禮來公司 (LLY) 2010 Q3 法說會逐字稿

Ladies and gentlemen, good morning.

Thank you for standing by, and welcome to the Eli Lilly and Company quarter three earnings conference call.

(Operator Instructions).

As a reminder, today's conference is being recorded.

At this time, I would like turn the conference over to our host, Vice President of Investor Relations, Mr.

Phil Johnson.

Please go ahead.

Good morning.

Welcome to Eli Lilly and Company's third 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, Enrique Conterno, President of our Diabetes business, 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 and 10-Q.

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.

Let's start with a few headlines for the quarter.

On the operating front, we again delivered robust financial results, delivering EPS of $1.18 on a reported basis, and of $1.21 on a non-GAAP basis.

Excluding the impact of foreign exchange, we continue to see positive leverage between revenue and total costs.

Our ongoing cost containment and productivity efforts allowed us to leverage 3% performance growth in revenue, into 7% performance growth in operating income.

On the revenue line, we saw strong performance growth in international markets for our human pharmaceuticals business, and globally for our Animal Health business.

As Derica will discuss later, revenue growth in our US human pharmaceutical business was negatively affected by wholesaler buying patterns, while the impact of foreign exchange on revenue turned negative for the first time this year.

Based on continued solid financial performance, and a lower estimate for the cost of US healthcare reform in 2010, we're raising our EPS guidance for the full year.

On the legal front, the US Court of Appeals for the Federal Circuit, or CAFC, upheld the Michigan District Court ruling that our method-of-use patent for Gemzar is invalid.

The US District Court in New Jersey ruled that the method-of-use patent for Strattera is invalid.

The CAFC will hear our appeal of this ruling in early December.

The CAFC upheld the Indiana District Court ruling that Evista's method-of-use patents are valid.

And the US Court of Appeals for the Second Circuit ruled that a class should not have been certified in a pending third party payer suit on Zyprexa.

The Court further ruled that the plaintiff's overpricing claims should not go forward.

Later in the call, Nick will provide a more detailed update on these and other patent challenges.

In clinical and regulatory news, the FDA issued a Complete Response Letter for Bydureon, requesting a thorough QT study, and submission of the DURATION-5 study results.

Pending discussions with the FDA, our goal is to reply to the Complete Response Letter by the end of 2011.

An independent Data Monitoring Committee for the Protege trial with teplizumab, recently met and concluded that the primary efficacy end point, a composite of patient's total daily insulin usage and HbA1c level at 12 months was not met.

Administration of study drug has been completed, and patients will be followed for safety information.

Lilly and MacroGenics have decided to suspend enrollment and dosing in two other ongoing clinical trials.

The companies are currently evaluating next steps.

And we halted development of semagacestat, our gamma secretase inhibitor that was being studied in Phase III trials to treat patients with mild to moderate Alzheimer's disease.

Finally, the FDA Anesthetic and Life Support Drugs Advisory Committee voted 8 to 6, in favor of expanding the pain indications for Cymbalta, to a broader population to be further defined by the FDA.

Now I'll turn the call over to Derica to discuss our Q3 financial results, and our 2010 guidance in more detail.

Derica?

Thanks, Phil.

Consistent with prior calls, 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.

Now, let's start on slide seven with a quick look at our Q3 non-GAAP income statement.

At the top line, we generated revenue growth of 2% in the third quarter.

This includes a negative impact of more than 1% from US healthcare reform, and European pricing actions that, in total, reduced Q3 revenue by roughly $65 million.

This 2% growth is slower than what we've seen in the first half of the year, primarily due to wholesaler buying patterns in the US, and movements in foreign exchange.

I'll provide more details in a moment, when we review the price rate volume analysis.

Gross margin as a percent of revenue again, came in at over 82%, an increase of 1.4 percentage points from Q3 2009.

This increase was driven by manufacturing productivity improvement, and by the favorable impact of price increases.

This quarter's operating expenses, which we've defined as the sum of R&D and SG&A, grew by 3%, slightly more than the 2% revenue growth.

Operating expense growth was driven by a charge of approximately $80 million that was booked to R&D expense, as a result of the termination of development of semagacestat.

R&D expense grew 9% in the quarter, due in large part to this charge.

Marketing, selling, and administrative expenses on the other hand, were flat compared to last year, driven by lower administrative expenses, and our ongoing cost containment efforts.

Now, as a result of the improvement in the gross margin percent, we were able to leverage 2% revenue growth into 4% operating income growth.

Now, moving down the income statement, you will see that other income improved by $45 million, due largely to an insurance recovery, and lower net interest expense.

In addition, our tax rate increased by 3.5 percentage points due to the expiration of the R&D tax credit this year, as well as the benefit realized in last year's quarter, related to a cumulative adjustment in the forecasted effective tax rate for the full-year of 2009, and to the resolution of the Company's 2001 to 2004 tax audit.

Now, as a consequence of this higher tax rate, growth in net income and EPS lagged that scene in revenue and in operating income.

Specifically, net income and earnings per share grew 2% and 1%, respectively.

Now, 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 Q3 results, and we'll start with revenue.

At the bottom of slide ten, you'll see the 2% revenue growth I mentioned earlier.

Now, this growth is driven by a favorable price impact of 3%, which was partially offset by a negative effect from foreign exchange of 1%, while volume growth was essentially flat.

So in performance terms, excluding the effect of foreign exchange, revenue grew 3% in the quarter.

