禮來公司 (LLY) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Q2 earnings conference 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, this conference is being recorded.

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

Please go ahead.

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

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

Joining me this morning are John Lechleiter, our Chairman and CEO; Derica Rice, our Chief Financial Officer; and Ronika Pletcher and Nick Lemen for 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 on our latest 10-K and 10-Q.

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

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

In the second quarter, we again generated strong financial results including robust volume-driven revenue growth.

We were able to leverage our high-single-digit revenue growth into double-digit growth in operating income and earnings per share.

In addition, we again generated strong operating cash flow.

This strong financial performance has allowed to us raise our full-year 2010 EPS guidance in spite of the negative effect of recent pricing actions in Europe.

Since our last earnings call, we've continued to be active in business development, completing two more deals.

We acquired Alnara Pharmaceuticals and their lead asset, liprotamase, which is under FDA review for the treatment of exocrine pancreatic insufficiency.

And we entered into a development and exclusive license agreement from Marcadia Biotech's preclinical short-acting glucagon program.

We've also made progress on the regulatory front.

The FDA confirmed that an advisory committee will be held on August 19 to discuss the chronic pain indication for Cymbalta.

With our partner Amylin, we submitted our response to the FDA's Complete Response Letter for Bydureon and the agency assigned a new PDUFA date of October 22.

And we received a positive final appraisal from NICE in the UK for the use of Alimta as a maintenance therapy for patients with nonsquamous non-small cell lung cancer.

In commercial news, we launched Livalo in the U.S.

Livalo is the statin we licensed from Kowa late last year.

We also announced an agreement with Wal-Mart to make Humulin available in Wal-Mart pharmacies across the U.S.

under the dual-branded named Humulin ReliOn.

And as I alluded to earlier, a number of European governments announced measures to reduce their pharmaceutical expenditures.

Let's briefly review the situation in Europe before discussing our Q2 results in detail.

While pricing and reimbursement systems vary by country in Europe, year-on-year average prices decreases of 1% to 2% across the region have been commonplace for many years.

We attempt to offset this by driving volume growth and achieving incremental productivity gains.

Occasionally, acute budget issues in one particular country have prompted more substantial measures like across the board price cuts.

As you are aware, the economic downturn has caused budget pressures which have forced a number of European countries to simultaneously introduce austerity measures to reduce public spending, including measures to reduce their pharmaceutical expenditures.

Let's briefly look at some of the measures that have been passed.

The German government announced two temporary measures that will take effect on August 1 of this year.

First, for products not subject to reference pricing, the rebate paid to the sick funds will be increased from 6% to 16%.

Second, prices will be reset back to their August 1, 2009 levels and held flat going forward.

Both of these temporary measures will expire at the end of 2013.

Not all of our German business is exposed to these actions.

For example, some of our products are subject to reference pricing and Humalog rebates already exceed the new 16% mandatory rebate and will not be affected.

In addition, a portion of our German demand for many of our products is satisfied through imports by wholesalers from other markets.

We are not liable for German rebates on these sales.

In Spain, the government introduced a 7.5% rebate on public sector purchases of most branded products.

Generics took an even bigger hit, 25%, while orphan drug prices were reduced by only 4%.

These reductions will remain in place through the end of the year with the government deciding later this year about 2011.

In addition, measures leading to a more rapid decline in prices post-patent expiration were passed.

On May 1, the Greek government implemented a temporary price reduction of up to 27%.

Lilly's average reduction was roughly 23%.

The Greek legislation stipulates that this temporary price reduction will be in effect through August 31 of this year.

By that time, we expect a temporary price reduction to be replaced by a reference price system that pegs the Greek price to the average of the three lowest prices in the EU.

While still substantial, we would expect the impact to Lilly of the new reference pricing scheme to be roughly half that of the May 1 price cuts.

In addition, this change should lead to reduced financial exposure in countries that may reference their prices to the prices in Greece.

We've also seen some pricing actions taken in smaller EU countries like Romania.

In total, at current exchange rates, we estimate that the price cuts announced by these governments will reduce our European revenue by approximately $90 million in 2010 and approximately $150 million in 2011.

In the three major European countries I've not mentioned, the UK, France, and Italy, we do not anticipate any additional significant price reductions.

Not long ago, the UK implemented a revised PPRS agreement to deliver savings on the country's pharmaceutical spend.

Under this industry-wide agreement, average prices were reduced by 3.9% in early 2009 and by an additional 1.9% in early 2010.

The remaining three years of the agreement call for price stability.

In France, similar to last year, the government has announced its intention to take actions to reduce pharmaceutical spend by 100 million euros.

Last year's actions were directed at the statins and proton pump inhibitors.

It's not clear how the French government will target this year's savings.

Finally in Italy, the price cuts announced by the government didn't affect patented products.

However, generic prices were reduced by 12.5% and the government announced its intention to move to a tender system in 2011 for purchasing generic drugs.

