禮來公司 (LLY) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Eli Lilly & Co.

Q1 earnings conference call.

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

(Operator Instructions).

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

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

Phil Johnson.

Please go ahead.

Good morning and thanks for joining us for Eli Lilly & Co.'s first-quarter 2011 earnings conference call.

I am Phil Johnson, Vice President of Investor Relations.

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

Jan Lundberg; our President of Elanco Animal Health, Jeff Simmons; and Ronika Pletcher and Jill Thoren from Investor Relations.

Today's Q1 earnings call coincides with our annual shareholder meeting.

As a result, our CEO, John Lechleiter, is not available to participate in today's call.

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.

Since the Q4 earnings call in late January, we have continued to bolster our operations through business development, to leverage our marketed products and to advance our pipeline.

We announced our offer to acquire the animal health business of Janssen Pharmaceutica from Johnson & Johnson.

This business is primarily European-focused, targeting disease segments in companion animals and livestock with special emphasis on swine and poultry.

Upon deal closing, which is expected by mid-year, we would obtain a portfolio of roughly 50 marketed animal health products.

Here in the US, we began active promotion for Cymbalta for the management of chronic musculoskeletal pain and we launched Axiron, the first and only testosterone replacement therapy applied to the underarm.

On the regulatory front, we submitted our response to the FDA's complete response letter for the use of Erbitux in first-line head and neck cancer.

We received a complete response letter from the FDA for florbetapir, our PET imaging agent being studied for the detection of beta amyloid plaque.

We are working closely with the FDA to address their questions on the reader training program to ensure reader accuracy and consistency of interpretations of beta amyloid plaque images.

Late last week, we also received a complete response letter from the FDA for liprotamase, a pancreatic enzyme replacement therapy, and we will be working diligently to address the agency's questions.

In Europe, we submitted our application for the use of Alimta induction treatment followed by Alimta maintenance treatment in advanced nonsquamous non-small cell lung cancer.

And also in Europe, we recently received a CHMP recommendation for approval of Bydureon for the treatment of Type 2 diabetes.

Based on this recommendation, we expect receiving EC approval by late June.

On the clinical front, we disclosed positive top-line results of a Phase II trial of once-monthly formulation of exenatide.

We plan to meet with regulatory authorities to determine next steps for this program.

We also disclosed top-line results of the Phase III DURATION-6 trial comparing Bydureon to the highest approved dose of Victoza.

Bydureon demonstrated a robust reduction in HbA1c from baseline.

However, it did not meet the primary end point of noninferiority to Victoza, 1.8 milligram in the reduction of HbA1c.

Additional data from the trial is planned to be disclosed at a later date.

And we began the first Phase III trial for our mGlu 2/3 prodrug for schizophrenia.

Lastly, on the legal front, we received a favorable ruling on the Cymbalta patent challenge.

[Lockhart] voluntarily consented to entry of judgment in favor of Lilly on all pending issues, which the Judge so ordered.

The Judge asked the remaining parties to indicate if they intend to proceed to trial and all nine defendants failed to indicate that they intend to proceed.

As a result, we remain of the view that there will be no generic fluoxetine product coming to market until the Cymbalta patent expires.

However, a trial date remains on the court's docket for June of this year.

A meeting with the court, Lilly and the defendants will be held later this month to determine next steps in this litigation.

While not specific to Lilly, perhaps one of the most notable events since our last earnings call was the disaster in Japan caused by the March 11 earthquake and its aftermath.

Because Japan is such a big part of our growth strategy, I would like to provide you with some details.

First and foremost, we were relieved that within hours we were able to account for the safety of all Lilly Japan employees.

We are also proud of the support, both monetary and product donations, that Lilly Japan, the Lilly Foundation and Eli Lilly & Co.

have provided to help those affected by this tragedy.

From a business perspective, our Japanese affiliate headquarters and development Center of Excellence are located in Kobe and we have a manufacturing plant in Seishin, just outside of Kobe.

These operations are approximately 500 miles southwest of the disaster zone.

As a result, we had no damages or other issues at these sites.

In terms of product supply, we have encountered no issues getting manufacturing products into or out of Japan and we have not had and do not anticipate having any issues with the supply of raw materials, intermediates or finished product from our Japanese suppliers.

Prior to the earthquake, we had robust inventory levels throughout our supply chain for materials sourced from Japan.

In terms of domestic sales, we did receive what appear to have been precautionary orders from customers totaling $30 million to $35 million in the quarter.