Clearly, the overall growth rate of revenue is below what we've seen in both Q1 and Q2 earlier this year.

The biggest changes are in exchange rate and volume.

In terms of rate, Q3 is the first quarter this year that FX has had a negative effect on revenue.

The primary drivers of this reversal are the weakening of the euro versus last year, and a number of other international currencies, only partially offset by a stronger yen.

In terms of volume, the biggest change is in the US, where we went from having low single-digit volume increases in Q1 and in Q2, to a 6% volume decrease this quarter.

Now, of that 6% decrease, 4 percentage points of this decrease were driven by changes in wholesaler inventory levels, which increased in Q3 last year, while they were decreasing in Q3 of this year.

Now, these fluctuations were within normal contractual limits.

We continue to see robust volume growth in our Animal Health business, which was up 13%, and in Japan where volume was up 18%.

We also registered volume growth of between 15% and 21% in a number of other international markets, including China, Mexico, Australia, Korea, and Turkey.

In total, our emerging markets business posted 14% volume growth in the third quarter.

Now, 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 currency rate.

The numbers in the first column are the same as you saw in the last column on slide seven.

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

First, you'll see a 3% growth in revenue.

Below that, you'll see that the cost of sales actually declined 7%, driven by our continued efforts to improve productivity and reduce costs.

In total, operating expenses grew slightly faster than revenue, showing growth of 4%.

Operating expense growth rising above that of revenue, is due to the R&D charge incurred for the termination of the development of semagacestat.

In total, we held the growth in our total expenses, being manufacturing, SG&A, and R&D below the revenue growth rate, which allowed us to leverage 3% performance growth in revenue, and to 7% performance growth in operating income.

Again, EPS growth of 5% in performance terms, was negatively effected by the increase in the effective tax rate.

And finally, as shown in the last column, you'll see similar leverage in our year-to-date results, excluding the effect of FX.

Now for your information, on slide 12, we provided the year-on-year growth of select line items of our reported income statement, once again, both with and without the effect of foreign exchange rate.

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

As Phil mentioned earlier, our continued strong financial performance, including prudent management of expenses, and a lower estimate of the 2010 revenue impact of US healthcare reform, has positioned us to raise our previously issued 2010 earnings per share guidance.

We're moving up from a range of $4.50 to $4.65, to a new range of $4.65 to $4.75 on a non-GAAP basis.

Now, this corresponds to a range of $4.55 to $4.65 on a reported basis.

In terms of line item guidance, we now expect total revenue to grow in the mid single digits.

This guidance contemplates the potential introduction of generic gemcitabine in mid-November, and it assumes no generic atomoxetine, and incorporates the revised 2010 cost estimates for US healthcare reform.

As we outlined in our press release, we now anticipate that US healthcare reform will reduce our 2010 revenue by between $225 million to $275 million.

Gross margin as a percent of revenue for the year is still expected to be flat to increasing.

And we continue to expect improvement, excluding the effect of FX on international inventories sold.

Marketing, selling, and administrative expenses are still projected to grow in the low single digits, and growth in research and development expenses is still expected to be in the low double digits.

Our forecast for other income has changed slightly to a net deduction of between zero and $50 million.

The effective tax rate for the full-year is still expected to be approximately 23%.

This includes the $85 million tax charge booked earlier this year related to US healthcare reform, and the future taxation of the retiree drug subsidy, and it assumes the extension of the R&D tax credit is retroactive to January 1, of 2010.

If this credit is not extended, our tax rate for the full-year would be roughly 1 percentage point higher.

Finally, through the continued efforts of our engineering group to deliver needed capital projects more efficiently, we now expect capital expenditures for the year to total approximately $700 million.

Also, please note that we are in the process of evaluating whether or not the news on Bydureon and Teplizumab will result in any charge to the fourth-quarter earnings.

Our guidance does not explicitly include any such charges.

On slide 14, we provide a reconciliation between reported and non-GAAP EPS for 2009, and for our revised 2010 guidance.

On an additional note, we will issue our 2011 guidance, including updated estimates of the impact of US healthcare reform, and European pricing measures on our Q4 earnings call in late January of 2011.

Also, we intend to update you on our medium-term 2014 outlook at our next investment community meeting, which we anticipate holding at the end of June of next year.

Now, let me turn the call over to Nick, who will share our quarterly pipeline update, as well as additional details on US patent challenges, and an overview of our Japanese business.

Nick?

Thanks, Derica.

Slide 15 demonstrates changes in our pipeline since our July 20, earnings call, as of October 18.

Our clinical stage portfolio stands at 68 distinct NMEs, including 28 compounds in Phase II and Phase III.

We remain focused on developing a robust biotech portfolio, and biotech molecules now represent over half of our Phase II and Phase III assets, and over 40% of our overall clinical portfolio.

Advancing our pipeline remains our number one priority.

Since our last formal portfolio update, we have advanced three assets into Phase I, two oncology compounds, and one for nephropathy; promoted two assets into Phase II, IMC-18F1 for cancer, and a second asset for osteoporosis; and we began Phase III trials of NERI-IV as an adjunctive therapy to SSRIs, in patients with major depressive disorder, based on the results of two positive Phase II studies.

Data from our Phase II augmentation trial will be presented in November, at the International Forum on Mood and Anxiety Disorders in Vienna.

In addition, data from our Phase II monotherapy trial will be presented in December at the ACMP meeting in Miami.

As shown at the bottom of the slide, we also terminated the development of one Phase I asset and two Phase II assets.

