禮來公司 (LLY) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Eli Lilly Q1 earnings call.

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

Later we will conduct a question and answer session, and instructions will be given to you at that time.

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

I would now like to turn the conference over to Executive Director of Investor Relations, Mr.

Phil Johnson.

Please go ahead.

Good morning and thanks for joining us for Eli Lilly and Company's first quarter 2010 earnings conference call.

I am Phil Johnson, Vice President of Investor Relations.

Joining me are our Chief Financial Officer, Derica Rice; our President of Lilly Research Laboratories, Dr.

Jan Lundberg; Senior Vice President of Corporate Affairs, Bart Peterson; and Ronika Pletcher and Nick Lemen 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 three and those outlined in our latest 10-K.

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

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

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 the podcast will be available on our website through May 21, 2010.

Q1 was a strong quarter for Lilly on many fronts.

In terms of financial performance we posted robust results with volume-driven revenue growth, substantial leverage on a performance basis between growth in revenue and growth in cost of sales as well as in operating expenses, and significant improvement in other income.

As Derica will describe, excluding the effect of US healthcare reform, this strong financial performance has positioned us to raise the top end of our guidance range by $0.05 and the bottom end by $0.10.

On our last call we discussed three business development deals that we had recently completed with Kowa, Incyte and Bristol-Myers Squibb.

Since that time we continued to be active in business development completing three more deals.

We've entered into a global licensing agreement with Acrux for the commercialization of an experimental underarm testosterone solution, completed a deal with Boehringer Ingelheim in which we reacquired full rights to Cymbalta in OUS countries other than Japan; and we agreed to acquire European rights for several animal health products from Pfizer.

Like the three deals we discussed in January, we think each of these deals helps to solidify our financial and commercial position in the short to medium term.

Ronika and Nick will provide more details on these deals later in the call.

On the regulatory front in Europe we submitted Exenatide once weekly for regulatory review.

Our regulatory team did a great job expediting this submission allowing us to submit well in advance of the end of the first half.

Here in the US the FDA issued a complete response letter for Exenatide once weekly or Bydureon.

We expect to submit our response this week.

Finally, the PDUFA date for Cymbalta in chronic pain passed without FDA action.

We expect that the FDA will schedule an advisory committee meeting in the second half of this year.

On the legal front the judge in the Southern District of Indiana case with Teva upheld our Gemzar compound patent and ruled in our favor on nearly all of the grounds Teva had raised for invalidity of our method-of-use patent.

You may recall the judge in the Michigan case with Sun had already issued a partial summary judgment ruling invalidating our method-of-use patent on the grounds of obviousness-type double patenting.

As a result the judge in Indiana did not rule on this particular issue.

In the Sun case the court of appeals for the federal circuit will hear our appeal on May 7.

The Board of Patent Appeals and Interferences affirmed the US patent office's rejection of the patent claim Pfizer had asserted for Viagra.

As a result, Pfizer's litigation alleging that Cialis had infringed Pfizer's patent claim was dropped by agreement of both parties.

Also in Cialis litigation the Court of Appeals For the Federal Circuit affirmed the Delaware trial court's decision rendering its opinion that certain scientists at Vanderbilt University should not be included as joint inventors on patents related to Cialis and its use in treating erectile dysfunction.

Finally, we reached a proposed settlement of the outstanding shareholder derivative litigation.

Perhaps the biggest news for Lilly and for the healthcare industry was the passage of new legislation that brings significant changes to US healthcare.

These changes began to affect our financial results in Q1 and will have a greater impact on our results in the future.

Before discussing our Q1 financial performance and our 2010 guidance, let's review some of the major provisions of the new legislation.

As you're probably aware, many of the provisions that raised money to pay for healthcare reform take effect within the first twelve months.

However, the provisions expanding insurance coverage are not slated to take effect until 2014.

Let's start with those provisions that will affect our 2010 results.

Changes to the Medicaid fee-for-service program and to the 340B program take effect retroactive to January 1st of this year.

For the Medicaid fee-for-service program these changes include an increase in the statutory minimum rebate from 15.1% to 23.1% and a limitation on the maximum rebate to 100% of a product's price.

Changes in the 340B program are focused on expansion of the program to include additional institutions such as children's hospitals, freestanding cancer hospitals, critical access hospitals, and rural referral centers and sole community hospitals meeting certain criteria for disproportionate share adjustment under the Social Security act.

Changes to managed Medicaid will take effect as of March 23, 2010 -- the date the healthcare legislation was signed.

Specifically, the new legislation calls for an expansion of Medicaid fee-for-service rebates to managed Medicaid.

In addition, our 2010 results will also be affected by channel accruals that we will have to book to reflect greater discounts and rebates for the various elements of healthcare reform.

Why is this?

Well, government expenditures for purchases in any given period correspond to sales we made to wholesalers in prior periods.

Therefore, in advance of the government expenditure occurring, we need to reflect our best estimate of the eventual discounts and rebates we'll have to pay.

From a practical perspective this means we need to accrue for these future government discounts and rebates at the time we make our sale to wholesalers.

In total we expect these various elements of US healthcare reform will negatively affect our 2010 revenue by $350 million to $400 million.