We expect that this will wash out in future quarters.

Our thoughts are with the Japanese people on what will surely be a long and difficult recovery.

We will continue to provide them our support and we will continue to ensure that Lilly products reach the patients who need them.

Now with this background, Ronika will discuss our Q1 financial results and provide our pipeline update and Derica will cover key events for the remainder of 2011 and our financial guidance for the year.

Ronika?

Thanks, Phil.

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

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

I will start on slide 7 with a quick look at our Q1 income statement.

On a non-GAAP basis, you can see that we generated solid revenue growth of 6% this quarter.

Excluding Gemzar outside of Japan and the effect of US healthcare reform, revenue would have grown 10%.

Gross margin as a percentage of revenue increased slightly from 79.5% to 79.8%.

Operating expenses defined as the sum of R&D and SG&A grew 10% this quarter.

Drivers for the increase included higher administrative expenses driven by the pharmaceutical manufacturers fee associated with US healthcare reform and higher litigation expenses, higher marketing and selling expenses driven by O-US investments primarily in the emerging markets and higher R&D expense due primarily to increased late-stage clinical trials expenses.

In addition, both SG&A and R&D expenses increased due to the BI alliance.

Excluding the effect of US healthcare reform and the BI alliance, operating expenses would have grown 7%.

Other income and deductions was a net expense this year compared to net income last year.

You may remember that we had substantial income in Q1 2010 related to the recovery of damages from generic olanzapine marketers in Germany and from gains on the sales of securities acquired in the ImClone acquisition.

Our tax rate was 20.9% this quarter, considerably lower than 27.3% from last year's Q1.

Last year's Q1 rate included an $85.1 million charge related to the future taxation of the retiree drug subsidy and did not benefit from the R&D tax credit as it had lapsed.

This year, we did benefit from the R&D tax credit, as well as from the resolution of certain IRS tax matters.

At the bottom line, our non-GAAP EPS increased 5% to $1.24.

As indicated when we provided the 2011 guidance in January, we saw robust EPS growth in our business in Q1, excluding US healthcare reform, the effect of the Gemzar patent expiration outside of Japan and investments related to the BI diabetes alliance.

Excluding these items, EPS would have grown low double digits.

Slide 8 shows our reported income statement while slide 9 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 Q1 revenue.

As you can see on slide 10, total revenue growth of 6% was driven by solid volume growth of 5% and foreign exchange contributing the remaining 1%.

Price had no impact on the worldwide revenue growth.

We continue to see strong volume growth from our three countercyclical growth engines -- Japan, Elanco Animal Health and emerging markets.

Volume growth in Japan was 34%, driven by recent launches of Cymbalta and Forteo, as well as continued strong growth of Alimta, Zyprexa, Gemzar and Humalog.

In addition, roughly a quarter of the Q1 volume growth was attributable to precautionary buying Phil mentioned earlier, Elanco Animal Health volume growth of 25% in Q1 driven by the increased demand for food animal products globally, as well as by the launch of Trifexis in the US and the acquisition of certain European animal health assets from Pfizer.

Going forward, we expect animal health revenue growth to benefit from international launches of Comfortis.

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

We also built a substantial development capability in animal health vaccines and, as demonstrated by our recent offer to acquire Janssen's animal health business, we will continue to look externally for opportunities to drive growth in this business.

Finally, you will see strong 14% volume growth from our human pharma products in the rest-of-the-world line.

Emerging market countries represented about three-quarters of the sales in Q1 and as a group also registered 14% volume growth.

In terms of products, growth in emerging market countries was driven by Alimta, Cymbalta, Humalog and Humulin.

In terms of geographies, we saw robust growth across a host of geographies in Asia, Latin America and, of course, China.

Given the very small effect of foreign exchange on our results this quarter, we provided our summarized non-GAAP and reported income statements with and without the effect of foreign exchange in our supplementary slides.

Now, before I turn the call over to Derica, let me provide a brief update on our pipeline.

On slide 11, you will find a view of our portfolio of new molecular entities in clinical development as of April 11 inclusive of changes since our January 27 earnings call.

Our clinical stage portfolio now stands at 69 distinct NMEs, including 31 compounds in Phase II and Phase III.

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

Advancing our pipeline remains our number one priority as reflected by the arrows on slide 11.

Since our January update, we have begun Phase III testing of mGlu 2/3 for schizophrenia, bringing our total Phase III portfolio to 9 NMEs.