We'll continue to monitor the economic situation in Europe and the actions taken by governments to address their budget and debt issues.

While we will see higher than average price erosion in the near term, the underlying fundamental of the European market remain strong.

There will continue to be strong demand for our products and the benefits they offer patients.

As we have seen in Spain and Italy, as well as Japan earlier this year, we're optimistic that governments that haven't yet done so will increasingly look to reduce the prices they pay for generic drugs to create room to pay for patented drugs.

This is crucial in order to maintain adequate incentives for companies to develop the next generation of innovative branded drugs that will subsequently become the next generation of improved low-cost generics helping future generations live longer, healthier and more productive lives.

Now with this background, Derica will discuss our Q2 financial results and our 2010 guidance.

Derica?

Thanks, Phil.

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

This view excludes certain items such as restructuring charges, asset impairments and other special charges.

Let's start on slide seven with a quick look at our Q2 income statement before reviewing the effect of foreign exchange.

On a non-GAAP basis, we generated strong revenue growth of 9% in the second quarter continuing our strong top line performance.

On a product basis, our Q2 revenue growth was fueled by Alimta, Cymbalta, Cialis, Zyprexa and Animal Health.

We're especially pleased with the continued strong performance of Alimta, which this quarter surpassed Taxol for share leadership in the first line nonsquamous non-small cell lung cancer setting in the U.S., which is a significant accomplishment given Taxol's longtime leadership in this setting.

On a geographic basis, just to cite a few highlights, Japan grew 32% on a performance basis and China grew 25%.

We saw solid growth in the U.S., Spain, and a number of other Asian and Latin American countries.

Our gross margin as a percent of revenue was essentially unchanged at just over 82%.

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

Within our operating expenses, marketing, selling and administrative expenses grew only 3% with the growth driven by higher marketing and selling expenses outside the U.S.

partially offset by lower administrative expenses and our ongoing cost containment efforts.

R&D expense grew 14% primarily due to increased late-stage clinical trial costs while also paying key milestone payments which added over three percentage points of growth.

In total, we were able to generate leverage between revenue and operating expenses, leading to operating income growing 12% in the quarter.

Moving down the income statement, you'll see that other income improved slightly due to lower net interest expense.

In addition, our tax rate increased by half of a percentage point due to the expiration of the R&D tax credit, partially offset by slight changes in the expected mix of income amongst tax jurisdiction.

Net income and earnings per share each grew 11% in the quarter, again, generating strong leverage from the top line.

Slide eight shows our reported income statement while slide nine provides a reconciliation between reported and 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 Q2 results.

We'll start with revenue.

As you can see at the bottom of slide ten, total revenue growth of 9% includes a favorable 1% impact from foreign exchange.

This includes a 2% drag in Europe due to a weaker euro.

However, this was more than offset by the strengthening of many other currencies including the Japanese yen, the Australian and Canadian dollars, the Brazilian real and the Mexican peso.

Absent the impact of foreign exchange, total revenue grew 7% driven by 5% volume growth.

Japan's substantial volume growth continues, driven by Alimta's Q2 2009 approval for non-small cell lung cancer, the recent launch of Cymbalta, and strong volume growth in Zyprexa and Humalog.

Our Animal Health business registered very strong 18% volume growth in both the food and companion animal segments, and both in the U.S.

and internationally.

In general, the Animal Health market has rebounded as economic conditions have stabilized.

Slide 11 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 in slide ten.

I'll focus my comments on the second column of numbers which strips out the effects of foreign exchange rates.

First, you'll see the 7% revenue growth I mentioned previously.

Below that, you'll see the costs of sales grew 8%.

In total, operating expenses grew slower than revenue at 6%.

As I mentioned earlier, increased investment in late-stage clinical trials and milestone payments drove R&D expense which was up 14% on a performance basis.

SG&A spending on the other hand grew much less, only 2%.

As a result of holding growth and operating expenses below the growth and the revenue rates, our 7% performance growth in revenue translated into 9% performance growth in operating income and 8% growth in EPS.

You can also see that year-to-date, we've leveraged 7% revenue growth on performance basis into 9% EPS growth.

Now, for your information, on slide 12, 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.

Given our strong performance in the first six months of the year, we are raising our previously issued 2010 earnings per share guidance range of $4.40 to $4.55 to a new range of $4.50 to $4.65 on a pro forma non-GAAP basis.

This corresponds to a range of $4.44 to $4.59 on a reported basis.

In terms of line item guidance, we continue to expect total revenue to grow in the mid-single digits even with the initial impact of the extraordinary European pricing cuts and the recent unfavorable movement in the euro.

Gross margin as a percent of revenue for the year is now expected to be flat to increasing, and we continue to expect improvement excluding the effect of FX on international inventory sold.

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

We continue to expect research and development expenses to grow in the low-double digits.