Finally, our 2010 results will be affected by changes to the subsidy paid by the government to employers who provide their retirees with a drug benefit that's at least equivalent to the Medicare Part D drug benefit.

Beginning in 2013 the federal government will tax the subsidy it provides to such employers.

While this tax will not take effect for three more years, accounting rules dictate that we recognize the present value of this future tax liability as a one-time charge upon passage of the tax law change.

As this tax law was officially passed in March our taxes for Q1 reflect a one-time charge of $85.1 million.

Now let's discuss those changes slated to take effect on January 1st of next year.

On this date two additional provisions of the healthcare reform legislation will kick in.

First, branded pharmaceutical companies will provide a discount of 50% on drugs dispensed to certain Medicare Part D participants when they're in the "donut hole".

Second, branded pharmaceutical companies will collectively pay a multi-billion dollar annual fee to the government.

Implementation of these two provisions will undoubtedly be complex.

Until specific regulations are written, it is not clear exactly how each of these provisions will be implemented.

We have made initial estimates of the effect of these two provisions on our 2011 results although these estimates could change substantially as the regulations are finalized.

When these provisions are added to those taking effect in 2010, we anticipate that our 2011 US revenue could be negatively affected by $600 million to $700 million.

Keep in mind that our exposure to various elements of healthcare reform is dependent upon product mix.

For example, our exposure will decline significantly after the Zyprexa patent expiration.

By January 2014 the US healthcare legislation calls for a significant expansion of insurance coverage.

This includes expansion of the population eligible for Medicaid as well as the establishment of state health insurance exchanges.

The congressional budget office has estimated this will eventually extend coverage to approximately 32 million Americans who are currently uninsured.

Finally, the healthcare reform legislation authorizes a regulatory pathway for follow-on biologics.

The legislation includes important incentives for Biotech research including data package protection of twelve years.

Now with this background, Derica will discuss our Q1 financial results and our 2010 guidance.

Derica?

Thanks, Phil.

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

Now, this view excludes certain items such as restructuring charges, asset impairment, and other special charges.

Since the ImClone acquisition was completed in late 2008 pro forma comparisons are no longer necessary.

Let's start on slide eight with a quick look at our Q1 income statement before reviewing the effect of foreign exchange.

On a non-GAAP basis you can see that we generated strong revenue growth of 9% in the first quarter, in spite of the negative impact of US healthcare reform.

Gross margin as a percent of revenue decreased from 83.8% to 79.5% due to the effect on the cost of sales of changes in the value of the US dollar on international inventories sold in the period.

Specifically, this effect significantly lowered cost of sales in Q1 of 2009 and modestly increased cost of sales in Q1 of 2010.

Once again, in the supplemental section of our slide deck we have provided a slide showing the trend in our gross margin as a percent of revenue, both with and without this particular foreign exchange effect.

Now, this quarter's operating expenses defined as the sum of R&D and SG&A grew by 7%, less than the 9% revenue growth.

Within operating expenses, marketing, selling, and administrative expenses grew 6% driven by higher marketing and selling expenses outside of the US and the impact of foreign exchange rates, which were partially offset by lower legal expenses, while R&D expense grew 10%, primarily due to increased late stage clinical trial costs.

Now despite generating leverage between revenue and operating expenses, operating income declined 3% due to the significant increase in cost of sales caused by foreign exchange.

Now, moving down the income statement, you will see an improvement in other income and this improvement is primarily due to damages recovered from generic pharmaceutical companies following our Zyprexa patent litigation in Germany, a gain related to the disposition of investment securities acquired in the ImClone acquisition, and lower net interest expense.

In addition, our tax rate increased by over 5 percentage points driven primarily by the one-time charge of $85.1 million associated with the imposition of tax on the retiree drug subsidy.

Let me also remind you that the failure to pass an extension of the R&D tax credit also served to increase our Q1 tax rate.

Net income and earnings per share declined 1% and 2% respectively, due to the negative effect of changes in foreign exchange rates on our cost of goods sold and the impact of the US healthcare reform.

Q1 earnings were reduced by $0.12 per share due to the impact of US healthcare reform, and it was comprised of two items -- first, approximately $60 million or $0.04 per share in accruals for higher rebates and secondly a one-time tax charge of $85.1 million or $0.08 per share.

Slide nine shows our reported income statement while slide ten provides a reconciliation between reported and non-GAAP EPS.

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

Let's take a look at how foreign exchange affected our Q1 results and let's start with revenue.

As you can see on slide 11, total revenue growth of 9% includes a favorable 3% impact from foreign exchange.

Absent that impact of foreign exchange, total revenue grew 6%, driven by 4% volume growth.

Japan's substantial volume growth continues driven by Alimta's mid-2009 approval of both first line and second line non-small cell lung cancer, as well as continued strong growth in Humalog and Zyprexa.

Lilly remains among the fastest growing companies in this very important market.

Slide 12 shows the year-on-year growth of select line items of our non-GAAP income statement, both with and without the effect of changes in foreign exchange rates.

The numbers in the first column are the same as those you saw on slide eight.

I will focus my comments on the second column of numbers which strips out the effect of foreign exchange rates.

First, you will see the 6% revenue growth I mentioned previously.