We continue to be on track to meet our goal of having 10 NMEs in Phase III by the end of the year.

Other molecules that could begin Phase III in 2011 include our novel basal insulin analog, our new insulin glargine product and our IL-17 antibody.

We also advanced two molecules into Phase II and two into Phase I.

Finally, both Tasisulam and [IL beta] antibody continued earlier stage development after we terminated clinical trials in their lead indications and we terminated one molecule in Phase I development.

With this current pipeline and our continued business development efforts, our goal is still to launch on average two molecular entities per year beginning in 2013, providing a foundation for future growth.

Derica?

Thanks, Ronika.

To set the stage for our financial guidance, let me briefly cover some of the key pipeline events for the remainder of the year.

Having now received a CHMP recommendation for approval of Bydureon, we look forward to launching the product in Europe later this year.

We have a number of other potential regulatory approvals this year, including linagliptan in the US, Europe and Japan and here in the US, Cialis for BPH, Byetta in combination with basal insulin and Erbitux for first-line head and neck cancer.

Expected regulatory submissions include our response to the FDA complete response letter for Bydureon, sBLA for Erbitux in first-line metastatic colorectal cancer and for first-line non-small cell lung cancer, Byetta in combination with basal insulin in Europe and our response to the FDA complete response letter for Amyvid.

Upcoming clinical trial data disclosures include initial results from the Phase III trial of Alimta induction treatment followed by Alimta maintenance treatment in advanced nonsquamous non-small cell lung cancer at ASCO.

At the EULAR meeting in London in May, we will present data on the two Phase II trials of our BAFF antibody in rheumatoid arthritis.

And lastly, data from a study assessing the safety of Cialis when coadministered with alpha blockers will be presented in May at the American Association of Urology meeting in Washington.

Just late last month, data from the clinical trial evaluating tadalafil in men with ED and with signs and symptoms of BPH was presented at the European Association of Urology.

Finally, as mentioned earlier, Phase III trials could begin this year for our novel basal insulin analog and our new insulin glargine product and for our own anti-IL-17 antibody.

In terms of our 2011 financial guidance, as you have seen in our press release, we still expect 2011 non-GAAP earnings per share of between $4.15 and $4.30.

Our 2011 reported EPS guidance range of $3.86 to $4.01 reflects the $0.23 IPR&D charge from the BI alliance and the $0.06 restructuring charge.

The business fundamentals underlying our guidance are essentially unchanged since our last update in January.

However, a number of foreign currencies, in particular the euro, have appreciated in recent months.

As a result, we are updating our revenue growth and growth margin percent guidance.

Assuming rates remain at current levels, we now expect 2011 revenue to grow in the low single digits and we expect 2011 gross margins as a percent of revenue to decline by approximately 3 percentage points.

Also, we are now estimating that the 2011 effective tax rate will be approximately 21% on a non-GAAP basis and approximately 20% on a reported basis.

Both of these rates reflect a benefit from the resolution of certain IRS audit matters.

In addition, the reported tax rate for the full year reflects the tax benefit of the in-process R&D charge associated with the BI alliance.

All other elements of our line item guidance remain unchanged.

Now slide 14 provides a reconciliation between reported and non-GAAP EPS for 2010 and the associated growth rates from these numbers to our revised 2011 guidance.

Now in summary, so far, 2011 is playing out as anticipated.

We are making progress advancing our pipeline and we are delivering solid financial results.

With the initiation of Phase III trials for mGlu 2/3 for schizophrenia, we now have nine molecules in Phase III development, putting us on track to meet our goal of having 10 molecules in Phase III development by the end of this year with more coming behind.

Along with continued business development, this pipeline serves as the foundation of our growth post years YV.

During Q1, we also made progress on our productivity goals and are on track to meet our 2011 headcount and expense containment goals.

When we discussed our 2011 guidance in detail on the January call, I shared that we face a number of headwinds this year as patent expirations will lower sales outside of Japan for, first, for Gemzar and later for Zyprexa.

US healthcare reform will exact a higher cost this year than it did in 2010 and we will face some near-term dilution from our strategic diabetes alliance with Behringer Ingelheim.

I also shared that we expect to see continued strong performance in the rest of our business.

We did see the negative impact in Q1 of these items and we delivered strong growth in the rest of our business as promised.

Excluding these items, on a non-GAAP basis, we posted revenue growth of 10%, operating expense growth of 7% and low double digit EPS growth.