Our forecast for other income is unchanged at a net deduction of between $50 million and $100 million, and the effective tax rate for the full year is still expected to be approximately 23%, assuming the extension of the R&D tax credit.

Finally, we now expect capital expenditures to be less than $900 million.

Slide 14 provides a reconciliation between reported and non-GAAP EPS for 2009 and for our revised 2010 guidance.

Now, let me turn the call over to Ronika for an update on our pipeline.

Ronika?

Thanks, Derica.

Before we review our pipeline slide, I'd like to take a moment to discuss the investigational product exenatide once weekly also known by the proposed trade name of Bydureon.

It is one of our most important pipeline molecules and is clearly the most proximate to potentially reaching the market as it is currently under active regulatory review in the U.S.

and Europe.

Based on the clinical data, Lilly and Amylin have generated with Bydureon, the evolving therapeutic landscape and the considerable real world experience we have with the [exenatide] molecule, we are very excited about the potential of Bydureon to help people with type 2 diabetes.

Over time we believe the GLP Class will play a significant role in the treatment of these diseases and the clinical data we've generated with Bydureon have set a high hurdle for drugs in this class.

As shown in slide 15 across the Duration Phase 3 program, Bydureon has consistently shown clinically meaningful reduction in A1C.

While Bydureon is not being studied as a weight loss product, we've also seen reductions in the secondary end point of weight as well as lower incidence of mild to moderate hypoglycemic events relative compared to drugs.

Common treatment emergent adverse events with Bydureon have included injection-site pruritis, nausea, vomiting and diarrhea and constipation.

At ADA last month, there were a significant number of presentations on the exenatide molecule covering both Byetta and Bydureon.

Just to highlight a couple of the Bydureon presentations, Slide 16 shows data from a pooled analysis of the Duration of 1, 2 and 3 trials in which we analyze the percentage of patients experiencing a reduction in both HBA1C and body weight.

As you can see, 73% of the people treated with Bydureon experienced reductions in both HBA1C and weight and comparison reductions in these two measures were achieved by 46% of the patients taking Sitagliptin, 32% of those taking Insulin Glargine and only 14% of those taking Pioglitazone.

Elevated HBA1C and weight are known risk factors for cardiovascular events.

We're also pleased to report that we've recently begun enrollment in our [Xcel] trial, a cardiovascular outcome study for Bydureon which will help show whether treatment with Bydureon does in fact reduce cardiovascular events.

The trial is slated to include 9,500 patients and provide results in 2016.

Finally, data were presented at ADA on the extension phase of the Duration 2 trial.

In the 26-week extension phase, patients that received Sitagliptin or Pioglitazone during the initial 26-week phase were switched to Bydureon while Bydureon-treated patients continued on therapy.

As shown on slide 17, when treated with Bydureon in the extension phase patients who switched from Pioglitazone to Bydureon maintained HBA1C improvements and nearly all of the weight gain seen in the initial 26 weeks was reversed by 52 weeks.

Patients who started initially on Sitagliptin experienced a further reduction in weight and an additional reduction in HBA1C.

These and other data make us very excited about the potential role the Bydureon can play in helping people with people with type 2 diabetes manage their disease.

Switching to our pipeline, slide 18 demonstrates changes since our April 19 earnings call as of July 20.

Our clinical stage portfolio stands at 69 distinct NMEs including 29 compounds in Phase 2 and Phase 3.

Our focus remains on developing a robust biotech portfolio as biotech molecules now represent nearly half of our late-stage Phase 2 and Phase 3 assets, as well as over a third of our overall clinical portfolio.

This includes the recent entry of four new oncology biologics into the clinic as highlighted with the green arrows on the left.

As we have said before and continue to emphasize, advancing our pipeline remains our number one priority.

Since our last formal portfolio update, we have advanced six assets in Phase 1, five targeting oncology and one for Alzheimer's, promoted two assets to Phase 2, one for BPH and a second for atherosclerosis, and liprotamase, which is currently under regulatory review in the U.S., launched Livalo in the U.S.

and still plan to submit Livalo in our first Latin American country during the second half of this year.

As shown at the bottom of the slide, we also terminated the development of two Phase 1 assets as well as three Phase 2 assets.

We're also seeing encouraging progress in our late-stage pipeline.

Our partner [Incite] disclosed top line three-month Phase 2a data on the JAK-1/JAK-2 in early May.

[Incite] also reiterated its plan to present more detailed three-month data as well as six-month data at the ACR conference in November.

Ongoing development efforts remain focused on initiating a Phase 2b study later this year.

We recently completed two Phase 2 trials for out BAFF Antibody for rheumatoid arthritis.

Data from both trials will also be presented at ACR in November.

We expect to start Phase 3 trails in late 2010 or early 2011.

We recently completed Phase 2 trials for NERI for depression, OpRA for alcohol dependence, and Hypnion insomnia.