Now, below that you will see that the cost of sales grew by only 1% reflecting continued expansion of our gross margin percent on a performance basis.

Operating expenses grew 5%, which was also less than our revenue growth and as mentioned earlier, increased investment in late-stage clinical trials drove R&D, which was up 9% on a performance basis.

SG&A on the other hand grew much less, which was only 3%.

As a result of holding growth in both cost of sales and operating expenses below the revenue growth rate, our 6% performance growth in revenue translated into 9% performance growth in operating income as well as 10% growth in EPS, including the $0.12 per share negative impact of healthcare reform.

For your information, on slide 13 we provided the year-on-year growth of select line items of our reported income statement, both with and without the effect of foreign exchange rates.

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

As you may recall, up until now, our 2010 guidance has explicitly excluded the potential effect of US healthcare reform.

Now that specific legislation has been signed into law, we are incorporating the estimated impact of this new legislation into our guidance.

We'll do so in two steps.

First, we'll provide our 2010 guidance, still excluding US healthcare reform, so that you can have a clear idea of how our underlying financial expectations for the year have changed since our last earnings call.

Then we'll layer in the estimated effect of US healthcare reform.

Moving forward, this will be the basis for future guidance updates.

So excluding the estimated impact of US healthcare reform, we are modifying our guidance to reflect our strong underlying business performance, including improvement in other income as well as for recent movements in foreign exchange rates.

At the bottom line we are raising our non-GAAP EPS guidance for the full year from a range of $4.65 to $4.85 to a range now of $4.75 to $4.90 and an increase of $0.05 on the top end of the guidance and an increase of $0.10 on the bottom end of the guidance.

In terms of line item guidance, we've slightly modified our revenue guidance to mid-to high single digits to reflect the recent weakness in foreign currencies versus prior periods.

Other income and deductions is now forecast to be a net deduction of $50 million to $100 million.

This represents an improvement of $100 million from our previous guidance of a net reduction of $150 million to $200 million.

This improvement is primarily driven by recovery of damages from companies that had launched generic olanzapine in Germany and a gain on the sale of investment securities acquired in the ImClone acquisition.

All other line item guidance remains unchanged.

On a reported basis, our earnings per share guidance, excluding US healthcare reform reflects the $0.03 charge for the Acrux deal and the $0.02 restructuring charge resulting in an EPS range of $4.70 to $4.85 per share.

Now, let's discuss US healthcare reform and how we expect it will affect our financial results.

As mentioned earlier, we expect US healthcare reform to negatively affect our 2010 revenue by $350 million to $400 million.

In addition, our 2010 results were also negatively affected by the one-time tax charge of $85 million related to the future taxation of the retiree drug subsidy.

Incorporating the estimated effect of US healthcare reform yields the following EPS and line item guidance -- on both a reported and non-GAAP basis our 2010 EPS will be approximately $0.35 lower, resulting in a range of $4.40 to $4.55 on a non-GAAP basis and a range of $4.35 to $4.50 on a reported basis.

We now expect total revenue to grow in the mid-single digits, driven primarily by Alimta, Cymbalta, Humalog, Cialis, animal health, Effient and the Exenatide franchise, partially offset by the negative impact of US healthcare reform.

We still anticipate gross margins as a percent of revenue to be flat to declining.

However, excluding the effect of foreign exchange rates on international inventory sold, we still expect gross margin as a percent of revenue to increase.

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

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

As mentioned earlier, other income for the year is now expected to be a net deduction of between $50 million and $100 million and as a result of the $85 million charge in Q1 related to future taxation on the retiree drug subsidy, the effective tax rate for the full year is now anticipated to be approximately 23%.

Note that our full year tax rate guidance assumes eventual extension of the R&D tax credit retroactive to January 1, 2010.

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

Slide 15 provides a reconciliation between reported and non-GAAP EPS for 2009 and the associated growth rates from these numbers to our revised 2010 guidance.

Now let me turn the call over to Ronika for an update on the Effient launch.

Ronika.

Thanks, Derica.

For Effient, Q1 sales of $9 million showed modest growth over Q4 2009.

However, this included continued inventory reduction from the original stocking.

We estimate inventory was reduced by $7 million in the first quarter.

Sequential quarter total prescription growth was 124%.

While uptake has been slower than planned, we're encouraged by the recent demand trend.

Currently new to brand share for Effient exceeds 8% for the total oral anti-platelet market and has continued to show strong growth.

New brand trends reflect placement of approximately 1,800 patients on Effient therapy per week.

Current estimates are that approximately 16,000 PCIs are conducted in the US per week.

Access continues to expand.

Of targeted hospitals Effient is now on formulary and is stocked in the cath lab in 75% of all accounts, up from 60% earlier this year, beating our expectations.

In addition, payer formulary access continues to progress well.

As of April 1, examples of payers making positive decisions include Express Scripts, Medco, WellPoint Anthem, Health Net, United Part D Prescription Solutions and Prime Therapeutics as well as many other PBMs and health plans.

Finally, in the US we believe our focus on the high risk ACS-PCI patients such as those with diabetes have gained traction in the market, as market research suggests that this patient type is often cited as a group in which physicians feel Effient is an appropriate choice.