As mentioned earlier, dosing will be suspended in Phase III trials of teplizumab for Type 1 diabetes.

And we terminated semagacestat, from our Phase III pipeline.

While the loss of semagacestat was a disappointment in our Alzheimer's program, we are encouraged by the progress of our A-beta antibody, solanezumab.

This month, the first Phase III clinical trial for solanezumab completed enrollment, while the second study is over 80% enrolled.

Assuming this trend continues, we would anticipate completing the two, 18-month studies in 2012.

Also, while not currently shown in the Phase III, by early 2011, we will begin Phase III trials of our BAFF antibody for rheumatoid arthritis and for lupus.

As mentioned earlier, the last three months have been busy from a legal perspective.

I'll take the next few moments to provide some more details on the recent patent decisions, and to highlight two upcoming cases.

As you know, protection of intellectual property is critical to our business.

And it is the nature of our business, that our patents will be challenged by generic manufacturers.

Over the past three months, the US Court of Appeals for the Federal Circuit upheld a prior ruling by the US District Court for the Eastern District of Michigan, that Gemzar's method-of-use patent is invalid.

We have requested a rehearing at the CAFC, and are waiting to hear if that request will be granted.

If the rehearing is denied, or is unsuccessful, we will lose market exclusivity for Gemzar in the US as early as November 15, 2010, when the compound patent and its extensions expire.

The US District Court for the District of New Jersey ruled that the method-of-use patent for Strattera is invalid.

The patents had been set to expire in May of 2017.

We appealed this decision, and the CAFC has scheduled a hearing on December 9, 2010.

In addition, we're pleased that the CAFC granted an injunction that prevents the launch of generic versions of atomoxetine until a ruling is rendered.

The CAFC also affirmed a prior ruling by the US District Court for the Southern District of Indiana that the Company's method-of-use patents for Evista are valid.

These patents provide protection for Evista in the US through March of 2014.

The period for requesting an appeal has passed, however, Teva can file a petition to the Supreme Court for review.

In the months to come, we have two other patent challenges that will go to trial.

Unlike the three cases I just discussed, which involve method-of-use patents, these cases involve compound patents.

First, three generic manufacturers have challenged the compound patent for Alimta.

These cases have been consolidated, and will be heard at the US District Court for the District of Delaware, starting on November 8, 2010.

We expect to prevail in this litigation, and maintain US exclusivity at least through July 2016.

Second, nine generic manufacturers have challenged the compound patent for Cymbalta.

Lawsuits against all but one of these challengers have been stayed, pending the outcome against the lone remaining challenger.

The trial is currently scheduled to be heard at the US District Court for the Southern District of Indiana, starting on June 6, 2011.

We also expect to prevail in this litigation, and maintain US exclusivity for Cymbalta until June 2013, or December 2013 if we are successful in securing the six-month pediatric extension.

Again, we are confident in the validity of our patents, and will continue to take every reasonable step to protect our intellectual property rights.

Successfully defending valid patents is critical to Lilly, and to all innovation-based pharmaceutical companies, as it provides the underpinning for investment in research and development to discover, and bring to market new therapies that improve patient outcomes.

In past quarters, we've provided informational updates on specific marketed products, compounds in developments, or business development deals, to help you better understand the story behind our quarterly numbers.

This time around, we would like to highlight our Japanese human pharmaceutical business.

Along with emerging markets in Animal Health, Japan will provide substantial countercyclical growth, as we experience patent expirations in the US and Europe on products like Zyprexa, Gemzar, Cymbalta and Evista.

You may wonder what's going to drive significant growth of Lilly products during this period in Japan, an established and mature market.

Historically, we've launched our products in Japan well after we've launched them in the US and Europe.

While we've made great progress in accelerating development of our pipeline molecules to allow for more proximate launches in the US, Europe and Japan in the future, we are still working through this historical launch gap.

As a result, we have a significant opportunity for growth over the next several years.

In 2009, we generated pharmaceutical sales of nearly $1.2 billion in Japan, representing growth of 28% over 2008, and making it the second largest market for Lilly behind the United States.

Growth continues to be very strong in 2010, with September year-to-date performance growth of 26%.

As measured by IMS, we are far and away the fastest growing major pharmaceutical Company in this important market, growing at 29%, versus market growth of only 1% for August year-to-date.

This has allowed Lilly Japan to move up in the ranking from number 23, to number 19 in the last two months.

Zyprexa is our biggest seller in the Japanese market, with over $300 million in sales, and 8% performance growth year-to-date.

This is an important opportunity for Lilly, and one that should be bolstered by additional indications, as we hope to receive approval for an indication in bipolar mania soon.

And we expect to submit an application for bipolar depression by year-end.

It is important to note, that while we lose the patents on Zyprexa in the US and Europe next year, we maintain exclusivity in Japan until December 2015.

This should help drive what we hope to be a significant tale of Zyprexa sales post-2011.

Alimta has demonstrated very impressive growth since it's approval for non-small cell lung cancer in Q2 of last year, with the best share of market uptake in first-line nonsquamous nonsmall cell lung cancer of any market in the world.

This growth has made it our second best selling product in Japan.

With Alimta and Gemzar, which had breast cancer added to its label earlier this year, our oncology presence continues to grow impressively in the Japanese market.

With our partner, Shionogi, we are very pleased with the uptake for Cymbalta for major depressive disorder, since our launch in Q2 of this year.

In addition, our application for diabetic peripheral neuropathic pain indication is currently under regulatory review.

