禮來公司 (LLY) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2009 earnings call.

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

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

Instructions will be given at that time.

(Operator Instructions) As a reminder today's conference is being recorded.

I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr.

Phil Johnson.

Please go ahead, sir.

Good morning, and thanks for joining us for Eli Lilly & Company's fourth quarter 2009 earnings conference call.

I'm Phil Johnson, Vice President of Investor Relations.

Joining me are our President, CEO and Chairman, John Lechleiter, our Chief Financial Officer, Derica Rice, our President of Lilly Research Laboratories, Dr.

Steve Paul and Ronica Fletcher and Nick Lemon from Investor Relations.

During this conference call, we anticipate making projections and forward-looking statements based on our current expectations.

Our actual results could differ materially due to a number of factors, including those listed on slide 3 and those outlined in our latest 10K and 10Q filed with the Securities and Exchange Commission.

The information we provide about our products and our pipeline is for the benefit of the investment community.

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

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

The supporting materials, the replay and podcast will be available on our website through February 26, 2010.

We accomplished a great deal in 2009 by once again delivering strong financial performance in a tough environment, as well as by implementing a series of actions aimed at speeding innovation to patients and delivering greater value to our customers.

Just as we have done in the past three quarters, in the fourth quarter we generated strong volume driven revenue growth.

Excluding the effect of changes in foreign exchange rates, we also generated an increasing gross margin as a percent of revenue, leverage between revenue growth and operating income growth, robust EPS growth and strong operating cash flow.

Our Q4 results capped a year of strong operating financial performance.

This financial performance gives us the resources we need to strengthen and progress our pipeline, to invest in our transformation, allowing us to speed development and improve our competitiveness in key therapeutic areas and geographies, to streamline our cost base to deal with the patent explorations coming later this decade and to respond to a challenging healthcare environment.

We will face our major patent exploration as a leaner, more agile company, a company focused on innovation with a strong pipeline, operating more efficiently and effectively and well positioned to resume sustained and sustainable growth.

Now I'll turn the call over to John for a review of key events since our last earnings call.

Thanks, Phil.

Since our last earnings call, we continued our efforts to strengthen our operations and effectively utilize our resources, typified by the following.

Lilly signed a co-promotion agreement with Kowa Pharmaceuticals America to commercialize Livalo in the US.

In addition, we entered into a licensing agreement with Kowa Company Limited to market Livalo in Latin America.

Livalo is a statin approved the FDA in August 2009 for the treatment of primary hyperlipidemia and mixed dyslipidemia.

On January 1, 2010, the company completed the sale of its Tippecanoe manufacturing facility in Lafayette, Indiana, to Evonik Industries.

Lilly and Bristol-Myers Squibb restructured our existing collaboration agreement to allow for the co-development and co-commercialization of necitumumab or IMC11F8 in the US, Canada, and Japan.

Lilly also continued its efforts to strengthen and advance our pipeline with the announcement of an exclusive worldwide license and collaboration agreement with Incyte Corporation for the development and commercialization of Incyte's oral JAK1/JAK2 inhibitor for inflammatory and autoimmune diseases.

On the regulatory front, Lilly received a number of regulatory approvals, including FDA approval of Zyprexa Relprevv long acting injection for the treatment of schizophrenia in adults.

Byetta as model therapy, along with diet and exercise to improve glycemic control in adults with type II diabetes, and Zyprexa in tablet form as an option for the treatment of schizophrenia and manic or mixed episodes associated with bipolar I disorder in adolescents.

The European Commission approved Adcirca as a once daily treatment option to improve exercise capacity for patients with idiopathic pulmonary arterial hypertension or IPAH and PAH associated with connective tissue diseases in WHO functional classes II & III.

The product also received regulatory approval in Canada and Japan.

And finally, Shionogi received approval from Japanese regulatory authorities of Cymbalta for the treatment of depression.

Before passing the call over to Derica, I would like to take a moment to once again recognize the efforts of Steve Paul who is participating today in his last earnings call for Lilly.

Steve will retire at the end of February after 17 years of service to Lilly.

Under Steve's leadership, we've built the most robust pipeline in Lilly's history with more than 60 molecules in the clinic including 29 in phases two and three.

Steve also helped recruit many of LRL's top scientific leaders during his 17 years here at the company, and he's played a key role in transforming Lilly's R&D to position us for the future.

Steve's successor will be Dr.

Yon Jan Lundberg, former Executive Vice President and Head of Global Discovery Research at AstraZeneca.

Over the past decade, Yon had a hand in delivering some 150 drug candidates to AstraZeneca's pipeline.

Dr.

Lundberg received his training at Sweden's Karolinska Institute where he spent 18 years involved in academic research before joining the industry.

Now, Derica will discuss our fourth quarter financial results.

Thanks, John.

As I've done on previous calls, I'll focus my comments on the pro forma non-GAAP results which we believe provide insights into the underlying trends in our business.

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

Now, let's start on slide 8 with a quick look at our fourth quarter income statement before reviewing the effect of foreign exchange.

