禮來公司 (LLY) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Q4 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 this conference over to our host, Vice President of Investor Relations, Mr.

Phil Johnson.

Please go ahead.

Good morning.

Thanks for taking the time to join us for Eli Lilly and Company's fourth-quarter 2010 earnings conference call.

I am Phil Johnson, Vice President of Investor Relations.

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

Jan Lundberg; and Ronika Pletcher and Jill Thoren from Investor Relations.

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

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

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.

We accomplished a great deal in 2010 while rapidly adapting to significant external and internal challenges.

Here are some highlights.

For the full year, we again delivered strong financial performance, generating 6% revenue growth.

And we were able to leverage this 6% revenue growth into 8% non-GAAP net income growth as we made substantial progress reducing headcount and containing costs.

Our strong operating performance, along with prudent management of working capital, generated nearly $7 billion of operating cash flow, easily covering capital expenditures of about $700 million and our dividend of roughly $2.2 billion.

During the year, we did experience pipeline disappointments with semagacestat, teplizumab and tasisulam.

However, our scientists remain focused on speeding innovation to patients, making significant pipeline progress, advancing 16 new molecules into Phase 1 testing, nine molecules into Phase 2 testing, and two molecules into Phase 3 testing.

We also concluded a number of business development deals, with a bias towards those that provide current or potential near-term revenues.

Our strong financial performance focused on speeding innovation to patients and targeted use of business development all support our goal of successfully navigating our upcoming patent expirations and emerging with an even greater strength and capacity to drive future growth.

Since our last earnings call, we've made significant progress on a number of fronts.

In clinical news, we began Phase 3 trials of our anti-BAFF antibody for both rheumatoid arthritis and lupus.

Based on an interim review of long-term safety data and after consultation with the FDA, we made the decision to begin Phase 3 trials later this year of mGlu2/3 as monotherapy treatment for schizophrenia.

And along with our partner, Incyte Pharmaceuticals, we disclosed promising Phase 2a data in rheumatoid arthritis for our JAK1/JAK2 inhibitor.

In regulatory news, we received FDA approval of Cymbalta for the management of chronic musculoskeletal pain, based on clinical trials in patients with chronic low back pain and chronic pain due to osteoarthritis.

And we will begin active promotion for this indication next week.

We also received FDA approval for Axiron as replacement therapy in males for conditions associated with a deficiency or absence of endogenous testosterone.

And we expect to launch the product midyear, after building sufficient launch quantities.

Health Canada approved Byetta to improve glycemic control in patients with type II diabetes.

And we also submitted sNDAs for Byetta used in combination with basal insulin and for Cialis for benign prostatic hyperplasia.

On the legal front, the US District Court ruled that judgment would be entered in Lilly's favor in the Alimta compound patent challenge.

Including a recently obtained six-month pediatric exclusivity, this patent provides protection for Alimta until January 2017.

And the Court of Appeals for the Federal Circuit heard our appeal of the US District Court's ruling invalidating our Strattera method of use patent.

As argue at the appeal hearing, we feel there is a strong basis for the CAFC to overturn the District Court ruling.

We are awaiting a decision by the CAFC, and in the meantime, an injunction from the CAFC prevents generics from launching.

Finally, in business development news, we announced and completed the acquisition of Avid Radiopharmaceuticals.

Avid's lead asset, florbetapir, was assigned a priority review by the FDA.

And just last week, an FDA advisory committee recommended approval of the beta-amyloid imaging agent if certain conditions are met related to physician training and rereading of existing brain scans.

Along with Boehringer Ingelheim, we announced a broad strategic alliance to develop and commercialize two oral diabetes compounds from BI and two basal analog insulins from Lilly.

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

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

On slide 7, you can see that revenue grew 4% in Q4 to nearly $6.2 billion.

As I will show in more detail in a minute, volume continued to be the major driver of our revenue growth.

Gross margin as a percent of revenue increased 4.2 percentage points from 75.9% to 80.1%.

Roughly two-thirds of this increase was due to the favorable effect of changes in foreign currency exchange rates on international inventory sold.

Specifically, changes in the foreign currency value of the US dollar substantially increased cost of sales in Q4 2009, but slightly decreased cost of sales in Q4 2010.

The remaining improvement in gross margin as a percent of revenue was due to lower manufacturing costs, a tangible result of our ongoing productivity improvement efforts.

This quarter's total operating expense, defined as the sum of R&D and SG&A, grew 8%.

Within operating expense, marketing, selling and administrative expenses grew only 2% as higher marketing and selling expenses outside the US were partially offset by lower administrative expenses and Company-wide cost containment efforts.

R&D expense, on the other hand, grew 18%.

Approximately two-thirds of this increase was due to higher than normal charges related to business development activities and termination of clinical trials.

Other income and deductions improved due primarily to lower miscellaneous other expense and, to a lesser extent, lower net interest expense.

In addition, our tax rate fell by 4 percentage points, largely due to the recognition in Q4 2010 of the full-year impact of the extension of the R&D tax credit.

Net income and earnings per share increased 24% and 22%, respectively.