Our insulin products continue to grow at double the market growth, with Humalog mix showing strong share of market gains, picking up 9 share points over the last two years.

The momentum in Japan has continued recently, including approvals for Strattera for ADHD in children last year, and for Forteo for osteoporosis in Q3, allowing the affiliate to launch the product on October 1, after having obtained a first-time exemption from the 14-day prescription rule in Japan.

In addition, we hope to receive approval soon for Byetta BID for Type II diabetes.

Hopefully this provides you with some valuable insights to our Japanese business.

We are confident in our ability to continue on a strong growth trajectory in Japan, and we expect Japan to contribute meaningfully to our corporate results in the coming years.

This concludes our prepared remarks.

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

Operator, first caller, please?

(Operator Instructions).

And our first question today comes from the line of Robert Hazlett, representing BMO Capital Markets.

Please go ahead.

Thanks.

Thanks for taking the questions.

Regarding Bydureon in the US, could you remind us of the timing actually of the European registration application there, and whether events in recent days in the US, are expected to affect that?

Then secondly, have those events with Bydureon, have any -- do you expect them to have any effect on the GLP Fc program?

Thank you.

Thanks, Burt.

We'll have Enrique handle your question.

Very good.

First, I would like to make a couple of comments, given the event with Bydureon.

We are, of course, very disappointed with the recent FDA action.

I think importantly, there are over 24 million patients with diabetes in the US alone, with Type II diabetes, and six of ten patients are not achieving today glycemic control.

Bydureon continues to be, can be a very important option, for many of these patients.

And we'll work with the FDA to try to get this product to market.

Now, as it relates to Europe, we submitted in Q1 of 2010, and we expect an action by European agency in the first half of 2011.

We do not comment on the current status of our discussions with the regulatory agencies.

We will not comment today on GLP FC.

All of our eyes are today, on Bydureon, trying to get the product to market.

Thank you.

Tom, next caller, please.

Next we will go to Tim Anderson with Sanford Bernstein.

Please go ahead.

Thank you.

A big picture question on strategy going forward for John.

Lilly's been describing Bydureon as its most important late stage pipeline product.

We have the delay recently that comes on top of some other pipeline setbacks, and some other negative news, like some of the patent losses.

I think the prevailing consensus among investors is, that given some of the big expirations that lay ahead, at some point Lilly will likely have to do a larger acquisition to fill in the gaps.

So, John, I'm wondering what you can share on this.

Are all options on the table at this point?

And can you reconfirm what you've said before, which is that any business development that you do do won't jeopardize the dividend?

And in as much as Lilly benchmarks against it's peers, in terms of strategy, is Lilly leaning more towards a Bristol-Myers type of approach, meaning a pure-play branded pharma company?

Or might the company head down the path of diversification, more like a GlaxoSmithKline, or some of the other players?

Thanks, Tim, for the question.

First of all, let me -- let me just comment.

We are maintaining our commitment to our dividend, to paying our dividend, at least its current level.

Our -- the recent events that you cite do not change our fundamental strategy, which at the core of which is progression of molecules through our pipeline.

We have still our eyes set on having at least ten molecules in Phase III development at, or around the time that we lose our Zyprexa patent here in the US in late 2011.

I think our fundamental strategy remains intact.

We're not interested in large scale combinations.

I think there are many other opportunities that I think we could consider along the lines of several that we've done already this year, most recently the Alnara acquisition, the acquisition of the Pfizer Wyeth divested Animal Health assets in Europe.

As far as diversification goes, we like our Animal Health business.

You saw us report 12% revenue growth for the quarter.

For Elanco, it's an area where we've shown a willingness to invest externally, as well as to develop our companion animal business organically.

And we're going to continue to focus on that.

As far as diversification goes, I think we're considering, as a form of diversification, our enhanced and increased focus on biotechnology.

You heard today I think 40% of our pipeline assets are biotech molecules.

And I think there's an element of geographic diversification here, as well.

When you can grow like we're growing in Japan, the second largest pharma market in the world, I think that presents a nice offset.

We have only about 10% of our sales today, in what we classify as the emerging markets.

We see a tremendous opportunity to grow and expand there, with, largely with, our existing product portfolio in the years ahead.

So I think that remains our focus.

And notwithstanding the setbacks, we're confident that we can execute on that strategy.

Great.

Tim, thanks for the question.

Tom, next caller, please?

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

Please go ahead.

Thanks for taking the question, just in -- piggybacking onto Tim's question.

There's been a fair amount of additional consolidation on the Animal Health side of the business, John.

And I think if -- you could just give thoughts maybe on how you think the Elanco business is strategically positioned.

Is that something that you want to hold on to and build on, or potentially divest going forward, or potentially use as a source of funds?

And a second question, your award program, which has four ongoing Phase III clinicals, I think in some of the earlier data there had been some statistically significant increases in blood pressure, heart rate.

Can you just help us understand what the implications of that are for your ongoing program, especially in light of what happened with Bydureon?

Is there any read-through there?

And will you need to do a similar type of study in naive patients with your own program that's being done with Bydureon?

And what is the timing for the completion of the first award trial?

Thanks.

Okay, great.

Thanks, John.

We'll have John handle your first question on the consolidation of Animal Health, and where we're looking to take that part of our business.

And Nick will handle your question on the award trials.

John, we're obviously watching the activity in the Animal Health space very carefully.

We -- this is a business that we're quite committed to, and we want to stay in the Animal Health business.