Our salesforce is well prepared to communicate these messages using promotional materials that incorporate feedback from DDMAC.

In Europe despite the widespread availability of generic clopidogrel we continue to achieve strong reimbursement and favorable pricing.

Reimbursement covers 100% of the labeled population in most countries.

It is important to highlight that following hospital formulary approval protocol inclusion is a critical step in the hospital access process across Europe.

In Germany Effient experienced a slower than expected start due to the complexity of the protocol inclusion and access process.

However, a clear account focus and intensified cath lab activities are accelerating access to formularies, protocol inclusion and ultimately patient initiation.

As a result, first quarter sales in Germany showed a 147% increase over Q4.

Similarly in the UK, PCI centers and primary care trust have made progress establishing formulary access and creating protocol.

The 59 PCI centers with current formulary approval represent 75% of all PCI's performed in the UK.

As a result, first quarter sales in the UK increased 190% over the previous quarter.

In the near-term, we expect OUS growth to be bolstered by uptake in recently launched markets.

Lilly launched Effient Australia in December of last year.

Notably, Effient was approved on its first submission in Australia and was listed for the full label population and length of therapy.

We launched Effient in France in January and we've integrated learnings from the UK and Germany to drive quicker formulary access and protocol inclusion.

Most recently we launched Effient in Spain in late March and Italy early April.

Remaining planned launches in 2010 include Canada and over 30 additional countries.

In March Lilly entered into an exclusive worldwide licensing agreement for the commercialization of Acrux's experimental underarm testosterone solution AXIRON.

The product is currently under regulatory review by the FDA for the treatment of testosterone deficiency in men.

In exchange for these rights, Acrux will receive an upfront payment of $50 million plus $3 million upon transfer of manufacturing assets.

Acrux may also receive a milestone payment upon issuance of marketing authorization in the US and commercial milestones and royalties based upon global sales of AXIRON.

We believe that AXIRON will be a strong strategic fit for Lilly, leveraging our experience in men's health with Cialis to advance both the science and clinical outcomes for men with low testosterone.

AXIRON has the potential to be the first testosterone solution to be applied via an underarm applicator for patients who have testosterone deficiency.

We look forward to working with Acrux and the FDA during the regulatory review process.

Nick?

Also in the first quarter, Lilly and Boehringer Ingelheim terminated our agreement to jointly develop and commercialize duloxetine with Lilly purchasing BI's interest in the compound.

This termination means that excluding Japan, all rights to duloxetine for all indications will revert back to Lilly.

Lilly paid $400 million up front to BI.

In addition, BI will receive a royalty on sales through the end of 2012.

Over the past few years we have been steadily building our animal health business both through organic growth, particularly in the large and growing companion animal segment and through acquisitions.

In 2007, we acquired Ivy Animal Health.

In 2008 we acquired worldwide rights to Monsanto's dairy cow supplement Posilac, and in March of this year we agreed to acquire European rights to certain of Pfizer's animal health products.

These products are used in both production and companion animals.

These products also include vaccines, a new area for us and one we're poised to expand in the coming years with our own pipeline.

To support our entry and future growth in vaccines, the transaction also included the acquisition of a vaccine manufacturing plant in Ireland.

Detailed financial terms of this deal are not being disclosed.

This deal is expected to close in Q2 pending regulatory approvals.

Now I will provide an update on our pipeline.

Our pipeline slide demonstrates changes since our January 21, earnings call as of April 12.

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

Our clinical stage portfolio now stands at 68 distinct NMEs including 30 compounds in Phase II and Phase III.

We continue to develop a robust Biotech portfolio.

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

As we have said before, advancing our pipeline is our number one priority.

As reflected by the arrows on slide 20, since our last formal portfolio update we have advanced four assets into Phase I -- one for anemia, two for cancer and one for pain; promoted one asset to Phase II, our basal insulin for diabetes; added AXIRON for testosterone deficiency; and finally, one Phase I schizophrenia asset was terminated.

So, while the patent expirations of the coming years will hit us hard, we have eight molecules in Phase III today and we anticipate at least ten molecules in Phase III by 2011 if not sooner, with more coming behind.

We expect that this will position us to launch two novel molecules per year beginning in 2013, providing a foundation for future growth.

We have seen encouraging progress in our late stage pipeline.

Our Alzheimer's program continues to enroll ahead of schedule.

We completed enrollment our first Phase III trial for Semagacestat, our gamma secretase inhibitor last year and will complete enrollment on the second Phase III study this month.

We have also exceeded 50% enrollment on one of the Phase III studies for Solanezumab, our A-beta antibody and are closing in on 50% enrollment for the second Phase III study.

We completed enrollment on the Phase III PRELUDE trial evaluating Enzastaurin for diffused large B cell lymphoma.

We also initiated our Phase III award program for our GLP-1 Fc asset in the first quarter and we have Phase II data on NERI for depression both as a monotherapy and for augmentation and are moving forward with our plans to initiate Phase III in the first half of 2011.

We plan to present this data at a scientific conference in the future.

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

Operator, first caller please.

Thank you.

(Operator Instructions) Our first question comes from the line of Tim Anderson from Sanford Bernstein.

