, if you remove the impact of exchange rate out of our results, we had 7% performance revenue growth comprised of volume and price.

We were able to leverage that 7% to 16% operating income and EPS growth.

So of the $1.12 proforma results that we -- EPS that we reported, about 3 pennies or $0.03 of that is related to FX's benefits in the quarter.

Yes.

And just to be precise, when you talk about the $0.18, that's the change from last year's Q2 2008 proforma EPS, up to the $1.12 we booked this quarter, an $0.18 difference, only $0.03 of that, Dave, is from FX.

The rest of the $0.15 around operating performance.

David, this is Nick.

With regard to your question on Cialis, I can't specifically as to Pfizer's actions promotionally.

But what we have seen is continued share growth since the launch of our on demand Cialis.

In addition, we've seen a nice uptake from the once-daily launch in the US in March of '08, and elsewhere around the world as well.

We feel that the once daily combination -- or in addition, rather, to the on-demand formulation, and provides important option for patients and physicians, and provides the flexibility of dosing options that people really appreciate.

Thanks.

Robert, can we have the next caller please?

Yes.

We have a question now from the line of Tony Butler from Barclays Capital.

Please go ahead.

Thanks very much.

Three questions, please.

Again, on Effient, Dr.

Paul you actually alluded to patients who, who may be inadequately dosed, even on clopidogrel.

But I'm curious, and despite the fact that TIMI 38 was done on 10 milligrams, as many interventionist will now consider, outside of the 4% of the population which are specified or pre-specified on the label, considering simply using 5 milligrams, is that going to be sufficient for those patients who will going to be put on Prasugrel.

That's question one.

Number two is, do you know or do you have.

or are you aware of any additional publications on prasugrel that may be coming out in the future maybe useful for the overall community at a time during the launch.

And then the third question on the Alimta, clearly having some very important and, to me at least, surprising growth, what do you think the maintenance therapy -- how do you think oncologists will behave with utilizing this agent in maintenance therapy given -- there's no particular reason to move away from first-line since platin and/or (inaudible) platin when in fact you don't have a patient which is relapsed.

How do you think they'll be motivated to use that agent under that guide?

Thanks very much.

Javan and Tony go ahead and handle your first questions for the Effient 5 milligram and the publications coming out for prasugrel.

And then probably Dr.

Paul and ourselves will answer your question on Alimta.

Tony, this is Tony Ware.

Regarding the 5 milligram, we received approval for the 5 milligram, as you noted in the lower body weight patients, that is those patients less than 60 kilograms.

It's difficult to speculate whether an interventionist would use a lower dose in their patients later on for that.

That obviously would be up to the decision of the treating physician.

We don't have the data to guide outcomes, of course, in that lower dose population.

We do have some bioequivalence data in the phase II we performed as some pharmocogenetic studies, and we can guide -- those data are available for the physicians you referred to regarding how much active metabolites are generated by the 5 milligrams versus the 10.

As you may remember the 10 milligram dosage was selected for phase III, because this was the lowest dose in which there were nonresponders, the basis for that choice and why we have taken taken that through.

Some additional information on 5 milligrams will be available with Trilogy.

In that study, we are randomizing patients to receive -- who are less than 60 kilograms, 132 pounds or those patient who is are 75 years of age or older, to receive the 5 milligram maintenance instead of 10.

In terms of publications coming forward, I know our academic colleagues are continuing to work on papers during that time.

This has been a very rich sort of data material for the attending group and for their colleagues, and I think that it's been -- I think it's fair to call it remarkable, a set of scientific publications that have occurred with this database thus far, and there will be more to come.

I'll just add, too, that our market research would suggest that there will be very little 5 milligram utilization.

I think the second thing is that some of the things that we discussed, these are very hot topics in the cardiology academic community.

So we actually expect there to be more publications from the cardiology academic community.

We will be seeing from Lilly.

Tony, just a few comments on Alimta and maintenance therapy for non-small cell lung cancer, first off I think we're in a new era, new territory.

I think this is pretty much the only drug that's ever been shown to be effective in maintenance therapy for this disease.

As you know, the survival advantage was five months, which is really quite, quite substantial.

Again, how this will play -- by the way, that was in the nonsquamous group of patients where we have already shown that that is the sub-group that responds well to this drug, as opposed to the squamous cell pathology.

As you well know, small cell lung cancer is still a horrible disease.