On a pro forma non-GAAP basis, you could see that we generated strong revenue growth of 13% in the fourth quarter while operating income fell 10%.

This reduction in operating income was driven by a 6.4 percentage point drop in our gross margin percent.

The decrease in gross margin percent from 82.3% to 75.9% is due to the unfavorable impact of cost of sales are rising from the effect 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 lowered cost of sales in Q4 of 2008 while increasing cost of sales in Q4 of 2009.

In December, we shared information with you on the trend in our gross margin as a percent of revenue, both with and without the effect of changes in foreign currency exchange rates on international inventories sold.

Now, many of you commented that this information was helpful.

In the supplemental slides, you'll see that we've updated the slide we presented in December and that we have also provided gross margin as a percent of revenue for each quarter of 2008 and 2009, both with and without this FX effect.

This quarter's operating expenses, defined as the sum of R&D and SG&A, grew slightly less than sales.

Within operating expenses, marketing, selling and administrative expenses grew 12%, driven by higher marketing and selling expenses outside of the US and the impact of foreign exchange rate, while R&D expense grew 10% due to increased incentive compensation and increased late stage clinical trial costs.

Moving down the income statement, you will see an improvement in other income due to lower net interest expense.

In addition, our tax rate increased by about two percentage points.

Net income and earnings per share declined 10% and 11% respectively due to the negative effect of changes in foreign exchange rates on our cost of goods sold as I previously mentioned.

Now, for the year, you can see that we generated leverage between revenue and operating income as revenue grew 5% while operating income grew a robust 15%.

This leverage between revenue and operating income was driven by a 2.2 percentage point expansion in our gross margin percent.

Net income and earnings per share both grew 16%.

Now, slide 9 shows our reported income statement while slide 10 provides a reconciliation between reported and pro forma non-GAAP EPS.

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

Now, let's look at how foreign exchange affected our Q4 results, starting with revenue.

As you can see on slide 11, for the fourth quarter, total revenue growth of 13% on a pro forma basis includes a favorable 3% impact from foreign exchange.

Absent that impact, total revenue grew 10%, driven by a robust 6% volume growth.

This robust volume growth was consistent across all major geographies.

Japan's substantial volume growth was largely driven by Alimta 's mid 2009 approval for both first line and second line non-small cell lung cancer.

For the year, total revenue growth of 5% on a pro forma basis includes a 3% negative impact from foreign exchange.

Absent that impact, total revenue grew 8%, driven by 5% volume growth.

On slide 12, we provided the price, rate, and volume analysis on a reported basis.

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

slide 13 shows the year-on-year growth of select line items of our pro forma non-GAAP income statement, both with and without the effect of changes in foreign exchange rate.

Now the numbers in the first column are the same as you saw earlier on our pro forma 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 pro forma non-GAAP results.

First, for the quarter, you'll see the 10% revenue growth I mentioned previously.

Below that, you'll see a 3% growth in cost of sales while operating expenses grew slightly less than revenue this quarter.

The 9% performance growth in operating expenses was driven by increases of 9% in both marketing, selling and administrative expenses and R&D expenses.

Our 10% performance growth in revenue translated into 15% performance growth in operating income and 16% in EPS.

Finally, you'll see in the last column that for the year, we grew revenue faster than both cost of sales and operating expenses, leading to 14% performance growth in operating income and EPS.

Now for your information, on slide 14, we've provided the year-on-year growth of select line items of our reported income statement with and without the effect of foreign exchange rates.

Comparisons of 2009 to 2008 operating income and EPS are not meaningful due to charges taken in 2008.

Now, let me wrap up my comments with our 2010 financial guidance.

We reconfirmed the 2010 financial guidance provided at our investor meeting in December.

This guidance excludes the potential impact of healthcare reform in the US.

And also as a reminder, our guidance reflects earnings per share of $4.65 to $4.85 on both a reported and non-GAAP basis.

In terms of line item guidance, we expect total revenue to grow in the high single digits driven primarily by Alimta , Cymbalta, Humalog, Cialis, animal health, Effient and the exenatide franchise.

We anticipate gross margin as a percent of revenue to be flat to declining; however, excluding the effect of foreign exchange rates on international inventories sold, we expect gross margin as a percent of revenue to increase.

Marketing, selling and administrative expenses are projected to grow in the low to mid single digits.

Research and development expenses are projected to grow in the low double digits.

Other income for the year is expected to be a net deduction of between $150 million and $200 million, and the effective tax rate for the full year should be approximately 22%.

Finally, we expect cash flows to be sufficient to fund capital expenditures of approximately $1 billion, anticipated business development activity and the company's dividend.

slide 16 provides a reconciliation between reported and pro forma non-GAAP EPS for 2009 and the associated growth rate from these numbers to our 2010 guidance.

Now let me turn the call over to Nick and Ronica for our product review and pipeline update.

Thanks, Derica.

The last two quarterly calls, we discussed underlying prescription and share of market trends for several of our major products.