Please go ahead.

Thank you.

A couple of questions.

On the reform figure, can you parse out the 2011 revenue figure into what will come from the Medicaid rebates, versus the other components like the donut hole filling and the excise tax and the 340B?

And I guess same for 2010 if you could split it between rebate for medication and 340B.

Second question on emerging markets, it's something that most drug companies are talking about a lot.

I don't hear Lilly talking about it as much and in fact unless I am missing it, doesn't seem like you disclose your sales in these regions.

And I am wondering when we can expect Lilly to give more transparency on sales levels and strategy in these regions.

Tim, thanks for the questions.

We'll have Derica answer those.

Let me try to address both.

In regards to the healthcare reform impact, the aggregate numbers we provided of $350 million to $400 million impact in '10, and the $600 million to $700 million in '11, that's the level we're comfortable disclosing at this time.

We do not have plans to disclose the pieces of that in terms of breaking it down into elements of the excise tax versus the Medicaid rebates.

My rationale behind that is there is still some of those elements of the healthcare legislation still being discussed and still to be further defined, especially around the excise tax as it relates to the composition of sales and will it be branded sales and so forth.

It will be premature to get to that level of detail at this stage.

But we did try to provide to you all at an aggregate level what we think in totality -- the range of the impact -- could be.

In regards to our emerging market strategy, in fact we are quite active in that space in terms of trying to take advantage of the opportunities in those geographies.

Clearly in China -- markets like China, Brazil and Turkey where we have a great presence -- but we're not just looking at exercising those opportunities on a commercial basis, we're also taking advantage on R&D.

So, for example, we are increasing both our R&D and manufacturing presence in China.

We've actually doubled the size of our sales organization in China, over the last twelve months, to take advantage of our diabetes and CNS and oncology portfolio there.

So while it may not be -- I guess as transparent to the marketplace -- we are employing a lot of different efforts and strategy there to take advantage of that marketplace.

However, if you look at our price rate volume slide, that gives you some idea if you're looking at the rest of world of what we are able to achieve in those markets today.

Tim, this is Phil.

Just qualitatively on healthcare reform, the larger element would likely be, given what we know today, the fee that would be assessed on our industry and our portion of that, the impact in Medicaid of the higher minimum rebate from 15.1% to 23.1% and the extension of that Medicaid fee-for-service pricing into the managed Medicaid book of business -- still a negative impact but less would be things like 340B expansion.

So that gives a little color while we're not in a position however to give specific numbers for each one of those line items.

If I can add something Tim as well, there is also as you look at Lilly relative to some of our pharmaceutical peers, there is also a product mix aspect in there as well.

So, products like Zyprexa that's heavily Medicaid weighted obviously has a disproportionate impact on Lilly maybe versus some of our peers.

So, you can see that over time how our mix -- our portfolio mix -- changes, then the impact of healthcare reform on Lilly will also change.

Thank you, next caller please.

Our next question comes from the line of Eric Lo from Banc of America.

Your line is open.

Good morning, guys.

Just wanted to follow up on the healthcare reform impact for 2011.

The excise tax, is that recorded also in sales and as part of your $600 million to $700 million impact that you guys are guiding us to?

And a question on Effient.

I was wondering if you guys have changed your detailing effort behind Effient over the last couple months.

And third question, on Byetta -- with Victoza appearing to have gained about 20% of new prescription share based on the latest IMS data, has your marketing message for Byetta changed and what's your overall expectations for the franchise?

And are there any plans to increase sales and marketing dedicated to the franchise?

Thanks.

Thanks Eric.

We'll have Derica handle your first question, I'll take your second one and then Ronika the third one on Byetta.

Derica?

In regards to the healthcare reform impact in 2011 and the excise tax, the impact of that would be shown as a reduction to net sales is what we're anticipating at this time.

One thing is that is another item that's still to be resolved, but at this stage, that's the assumption that we're making.

And, Eric, in terms of the Effient messaging, as we have discussed some in the past, we have continued to be very focused on the patient populations that seem to have the best risk benefit from the drug -- in particular for example diabetics -- as one area where we're clearly focusing on to ensure the initial position experience is positive.

We do detail to the full label that we have but would highlight some of those areas where we have the strongest risk benefit.

With regards to Byetta, what we have seen most recently is we have seen some share of market softening, but it is largely stayed flat.

That's key.

We have seen some very slight softening in our new-to-brand and it's specifically within the [Endo's] group and they're trying to get clinical experience with the new drugs.

But in the long run we feel as though the growth of the GLP market in general will actually drive more patient utilization of our Byetta BID and unfortunately when it comes time for our launch of our Exenatide once weekly or Bydureon we feel as though the market will be educated more broadly with regards to the GLP1 class itself.

Cynthia, next caller, please.

Thank you.

The next question comes from the line of Marc Goodman from UBS.

Please go ahead.

First on the JAK1 product can you give us a flavor when we're going to get the data?

I know you'll show something at ACR but what are we going to get before that?

And secondly on Alimta, can you give us a flavor for -- just quantify what's going on in Japan and how much bigger that is really driving versus your expectations?

Is it $300 million international in the quarter, so how much of that was Japan?

What kind of growth are we seeing there?