For the year, you can see that we generated leverage between revenue and net income, as revenue grew 6%, while net income grew 8%.

We achieved this leveraged between revenue and net income despite foreign exchange being a drag on our gross margin percent for the full year, higher than normal charges flowing through R&D in 2010, and a 1.6 percentage point increase in the full-year tax rate, largely due to the $85 million tax charge taken in Q1 2010 as a result of US healthcare reform.

Slide 8 shows our reported income statement, while slide 9 provides a reconciliation between reported and non-GAAP earnings per share.

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

As you can see on slide 10, for both the fourth quarter and the full year, foreign exchange had little effect on revenue growth as a weaker euro was offset by strength in other foreign currencies, including the Japanese yen.

Consequently, performance growth in total revenue of 5% for both the quarter and the year was driven by 3% volume growth and a favorable 2% impact from price.

In both periods, we saw robust double-digit volume growth in our Japanese human pharmaceutical business and in our global animal health business.

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

Slide 11 shows the year-on-year growth of select line items of our non-GAAP income statement with and without the effect of changes in foreign exchange rates.

The numbers in the first column are the same as those you saw earlier on our non-GAAP income statement.

If you look at the top of the second column of numbers, you'll see the 5% performance growth in revenue I mentioned previously.

Below that, you will see the cost of sales actually decreased 2%, excluding the effect of foreign exchange.

As a result, gross margin grew 7%.

Operating expenses grew faster than revenue this quarter.

The larger than normal R&D charges mentioned earlier drove the majority of the 9% performance growth in operating expenses.

As a result of this increase in operating expenses, our 5% performance growth in revenue translated into 3% performance growth in operating income, while the lower tax rate this quarter boosted growth in EPS to 10%.

Finally, you will see in the last column that for the year we leveraged 5% performance growth in revenue into 7% and 8% growth in operating income and earnings per share, respectively.

We achieved this leverage due primarily to lower manufacturing costs.

For your information, on slide 12, we've provided the year-on-year growth of select line items of our reported income statement with and without the effect of foreign exchange rates.

Next, I will briefly cover some highlights from our quarterly pipeline update.

Slide 13 shows our pipeline as of January 24 and highlights changes since our last earnings call on October 21.

Movement of molecules to the next phase of development are shown by green arrows, and additions from business development are shown by green stars.

These both demonstrate our focus on addressing our upcoming patent expiration through innovation, both that coming from our own labs as well as from outside our walls.

You can see that we added two compounds under regulatory review -- florbetapir, the beta-amyloid imaging agent from Avid; and linagliptin, the oral DPP-4 inhibitor for diabetes from BI.

The BI alliance also brought a Phase 3 compound, BI 10773, an oral SGLT-2 inhibitor.

We also saw significant movement in the pipeline as Axiron was approved.

We began Phase 3 testing of our anti-BAFF antibody for both rheumatoid arthritis and lupus.

Four molecules began Phase 2 testing, three new molecules began Phase 1 testing, and we terminated development of five molecules and sold one molecule to a third party.

Now I will turn the call over to to Derica to cover some of the key events we anticipate in 2011 and a detailed discussion of our 2011 financial guidance.

Derica?

Thanks, Phil.

Having received FDA approvals late last year, we are preparing to launch Cymbalta for chronic musculoskeletal pain and Axiron for testosterone deficiency.

We have a large number of potential regulatory approvals, including Bydureon in the EU and a number pending here in the US -- linagliptin for type II diabetes in collaboration with BI; liprotamase, our recombinant pancreatic enzyme replacement therapy; and florbetapir; Cialis for BPH; and Byetta in combination with basal insulin.

Expected regulatory submissions include our response to the FDA complete response letter for Bydureon and sBLAs for Erbitux in first-line metastatic colorectal cancer, head and neck cancer, and non-small-cell lung cancer.

In terms of Phase 3 trials, we will complete the DURATION-6 comparing Bydureon to Victoza.

We also expect to present initial results from the Phase 3 trial in advanced non-squamous non-small-cell lung cancer of Alimta induction followed by Alimta maintenance therapy.

Following the initiation of Phase 3 trials late last year for both NERI in depression and our anti-BAFF antibody in RA and lupus, Phase 3 trials are slated to begin this year for mGlu2/3 in schizophrenia, our novel basal insulin analog and our new insulin glargine product; and potentially for our anti-IL-17 antibody in RA.

Now, as I move on to guidance, I'm going to take a bit more time today than I have in the past to walk you through it, as I want to make sure you understand how we expect some of the more substantial drivers to affect our results in 2011.

Now, clearly, more sales of Zyprexa and Gemzar outside of Japan due primarily to global patent expirations, as well as the incremental impact of US healthcare reform, will have a significant negative impact on our 2011 results.

In addition, we will face some near-term earnings dilution from our strategic diabetes alliance with Boehringer Ingelheim.

At the same time, we expect continued strong performance in the rest of our business in 2011, including the three countercyclical growth engines we've discussed for some time -- Japan, emerging markets and animal health -- as well as in a number of our patent-protected products in the USA and in Europe.