We saw robust revenue growth from our three countercyclical growth engines with Japan growing 41%, Elanco growing 28% and emerging markets growing 15%.

Moving forward, we will continue to focus on delivering strong financial results, improving productivity to allow for appropriate investment in our patent protected products in our pipeline and on speeding the next generation of Lilly molecules to market to provide growth post years YZ.

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

Operator, first caller, please.

(Operator Instructions).

Jami Rubin, Goldman Sachs.

Thank you.

Derica, a question for you on Bydureon.

And congratulations getting CPMP approval, but I am wondering if you could share with us sort of generally how you are thinking about pricing relative to Victoza in light of the DURATION-6 results.

And then also included in the recommendation for approval was a PhRMA Code vigilance program and I am wondering if you could elaborate on that.

And just lastly, just to switch gears here on the gross margin, the delta in the gross margin, the delta in terms of your new guidance for the full year reflects a $0.17 hit.

And I am wondering if that is all related to foreign currency or is there cushion related to Zyprexa going generic?

Thanks.

Sure, Jami, I will take the Bydureon pricing question and the question also in terms of the gross margin.

Jan, you may want to deal with the PhRMA Code vigilance question.

As it relates to Bydureon pricing, clearly, at this stage, we are not in a position to disclose what our pricing strategy would be behind this brand before we have even launched it.

But what I can say is we still feel very confident in the commercial prospects for Bydureon and given the label that we would anticipate.

As it relates to your gross margin question regarding FX, it is all attributable to FX rate in terms of our revised guidance of minus 2 percentage points to minus 3 percentage points decline.

In relation to risk management for Bydureon, of course, we have safety very high on the agenda and we know that there are certain special issues that have been discussed in the past.

But in general, we have our safety surveyance that we need and particularly looking for if there are increase in pancreatitis, thyroid tumors, etc.

A couple of quick things as well, in terms of additional details on the potential label coming out of Europe and specific details on the PhRMA Code vigilance plan, those are things we will need to wait to comment on until the EC provides its formal approval of the CHMP recommendation, which we expect to come hopefully in late June, and then in terms of pricing, do keep in mind that the DURATION-6 trial was against the 1.8 milligram dose of Victoza.

Rough numbers in many of the European markets -- it would appear that the 1.2 was launched at roughly parity to Byetta, which means that the 1.8 would be the substantial premium.

So as we enter those discussions with pricing authorities in Europe, we will be looking at the full raft of DURATION trials where we have very strong data against insulin glargine, against Actos, against Januvia and against Byetta, all of which have a price that is out in the marketplace and that as you are mentioning we will also have the DURATION-6 data against the 1.8 milligram dose of Victoza that will enter those discussions as well.

So again, as Derica said, a very strong overall package.

Brad, next caller, please.

Tim Anderson, Sanford Bernstein.

Thank you.

On the 2011 guidance, is that likely to be impacted by the pending purchase of the animal health products and more generally, what is the landscape looking like for Lilly in terms of additional acquisitions, either in animal health or other areas, that might provide you with a greater level of diversification?

And then on solanezumab, can you narrow down the timing of when we will likely see results and also where you are with the interim looks and whether you will announce one of those -- well, once those interim looks have been completed?

Okay, great.

Maybe, Derica, you can comment on the 2011 guidance and how that might be impacted by the Janssen acquisition.

Then maybe you and Jeff can comment respectively on the general and then animal health acquisition landscape.

And then Jan and Ronika, maybe the solanezumab update would be great.

Tim, this is Derica.

Our 2011 guidance does fully take into account the acquisition of the Janssen animal health assets, both top line, as well as bottom line.

In regards to business development, we continue to be active in this space, but I think we have been also very clear about our intent.

We are not in the market for large-scale M&A, but we are looking for opportunities to continue to enhance our business both from the standpoint of either finding molecules that complement our development pipeline portfolio or finding those product opportunities that we can bring in that bring sales and cash with it.

And then clearly what we also saw is we looked at the Janssen acquisition in terms of animal health, a way of bolstering our animal health business, which Jeff can respond to further.

Yes, Tim, I would say we have made four acquisitions in four years, Lilly has and it is all playing around this countercyclical growth engine that was made in the comments.

We will continue to be opportunistic, but it really has to drive three things.

One is growth.

Strategically, it has to drive growth, diversity and bring capability and I would say all four acquisitions in the past have done that.