We'll have Nick take the first question on the JAK and then Ronika your question on Alimta.

The current data disclosure plan for the Incyte JAK1/JAK2 inhibitor is to present the six month data from the ongoing Phase II at ACR in November of 2010.

We also believe that Incyte will share an update on the progress of that trial in the first half of this year.

So three-month data is going to come soon?

They'll provide an update in the first half of this year.

Okay.

With regards to Alimta sales in Japan we're really pleased with the uptake there.

Keep in mind we receive both the first line and the second line indication approval at the same time.

Unfortunately we don't give specific sales estimates by product or by country, but Alimta sales have been strong but we have also seen other products have fairly strong sales growth as well as mentioned in the call including Zyprexa, Humalog, Cialis and Gemzar so we're very pleased with the Alimta progress in Japan.

If you excluded Japan from the Alimta numbers would there still be growth, in the US?

There certainly would be.

We had very strong volume growth in the US, in Japan, and in the aggregate of the other markets worldwide.

All three of those broad geographies had very solid growth and frankly in terms of dollars probably a similar kind of magnitude.

Think about the geographical mix, that for us to achieve 57% overall growth for Alimta globally says it has to be driven by more than just the Japanese marketplace.

If you remember from the last couple of annual investment community update meetings we have been talking about Japan -- while it is a mature market given the timing of launch of various products and line extensions, should provide some counter-cyclical growth for us relative to what we would see in the coming years in the US and Europe.

And I think you're seeing essentially the beginning part of that trend that we had been talking about for the last couple of years.

Cynthia, next caller, please.

Thank you.

The next question comes from the line of David Risinger from Morgan Stanley.

Your line is open.

Thanks very much.

I had a couple of questions on reform and one on Alzheimer's.

With respect to reform, can you provide a little bit more detailed explanation on the impact of rebates going up and the implications for 2010?

Specifically if you could please explain the extension of Medicaid pricing, that would be helpful.

And then second, for 2011, I am assuming your $600 million to $700 million revenue impact does not reflect some marginal benefit from additional revenue -- from seniors being pushed through the donut hole.

If you could confirm that and also maybe talk about whether you are expecting a revenue benefit in 2011 from the seniors being pushed through the donut hole.

And finally if you could just walk us through the timing on the Phase III readouts from your Alzheimer's program, I am assuming that those will be in 2012, but if you could walk us through the timing that would be great.

Thanks.

We'll have Bart start off with your healthcare reform questions and Jan will handle the Alzheimer's questions.

Bart?

With respect to the impact of Medicaid rebates increasing, the expansion of not only the Medicaid fee-for-service from minimum rebates of 15.1% to 23.1%, we also have the shifting or the expansion of the rebates into Medicaid managed care.

Now, Medicaid fee-for-service is a larger portion of the overall Medicaid sales than Medicaid managed care, but nonetheless, that is another meaningful increase.

And also, the increase in the rebate has an impact on the 340B discount as it currently exists and as 340B will be expanded as well.

Secondly, the second question with regard to revenue benefits from the donut hole -- partial filling of the donut hole -- that's something that we're still looking at and the behavioral aspects of seniors as they -- in 2011 -- begin to receive a 50% discount is something where we're not certain what the impacts will be at this time and as a result we're still analyzing that.

Jan, on Alzheimer's.

First of all being a newcomer to Lilly, I am very pleased that Lilly has these two Phase III trials in a very high medical need area.

The first component, the gamma secretase inhibitor, Semagacestat, the two trials, IDENTITY 1 and 2 are planned to be completed in June 2012.

In reality it is 21 months after the last patient enrollment.

The second one, Solanezumab, the A-beta antibody, the Expedition one and two trials are also coming in the same timeframe.

The date currently is July 2012, eighteen months after the last patient is enrolled.

A couple of other things to provide some additional color.

In terms of the benefit -- potential benefit -- coming from additional patient utilization as Pharma companies help fill the donut hole, there are two components we have looked at.

There is one that we have quantified and put in some potential upside for and that is a few more individuals actually getting through the donut hole as opposed to stopping treatment under the current reimbursement scheme.

Frankly, there is not a huge percentage currently -- if we take Forteo as an example and probably the one we have the biggest issue in our portfolio, we estimate that about 15% to 30% at most of patients stop treatment as they hit the donut hole.

Some of that you just might expect from normal compliance.

Some of it could be financially related.

So there could be a slight benefit there but it is not a large impact.

The other one that I heard a number of people on the street discuss is, are doctors currently not putting patients on medications because they're quite sure they won't be able to afford them and they don't want to start to have them have partial treatment?

Early market research would indicate that you need to have a more substantial closing of the donut hole to make a significant impact in that particular area.

The other thing for the 21 months just -- you can do the math as well but to make it easy on you -- September we completed enrollment of the first trial, 21 months from that date would be approximately June of '11.

If we complete enrollment as Nick said which we plan to here in April on the second trial, that takes you out to January of '12.

As we discussed in the past it is very likely we will hold off on announcing results from the first trial until we have both trials actually closed so we can preserve the data integrity of all the data from the second trial as well.

Phil, I don't know if you can still hear me.