In addition, we expect to see continued benefits from our cost reduction and productivity efforts.

I want to make sure you have good visibility into this growth within our business.

I'll start with a discussion of our bottom-line EPS expectations and then review our individual line item guidance.

As you've seen in our press release, we expect 2011 non-GAAP earnings per share between $4.15 and $4.30.

Our 2011 reported EPS guidance range is $0.23 lower due to the estimated IPR&D charge from the BI alliance.

On a non-GAAP basis, this represents a decline of between 9% and 12% when compared to 2010.

So how does this 9% to 12% EPS decline break out between the negative EPS impact of the items I mentioned earlier and the continued growth in the rest of our business?

I will start with the latter -- the underlying EPS growth we expect to see from our business before factoring in expected sales decline in Zyprexa and Gemzar outside of Japan due primarily to patent expirations, and US healthcare reform and the BI alliance.

Now, as we have discussed before, we have been making targeted investments in Japan, our emerging markets and animal health and, more broadly, in our remaining patent-protected products.

And also, we've been aggressively reducing headcount and controlling expenses as we rebase the size of our business.

We've seen these efforts pay off in 2010 and expect to see the same in 2011 and beyond.

In fact, our 2011 non-GAAP EPS guidance of $4.15 to $4.30 implies a gross contribution of roughly 15% from these parts of our business.

In Japan, our sales growth has been outstanding in recent years, fueled by the launch of products and indications that were launched more earlier in the US and Europe.

On a local currency basis, sales in Japan grew 15% in 2009 and 25% in 2010.

As reported by IMS, currently we are far and away the fastest-growing major pharmaceutical company in this important market.

And we're seeing strong growth from a host of products in Japan.

Please note that going forward, I will be citing local currency growth for certain products in Japan as well as in Europe.

The effect of foreign exchange for any individual product is similar to that shown on slide 10 for that relevant geography.

Now, Zyprexa, our largest-selling product, grew 8% on a local currency basis in 2010, and we expect continued growth.

In Q4 last year, Zyprexa became the first atypical antipsychotic approved in Japan for bipolar mania.

And later this year, we plan to submit for approval in bipolar depression.

Now, remember, we maintain exclusivity in Japan for Zyprexa until December of 2015, and we expect Japan to help drive what we hope will be a significant tail of Zyprexa sales post-2011.

Alimta was approved for non-small-cell lung cancer in Japan in Q2 of 2009 and achieved the best share of market uptake in the first-line non-squamous segment of any market in the world.

It is now our second-largest product in Japan, and we see continued room for growth, as we believe more patients with non-squamous-cell histology can benefit from the treatment with Alimta.

We've also been driving increased share of market with Humalog.

This product has been growing at roughly twice the insulin market growth rate and registered 14% growth in local currency in 2010.

We are focused on continuing this strong momentum.

And we expect to see significant growth contributions from Cymbalta, which was launched in Q2 of last year, and Forteo and Byetta, both launched this past quarter.

Now, turning to emerging markets, revenue grew 10% in 2010 on a local currency basis.

As we've shared with you in the past, we've been making targeted investments in six markets -- China, Russia, Turkey, Korea, Brazil and Mexico.

And these investments are paying off.

Volume growth has accelerated in each of these markets, with the exception of Brazil.

From 2009 to 2010, volume growth accelerated from 18% to 21% in China, from a minus 7% to a positive 21% in Russia, from 4% to 20% in Turkey, and from a minus 2% to a positive 19% in Korea, and from 1% to 7% in Mexico.

More broadly, for the 12 months ending September 2010, IMS showed that Lilly ranked first in sales growth at 12% among the 10 leading multinational companies across five emerging markets -- China, Turkey, Korea, Brazil and Mexico.

We remain focused on driving profitable growth in emerging markets.

We see significant opportunities to do so with our core assets, including Cymbalta, Cialis, Humalog and Alimta.

While the majority of our efforts will be concentrated on maximizing opportunities from our core assets, we will continue to look to supplement this organic growth with targeted business development.

On a local currency basis, our Elanco Animal Health business grew 12% in 2009 and 14% in 2010, significantly outpacing overall industry growth.

This solid growth was driven by our food animal business and by Comfortis, our oral flea control product for companion animals, which has had a strong uptake here in the United States.

Going forward, we expect animal health revenue growth to benefit from international launches of Comfortis, including in the EU this quarter.

In addition, Elanco has built a robust innovation pipeline and is poised to maintain double-digit growth in the coming years, with launches expected for multiple products targeting high-value markets such as livestock immune enhancement, control of parasites in companion animals, and pain control.

This quarter, in the US, we will launch Assurity, a topical flea treatment for cats; and Trifexis, an oral flea and heartworm treatment for dogs.

We've also build a substantial development capability in animal health vaccines and have demonstrated a willingness to drive the growth of this business via business development.

Apart from continued strength in these three countercyclical growth engines, we also see opportunities for growth in a number of patent-protected products outside of the emerging markets and Japan.

Now, let me cite a few examples.