Since we just provided detailed product updates at our meeting in December, this quarter, we'll take a look at three recently completed business development transactions.

As mentioned earlier, in late December, Lilly entered a co-promotion agreement in the US and a licensing agreement in Latin America with Kowa to market Livalo.

We are pleased to partner with Kowa and are excited to help bring this new statin to market.

Livalo is an HMG co-A reductase inhibitor approved by the FDA for patients with primary hyperlipidemia and mixed dyslipidemia as an adjunctive therapy to diet to reduce elevated total cholesterol, LDLC, APO-B and triglycerides while increasing HDLC.

Livalo was approved the FDA in August of 2009 and the drug has been marketed in Japan since 2003.

This deal enables us to more effectively utilize our current sales force as it allows us to expand our product offerings in the cardiovascular therapeutic area, an area of high focus given the launch of Effient.

While Livalo effectively lowers bad cholesterol similar to other prominent statins, Livalo will offer physicians an additional options for their patients who may not be responding to or tolerating their current treatments and for more complex patients treated with multiple medications and at a risk of drug interaction that may occur with some of the other current available statins.

Lilly and Kowa are working towards a mid 2010 launch of Livalo in the US, where Kowa will record sales and pay Lilly undisclosed escalating co-promotion fee based upon net sales.

Under the US agreement, the parties share the cost of commercialization and development equally, and Kowa is responsible for manufacturing the product, while Lilly is responsible for distribution.

The undisclosed up front payment to Kowa will be amortized over the product's remaining patent life, and will be booked to collaboration of the revenue.

The agreement runs for the life of the patent, which has a current expiration date of January 2016.

Kowa has applied for the five year patent term extension.

In Latin America, Lilly plans to submit Livalo to regulatory agencies during the second half of 2010 and hopes to launch Livalo by mid 2011.

The agreement in Latin America is for a period of 10 years from product launch.

In late December, Lilly also announced it entered an exclusive worldwide license and collaboration agreement for the development and commercialization of Incyte's oral JAK1/JAK2 inhibitor, INCB28050 currently in Phase II.

The addition of this asset serves to further bolster our inflammatory and autoimmune disease pipeline.

The asset is currently in an ongoing placebo controlled Phase II dose ranging study that has enrolled 100 patients with RA.

After three months of treatment, patients in the placebo arm will crossover and receive active drug, and the study will continue for another three months.

We also plan to run a larger Phase IIb trial which will generate the data necessary to inform dose selection for Phase III.

To this point, there have been no scientific data disclosures on INCB28050.

The current data disclosure plan includes sharing six month data on the ongoing Phase II trial in patients with RA at the ACR meeting in October of this year, with Incyte also planning to share top line three month results some time in the first half of the year.

Lilly is very excited about this opportunity given that RA and other autoimmune diseases are chronic, debilitating diseases that still present an unmet medical need.

The current therapeutic continuum typically starts with oral agents such as methotrexate, but a significant proportion of patients are not well controlled and therefore, typically move to biologics, most commonly the anti-TNFs.

Even in patients receiving anti-TNFs, only about 50% achieve good ACR50 response.

Therefore, the norm in treatment for these patients is to cycle from one therapy to the next.

If INCB28050 is successful with a favorable benefit risk profile, it could be positioned higher up the therapeutic continuum than anti-TNFs and therefore, not in direct competition with our own internal portfolio of biologics.

We hope that our internal antibodies will be positioned, at least initially,as the treatment of choice following the failure of anti-TNF therapy.

As safety and efficacy data on these assets increases, these compounds could assume a role as first line biologic after failure of oral therapy.

Ronica?

As John mentioned earlier, in January, Lilly and Bristol-Myers Squibb restructured our existing collaboration agreement to allow for the co-development and co-commercialization of necitumumab or IMC-11F8, which is currently in Phase III clinical trials for non-small cell lung cancer.

Satumomab is a fully humanized version of Erbitux.

Lilly and BMS will share the cost of developing and potentially commercializing satumomab in the US, Canada and Japan.

Lilly retains full rights to the asset in other markets around the world.

Now I'll provide a brief update on our pipeline.

Our pipeline slide demonstrates changes since our December 10 analyst meeting as of January 21.

The recent additions and progress of our compounds further underline our robust pipeline in both quantity and quality.

Our clinical states portfolio now stands at 64 distinct (inaudible) including 29 compounds in Phase II and Phase III.

We continue to develop a robust biotech portfolio.

Biotech molecules represent nearly half of our late stage Phase II and Phase III assets and over a third of our overall clinical portfolio.

Our focus remains unchanged, advancing our pipeline is our number one priority.

As reflected by the arrows on slide 20, since our last formal portfolio review, we have advanced one oncology asset to Phase I, promoted three assets to Phase II, one for diabetes, a glucose kinase activator, one for psoriasis, our anti-IL23 antibody, and one for cancer, an EG5 inhibitor.