We're currently reviewing these data and plan to disclose these data at an upcoming medical meeting.

Currently, we have eight molecules in Phase 3 and we are on track to have at least ten molecules in Phase 3 by the time the Zyprexa patent expires in late 2011, if not sooner, with more coming behind.

We continue to expect that executing on our innovation-based strategy will position us to launch two novel molecules per year beginning in 2013 providing the impetus for future growth as we emerge from the (inaudible) period .

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

Operator, first caller,

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

Please go ahead.

Good morning.

This is Jay [Olstin] for Tim Anderson.

Congratulations on the quarter.

I had a question about emerging markets.

You had provided some information on your emerging markets business unit, strategy and sales performance last year.

I was wondering when we might see an update on that and specifically more transparency with regards to the emerging market sales performance?

And a second question on guidance.

You've raised your 2010 guidance, but I was wondering about longer-term guidance you had previously given out until 2014 and with what's happening with price reductions in Europe and U.S.

healthcare reform.

Should we assume that the 2014 guidance is still intact?

And then a last question, if I could, on your pipeline, you've got eight drugs in Phase 3.

Could you highlight one or two of the compounds in Phase 3 which you think are the most exciting, especially one or two where you think investors might be missing something or underestimating them?

Thank you.

Great.

Thanks, Jay.

Thanks for the comments on the quarter.

We'll have Derica take your question on emerging markets and the longer-term guidance and then John on the Phase 3 assets.

In regards to the emerging markets, we feel very good about our current performance but also even better about the future prospects of our emerging market business.

If you look at Lilly today, our emerging markets represents about 10% of our total revenue.

If you look at our Q2 results, we had about 14% growth in the emerging markets.

Obviously, that's a mix of countries and it also has patent expirations in there in some of the smaller ones.

But if you look at markets like we talked about earlier in China in our opening comments where we had 25% growth, you could say Japan's not an emerging market but clearly it's a key strategic market for us where we had 32% growth.

We see huge opportunity and we see, also, the additional benefit of launching some of our current products in those markets.

Here recently we launched Cymbalta in Japan.

We're looking forward to launching Forteo.

In regards to the 2010 and 2012 longer-term guidance, we still feel very good about our comments that we made in December at our analyst meeting about our ability to be at least a $20 billion revenue Company even as we go through the series of patent expirations and the fact that we think we can also have good prospects of generating at least $3 billion in net income.

That allows to us have the cash flow, as you've seen in the first part of this year, to fund our pipeline of over -- almost 70 molecules and also to pursue the development opportunities that we think will enhance our longer term prospects.

Jay, this is John.

Before I talk about the Phase 3, I just want to call attention to the fact that we did recently launch a new molecular entity, Livalo, a statin, along with Kowa here in the U.S.

Two deals we've done in the last six months.

The one with Acrux for Axiron which is the novel preparation of testosterone under review by the FDA.

The Alnara deal that we just announced will give us access to another molecule like liprotamase or another product like liprotamase which is under review right now also by the FDA.

And then we've got an August 19 advisory committee meeting as I think Ronika mentioned for Cymbalta for chronic pain, and we've got the action dated on October 22 for Bydureon.

So there's a lot happening at that end of the pipeline.

I think as you look at the eight that we currently have in Phase 3 right now, the ones I would call attention to would be the two Alzheimer's assets, Semagacestat, the oral; Solanezumab, the antibody.

Both are progressing well in Phase 3.

Then we've got the two other molecules from ImClone, the 1121B and 11F8, both of those are in Phase 3 right now looking at different kinds of tumors.

And I think for all of the reasons we talked about when we made the ImClone acquisition we think those hold great promise.

And, Jay, your question about when the investment community could hear a bit more about our emerging business, remember Jacques Tapiero, who heads up that business for us, talked about some of the recent performance in those markets, doubling our revenue there over the prior five years with the goal to do the same in the following five years.

We actually will have Jacques out at a conference.

I apologize it's a competitor's conference, it's the BMO Conference on August 5, but that will be the next point at which we'll have a bit more disclosure and discussion about the emerging market business.

Operator, next caller, please?

Thank you.

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

Please go ahead.

Thanks very much.

I have a couple questions.

First, with respect to the ReliOn product, I just find it intriguing that you are sort of transferring Humulin to a store brand name for Wal-Mart.

Could you just provide a little bit more color on whether that's an offensive or defensive move because Wal-Mart maybe could have sourced a similar insulin product elsewhere?

And also whether you see that product sales via Wal-Mart as being at the same profit level in terms of profit dollars for Lilly or not?

And then, second, with respect to patent litigation developments, could you just give us a framework for what to watch later this year on Gemzar, Strattera and Alimta, please?

Thank you.

Great.

Thanks, Dave.

We'll have John take your ReliOn question and then Nick's going to handle your patent question.