On a local currency basis, Cymbalta grew 15% in Europe last year.

Here in the US, Cymbalta continues to fare well in its existing mood and pain indications in a market dominated by generics.

And we'll begin active promotional efforts next week for Cymbalta's latest FDA-approved indication, management of chronic musculoskeletal pain.

2010 local currency growth of Alimta was 20% in Europe and 17% in the US.

This year, we anticipate submitting the results of our S124 study to the FDA for approval of Alimta induction treatment followed by Alimta maintenance treatment in patients with advanced non-squamous non-small-cell lung cancer.

In our diabetes business, Humalog registered solid 6% local currency growth in Europe in 2010.

Now, while sales in the US were essentially flat, in the second half of the year, we saw sustained growth in our new prescription share of rapid and mealtime analog market for the first time in years.

We've also improved Humalog access, which should reinforce the positive share market trend as we begin 2011.

Now, for Cialis, in Europe, we have continued to extend our leading DOT and cash share of market, while in the US, Cialis has continued to gain market share in a declining ED market.

At the end of last year, we submitted Cialis for the treatment of benign prostatic hyperplasia to the FDA and could have an action before the end of this year.

Finally, we continue to see consistent growth and share of market for Effient in the US and in Europe.

2010 sales totaled $115 million, and sales in the fourth quarter were $47 million.

We remain committed to this product.

And based on the clinical data we've generated along with Daiichi Sankyo, we believe Effient has an important role to play in the treatment of ACS patients undergoing PCI.

In addition to maximizing opportunities to drive topline revenue growth for the Company, we've also been focused on driving greater productivity.

Through deliberate and determined actions, we are tracking to achieve the headcount and cost containment goals we laid out in September of 2009.

As of December 31, 2010, excluding strategic headcount additions in key emerging markets in Japan and business development, we had reduced headcount by 3450 or nearly two-thirds of our goal of 5500.

And we are on track to meet or exceed our goal of reducing our projected 2011 costs by $1 billion.

We saw some of those benefits of these efforts in the leverage we've generated in 2010 between revenue growth and net income growth, and we expect to see an even greater benefit in 2011.

Now, hopefully, the information I've shared illustrates the opportunities we see for many areas of our Company to generate future topline growth and to deliver on our productivity improvement goals.

It is through these opportunities and efforts that we expect to generate midteens earnings per share growth, excluding the impact of Zyprexa and Gemzar sales reductions outside of Japan, US healthcare reform and the BI alliance.

Now let me turn to those other items.

Outside of Japan, we estimate that Zyprexa and Gemzar sales will decline significantly in 2011 compared to 2010, driven by patent expirations.

In total, we anticipate this will lower EPS growth by approximately 15 to 17 percentage points.

We are already seeing rapid erosion of Gemzar sales in the US and expect to see some continued erosion in international sales, where we lost patent protection in many markets in early 2009.

We also anticipate Zyprexa sales to decline rapidly post-patent expiration, which occurs in April for some international markets, in September for most major European countries, and in October in the United States.

Compared to 2010, US healthcare reform could lower 2011 revenue by an incremental $170 million to $270 million and add an additional $150 million to $200 million in non-tax-deductible operating expenses through the pharmaceutical industry fee.

Combined, we estimate this could reduce 2011 EPS growth by approximately 4.5 to 5.5 percentage points.

Finally, we expect our strategic diabetes alliance with Boehringer Ingelheim to reduce 2011 non-GAAP EPS due to increased SG&A and R&D expenses.

Specifically, we expect this alliance to reduce 2011 non-GAAP EPS growth by approximately 4.5 to 5.5 percentage points.

However, we view this near-term earnings dilution very differently than that from patent expirations or governmental actions.

Clearly, we've anticipated that the near-term earnings dilution is a precursor to longer-term EPS accretion and that this alliance adds economic value to Lilly and its shareholders and is thus a good investment for the business.

So while we face major headwinds in 2011, we've taken a number of actions designed to significantly mitigate this negative impact and position the Company to continue to invest in our long-term growth potential while funding our dividend, capital expenditures and targeted business development.

Now I will provide some color commentary on our line item guidance.

In terms of the topline, we anticipate 2011 revenue will be flat to slightly increasing compared to 2010.

Excluding the anticipated decline in Zyprexa and Gemzar sales outside of Japan and the incremental impact of US healthcare reform, we would expect 2011 revenue to grow in the mid- to high single digits.

We expect gross margin as a percent of revenue to decline approximately 2 percentage points due to the negative effect of patent losses, the Puerto Rican export tax, and the anticipated negative effect of foreign exchange on international inventory sold.

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

Now, it is important to note that the new pharmaceutical industry fee will be booked in this line item of our income statement.

In addition, we expect to have substantial additional marketing and selling expenses as a result of the alliance with BI.

Excluding anticipated expenses from the pharmaceutical industry fee and the BI alliance, we would anticipate marketing, selling and administrative expenses to be essentially flat.

Research and development expenses are expected to be relatively flat.

This growth rate is affected by the higher than normal charges in 2010 that flowed through R&D.