We're going to have to, in essence, double food production globally in the next 40 years or so.

We think there's a lot of opportunity there for a Company like Elanco, with our product mix.

At the same time, we're watching the space.

And as some of the big players get bigger, we're going to have to consider thoughtfully what that means for us, and ensure that we're able to compete effectively.

So we're, we're eyes-open there.

We think it's a good opportunity for growth for the Company.

In terms of the GLP-1 Fc asset, the award trials, as well as our Phase II/III seamless adaptive trial for GLP-1 Fc, those will start to report out in the 2012 timeframe.

So we'll look for that then.

In terms of the cardiovascular profile, we are currently conducting a Phase II trial, measuring blood pressure and heart rate.

There's been a lot of discussion about this asset, with regards to that profile.

It's important for us to note, there have been no serious cardiovascular events observed in any of our Phase I or Phase II studies with this asset.

But we're running this additional stay to better understand the human dynamic profile of GLP-1 Fc, and we'll learn more from that study.

In terms of other studies exploring the cardiovascular profile, we're -- we haven't discussed that at this point in time.

Thanks.

Tom, next caller, please.

Next we'll go to Steve Scala with Cowen.

Please go ahead.

Thank you.

And my apologies, if you've already covered these topics, but on the second-quarter call, the Company said that Zyprexa and Cymbalta had benefited from a gross to net true-up.

Did that benefit continue in Q3, or did it reverse?

And either direction, can you please quantify the impact?

And secondly, on semagacestat, I think the Company said back in August, that it needed to review follow-up Phase III data to determine whether the gamma secretase inhibitor pathway was still a viable approach.

Has that review occurred, and if so, what is the conclusion?

Thank you.

Sure.

Derica, do you want to handle the first question?

And I'll handle the second one.

Hi, Steve.

Good morning.

In regards to your question around gross to net true-ups, we really didn't have any significant movement in the third quarter, other than the one true-up we had, in terms of the healthcare reform impact, which we highlighted in the call text.

And so, if you're looking at healthcare reform, the true effect, and the underlying effect in the third quarter was about $65 million.

We did have a reversal of an accrual of about $40 million, associated with the timing of the 340B Expansion, and when that would take effect.

We had been assuming that it would be effective retroactive back to January 1st of this year.

And in fact, it's only going to take effect, as the hospitals themselves take on that declaration.

So that was the cause of the $40 million reversal.

And for semagacestat, Steve, yes, at the time we had made the announcement about the futility analysis had been performed, and the results of that analysis, we had said, we would go ahead, and continue to monitor patients.

We'll continue to take a number of biomarker measurements, probably for another six to nine months.

At the end of that time, we're hopeful that information can give us a little more insight into the deterioration and cognition that we saw, among other things, to figure out what may have been causing that.

However, we do not have any active clinical programs in gamma secretase inhibition for Alzheimer's Disease, nor do we have any short-term plans to do that.

We'll wait until we get these results, to see what they may tell us to inform any future decisions in that area.

Tom, next caller, please.

Our next question comes from the line of Seamus Fernandez with Leerink Swann.

Please go ahead.

Thanks very much.

Actually just had a quick follow-up on the healthcare reform estimate being reduced, by I think roughly $175 million.

You had mentioned the 340B, and the timing of the hospitals actually coming into the program.

Can you just explain what percentage 340B actually represented of the total, either change or of the total program?

Or -- I'm sorry, the total estimate, the original estimate was I think $350 million to $400 million this year.

And then also, managed Medicaid, I think some of the managed Medicaid programs actually were rolling in, perhaps a little bit slower than anticipated.

Were there any changes to policy estimates, in terms of the managed Medicaid impact?

Or are there really no changes there, and that's where you really -- that, and the Medicaid rebate is where you're expecting the delta?

Thank you.

Okay.

I'll take that question.

This is Derica.

First of all, when we provided our healthcare reform estimating impact on revenue, we gave the aggregate impact.

We've never provided the line item detail there.

And so, we're not going to do that today either.

What I can say is the majority of the impact in terms of our revised estimate, that we provided on the call is driven by the change in assumption of the effective date of the 340B expansion.

As it relates to the managed Medicaid, and what we're seeing there, there's really no change.

It is slightly slower I think, Seamus, as you are mentioning, another contributor to the reduction.

And just to be clear, it's a reduction in our accounting of 125 basically from the prior estimate, which was 350 to 400, and now is 225 to 275.

The other thing is an impact really more on the accounting side of things.

It's now appearing that the excise tax on the industry is likely to be showing up as SG&A and operating expense, as opposed to offset to revenue.

So in our prior assumption, when we assumed it would be an offset to revenue, that would have meant that certain sales that we would have been making this year would have eventually been sales the government would have been purchasing, if you will, next year.

So we had estimated some accruals for the fourth quarter, that at this point, with the change in the treatment of the excise tax, are no longer going to be occurring.

Tom, next caller, please?

Next we'll go to Catherine Arnold with Credit Suisse.

Please go ahead.

Good morning.

Thanks for taking my question.

I actually have a request and a question at the same time.

I was wondering if on the request side, I wondered if you would consider making available the DURATION-1 data on QT, because a lot of investors as you know would love to see that, to help to mention the risk, or lack thereof, for Bydureon.

So that's my request, which I'll put out there, and you can react to.

My other questions are on Bydureon, which I would like to ask for your directional comments on how you think growth in the GLP-1 category is going to change, next year relative to if Bydureon would have launched, and relative to what we've seen in the market this year?