Dave, we see the partnership with Wal-Mart on the Humulin ReliOn product as important and strategic.

I think they understand the strength and power of the Lilly brand, and we understand their connection with the consumer as a significant proportion of Americans enter a Wal-Mart store in the course of a week.

This will not be the only channel through which we sell Humulin or biosynthetic insulin, but it will offer, we think, an important treatment option for patients who wish to secure their insulin through the Wal-Mart channel.

We're not giving any information out about the profitability here versus selling that similar product at another venue.

And, Dave, with regards to patent, first, on Gemzar, we, of course, had the first summary judgment from Judge Steeh in the Eastern District of Michigan in the Sun case on the method of use patent that extends into 2013.

We appealed that decision.

That PSJ and the case was heard in early May.

We're still awaiting to hear that decision from the CAFC on that case, but are still confident that we will have exclusivity for Gemzar into 2013.

For Strattera, we had the court case in the District Court of New Jersey that was held in mid-May, May 18.

The final presentation of evidence took place in late May.

Closing arguments in early July.

We could hear the decision on that case at any time.

Finally, for Alimta, we have the challenge in the District Court of Delaware from Teva.

We have a trial date later this year on November 8 for Alimta.

And, Dave, just real quick on ReliOn, my understanding is, I don't know for how long, that there's actually a ReliOn brand of Novolin that's currently being sold through Wal-Mart.

That will go through, I think, August of this year when the Humulin ReliOn will begun to be sold through the Wal-Mart pharmacies.

Operator, next caller, please?

Our next question comes from the line of John Boris from Citi Investment Research.

Please go ahead.

Thanks for taking the questions, and congratulations on the quarter.

First question, just on M&A, John, just your thoughts.

Some would have you believe you're interested in a large-scale-type deal.

Can you just discuss how some of the business development efforts that you've had helps to maybe minimize or eliminate that assumption that you want to become bigger?

Could you maybe put boundaries around the types of acquisitions that you might be looking at.

Are we talking about [ICO/Symclone]-type ranges or any thoughts there?

And then I have a follow-up.

John?

Okay.

John, I think on M&A, our position really hasn't changed.

We're not interested in large-scale combinations.

We think that the key to growth for Lilly and for this industry is innovation, and we're focused on reinventing our innovation engine here.

We think we're making good progress and moving the most exciting pipeline along that we've ever had in our history.

I think as you can see from the deals we've done, we will move aggressively to augment and supplement that pipeline.

The deals we did for Livalo for liprotamase, for [Astron], really fit nicely into our existing, I guess what you'd call sales presence, and they are molecules with a high probability of getting to the market.

I am not going to put sort of a price range on what we might consider the largest type of deal that we would do.

I think the way I would frame that is to say that obviously as we go forward into these years where we're going to have patent expirations, we're going to be first and foremost paying attention to at least maintaining our dividend, making sure that we've got the cash, as we're confident that we do, to run our business to make capital investments, and then to also pursue licensing opportunities, including in our Elanco business.

We saw great growth from Elanco this quarter, 18%.

We continue to see an opportunity to grow that business organically and inorganically and provide a little bit more diversification for the Company in the process.

Thanks for that.

And just in follow-up on the two assets that you mentioned, the Axiron and the liprotamase assets, when you did your due diligence on those assets before (inaudible) can you maybe just give color on the clinical packages and the quality of the clinical packages that have been filed with the FDA?

And then just any kind of update on the Erbitux filings in first line KRAS colorectal cancer and any update on Erbitux would be useful.

Thanks.

Okay, John, I'll answer the first part of your question and I think Phil will talk about your Erbitux question.

I think when you do due diligence, and I think we've got a very good team here that does a very thorough job I doing the diligence.

When you're looking at a data package that's been filed with the FDA, that doesn't give you a 100% assurance, but I think it provides a lot better assurance that you've got a body of evidence that will support the intended claim.

That was the conclusion we drew in both those cases.

Yes.

John, this is Phil.

In terms of the clinical data, I'm a bit more familiar with some of the data that we have for liprotamase, in large part because that's where we've gotten a few more questions since we've done the deal.

So a couple comments there.

First, the regulatory endpoint that we're shooting for is called coefficient of fat absorption.

It's out understanding that for the FDA that this is a very valid surrogate measure of lipase activity that is accepted as a primary endpoint for approval of treatments for EPI.

There were two studies that will contribute to that primary endpoint, both of which met their endpoint with statistical significance, a 726 study, and also called TC2a study.

Both of those are at the registration pivotal studies.

I think some of the concern has come about the 726 study where there was a subpopulation of patients in Eastern Europe and South America that did not seem experience the same level of benefit.

Again, that overall trial did meet its endpoint and we view that as being appropriate basis to go ahead and make the submission.

There were also two other studies that were done, longer-term studies that go out about 12 months, that look at endpoints that while they're not strictly the ones we'd look to for the regulatory approval they're very important, we believe, as supportive data.