Excluding these charges from the base period, R&D expenses would be expected to grow in the mid-single digits, with much of this growth driven by our portion of the anticipated clinical trial spend for BI's DPP-4 and SGLT-2 inhibitors.

For the year, other income and deductions is expected to be a net expense of between $50 million and $150 million, driven largely by net interest expense.

The tax rate is anticipated to be approximately 21.5% for the year.

While the IRS has not provided a final ruling on US tax treatment of the Puerto Rican export tax, for the purposes of our guidance, we have assumed that this export tax will be creditable in the US.

Finally, we expect operating cash flow to be more than sufficient to fund capital expenditures of approximately $800 million to $900 million, as well as the dividend and continued business development.

Slide 19 provides a reconciliation between reported and non-GAAP EPS for 2010 and the associated growth rates from these numbers to our 2011 guidance.

This concludes our prepared remarks, and now we will take your questions.

Operator, first caller, please.

(Operator Instructions).

Catherine Arnold, Credit Suisse.

I wanted to ask you on the product side about the mGlu program.

Obviously, the decision to advance that into Phase 3 is a positive sign in regards to some of the issues that surfaced in some of the earlier work.

And I was wondering if you could talk about if seizures were not an issue in the data such that you felt comfortable moving forward, and when we'll be able to see the Phase 2 data, if the profile is similar to what was sort of hypothesized in the Nature article that was published on the compound back in time.

And then just one other question I would like to ask you, which is about Bydureon.

I'm wondering if the EMEA has come back to you with any more questions on the QT front since the FDA decision was handed?

All right, Catherine, thank you for your questions.

We will have Ronika handle the question on mGlu2/3, and either Jan or I will talk about Bydureon in the EU.

Hi, Catherine.

Pardon me; my voice is a little hoarse.

But you might remember, back in 2009, we started a safety and tolerability study for mGlu2/3.

It started out as a six-month study.

And in that study, our intent was to get better understanding on some of the earlier observations on the MGlu trials.

That study, we now have six-month data on that study, which we plan to actually disclose at a European event in April.

That study -- actually did have two additional seizures in that study.

Of those two, one of the patients had the seizure actually before they were randomized to drug.

And the second patient actually had their seizure as they were -- after they came off of study drug and before initiating the typical.

So we are now getting additional information to help us understand, but we feel confident in the data that we have so far in that six-month study to now go ahead and move ahead with our Phase 3 program.

And that is also in combination with our prior Phase 2 studies that were presented and published back in 2007 and 2009.

Catherine, before Jan handles the question on Bydureon in the EU, but we also did have a discussion with FDA to review this interim data in coming to the decision to move forward into Phase 3.

Jan?

Bydureon EU?

Yes, please.

Well, we are, as you know, in the regulatory review in that area, and we will receive them, some more comments, the first half of this year.

We are quite confident that we are on track with the EU submission, and so far, the QT issue has not been raised as an issue by the EU regulators.

One other thing, Catherine, for the mGlu trials, in the shorter-term acute phase studies earlier, as you are aware, we did have a number of occurrences of these seizure type events.

I believe the total number was eight.

So, actually, I think this longer-term data that we're generating, only had having had two events to date -- again, one prior to randomization and the other one coming after the patient had discontinued for lack of efficacy and started up the typical -- gives us hope that this is actually something that will not be a particular issue for the drug.

Again, patient safety is extremely important.

We will monitor this going forward.

We have extended that study to go out to 12 months and look forward to presenting not only the six-month data in April, but the 12-month data subsequently when that has matured.

Tony Butler, Barclays Capital.

First of all, I want to say thanks to Derica for the elaborate explanation on the earnings per share and the hits there; it's very much appreciated.

But two brief questions, principally for Jan.

One is, can you give us some idea of how you're going to go out and market the chronic pain indication in Cymbalta?

Clearly a positive, but the question is, I am assuming that is more PCP or has greater PCP direction.

And what would that message be distant from its use as an antidepressant?

And then second, again, staying with you, Jan, if possible, I'm just curious how you think or if you can provide some color around a couple of institutions, principally in India and Korea, have made comments or seem to be gearing up for the introduction in Europe possibly of generic insulins or generic alternatives.

And while generic insulin may not necessarily be a focus proper to Lilly, I guess it could bleed over into Humalog.

And I'm just curious how you think about those potential generic biologic entries into the European market over the next couple of years and if you think that is really a possibility.

Thanks very much.

Tony, this is John.

I will take both your questions.

First of all, we'll be launching Cymbalta for chronic pain next week here in the US.

We feel well prepared for that launch, and we feel like we've got the right salesforce coverage for the right positions to make sure that the appropriate message is getting out there.

I'm not right now at liberty to discuss the range of tactics, etc., but it's obviously a very important new indication for us, for a molecule that now has five or six approved indications in different countries around the world.

It is going to be Cymbalta; as Derica pointed out, it's going to be an important growth driver for us in this -- beginning of this YZ period.

With respect to insulins, I think it really remains to be seen how big of a threat so-called generic versions of insulins will be.