And then lastly, could you just comment on what the EU filing has requested, not new, but just what was underlying in the filing for Europe on Bydureon in terms of QT?

Is it -- is there anything that they have requested that's different from what the US has requested?

Thanks.

Katherine, thanks for your questions.

They are right up Enrique's alley; we will have him handle those for you.

Very good.

Let me start with the question of the growth in the GLP category.

We continue to believe that this category will experience significant growth.

Now, clearly, Bydureon is a key catalyst to the growth of the category.

So when we look at some of the growth rates, clearly, they are going to be delayed versus what would have been, had Bydureon been approved at this time.

In terms of Europe and the agency, that's something that, as I mentioned, we prefer not to comment at this stage.

We are in discussions with the European regulatory agencies.

And as I said, we expect an action by EMA in the first half of 2011.

I -- we will take into consideration your request regarding DURATION-1 and QTc.

I will remind, my belief it was mentioned in the analyst conference call, but we conducted ECGs, steady state plasma Exenatide concentrations in 148 patients; 56 of those patients had mild and 10 had moderate, renal impairment.

And we found no clinically meaningful effect on QT, QTc intervals over a wide range of Exenatide concentrations.

Thanks, Enrique.

Tom, next caller, please?

Next we'll go to Tony Butler's line with Barclays Capital.

Please go ahead.

Thank you.

Derica, while I recognize that you will not be providing an update on the 2014 guidance until middle of the next year, might I ask, were the previous assumptions, though, inclusive of both revenue and expenses for semagacestat and for Bydureon?

And then second, John, back to strategy once again, while I notice there may be a number of difficult hurdles to think about with respect to total head count at Lilly, while I recognize there has been some reduction, is there some additional thought, some very sensitive thought, to even a much more, or much greater change in the overall head count reduction going forward?

Thank you.

Tony, this is Derica.

As I stated earlier, when you think about Lilly between now and 2014, and what we put out there, even in terms of that -- that construct, it's really going to be driven by the trends of our currently marketed portfolio, as well as our ongoing cost containment effort.

That's -- those are the two biggest drivers, in terms of us achieving our regional 2014 estimate.

In regards to semagacestat and Bydureon, Bydureon was in those estimates, and semagacestat to a much more smaller effect.

Tony, with respect to head count, as you know, we made an announcement last September, September of 2009, saying that it was our intention to reduce our head count by 5,500 by the end of 2011, from a base at that time of 40,500, excluding additions in fast-growing emerging markets, and Japan.

And obviously, also including small numbers of employees associated with certain acquisitions that we've made since that time.

Now, if you go back, and do apples and apples, and you say how far along toward the 5,500, we're at about 2,700 today.

So one can say, we're sort of halfway through the process of eliminating the 5,500 positions that we described in September of 2009.

With respect to any further plans on head count reduction, we have no such plans at the moment.

Obviously, we work in a business, and in an industry that's undergoing a tremendous amount of change.

We will continue to navigate through these waters, and do -- at any point in time what we think is the appropriate thing for the business.

But right now, our focus is resolutely on advancing our pipeline, taking advantage of growth opportunities we have, that we described earlier in the phone call today.

Thank you, both.

Great.

Tony, thanks for the questions.

Tom, next caller, please?

We'll go to Chris Schott, JPMorgan.

Please go ahead.

Great.

Thanks, just a couple questions, here.

First, with the timing of Bydureon and GLP Fc, now moving closer to another, can you just elaborate a little bit on how you would handle the potential approval of both those assets, with obviously your internally developed program clearly having better economics for Lilly?

Second question was on Pfizer's Biocon deal, and just interested in your thoughts on what implications that might have for increased insulin competition in both the emerging markets, and maybe longer term in the established markets over time?

And then finally, you highlighted Zyprexa in Japan, as contributing to a significant tail for the Zyprexa franchise, post the EU and US patent expirations?

Just help us understand the magnitude of that business you are anticipating as we look out to 2013, 2014.

It's a $5 billion franchise today, and you hope to have that north of a $1 billion longer term?

Or just any thoughts on how long that resid -- or how large that residual business could be would be great?

Thanks.

Great.

Thanks, Chris.

We'll have Enrique handle your first two questions, and then Derica and Nick, probably on your last one.

Very good.

On the Biocon Pfizer deal, to keep things into perspective, Biocon today basically sells, when it comes to insulin, their insulin portfolio, it's about 1% of what Eli Lilly sells today.

Clearly Pfizer would add significant commercialization power to them, as they commercialize in a number of different countries.

We do believe, though, as we look at insulin, that delivered devices are a critical capability, that only a few players actually possess.

And it's not just the current delivery devices, but improved delivery devices, and the innovation that we continued to work on.

So clearly something that we will watch.

But we feel very confident in our ability to be extremely effective with our insulin portfolio.

As I shared before, I'm not going to comment on GLP Fc.

When we look at Bydureon, what we have shared is, that we expect to have a submission at the end of 2011.

And this projection is based on a range of possibilities, when we look at a range of product costs, that we plan to discuss with the agency.

Clearly this is a conservative estimate, and one that we want to make sure that we are meeting.

That would mean basically that we will be looking at six months class 2 resubmission, and a potential launch in the first half of 2012.

Derica?

Sure, Chris, in regards to Zyprexa [and Natell].

First of all, in Japan, September year-to-date, Zyprexa is about $300 million.