Did you mention that for 2011 revenue, you did include a potential marginal benefit from a few more individuals getting through -- halfway through the donut hole?

There is a very small amount that's in the net estimate that we put together for the donut hole, but it is a net cost clearly.

Operator, next caller, please.

Thank you.

Next we'll go to the line of Jami Rubin from Goldman Sachs.

Your line is open.

Thank you.

Just to follow up more in trying to understand the $600 million to $700 million -- assume that $300 million is the excise tax plus the donut hole -- does the donut hole -- is the donut hole offset by any patient assistance programs?

I think on the Roche conference call, their portfolio is -- their mix is different from yours but they expected the donut hole to be offset by patient assistance programs.

Are you seeing the same thing?

Secondly, can you remind us what your exposure is to Medicaid?

And thirdly the $600 million to $700 million for 2011, are there any bottom line offsets to that or should we assume that all drops right to the bottom line?

Thanks.

Jami, this is Derica.

First of all, I am not sure where the $300 million you threw out relates to 2007.

We haven't provided that level.

I think it was a bump up from the $350 million to $400 million.

Oh, you mean the increase.

Got it.

In regards to the last question again, Phil -- in regards to the bottom line offset, while we've been obviously all anticipating that there could be some form of health care reform in the US, we had already begun our activities in terms of having to restructure our business and make sure that we are accounting for the expected declining margins.

So if you go back to September of last year when we announced that we were looking to reduce our headcount by another 5,500 as well as also save an additional $1 billion by the end of '11, we are farther down the road in achieving some of those outcomes.

Today we have taken out about 1,500 of the 5,500 and made considerable progress in terms of our $1 billion savings goal.

We feel very good there.

The impact that you're seeing us talk about here on the call primarily only relates to the top line impact both in '10 and '11.

Bart, do you want to mention the Medicaid exposure?

Yes, on a gross basis both Medicaid fee-for-service and managed Medicaid combined, account for just over 10% of our total US business, and on a net basis just slightly under 10%, so roughly 10% of our US business is exposed to Medicaid.

With regards to the other portion of your question specifically with regards to the patient assistance programs, we have said in the past that we did see an uptick in the patient assistance programs through 2009.

We saw an uptick continue into the first quarter of [2001].

How it will transition as these pieces of legislation are rolled or inactivated is yet to be seen.

And we can't say at this point will there be a direct offset with regards to the expense in the patient assistance program versus the expense incurred with regards to healthcare reform.

That is yet to be seen.

Some of that may come into play more in the '14 period or if States elect to adopt early the expansion, for example, of the criteria for inclusion into Medicaid but likely not a short-term effect we would see.

Operator, next caller please.

Our next question comes from the line of Chris Schott from JPMorgan.

Please go ahead.

Thanks.

First question on animal health.

Can you quantify the revenue associated with the Pfizer assets you're acquiring?

Second question just on the reform issue again.

Within the $350 million to $400 million 2010 impact, I know you're not going to give specific breakdowns of the Medicare pieces, et cetera, but can you quantify how much of this year's impact is from that channel accrual piece in anticipation of future discounts as compared to items that are being actually implemented in 2010?

And then just a final question on your basal insulin now moving to Phase II, can you talk about timelines around development of that product and differentiating features you might see there?

Thanks.

Nick, I think will take the first question on animal health and Derica will talk about the channel accruals and then Jan about the basal insulin.

We estimated that the sales of the Pfizer animal health products were about EUR60 million in 2009.

We anticipate those -- that revenue could come down due to competitive pressures over the next several years.

Chris, this is Derica.

In regards to channel accrual, it is a small portion of the charge that we are talking about for both 2010 full year as well as the $60 million or the $62 million we talked about for Q1.

We have seen the recent Phase I data on the basal insulin product, and we were very pleased to have a flat 24 hours slow profile of glucose levels -- there was very little variability in glucose levels and the very acceptable safety.

Now we have just entered a larger study in Phase II clinical testing, and I don't want to comment about the timelines specifically.

I just say that we are very excited about these programs.

Next caller, please.

Thank you.

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

Your line is open.

I appreciate you taking the question.

I have a couple.

Quick on healthcare reform.

Do you guys have an estimate in terms of what you think the baseline was for seniors hitting the donut hole in regards to the compliance rate?

Do 50% of them continue to take a drug or some proxy you can give us to think about that?

And, I want to follow-up on the basal insulin question.

I wondered if you could talk about your interest being driven by a combination with the GLP 1 I think what you are seeing Novo and Sanofi do and I wonder if you had the same intention as far as your GLP 1 plus basal insulin and if so, is it yours or your partner's that might be the combination of choice?

And last question is related to Alzheimer's program.

At the AEN there was some progress of diagnostics in regards to detecting disease earlier.

If the confirmation of these final results comes later this year, would you think about moving ahead in the earlier disease setting and if so would you do that for the a-beta and the gamma secretase programs?

I will take the first two and Jan will take the last question.

We'll need to follow up on your first question.

We don't have the data that you were asking about.

For the basal insulin GLP combo clearly we have seen a number of companies talking about moving forward with some of these kinds of programs.

There is currently nothing that we discuss publicly and we'll continue to monitor the space and see what the best way is for the GLPs to become a very significant portion of the treatment for Type 2 diabetics.