Those are the 767 and the 810 study that had very good data BMI, height and weight that we think supports the profile of the product.

In terms of the Erbitux line extensions, new indications, on all three of those we've made very good progress with the FDA and would expect in 2011 to be in a position to respond to the Complete Response Letter on the first line head and neck indication to resubmit the first line non-small cell lung indication and to submit the first line colorectal.

And, John, one comment on Axiron as well.

In the Phase 3 trial, it demonstrated that after four months of treatment 84% of subjects across the dose levels achieved average blood levels of testosterone within the normal range exceeding the 75% hurdle.

In addition, after two weeks of treatment, 76% of subjects reached those average blood levels for testosterone in the normal range.

No serious adverse events were reported.

Headache and application-site reactions are the most common adverse events.

All right.

Thanks, John.

Operator, next caller, please?

Thank you.

Our next comes from the line of Steve Scala from Cowen.

Please go ahead.

Thank you.

I have one clarification and one question.

Based on your guidance, it would appear that the second half of 2010 gross profit margin should be above second half of 2009 by a significant margin.

Can you please confirm that as your expectation?

Secondly, Lilly is now sufficiently through 2010 to have good conviction on this year and presumably some visibility on next year as well.

I do not believe you have explicitly reiterated your 2007 to 2011 EPS guidance of double-digit today, but you have also not not retracted it either.

The implied EPS number in 2011 is a minimum of $5.20, I believe.

Based on what Lilly has said, are there any other conclusions we should reach than your guidance will be $5.20 in 2011?

And would you agree that we should have very high conviction in this expectation?

Thank you.

Great.

Thanks, Steve.

We'll have Derica take your questions.

Hi, Steve.

This is Derica.

In regards to your first question regarding our gross margins, as we've stated in our call text, we expect, even in our guidance that we provided, we now expect flat to increasing gross margins for the year.

Yes, that does imply improvement for the second half versus prior period.

In regards to your second question in regards to our guidance around our 2007 to 2011 growth in achieving double-digit bottom line.

If you recall, that was prior to healthcare reform in the U.S.

I still expect us to achieve double-digit bottom line growth between 2007 to 2011 but that excludes the impact of healthcare reform.

Operator, next caller, please.

Thank you.

And our next question comes from the line Tony Butler from Barclays Capital.

Please go ahead.

Good morning.

Thanks very much.

A large focus this morning in your prepared remarks on Bydureon.

John, I would just be interested in hearing your comments, if you will, on, is there a unique go-to-market strategy for Bydureon that may be different from Byetta, point one?

And number two, what initial patient population would be targeted?

Is it those that have tried a Byetta or a GLP-1-type product and have then moved beyond or would this just be a widespread, anybody who has diabetes may need to be on Bydureon?

And then the second question, Derica, is really around the R&D expense, which in the quarter you said was up 14% year-over-year, 3% were due to milestones.

I'm assuming that's a one-time effect from the milestones.

Therefore, on a sequential basis does R&D actually moderate?

Thank you.

We'll have John comment on the Bydureon and Derica you'll have the R&D.

Tony, I can't comment on our marketing strategies.

I can say that both Amylin and Lilly are very much prepared to be able to launch the product at the point at which we get the approval.

Our partnership has evolved since we launched Byetta in 2005.

I think we've got a terrific connectedness across our medical marketing and sales organization.

So we're excited about the opportunity to launch this product.

I think it's fair to say that we will position Bydureon as a product that can be helpful to a range of patients who meet the criteria for Bydureon.

We don't see this as simply a trade from the current twice-a-day Byetta up to the once weekly.

Derica?

Okay.

In regards to your question around R&D expense, yes, if you look at the 14%, about three percentage points of that was driven by one-time milestones, one of which was we paid a milestone for the JAK-2 inhibitor to [Incite] because we achieved a key point or a key outcome.

So we view that as being very positive.

If you look going forward, as we stated, we still expect our R&D expense to grow in the low-double-digit range and that's really driven by the progression of our pipeline.

Linda, next caller, please?

Thank you.

That goes to the line of Robert Hazlett from BMO Capital Markets.

Please go ahead.

Thanks.

First, I appreciate the plug for our conference.

Thank you much.

Just, secondly, on the VEGFR2 compound, the monoclonal antibody, that seems to be a very active molecule, but the Phase 3 trials appear to really result in several years from now.

Is there any ability to accelerate the development of that compound?

Then, secondly, Effient seems to be gaining some traction.

Where are you seeing the gains?

Is it specifically in diabetic patients, for instance?

Thanks.

Thanks, Bert.

I'll go ahead and take your first question and Nick will handle the Effient question.

So for the VEGFR2 product, breast cancer trials, as you are aware, do take quite a bit of time to go ahead and accrue sufficient numbers of cases to show statistical powering.