Added our previously mentioned new in license asset INCB28050 a JAK1/JAK2 inhibitor for RA in Phase II, advanced (inaudible) to Phase III as first patient visit occurred in late December, added Livalo through our co-promotion and licensing agreement with Kowa in the US and Latin America and finally, one Phase I oncology asset was terminated.

Now, let's turn to slide 21 to highlight selected milestones between now and mid 2010.

Both Lilly and our partner Amylin expect exenatide once weekly moved on several fronts, including potential action by the FDA on our exenatide once weekly NDA, commission of exenatide once weekly to the European medicines agency, results from our duration four monotherapy trials, initiation of our exenatide once weekly cardiovascular outcome study XL designed to show improvements in cardiovascular outcomes as well as initiation of duration 6, of our open label study of exenatide once weekly versus liraglutide.

For Cymbalta, we could have FDA action on the chronic pain FNDA, and we will initiate the GLP 1 SC Phase III award program.

This concludes our prepared remarks, and we will now open the call for the Q&A session.

Operator, First Caller please?

Thank you, ladies and gentlemen.

(Operator Instructions) Our first question will come from the line of Bert Hazlett at BMO Capital Markets.

Thanks for taking the question.

On the cardiovascular franchise, you licensed Livalo.

You've had the launch ongoing with the platelet blocker.

Do you expect this to be an area where you focus on in terms of licensing?

And then secondly, looking at your Zyprexa, Relprevv, long acting risperadone is well above a billion dollars globally.

Could you just frame your expectations for Zyprexa Relprevv Thank you very much.

Sure, Bert, this is Phil.

Thanks for the question.

With the formation of our new structure, each of the various areas that we have designated will be focused on developing sustainable long term businesses.

That will include not only advancing molecules that come out of our own research laboratories but continued in licensing and business development.

With regard to Zyprexa Relprevv, we still view this as an important opportunity to provide additional attractive options for our patients, particularly those that are difficult to control their symptoms of schizophrenia.

We're currently in the process of rolling out that product in Europe.

As you know, I think you're aware there are some significant requirements in terms of prepping the marketplace, making sure that physicians in various centers are properly trained.

Here in the US, we're in the very beginning stages of a similar process and would expect to fully launch that product here stateside in the middle part of this year.

Operator, next caller please?

We'll go to the line of Catherine Arnold at Credit Suisse.

Please go ahead.

Thanks a lot, and good morning.

I wanted to get your reaction on some level to Effient's performance.

I know you're building access, I know it's early days.

I know we're in a different world in regards to launches and the uptake versus the same, but even considering all of that, I guess I would think you would be disappointed with the early results of the product, and I wondered if you could react to that and tell me, have you readjusted marketing plans?

Have you changed the team?

Is there anything going on behind the scenes that might sort of give us a little bit more confidence in sort of the change in execution here?

And then could you talk about the Kowa deal in terms of if you don't hit financial targets for that collaboration, is there an opportunity to exit that down the road?

Thanks.

Thank you, Catherine, for your question.

I'll let John answer your question on Effient and then either Nick or I will go ahead an take your question on the Kowa deal.

Catherine, I think that first of all, it's important to point out that the initial -- the indication we have approved for Effient, which is treatment of -- for patients experiencing ACS or undergoing PCI, it represents one slice in the pie in terms of the total range of indications that for example, the competitive product has.

So I think we're -- we haven't made dramatic changes in direction.

We're obviously responding as you would expect us to to the inputs that we get from payors, from our physician customers, as we understand better what we need to do to get the product properly positioned and to take advantage of a rather compelling data set to help physicians understand the advantages that we believe Effient can offer for many patients.

So we're going to stick with the plans that we have in place now.

We're pleased with the level of unrestricted access that we're gaining, both tier 2 -- or the access that we're gaining unrestricted in tiers 2 and 3, the placement now of the product in the cath labs of hospitals that account for well over 50% of all of the procedures, the stent placement procedures.

So I think that we're not put off by the initial results of this product, by any means.

We remain very confident in it.

As you know, we have the medical management trial well underway now so both companies, Lilly and Dieche are going to continue to be thoughtful, but continue to be very supportive of making sure that Effient has the very best chance to succeed.

Nick, on Kowa?

And one additional point on the Effient as well, we have -- we now have in hand some of the promotional materials that have been approved De De Mac, and we will be putting those in the hands of the sales reps starting in February.

So we're excited about that.

With regards to Kowa, we have not disclosed any of the -- the financial provisions or termination provisions of that agreement, Catherine, so unfortunately, I can't help you with that question.

Catherine, one last thing with to regard to the building of Axa, that continues to progress well, as John mentioned.

In December, we had said that here in the US, we were currently approved and stocking cath labs that perform about 50% of PCIs here in the US.

That's now in excess of 60%, and we expect that to continue to build nicely over the coming months, so we are able to much more fully compete for those new patients coming and getting those stenting procedures.

Operator, next caller please?

Thank you.

We'll go to the line of John Boris at Citi.

Please go ahead.

Thanks for taking the questions.