We're not blind to this.

We're keeping a careful eye on it, as you know.

Insulins are a different kind of biologic product.

The production outputs are in the thousands of kilos as opposed to molecules like EPO and others.

The capital investments required, the complexity of the technology around insulins I think serve as more of a barrier to entry, perhaps, for would-be competitors than is going to be the case in other therapeutic categories.

But, obviously, we're going to stay very plugged into this.

I think it's important to keep in mind that we believe the world can benefit from new and improved insulins, which is why we're excited about our two insulin analogs that we disclosed we were now partnering with BI to bring to the market.

In addition, delivery technology has moved a considerable way since the era of the vial and syringe, and Lilly is going to continue to pioneer new and more convenient ways to administer insulin as part of our value proposition for all of those products going forward.

Bert Hazlett, BMO Capital Markets.

I have a quick one on insulins and then just two pipeline questions.

On the insulins, how much did the Wal-Mart deal add to the Humulin franchise?

And is that sustainable?

Then just briefly, regarding Amyvid, could you talk about the timeline for the reread of the Phase 2 study for Amyvid?

And is that the gating item for resubmission?

And then when is the next interim safety look for solanezumaba, the A beta Alzheimer's compound?

Thanks.

Okay, thanks, Bert.

If you want, I will take an initial shot, and then maybe Derica will chime in on the insulins and Jan will take you to questions for the pipeline.

On the insulins for Wal-Mart, I don't believe we're going to be quantifying the specific impact from that.

Clearly, there's going to be a ramp-up in that business, so I wouldn't take some of the initial data necessarily being the run rate for growth going forward.

But, clearly, it's a very important deal that we struck with Wal-Mart.

We're very pleased with the initial results.

I would also say that in general, it seems that globally we're having a very good run of growth with Humulin, which, for various strategic reasons I believe that Noble has been taking, is a market that is opening itself up a bit to our Humulin.

So, Jan, for the pipeline?

Yes.

In relation to Amyvid, the timelines for reread we have stated before is likely to be months, not longer.

So we are looking positively on that one.

In relation to solanezumab, as you know, both of the Phase 3 studies have now been enrolled and the duration is 18 months, and we will have an interim readout.

I don't want to comment on exactly when, but we are following I think on track to deliver this molecule.

And just to be clear, Bert, there is an "s" at the end of when Jan was saying months, so it is a matter of months.

We don't yet have a specific timeframe.

Obviously, we're working through that expeditiously with the FDA.

But it is something we think we will be able to address here in the relatively near term.

[So it's just to make sure to] clarify from, if I heard you correct -- your question correct on Wal-Mart, that deal was with Humulin, not Hemalog.

Tim Anderson, Bernstein.

A couple of questions.

On the tax rate guidance for 2011, that is below 2010 and it's below where you've previously suggested the tax rate might ultimately creep up to.

And I'm wondering what is driving this in 2011 and what we should, again, expect over the longer term.

And then second question, on 2014 guidance that you've given before -- I got on the call late, but I'm not sure if you talked about 2014 or not.

Is that still on track?

And then third question, a quick one -- just emerging market revenue growth in fourth quarter?

Okay.

Derica, do you want to handle the first two and then (multiple speakers) take the last one?

Sure.

Tim, in regards to your question about the tax rate, let me remind you there's three moving pieces here.

First of all, with the patent expirations with Zyprexa and Gemzar, the mix effect of that creates upward pressure on our tax rate.

Also, the second factor affecting our tax rate, which also creates upward pressure, is the pharmaceutical industry fee, which is non-tax-deductible.

What's creating a lowering pressure on our effective tax rate is the assumption that we will be able to credit the Puerto Rico excise tax.

So that is how we get to the tax rate that you saw.

In regards to the 2014 guidance, Tim, we did not discuss that on the call today.

And we still look forward to update that at our June analyst meeting in New York.

One of the things to keep in mind, Tim, for the 2010 effective tax rate is that we did have in Q1 that $85 million charge due to the future taxation of the retiree drug subsidy that drove up the overall tax rate for the full year by about 1.3 percentage points.

That will not be recurring in our 2011 or going-forward numbers.

And then in terms of the emerging markets, as we said on the call, the full-year growth rate was 14% total.

It actually is 10% pro forma, so very robust growth.

We did have a spike in Q3 that came down a little bit in Q4 due to timing of orders.

Specifically in Q4, we had about 6% total growth, nearly all of which was from performance.

Just by way of reference, that compares to 18% growth in Q3, 16% of which was performance.

Some of the things that we saw, for example, Tim, to give you some color, there would have been some Zyprexa orders, for example, in Brazil that we would've expected to come through in Q4.

They did not come through in Q4.

They did come through early this Q1.

So, again, we think by looking at that full-year number gives you a better trend for how the emerging markets are growing.

And, again, that's 10% performance.

John Boris, Citi.

Thanks for taking the questions and especially thanks for going into the detail on the factors driving your EPS growth in '11.

First question is for Derica on international sales in 2010, total international sales for 2010.