Theoretically, I guess, there would be a possibility depending on interim results that could even read out earlier.

But expectations would be that would probably need to play out over the full timeframe of the trial.

There are, although we haven't commented specifically, but there are some other tumor types that have not yet entered Phase 3 that could potentially move quicker than the ones that we have currently started.

So I'd stay tuned on that front.

Then on Effient, I guess what we have been saying from the launch of the product is it would take a time for a hospital product like this to get the appropriate access and get on the formularies and located on the cath labs and then once that was in place then we were in a position to be able to compete for share.

We saw TRX in the second quarter that as was actually greater than what we had seen from the launch to the first quarter for the product.

Good acceleration there of TRX up to a 91,000 range in Q2 versus 51,000 in Q1.

So again, building that access and then getting trial in those target patient populations we've talked about being our beachhead, the diabetes population, the [stemi] population and so forth.

In Europe, in addition, we continue to launch the product in a number of countries.

We're seeing better uptake in Germany and the UK where we launched a little bit earlier.

But also, we've gotten some nice learnings from our early launches and some of our later launching countries such as France and especially Switzerland.

We continue to see some good momentum for the product.

Again, it's going to be a battle for share, but we feel good about the data we have and are confident in the prospects.

Linda, next caller, please.

Thank you.

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

Please go ahead.

Yes.

First question is Zyprexa and Cymbalta and [Vista] in the U.S.

all seem to be a little better than expected.

Just curious if there was any stocking on that?

Second question is you moved two new products into Phase 2 for atherosclerosis and BPH.

Can you comment on those products a little bit?

Then a third question is now that you've had a chance to think about U.S.

healthcare reform a little more, are there any changes to your prior thought as far as the impact to next year?

Thanks.

Okay.

So I'll go ahead, Marc, and take your first couple of questions and then Derica will take your third question.

In general for stocking for the quarter there were no significant movements in total for the U.S.

affiliate.

The product-by-product movements were not particularly large, either.

You mentioned Zyprexa and Cymbalta as two of the three.

There was one phenomenon, so we definitely saw as we talked about a hit from U.S.

healthcare reform in the quarter.

As you know, each and every quarter we get new data in that typically lags about four to six months the actual sales that would have occurred in the various channels and that causes us to true up our gross to net adjustments.

This particular quarter, those two products that you mentioned, Zyprexa and Cymbalta, did benefit somewhat by a few percentage points in those gross to net true ups.

For the atherosclerosis and BPH, you'll need to wait until we actually unblind those assets.

At this point in time, we're not prepared to talk about the mechanism of action or the data we've seen to date.

Derica?

In regard to your question regarding U.S.

healthcare reform and our outlook.

As you recall, in the first quarter the impact of healthcare reform, and this is excluding the tax subsidy, was about $62 million.

In the second quarter, we stated that the impact was about $70 million.

So we still expect to be in that 350 to 400 range, although it may be a little less than that.

Obviously, as Phil just stated, we're having to wait for four to six months once we get receipts in to be able to see what the true trends looks like.

As it relates to 2011, we haven't changed our view at this time because we don't believe we really have any new data or anything sufficient to change our outlook.

Obviously, there's some key elements that come into play that take effect January 1 such as the excise tax and once -- only until we get that kind of information will we be able to have better insight in terms of what 2011 will look like versus what we are prior statements.

Linda, next caller, please?

Thank you.

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

Please go ahead.

Great, thanks, John.

First question is on the diabetes franchise.

I believe your competitor has discussed plans to add significant sales resources to their diabetes franchise following the Victoza launch.

How do you respond to that competitive move and with the approaching Bydureon launch?

What type of incremental resources, if any, are you anticipating to add to the franchise?

Second question was on Europe.

Had you already anticipated a more difficult [ewe] environment in your prior 2010 guidance as, i.e., above that kind of 1% to 2% historic rate you referenced in the prepared remarks?

And then the final question, also on Europe, in markets such as Italy and Spain where generic utilization is very low, how do you think about the impact to your legacy business in some of these markets with generic prices now coming down?

Is there some risk that your older products could see higher or faster rates of generic erosion as government now has more incentive to move people to cheaper generics as a further source of cost savings?

Thanks.

Chris, I think we'll have John take a shot at your first question, maybe Derica the second on what we had in the guidance for this year with regard to European pricing.

And then either Derica or myself will talk about the last one for the late-stage products, generic products, over in Italy, Spain and markets like that.

Chris, I think as we contemplate the launch of Bydureon, certainly Amylin and Lilly have looked and studied this quite closely to ensure that we are competitive here in the U.S.

I think more broadly as we have moved into our different business areas that are now focused among the five on diabetes, I think we've really been able to take a better look at our competitive posture around the world.

I think you can expect in all markets where we see opportunities to do better with our insulin product line as well as with Byetta, we're going to take the actions that we believe are appropriate to enable us to compete effectively.