First question just has to do with foreign exchange.

Can you -- can Derica, can you just give us color on what your assumption is for foreign exchange going into 2010, and then a question on Cymbalta.

The SNDA that was filed for chronic pain was scheduled to have an add com and then the FDA cancelled that.

Does that have implications, or have you been notified by the FDA about an extension of that PDUFA date or that committment?

And then can you provide any color on the last safety update that you provided to the FDA on Cymbalta?

I would assume that's something that's ongoing, of which -- is there a label change on the horizon or something to that effect that you might be expecting?

And then just on the rollout, if you were to secure approval, is Quintile still intimately involved with -- do you have a relationship with them where they would be assisting you in the rollout of that chronic pain indication?

Thanks.

Derica, do you want to handle the FX, and I'll handle the Cymbalta questions.

Sure, hi, John, good morning.

John, in regards to the FX effect on 2010, if rates were to stay where they are today, we would expect to see modest improvement on both the sales line and the international income line associated with that versus the dollar.

We would expect also to see the opposite being on our cost of goods sold line, similar to what you've seen here in the fourth quarter of 2009, that would obviously, for the year, it would be more modest than what you saw in the fourth quarter, but you would see an increase in our cost of goods sold due to the FX effect if rates stayed where they are today.

And John, on your three Cymbalta questions, the FDA has not communicated any kind of an extension to the PDUFA date.

There's been no major amendment declared, so we still have the same PDUFA date that we had earlier.

The safety information essentially was provided as part of the routine 120 day safety update.

We did submit one new efficacy and safety study as part of that update, and that study did not show any new safety signals.

And then lastly, there is not currently any active promotion agreement with Quintile.

As you may recall from the original agreement, they will have a residual payment coming to them over the next three years as a result of the original involvement with the promotion of the product.

Operator, next caller, please?

Thank you.

And that will come from the line of Tim Anderson at Sanford Bernstein.

Please go ahead.

Good morning.

This is Jay Olson for Tim Anderson.

I have a couple questions.

First, could you please share with us your latest thinking about the competitive landscape in the GLP-1 category with the recent approval of Victoza and how that may impact Byetta?

And secondly, your thoughts on the potential risk for therapeutic substitution of Cymbalta with Effexor XR with how it goes generic later this year and how you plan to manage that.

Thank you.

Thanks, Jay for the questions.

We'll go ahead and John have you -- have John respond to your first question on the GLP-1 landscape, and I'll go ahead and handle your question on Cymbalta.

I think the launch of liraglutide here in the US obviously changes the landscape here, but keep in mind, we've been -- they've been -- that product has been available in Europe for a number of months now.

One of the things that we've observed in a couple of those markets in Europe is that the overall market for -- in this category is expanding, and so I think that to some degree, if that happens here, all boats will rise, as it were.

We're going to emphasize in the process of meeting the competitive challenge of the entry of the second product.

We're going to emphasize the fact that we have treated -- Byetta has been used in over a million patients, I think there have been 10 million or so prescriptions written.

We think we have a very good understanding of the benefit risk profile of Byetta.

It's a product that's been used and trusted by many physicians and patients and I think that base of experience we have will be important.

Obviously, we're looking forward to the approval of the once weekly version of exenatide, which we think has the potential to offer even more advantages.

And Jay, in relation to the competition that could come with generic Effexor later, we continue to believe that Cymbalta has got a unique profile that positions is quite strongly in the marketplace with the approved indications in major depressive disorder, generalized anxiety disorder, DPMP and fibromyalgia, and that position will be further strengthened should we receive the approval in chronic pain.

As we have presented in December 2009 as well as December 2008, even with strong generic competition already in that marketplace from a variety of products that have gone generic as well as the launch of Pristiq, for example,, Cymbalta has continued to perform quite well among those branded products.

So we're optimistic about the future despite the continued generic pressures that we will see.

Operator, next caller please?

Thank you.

And we'll go to the line of David Risinger with Morgan Stanley.

Please go ahead.

Yes, thank you very much.

I have two questions.

First, could you please -- excuse my voice, could you please comment on the outlook for Forteo going forward, what type of growth you're expecting?

And also discuss the implications of Denosumab, if that's approved.

And then second, could you just discuss the key pipeline events that investors should be watching in 2010 beyond LAR?

Thanks.

Dave, thanks for the question.

We'll go ahead and have Nick handle your Forteo question and Ronica, some of your 2010 events question.

Yes, thanks, Dave.

With regards to Forteo, we feel very good about the lift we've gotten so far with the Forteo Connect program where we have a more hands-on approach of helping patients initiate therapy and stay on and work through their therapy.

So we saw a good start to that program last year, and we hope to continue to see a good subscription to that program going into 2010 as well.

With regards to Denosumab, we really believe that Denosumab is going to be viewed as a reabsorptive, much like some of the bisphosphonates and could be positioned similar to Reclast.

We believe that Forteo continues to be unique in that it is an anabolic and it does build new bone, and so we feel that there is still going to be a strong position for Forteo, even with the potential strong competition from Denosumab.