Is it possible just to get some information on percent of sales of that international component that is coming out of Japan and coming out of emerging markets?

Second question, on your diabetes portfolio, Byetta in particular, if you look at the Canadian label, it does increase -- a small increase in QTC that they've highlighted in that label.

Can you just help us understand that and also maybe walk through what the implications are on that for the US label and for Bydureon?

And then last, is it possible just to get an update on where you're at with your own fully humanized GLP-1 program going forward?

Any update on enrollment and timing of release of results there?

Thanks.

Okay, so we will probably go ahead and tag-team this.

Derica, do want to start off, and then we'll --

Sure.

John, let me start with how to characterize our international sales.

So, today, about a little over 45% of our total revenue base is outside of the US.

And if you were referring back to -- if you refer back to slide 10, you will see from the PRV, if you look at just the total year here, what was really driving our overall revenue growth -- so in Europe for the year, we had 3% volume growth.

In Japan, we had 26% volume growth.

And in the rest of the world, so in those markets outside of those areas, we had 6% volume growth.

And when you break that down, you really saw, even in Europe, where we were already in some YZ aspect in terms of Gemzar erosion, we still were able to drive good volume growth.

And so when we look forward, we really see those markets like the emerging markets and Japan really acting in a countercyclical manner compared to what we're going to see in the US in 2011, as well as in Europe major markets in 2011 with the Zyprexa effect.

So this is where we anticipate driving the future growth.

Real quick, in terms of sales numbers, on that slide, John, 10, which is the effect of price rate and volume on revenue, you will see that the full-year revenue for Japan actually passed $1.5 billion for the year.

And then in terms of emerging markets, as we commented during the prepared remarks, over 10%, essentially, or roughly 10% of our sales now are coming from emerging markets.

So I don't have the exact percentages for you broken out by the international, but I think hopefully those two numbers will allow you to make that calculation.

And then for John, for the Canada Byetta?

Yes.

John, I think first of all, we're very pleased to have Byetta approved in Canada.

And I don't have the label language in front of me, but my recollection is this is not a contraindication or a warning.

The fact is, the FDA is asking its own questions for Bydureon on QT.

And whether or not that is connected with questions that Canadians might have is is something I can't speculate on.

But we are obviously well along with meeting what we understand to be FDA's requirements so that we can refile Bydureon in the second half of this year and ultimately hopefully gain approval for that.

On the (inaudible) program, we are really pleased with that program.

We've actually initiated four of the award studies all of last year, as well as we have an ongoing seamless adaptive trial that is progressing well as well.

We have plans later this year to actually probably start a [CV] study, so we're pretty pleased with the progress of that program and we look forward to sharing some data in early '12.

David Risinger, Morgan Stanley.

A couple questions.

First, maybe you could just help us understand the solanezumab interim look for 2011.

What are these scenarios for that interim look?

Typically, Phase 3 trial have to run to completion.

It is it a DSMB interim look, or what exactly is the interim look?

That is the first question.

Second, in terms of other key late-stage pipeline results to watch in 2011, what are the few that are most important that you're focused on in terms of Phase 3 results?

And then, third, could you just update us on the Strattera and Cymbalta patent litigation outlooks, please?

Sure, Dave.

I will going ahead and take a shot at your first two questions, maybe ask Ronika to help on the last one.

So for solanezumab, the interim look, to your question, I think you're tracking exactly correctly, that for efficacy these trials need to run all the way to completion to be able to have, in this particular case, statistical powering to be able to show the slowing of progression of the disease.

So this will be a look that is a safety look, so these trials can only be stopped early for either safety issues or for very clear signals that there is no way the primary endpoint could be met.

They cannot be stopped early for efficacy.

In terms of the Phase 3 data, a couple of the major ones that were mentioned on the call are probably the ones I would highlight to you as well, which would be the DURATION-6 data head-to-head with Bydureon versus Victoza.

I believe that should be coming here probably in the first half of the year.

Expectation would be that, much like we have in the past, we probably have a topline results press release with subsequent presentation at a medical meeting.

Timing of that medical meeting, it's difficult to know if that might be ADA or EASD.

And then, obviously, with Alimta, we continue to build out that franchise and are very hopeful that we'll be able to do so with the S124 study that Derica mentioned that is Alimta induction followed by Alimta maintenance therapy.

You may recall that the current maintenance indication that we have is for Alimta used in the maintenance setting, followed by a first-line treatment with platinum agents.

Just to add to that, with regards to Cialis for BPH, we have plans on disclosing data here in the first quarter.

We have already been accepted with an abstract at [EAU] in March, as well as in the European Association of Urology.

We will have a combo or at least a coadministrative study with the alpha bloggers and tadalafil [admitted] with BPH.

Those are -- that's another set of Phase 3 data.

I want to -- not to pile on, but I just want to mention that we've guided FDA action dates for florbetapir, which received a priority review status.

This is the Avid beta-amyloid imaging agent.

For linagliptin, this is the BI DPP-4, and also for liprotamase, the molecule that we acquired with Alnara.

Ronika, do you want to handle the Strattera and Cymbalta updates, or do you want me to do that?