As you've heard from our past comments, we continue to feel that the GLPs will be over time a very significant player in the treatment of Type 2 diabetes.

The profile, for example, that we have shown with the Exenatide once weekly compared to essentially all the major current therapies is extremely promising, very strong h.p.1.c control, very good weight profile.

Initial things we have seen in terms of CV risk and definitely compared to some of the other drugs like insulin's low risk of hypoglycemia, make it something we think would be a very significant drug in the treatment of Type 2 diabetes going forward.

Jan, for Alzheimer's disease and diagnostics?

In the Alzheimer's area there is a key need to identify the right patients which have the type of amyloid disease that we believe a majority of Alzheimer's patients have, but certainly some dementias are likely to be caused by other factors such as more vascular problems in the brain.

So from the standpoint of the current therapies, I think we need the amyloid diagnostics to be combined with Alzheimer's treatments and preferably to do that as early as possible in the lifespan of the Alzheimer's disease.

So I assume the readouts for these first two programs will guide us actually.

How early do we need to treat an Alzheimer's patient and also for heart/lung.

I also see a great interest in the evolution of diagnostics for the Alzheimer's area, specifically to have some of additional markers than just cognition to in time realize when there is a need and to treat further amyloid accumulation.

Cynthia, we will take one more caller.

Thank you.

That will come from the line of Steve Scala from Cowen.

I have three brief questions.

Will the healthcare reform hit to earnings in 2011 be roughly $0.50 a share and will that be evenly spread throughout the year?

Secondly excluding healthcare reform Lilly is cutting our revenue growth guidance due to the recent exchange trends.

Why isn't this same exchange trend benefiting R&D and SG&A guidance?

It appears that the higher guidance -- higher earnings guidance -- is solely due to the higher other income.

And then lastly, Cymbalta chronic pain claim, Lilly notes in the release it expects an FDA advisory meeting in the second half.

But when the meeting was canceled the first time I thought the Company was saying no meeting would be required.

What has changed, please?

Thank you.

Okay.

Derica and I will handle your first couple of questions and Ronika will handle your Cymbalta chronic pain question.

What we said is we've given a broad range because -- for 2011 -- because there is still some quite dynamic pieces in there, especially around the excise tax as well as the donut hole that we were articulating earlier, so that's why we focus primarily on the range of the $600 million to $700 million in terms of the sales impact.

In terms of foreign exchange, and the foreign exchange changing the guidance for some elements and not others, Steve, we've talked in the past about the foreign exchange having a larger effect on revenue, a similar effect probably on SG&A but not quite as large.

I think you can take by the fact we're moving the revenue guidance and not the SG&A guidance that probably it was close enough to tip us, so we had possibilities of being in that lower range on the revenue side.

And we're still within the range on SG&A side.

And then for R&D -- R&D has a much lower exposure given where we actually have the spend to changes in foreign exchange rates.

But recall in our SG&A in Q1 we did see about a three percentage points impact in our SG&A growth in Q1 due to the movement in foreign exchange and that was three percentage points increase.

Ronika?

With regards to the Cymbalta chronic pain sNDA we're currently -- have always said and we have been consistent with saying with prasugrel as well that the FDA can schedule a review at any time.

We have had discussions with the FDA and in those discussions our expectations is that a panel will be held in the second half of the year.

We stand behind our data that we submitted.

We feel it is promising data.

We've had other pain indications prior with regards to fibromyalgia and DPMP, so we stand behind that data.

And we are prepared to address any of the FDA's questions at the panel if it occurs in the second half and we're ready to do so.

Thank you all for your questions.

Before I turn it over to Derica, just to remind you today also is our annual shareholder meeting so Ronika, Nick and I will be available for your questions later.

We will probably be out between 11 and 12 at the shareholder meeting so apologize if there are delays in getting back to you.

Derica?

Let me try to close today's session with some overarching remarks.

First of all, we've had a very good start to 2010, and it was highlighted by volume-driven revenue growth.

We've had substantial leverage on a performance basis which drove operating income to grow faster than our revenue, and we also have seen significant improvement in other income as we highlighted.

Excluding the effect of the US healthcare reform, this strong financial performance has positioned us to raise the top end of our [2000] EPS guidance by $0.05 and the bottom end by $0.10.

This strong financial performance also provides the resources we need to strengthen and progress our pipeline and engage in business development and pay our dividend.

In fact, in the past three months we've completed three more business development deals, we've made significant progress on products such as Bydureon, and our Alzheimer's drugs -- Enzastaurin, NERI IV, GLP-1 Fc and our basal insulin.

All the while, we have initiated Phase I trials for four new molecules.

While the US healthcare reform clearly provides a near term challenge, we are confident our innovation based strategy will create value for patients, payers, and shareholders.

We're focused on advancing our pipeline to deliver on our strategy and believe our pipeline will enable us to launch two new novel molecules per year beginning in 2013 and return us to growth after the [year's YZ].

I want to thank you for taking your time allowing us to update you on Eli Lilly and Company, and we greatly appreciate your interest in our Company.

As always, we'll keep you informed on our progress and have a great day.

Thank you.

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