Dave, with regards to pipeline events, I'm going to initially make my connection with two of the movements that were recently announced, at least today announced, with regards to IL23.

IL23 was promoted into the next phase.

Later this year we should have that proof of concept data available.

I'm not sure what medical meeting it will be available at, but that's some new information that will be out there, as well as our GKA as well.

We'll have a data presentation or publication later next year, but that was one of the two that were promoted.

We also hope to have some Phase II phase advanced data with regards to the Hypnion compound early this year as well.

And also, something that's gotten a lot of attention with our GLP-1 FC program, the initiation of our award program, which is the full Phase III program.

Dave, sorry to hear you're under the weather.

Hope you're feeling better soon.

Operator, next caller please?

We'll go to the line of Chris Schott of JPMorgan.

Please go ahead.

Great, thanks.

Just a series of GLP questions, maybe starting with the GLP FC Phase III program.

Just also update us in terms of just how we should think about timing of completion of that program, how long we should expect on that front, and are you monitoring calcitonin levels with that Phase III program.

Maybe then taking a step back as it relates to the GLP-1 portfolio.

Do you expect the black box warning we saw on your competitors label is going to be something that's product specific or something that could be applied to all long acting GLP-1's until there's more information on this?

And then finally, when you receive FDA approval for Byetta LAR, do you think you need to expand the resources dedicated to the GLP-1 franchise, or should we think about support maybe in line with what we're currently seeing with Byetta, thanks.

Alright Chris, thanks for your questions.

I'll take a shot and then look for additional comments from the group, if you'd like to augment the response.

In terms of the GLP SC timing offer completion, at this point I know the team is essentially finalizing protocols.

A number of these will likely appear over the next few months, so I'd prefer to wait to comment on potential timing until that process has completed, Chris, but that should be something, again, I'd say within the next couple of months, trials will be finalized and protocols posted to clintrials.gov for that award program.

My expectation would be it's likely we would measure calcitonin , unclear based on some of the discussions that you may have seen and communications from FDA as they talked about the liraglutide approval.

Whether or not these are particularly meaningful and in fact, whether implementing this and practice could in fact lead to additional surgeries that are really not necessary.

Black box being product specific, clearly each one of these products does have a different data set with regard to pre-clinical and clinical data.

In the case of Byetta, the exenatide molecule, we also have substantial amount of data from the marketing of the product over the last five years or so, so our expectation would be that the FDA will in fact look at the data sets that the different companies have generated for the different molecules to make a determination of what the appropriate labeling is for that molecule.

And in terms of expanding resources, my understanding is at this point in time, we're essentially resourced along with Amylin to support a launch of exenatide once weekly.

Obviously, we'll be monitoring the competitive landscape and also the needs once we get to that point to determine if we need to make any adjustments in that particular sales force sizing that we've got currently.

Any other

Chris, the only thing I would also add, obviously, everybody is concerned about safety of a new class of drugs like the GLP-1s, but I would also point your attention to the really strong efficacy data that's accumulated on once weekly.

If you just go through each of the durations trials, I think you'll walk away pretty darn impressed with what these drugs could potentially do for the treatment of diabetes, and that will obviously also be factored in by the FDA.

Operator, next question please?

Thank you.

That will come from the line of Jami Rubin of Goldman Sachs.

Please go ahead.

Thank you, just to follow-up on Byetta LAR.

Byetta sales in the US continue to decline, and my question is to what extent does this affect your view on the EQW opportunity, and how important is having a robust Byetta base on that launch?

I think initially our expectations, the street's expectations would be that LAR would significantly drive increased penetration to the GP community, so if you could comment on that.

And then John, back to Effient.

Just curious, expectations are 500 to a billion for this opportunity and potentially even larger, and I'm just wondering, is there a point in time, is there an inflection point that we should be looking for at which all formularies include Effient or until you've -- at what point do we say, or what point do you feel that you have enough information to be able to sort of reset expectations?

Thanks.

Jamie thanks for the questions.

John, do you want to handle the Effient question first and then go to once weekly, or I'll handle that one, however you prefer.

Jami, I think the results so far following the launch in August, as I said earlier, do not diminish our belief that Effient is going to be an important product.

Obviously, we're not in the business of forecasting peak sales, everyone out there has their views.

But I think if you go back and you look at the data and you look at the opportunity we have, whether it's in distinct patient subsets or the broader question around the effectiveness of the molecule, the consistency I should say.

of the effectiveness of the molecule relative to other choices, we feel just as good about Effient today as we did when we launched the product.

So I think it's too early to say that we should reset expectations.

I think physicians are increasingly of a mind to ask how should the product be used, in which patient should I use the product.

So I think I'm very reluctant to say after six months we can declare this or declare that.

We're going to stay with it, we're going to continue to generate publications coming out of the large clinical trial that served as the basis for the regulatory approval.

We're going to continue to pursue the medical management indication as well.