You can take it.

Okay.

So, Strattera, as I mentioned on the call, we are awaiting the decision.

We feel very confident that the CAFC should in fact overturn the District Court ruling and have included the assumption that we maintain the Strattera patent in the guidance we've issued for 2011.

Cymbalta, last update we had, we remain on track for a trial to start here in the US District Court for Southern Indiana on June 6 of this year.

Maybe we will take one last question, and then we will have John close the call.

Chris Schott, JPMorgan.

Just two follow-up questions on the 2011 guidance.

Maybe first on gross margin and the 2-percentage-point decline, can you just give us a little bit more granularity on how we should think about the magnitude of the impact of the loss of Zyprexa and Gemzar sales on gross margin relative to some of the other factors you mentioned?

I guess should we assume those two products are much of the impact, or do some of the things like Puerto Rico play a bigger role?

And then the second question was on SG&A expense.

I think you mentioned flat SG&A ex-healthcare reform and the BI announcement.

With the restructuring initiatives you've announced, I guess I would have anticipated a bit more of a decline in 2011.

Can you just help us understand a little bit better the pushes and pulls that are going into SG&A in 2011?

Sure.

Chris, this is Derica.

Let me try to address both of your questions.

In regards to gross margin, we will see downward pressure on our gross margin driven by the mix effect due to the loss of the Zyprexa and Gemzar patent.

And so that is going to create a negative pressure.

You're also going to see negative pressure on gross margins attributable to the Puerto Rico excise tax.

And because it's an excise tax, it will actually flow through [costs] or manufacturing costs, thus reducing our gross margins.

And then, obviously, it's offset or accredited through the tax rate in the line item below that.

And those are the two factors that's driving the decline in our gross margin by approximately 2 percentage points in the aggregate.

I'm not prepared to break those out into pieces.

In regards to the SG&A and being flat if you exclude the pharmaceutical industry fee, as well as the BI alliance expenses, what you see is kind of a mix of, in the US and European markets, you are seeing a dramatic decline in our overall operating expense base in terms of SG&A.

But as I highlighted on the call, we are making strategic investments in some of our key emerging markets like China, as well as in markets like Japan, where we are expecting to drive significant countercyclical growth as we go through this period of YZ.

So that is what is driving the overall effect of SG&A being essentially flat.

John?

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

As always, we appreciate your continued interest in our Company.

We fought and for the most part overcame significant headwinds to post strong financial performance in 2010.

This was highlighted by volume-driven revenue growth.

On a performance basis, we delivered increasing gross margin as a percent of revenue.

We gained leverage between revenue and operating income growth and posted a robust 8% net income growth.

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

We're pleased with our performance and our progress in 2010.

We're excited about the opportunities before us in 2011.

As Derica discussed, we enter this year with a keen awareness of the challenges posed by the patent expirations we face in the YZ period ahead.

But we have a focused strategies centered on innovation that we're aggressively pursuing.

Over the last year, we advanced 16 new molecules into Phase 1 clinical testing, nine molecules into Phase 2 testing, and two molecules -- NERI for depression and our anti-BAFF antibody for rheumatoid arthritis and lupus -- into Phase 3 testing.

We concluded a number of business development deals with a bias toward those that provide current or potential near-term revenues.

We acquired florbetapir with our acquisition of Avid Radiopharmaceuticals.

And just last week, an FDA advisory committee recommended approval of the beta-amyloid imaging agent if we provide appropriate physician training and successfully reread existing brain scans.

And our strategic alliance with Boehringer Ingelheim includes the development and commercialization of two oral diabetes compounds from BI, including linagliptin, which could be approved this year, and two basal analog insulins from Lilly.

In addition, we're preparing to launch Cymbalta for chronic musculoskeletal pain and Axiron for testosterone deficiency and have a number of potential regulatory approvals, including Bydureon in the EU and several pending here in the US.

At the same time, we expect continued strong performance in the rest of our business in 2011, including the three countercyclical growth engines we've discussed for some time.

Lilly is today the fastest-growing pharma company in Japan and the fastest-growing among the top 10 multinational companies in key emerging markets, while Elanco Animal Health is outpacing its industries growth as well.

We'll continue to take advantage of this countercyclical growth, as well as the growth in a number of our patent-protected products in the US and Europe.

Our strong financial performance, our focus on speeding innovation to patients and targeted use of business development all support our goal of successfully traversing years YZ and emerging with even greater strength and the capacity to drive future growth.

We'll continue to act with urgency and purpose to overcome the challenges that we face.

And as always, we will keep you informed of our progress.

Thanks again for joining us.

Have a great day.

Ladies and gentlemen, this conference will be available for replay after 11AM Eastern today until February 3, 2011, at midnight.

You may access the AT&T executive playback service by dialing 1-800-475-6701 and entering access code 186408.

International participants may dial 320-365-3844.

And again, those numbers are 1-800-475-6701 and 320-365-3844; access code is 186408.

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

Thank you for your participation ausing AT&T Executive TeleConference Service.

You may now disconnect.

Have a great day.