So if you said on a run rate, you would think that for the full year, it would be at least $400 million.

If you look at the rest of the world, okay?

We're about $175 million, in terms of what we call, rest of world or emerging markets.

Remember, in those markets, we basically have already lost in many of those markets patent protection for Zyprexa.

So this gives you some idea of what the magnitude of the tail could be.

Let me also remind you that in Japan, while we are on a run rate of at least $400 million per annum currently, we still anticipate additional growth, because we have additional indications that are expected to come online.

Now, I gave you that in terms of where we stand today because, and we'll let you do your own math, because we typically have not provided future projections in terms of revenue projections by product.

Thanks, Derica.

Next caller, please?

We'll go to Marc Goodman's line with UBS.

Your line is open.

Yes, two questions.

One is, can you comment on the healthcare reform hit in 2011, just update us there, since things seem to be changing there.

And then second of all, can you comment on the two new products that have entered Phase II, the osteoporosis drug and then this 18 F1?

Derica, do you want to handle the first question?

I'll take the first one.

In regards to healthcare reform for 2011, we will look to update those estimates to the street on our Q4 earnings call in January.

Great, and then as far as the pipeline assets, the first one you mentioned is still blinded.

So we won't have the ability to tell you about mechanism, until we're at a point we could unblind that asset and talk more fully about it.

18 F1, is essentially in terms of mechanism, one that has a VEGFR-1 target, that looks at both the VEGFR-1 on cancer cells, as well as the vascular structures, as far as where it interacts.

That's probably about the most detail I've got at this point in time.

If you want to follow up after the call, if you have additional questions, Marc may be happy to take those.

Next caller, please?

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

Please go ahead.

Thank you.

John, just a couple of questions for you.

Maybe you could share with us your views on what you see as a change in the fundamental communications between the industry and the FDA?

Because clearly Lilly has been subjected now to what seems to be several communications breakdowns, both, with Effient, and the multiple Complete Response Letters, the pain indication for Cymbalta, and now Bydureon.

It is my understanding is the first Complete Response Letter did not include any request for QTc issues.

So just your view on that.

What's changed?

And your outlook for communications, going forward with the agency?

And secondly, I appreciate the Company's continued commitment to the $2 billion annual dividend.

But based on our numbers, just with the patent expirations, and the setbacks in the pipeline, which would have helped to fill that somewhat, we're reflecting about a $4 billion to $5 billion hit on the revenue line between 2010 to 2015.

And that's before Alimta goes away in 2016.

So maybe you could -- it seems that the only way to really offset that, and maintain your annual $2 billion dividend is, by announcing a much more significant head count reduction or cost reduction program, and/or what are we missing in terms of the top line?

What are the products that give you confidence to drive the Company sort of the next period 2015, and beyond?

Again, sorry for the long-windedness of my questions, but I want to take advantage of your being on the call this morning.

Thanks.

Okay, Jami, I'm going to tackle your first question.

And I think Derica's going to address your second question.

Well, I think there's no doubt that FDA is scrutinizing drug applications like never before.

I think there is a -- this has been a tougher journey for many companies in the industry.

As FDA, I think, tries to strike the -- what it believes to be the right balance between putting -- making new medicines available, and ensuring safety.

We're -- I think -- the three examples you cite, I think you talked about Effient, and then Cymbalta, and Bydureon, they are all reviewed, and looked at by different divisions within the FDA.

There's sort of a different story line there, for each one of these.

I think as Enrique said earlier, we're committed to meeting the request that FDA has made around Bydureon.

And hopefully getting this work done in a time that enables to us resubmit at the end of 2011.

We were pleased with the outcome of the Advisory Committee for Cymbalta in August.

And we continue to work with the agency toward, what we hope will be an approval for a new indication for Cymbalta, in the area of chronic pain.

Derica?

Good morning, Jami.

Let me try to take us back to a previous discussion.

When we presented the 2014 construct in December of last year, we said at that time, that we anticipate 2014 being the trough period for Eli Lilly, in terms of the scheme of patent expirations.

And even at that time, we still anticipated being able to both fund or finance the operations of our business, including progressing the pipeline, as well as maintaining our dividend.

And that was in what we considered to be the trough period.

To your point about what I think many in the market may be missing about Lilly, everyone obviously is focused on the certainty of the patents that we will lose.

I think some of the growth opportunities that's not registering maybe in the investor's mind these days are, one, I'll come back to the Zyprexa comment earlier.

Recall that we do not lose the patent for Zyprexa in Japan until the end of 2015.

So we still anticipate growth there.

In most of the markets outside of the US for Zyprexa, we've already lost in the major markets, much of the patent protection there.

So I think there's more of a tail to Zyprexa than people are giving it credit for.

Secondly, if you look at markets like Japan, we expect to double the size of that business over the next three to five years.

If you look at the business at Elanco, which John touched on earlier, we also expect to double in the next three to five years.

And then thirdly, if you look at our emerging markets, which grew 14% this quarter, we expect to double the size of that business as well.

So, yes, while we may be losing revenue associated with Zyprexa in the US, as well as Cymbalta and Evista in the US, there are some markets outside the US, and some other business segments, that we anticipate growing very robustly during that same period.

Operator, one last question, and then I'll turn it over to John for the close.

Great.

Our final question today comes from the line of Barbara Ryan with Deutsche Bank.

Please go ahead.

Hi.

Sorry to beat a dead horse, and thanks for taking my question.

It's sort of related to what others have said.