And Jami, for the Byetta base and how that might influence exenatide once weekly, clearly we had been hoping to have better performance in 2009 than we had.

I think you may have heard some similar comments from Amylin yesterday.

There were a variety of factors that contributed to that.

We are intent on continuing to improve the performance of Byetta with a number of the uncertainties now behind us with regard to approval of monotherapy and the label updates that occurred late in the year.

We'll continue to also monitor the progress of liraglutide or Victoza in a number of markets where it's already been launched.

I think some of the early results for this class and what it means for exenatide once weekly are promising.

What we have seen in a number of the markets in Europe is pretty substantial expansion of the overall market size for the GLP class.

And again, as we mentioned earlier, with the kind of efficacy data we have generated with the exenatide once weekly, we think we'll be a very strong player with that product in that GLP space.

So we're anxiously awaiting the FDA review of our NDA and very hopeful that this product will be very important in the treatment of type II diabetes going forward.

Operator, next caller please?

That will come from the line of Tony Butler with Barclays Capital.

Please go ahead.

Thanks very much.

John, just a little bit more on Effient and to some degree, Livalo, if I may.

Are only reps who are currently marketing Effient, will they be the ones marketing Livalo, or is there some other go to market strategy?

I'm trying to get you to separate the financial aspects of this transaction, if in fact there is something more strategic.

And then the second question more product related.

There was a movement of one drug, (inaudible) to Phase III, and I'm curious given a Phase II trial still is ongoing, what was the rationale to move into that 800 patient Phase III trial, which I think began in December.

Dr.

Paul, if you could help us there, thanks very much.

John for Tony's first question on Effient ,and then we'll go to Steve for the (inaudible) or ASAP question.

Okay, Tony I'm sorry, I was distracted.

Your question on Effient?

How this will fit in with the current sales force we have --.

Okay, yes.

Tony, at this point in time, we don't anticipate adding incremental resources to support the launch of Livalo.

We're going to be doing this in partnership with Kowa.

We feel that the target physician audience for our message around Livalo is very well aligned with the physician audience that we're calling on today in our efforts around Effient.

So the product really fit well within the existing framework that we have in place.

Tony, on (inaudible) just to remind you, this is a very unique cytotoxic agent.

Actually, as I think back and sort of reflect on the development of Alimta, it has many similarities.

What we tend to do, as you know, when we develop oncolytic agents is we tend to find activity in a given tumor.

In this case, we found a good enough activity in a very difficult cancer, metastatic melanoma, to advance this into Phase III, and we feel very good about, given the alternatives, the benefit risk for this particular disease is more than appropriate to advance it, and we're enthusiastic about it.

We have actually seen some other responses and some other tumors, ovarian cancer, et cetera.

Some very difficult cancers, and we'll continue to do Phase II work with this molecule and if we see additional responses that are better than standard of care, we will continue to think about additional -- excuse me, Phase III trials.

So again, given the unique mechanism of actions of this compound, the fact that we've seen a good activity in melanoma, that's what's prompted us to move this compound forward and move it into Phase III.

Obviously, we'll be thinking about tailoring strategies, trying to find those patients that respond better to the agent, just like we did with Alimta, as we progress.

Operator, next caller please?

We'll go to the line of Barbara Ryan with Deutsche Bank.

Please go ahead.

Thanks for taking my call, and I also want to pass along my well wishes for you, Dr.

Paul, in your retirement.

Thank you, Barbara.

You're welcome.

I just had a question, Derica for you, and it's really related to a sentence in the press release.

We've had a lot of conversation surrounding the impact of currency fluctuations on your P&L, and there's a statement on page 5 of your press release that basically says net income and earnings per share declined blank and blank respectively, excluding the impact of exchange, earnings and -- earnings would have increased approximately 16%,, again, that's versus a decline of 11%.

And what we had discussed previously and my understanding was that there was sort of a wash in the P&L where currency would have a net positive or negative impact on the top line, and that would be offset by an opposite effect on the gross margin and then clearly, your expenses would fluctuate with that currency change on the top line as well.

So I'm just wondering if something has changed or I misunderstood or if you can just put that sentence in the press release in context relative to currency, thank you.

Sure, Barbara.

The way to look at this is that you saw a dramatic movement in the exchange rate, the dollar versus the euro and the fourth quarter, and so you got an exaggerated effect in the P&L in the fourth quarter.

However, if you look at that same effect over the 12 months, then you basically see it at a neutral level.

And so if you look at our four year results, both with and without FX, you do not see as much of a dramatic difference, and that's consistent with our inventory turns.

So our inventory turns are about 12 months.

So when we have those kinds of sharp movements, it takes about 12 months for the full effect to flow through our P&L so when you saw that vast change in the fourth quarter that's why you got the exaggerated effect in our gross margin in the fourth quarter.

If you went back to the same period being fourth quarter of 2008, you would have seen the opposite effect.

One thing Barbara to also call your attention to, in December we had provided a slide in the materials Derica had presented that looked at on a rolling four quarter basis the gross margin as a percent of revenue, both with and without the FX impact on international inventory sold.