Chris, in regards to the EU pricing in our prior guidance, yes, we did assume some erosion but not to the extent that you are seeing being announced here recently.

So as we stated, we've typically seen that 1% to 2% annual erosion.

Obviously, at levels beyond that we're having to absorb now into our ongoing operations.

We've been able to offset a good portion of that either through better volume performance that we're seeing in some areas, but also through our cost containment measures as well.

Chris, in rough numbers, you'll probably see this from some of the analysis you guys have as well.

Roughly it's a $5 billion business in Europe.

The $150 million that we approximated the impact for next year is roughly 3%.

Just with those actions alone it would be a bit higher than we've been seeing in the past with this 1% to 2% range.

So just in terms of order of magnitude that's where we're at.

In terms of the impact to late-stage products that we currently are marketing that already off-patent, there will be some impact there.

Honestly, the sales numbers are pretty low so that's not as significant an impact.

The piece, I think, for all pharmaceutical companies will be a reality is as you lose future products to patent expiration, you will likely see in some of these markets a quicker erosion in terms of price for sure.

In Spain, what they had basically done is said that going forward the initial price cut rather than being 30% will be 40%, and rather than referencing to the average of the three lowest generics they will actually reference to the lowest price of the generics that are there.

I do have time for one last question and then we'll wrap up the call with John's closing comments.

Thank you.

That will go from the line of Seamus Fernandez from Leerink Swann.

Please go ahead.

Thanks for the question.

Just want to come back to specifically Effient and the deal that you decided to do recently with Accumetrics.

Can you just talk about how you are planning to partner with that product?

I know the GRAVITAS study is expected to be released and revealed at the end of, or toward the end of this year.

There also was a study with Effient as well.

I'm just wondering what your views are on kind of the personalization of this, how this strategy might play to managed care, and then also how you view this as potentially defending Effient and continuing to grow Effient, possibly in the face of a potential launch of [Berlinta.] Thanks.

I think we'll have Nick go ahead and take a shot, John, please chime in if you'd like and then Nick (inaudible), please.

For the Accumetrics deal following the recent events with the addition of a box warning on [Clipiterol], it seems as though there were some reports about confusion in the physician population about when to use [Clipiterol] and when not.

We feel that the deal with Accumetrics could help physicians understand the anti-platelet effect to the various therapies that are available and, therefore, that addition of knowledge will help physicians when their making the decision.

We feel it is important to understand what Effient should be and can be used and the Accumetrics deal will help us along that path.

John, if you want to close out the session for us.

Sure, Phil, thanks.

Thanks to everybody on the phone for taking your time this morning for this update on our Company.

We appreciate your continued interest in Eli Lilly.

Let me close with a few key points.

First, underscoring our financial performance then highlighting progress made on our innovation-based strategy.

We're very pleased with our performance so far in 2010.

In the second quarter, we again generated strong financial results with robust volume-driven revenue growth, continued leverage between growth and revenue and operating expenses largely driven by our ongoing cost containment efforts and strong operating cash flow.

This strong financial performance has allowed to us raise our full year 2010 EPS guidance.

And we're doing this despite the negative effect of the recent pricing actions in Europe.

During the remainder of the year, we expect continued strength in worldwide uptake of Alimta, growth in product demand, most notably outside the U.S.

Further indicators of stronger uptake of Effient given Lilly's and Daiichi Sankyo's continued commitment to Effient and its potential.

And along with our partner, Kowa, we look forward to growth contributions from our newest cardiovascular product, Livalo.

As we increase our guidance, we're also keenly aware of the challenges ahead.

However, we remain confident that we are positioning ourselves to meet those challenges as we remain focused on implementing our innovation-based strategy.

Again, just over the past quarter, we brought six more NMEs into Phase 1 human testing.

We've moved two more assets into Phase 2 testing, and we completed two additional business development deals for truly promising and novel assets with the acquisition, excuse me, of Alnara Pharmaceuticals and the exclusive licensing agreement with Marcadia Biotech.

As highlighted earlier, we remain excited about the strength of the Bydureon data and the product's potential as a truly best-in-class therapy for people with type 2 diabetes.

We're looking forward to the October 22 PDUFA date and hope to make this product available to patients before the end of the year.

In closing, we remain focused on speeding innovation to patients.

We currently have eight molecules in Phase 3, we're on track to have at least ten molecules in Phase 3 by the time the Zyprexa patent expires in late 2011, if not sooner, with more coming behind.

We continue to bolster our near to medium-term top line and earnings with targeted in-licensing and acquisitions.

And we are prudently reducing our head count and managing our expenses to enable us to invest in the pipeline and provide a robust return of cash to shareholders with our dividend.

We continue to expect that executing on our innovation-based strategy will position us to launch two novel molecules per year beginning in 2013, providing the impetus for future growth as we emerge from the [YZ] period.

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

Have a great day.

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