And I think we can all appreciate that R&D is the life blood of the industry, and your dedication to pursuing an improvement in R&D productivity.

I think that probably a lot of your competitors would say that they are doing the same thing.

But in the context of an environment that seems to be fraught with increased risk, they are doing a lot of other things to sort of smooth that risk for their shareholders.

And I think that's -- given the recent performance from the pipeline at Lilly, sort of one of the frustrations.

So what are you learning through this process?

And the meeting -- the guidance for 2014 going out to June sort of implies that you're going to be going back to the drawing board.

I think that with the benefit of hindsight, certainly we could look at Bydureon, and say maybe you took shortcuts in the line extension strategy versus a new drug application strategy.

And certainly with prasugrel, you got the product approved onto the market, but certainly it isn't commercially probably doing what you would hope.

So can you just sort of talk to us about what we should be expecting you're going to be looking at over the next six months?

And specifically, what kinds of changes, if any, you may be making in R&D?

Barbara, this is Derica.

I'll take the first stab at it.

And if anyone else has anything you want to add to it, feel free to chime in.

But I guess I'm not as negative as maybe some of your commentary may indicate, in terms of the outlook of our business.

I want to remind the investment community once again, we still anticipate 2014 being the trough.

And as I indicated earlier, what gets us between today and 2014 is the drivers of that primarily are ongoing trends of our currently marketed products, as well as our cost containment efforts.

The portfolio, the pipeline will be more indicative of what our growth prospects looks like coming out of 2014.

And I think that hinges back to what John stated earlier, that today we're sitting on approximately 68 molecules in clinical stage development.

We still anticipate having at least ten molecules in Phase III development by the end of 2011, which we believe puts us in proximity to be able to begin to launch products, as we're coming out of the YZ period, and then returning to growth.

When you think about our strategy, there are some, I guess to your point about how do you mitigate risk?

Or how do you dampen the sawtooth nature of the business that we're in?

I think there's a couple of factors.

One is the Elanco Animal Health business.

It softens that.

Secondly, we have some parts of our geographical business that's counter-cyclical to what you're seeing in the YZ.

And then thirdly, if you come back to just our biotech presence, the fact that roughly half of our portfolio is in biotech, or a little bit more than 40%, half of our Phase II, Phase III portfolio is biotech.

So when I think about our fundamental business strategy, I think it's still intact.

And yes, we will continue to use our balance sheet, and business development opportunities to bridge gaps that may be there, or to take advantage of emerging opportunities.

But I feel very confident about what we are pursuing in terms of our strategy.

Barbara, the only comment I'll make is first of all, Effient is off to a slower start than we had hoped for, but we continue to see good progress with Effient.

We're certainly not giving up on that very important product.

And I will also take exception with your comment about short-cutting the pathway for Bydureon.

There's no short-cutting in drug development.

Bydureon is supported by a very extensive group of studies and a very solid database that includes five years of marketing experience with the active ingredient in the form of Byetta.

John, do you want to close the session, please?

Yes, I would like to close out now.

I want to thank everybody, again, for taking time this morning for this update on Eli Lilly and Company.

We appreciate your continued interest in Lilly.

Clearly, this is a challenging time for the Company and the industry, but it's also, we believe, a time, as I said earlier on the call, of great opportunity.

We continue to believe that our innovation-based strategy, while not without risk, will provide the greatest value to our shareholders and to society.

Clearly, we're not sitting here passively reacting to events as they occur, but we're acting with focus and purpose to achieve our goals, to overcome upcoming patent losses and to return to growth.

The consistent operational performance we've shared with you throughout this year are signs of progress, and provide the wherewithal for us to meet our challenges.

To date, we've generated strong financial results with robust volume-driven sales growth, continued leverage, driven by cost containment and productivity efforts, and strong operating cash flow.

Thanks to this strong financial performance, we've raised our full-year 2010 EPS guidance for the third time this year.

We're seeing strong growth in our Animal Health business, in emerging markets, and in Japan, as Nick commented, where we're the fastest growing pharma Company.

Obviously this strong financial performance is the fuel for our innovation strategy.

And because we know that setbacks are part of our business, we've been working hard to increase our shots on goal.

We now have 68 assets in human testing, 28 in Phases II and III, including many with tremendous potential.

Among them, we have Phase III trials ongoing for 1121B.

This is the ImClone molecule in breast and gastric cancer, and we recently started another Phase III study in hepato cellular cancer.

We'll be starting more in the near future.

And we completed enrollment in our first Phase III trial for solanezumab.

And the second is more than 80% enrolled.

Furthermore, a major part of our recent restructuring was aimed at accelerating our pipeline flow, and I'm encouraged by what I'm seeing.

We've moved nearly four into Phase III, and we expect to begin Phase III trials of our BAFF antibody for RA and for lupus in early 2011.

This molecule is the first of an emerging autoimmune portfolio that includes our IL-17 antibody and the JAK-1/2 with our partners from Incyte.

We also advanced three more assets into Phase I, and two into Phase II this quarter.

We're going to continue to focus on speeding innovation to patients.

And we remain on track to have at least ten molecules in Phase III by the end of 2011, with more coming behind.

We continue to bolster our near to medium-term top line end 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 the dividend.

As always, we'll keep you informed of our progress.

Thank you, again, for your interest in Lilly.

Ladies and gentlemen, that does conclude our conference for today.

Thank you for your participation, and for using the AT&T Executive Teleconference.

You may now disconnect.