It really seems to be the one that is maybe moving a bit counter intuitively, if you will.

We've gone ahead and updated that in the current quarter's slide deck, it's the first supplemental slide, if I recall correctly, I believe slide 23, and we've also done this time is given you by quarter for the last two years what the gross margin as a percent of revenue would have been without that impact.

So I think you can look at that and begin to understand the magnitude of some of the effects we've had on a quarterly basis.

This is in effect that if rates were ever to stay stable, essentially would be a non-event.

There would be no impact from it.

Unfortunately, that's not the current environment nor will it be in the future, but this hopefully will help you and your team to understand what are more of the underlying trends apart from this particular accounting effect that we do see in our international or in our cost of goods sold due to the foreign currency impact of international inventories sold in a given period.

So I hope that's helpful for you guys.

Operator, next caller please?

We'll go to the line of Eric Lo of Banc of America, please go ahead.

Thanks for taking the questions.

Maybe another question on gross margin and FX impact as well.

If you were to use current FX rates, what would be the impact to gross margins from currency for the first quarter?

Second question is on cost restructuring program, do you have any update on the program itself, and how much of a cost savings may we see in 2010, and third question on animal health.

What's the outlook for sales in 2010?

Ex-US seemed to have pretty robust growth in the most recent quarter, what drove this?

Thanks for your questions.

We'll have Derica, I think, try to handle all three.

The tri-factor, okay.

Let me start with if you take a look at where the current FX rates are today, while we're not prepared to give you specific estimates for the first quarter, we would expect to see a increase in our cost of goods sold due to the FX effect on inventories sold in the period if FX -- if rates stay where they are currently.

So you would see a similar effect to what you saw in the fourth quarter.

However, we anticipate that that would dissipate or moderate as we go through the year and rates normalize out, okay?

Secondly, in regards to our cost reduction programs, we continue to make very good progress, okay?

If you look at our headcount that we'll be reporting, we'll probably be down year-on-year somewhere around another 500 to 600 employees, and so, we're making progress to our ultimate goal of the 5,000 by the end of 2011.

You'll also see, in regards to our $1 billion cost reduction goal, we continue to make very good progress.

And what you are going to see is probably not one big announcement that will come out, but you'll see a series of actions that we take to steadily pull those costs out, beginning with actions that we did with Tippe, that we announced with Tippe last year.

So with us competing the Evonik deal and closing that on January 1 of this year, you'll see that that's one step towards reducing our cost basis.

In regards to your third question, in regards to the animal health outlook, we actually saw a nice rebound in the animal health market in the fourth quarter.

So in regards to our dairy business, which also effects our RBST compound, we actually saw milk prices or dairy prices increase, which was a very positive for the milk producers and therefore, they were much more able to use the additives or the enhancements, and we saw that reflected in our fourth quarter results for our animal health.

The question is how sustainable will that be, and so we are carefully monitoring that as we enter the year of 2010.

We have not seen a significant change in the first few weeks of January, but it's still early.

Did you have a comment John?

No, I think we'll go ahead --

One last thing before turning the call over to John to wrap up, do keep in mind, Eric, as you look at some of the year-on-year changes and hopefully, the slide we've provided in the backup, slide 23 will help.

That is as you look at year-on-year compares as we move through on a quarterly basis here in 2010, that we did have a substantial additional cost that we booked to cost of sales in both Qs one and three of 2009.

And again, as we've just discussed, we had a substantial reduction in the, I'm going the wrong way, we had a substantial reduction in the cost of sales in Q1 and Q3 of 2009 and a substantial additional cost to cost of sales in Q4 of 2009.

So your year-on-year compares in a number of these quarters, even if rates were to stay where they are today, could be significantly swinging.

John?

Want to close?

Thanks, Phil.

I think we'll go ahead and wrap up.

I want to thank everybody for taking time this morning for this update on our company.

We appreciate your continued interest.

We're pleased with our performance and our progress in 2009.

We're excited about the opportunities ahead of us this year.

We had very strong financial performance in 2009, highlighted by volume driven revenue growth.

On a performance basis, that is excluding the effect of foreign exchange, we delivered increasing gross margin as a percent of revenue.

We got leverage between revenue and operating income growth, and we demonstrated robust EPS growth.

We prudently managed working capital and CapEx and once again generated strong operating cash flow.

And we expect this strong financial performance to continue, as Derica laid out in our 2010 guidance.

We remain confident that this type of financial performance provides the resources we need to strengthen and progress our pipeline, to invest in our transformation, allowing us to speed development and to improve our competitiveness in key therapeutic areas in geographies; to streamline our cost base, to deal with the patent expirations coming later this decade and to respond to a challenging healthcare environment.

We move into the new decade poised to become a more efficient and effective company, one that remains focused on innovation and with a pipeline that we expect to deliver long term sustainable growth.

As always, we will keep you informed of our progress.

Have a great day.

Thank you.

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