It is a fundamentally fatal disease.

There are few people who are cured from it unless it is resected very early, et cetera.

So I personally believe patients will elect, particularly if the treatment is effective, to more aggressive treat and try to prolong survival in a maintenance mode, rather than wait until the tumor recurs, and then go for another round of chemotherapy.

But of course, this will need to be played out over time.

But we're thrilled with the data, thrilled with the results that we have seen.

And five months is a pretty big deal in this field.

Robert, we'll take one last caller.

Thank you.

I have a question now from the line of Burt Hastings, BMO Capital Markets.

Please go ahead.

Thanks.

I've got a couple.

First off, I guess we're going to hear on Dirucotide in a little bit.

Can you frame that opportunity for us in terms of the potential?

And with regard to the data specifically, I believe they're called the MAESTRO studies.

Are you able to file on if the MAESTRO 1 study is positive, or do you need the second study as well, and when will the second study play out?

And then a question on the potential competition for Effient.

You have an AstraZeneca compound that's going to be showing phase III data relatively short order here.

It appears to have decent platelet aggravation inhibition, but also some side effects, some increase in uric acids, some dyspnea and ventricular pauses seen in phase II.

How do you think Effient will stack up against that potential competitor, ACD 6140?

Thanks.

Okay, thanks Burt.

We'll have Dr.

Paul and I work on the first question for you, and then I'll turn it over to Tony to talk about the Astra component.

Do you want to talk a little bit about the potential for this?

Yes.

As you know, this is a completely new approach to treating multiple sclerosis.

We're in the clinic now, in a very large phase III study, which as we said, we will see the results, announce the results by the second half of this year.

This is the Maestro 1 study for secondary progressive MS.

As you probably know, the only real treatments out there are the treatments that really profoundly affect the immune system.

They are immunosuppressants.

They themselves have unfortunate adverse events associated with the treatment.

And this is a very, very specific approach to preventing the progression of these secondary progressive symptoms of MS.

So I am fairly confident that if we see robust results in the study, that there will be great enthusiasm for bringing the dug to patients sooner.

Obviously those would be discussions that we would have subsequently have to have.

Steve, I do believe the FDA assigned the fast track correlation to the drug.

Is that correct?

Correct.

So if you really did have outstanding data, that would be an especially nice thing to have them open to?

People are enthusiastic about seeing the results for this disease including the regulators and so on.

So I think we'll be on pretty good grounds.

Obviously it will depend on the robustness of the data.

Tony.

This is Tony Ware.

Regarding the Astra Zeneca compound, it's a little early to comment on it, since we haven't seen the phase III data yet.

It differs fundamentally from Effient in a couple of ways.

Effient is an irreversible inhibitor, meaning that it inhibitors the platelet for the lifetime of the platelet, whereas the Astra inhibitor is a reversible platelet inhibitor.

It's a twice-a-day drug.

And as you point out in your question, in phase II there were several side effects, which include shortness of breath in about 12% of the patients in nausea and in the ventricular pauses.

But I think that we'll have to see what the -- we'll have to see what the data shows us at the ESC for me to be able to comment a little bit more intelligently about that.

Derica?

Okay.

I want to thank you all for taking your time this morning for the update on Eli Lilly and company.

We truly appreciate your interest in our company.

Let me close by emphasizing here just a few key points.

We performed very well, I believe, so far in 2009.

For the quarter, we delivered strong operating results with volume-driven revenue growth, continued leverage between growth and revenue and operating expenses, and increasing gross margin percent, and strong operating cash flow.

We remain confident that this type of financial performance provides the resources necessary to build a robust pipeline to guide future growth, to effectively deal with the patent expirations coming in the next decade, and to respond to an ever increasingly challenging health care environment.

Now clear, we have staked our future on innovation, building upon our 2007 and 2008 pipeline progression.

With a strong 2009, as we have built a robust pipeline that has 66 distinct entities, and we have advanced compounds into phase I testing.

We've advanced five compounds into phase II testing.

We've advanced one compound our A beta antibody for Alzheimer's disease into phase III testing.

And importantly we received regulatory approval for prasugrel in both the US and the EU.

We are optimistic about the benefits that this drug can bring to the treatment of patients with ACS undergoing PCI.

We do look forward of keeping you informed of our continued progress, and we wish each of you a great day.

Thank you.

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