That is what we will continue to look for as we go forward.

Although the organic growth that we see over the next two, three years in animal health is going to be significant with six new launches this year and more launches to come in 2012.

In relation to solanezumab, our (inaudible) antibody then to stop progression of Alzheimer's disease, we will have an interim analysis this year in relation to futility and safety.

The final data from the two Phase III trials are expected mid-2012 and then we will disclose the data at an appropriate event.

One other thing I would add, Tim, you have seen we had, in an effort to give you guys some more exposure to the operational heads of our various areas of the Company, Enrique on the call last quarter, Jeff this quarter, we will likely have Jacques Tapiero, Head of our Emerging Markets area, on next quarter.

That is an area in emerging markets countries where on your question of M&A probably for the last 24 months or so, we have seen pricing very high frankly and more likely, you will see things that are of the collaboration and licensing in the short term until those trends reverse in the emerging markets properties.

Brad, next caller, please.

Gregg Gilbert, Merrill Lynch.

Thank you.

Three quick ones.

First, Derica, were there any wholesaler or retailer inventory level changes of note that affected sales in the quarter in the US?

Secondly, can you talk about what you needed to see on your GLP-1 to move it into Phase III?

What was the bar there with any specifics you care to share?

And thirdly, more strategically, should we view the Abbott acquisition as a sign of things to come for Lilly or more as a one-off that will take you some time to assess before you really answer that question for yourselves?

Thanks.

We will have Derica take your first and third questions, Gregg and then we will go ahead and handle the GLP question you asked as well.

Gregg, we actually had -- we saw two types of activities that relates to wholesalers stocking and destocking in the first quarter.

In the US, we did see a level of destocking on the part of wholesalers and as best as we can tell, even at the retail level as well in the first quarter.

So that destocking served to dampen our revenue growth in the US in Q1.

At the same time, given the disaster that we all witnessed in Japan, we saw a buy-in on the part of wholesalers or distributors there in the case of emergency.

And that buy-in in Japan was probably in the range of around $30 million to $35 million in the quarter.

So of the 41% of Japan growth that we saw in the quarter, about 25% of that was related to this buy-in.

As it relates to your third question around the Abbott acquisition, just to remind everyone, when we did the Abbott acquisition, it was solely based upon the prospect of that compound itself and our thesis behind that is that we saw an interesting therapeutic that could complement our portfolio.

Clearly, as that plays out, it gives us an opportunity to ponder other alternatives.

But for right now, we were planning and progressing as though it is around Abbott itself.

Now regarding your second question, Gregg, you mentioned GLP moving into Phase III.

We actually moved GLP into Phase III quite a while ago.

I think you may have meant to say mGlu 2/3 in which we moved into Phase III this past quarter.

If that is your question, I am going to actually turn the call over to Jan to give some more clarity, but we actually presented some six-month safety study data at the beginning of April at the ICOSR meeting, the International Congress for Schizophrenia Research, which discharged some of the risk.

But again, I will turn it over to Jan to answer further.

Thank you.

The whole schizophrenia area is in desperate need of some new agents in addition to the currently used typical antipsychotics.

So we are very interested in our mGlu 2/3 agonist as an optional treatment for these patients.

The study mentioned discharged the risk in relation to seizures as we see it in relation then to standard of care.

It is known that patients with schizophrenia do have an increased risk of seizures, but our agents did not seem to have any more effects than standard of care.

We should remember there are some potential clear advantages with our mGlu 2/3 agent, less risk for extrapyramidal symptoms.

And also it has a much better metabolic profile in relation then to typical antipsychotics, even with a potential weight loss, not a weight gain.

Great, thanks Jan.

Lastly, Gregg, on the US piece, let's put some numbers around what Derica had mentioned.

Each year, we typically would end within the guidelines we have with the wholesalers, but at the higher end of the days on hand to wholesalers at the end of the calendar year and we typically come down in Q1.

That was the case both in 2010 and in 2011.

However, the decline was a bit steeper in 2011 and that would have trimmed about 1 percentage point off of the US growth rate.

Brad, next caller, please.

David Risinger, Morgan Stanley.

Thanks very much.

I have a couple questions.

First, I missed the answer to the question about whether the guidance already assumes the inclusion of the animal health business later this year.

So that is my first question.

Second, with respect to solanezumab, I think that Jan mentioned that there is a futility analysis this year.

Could you please comment on whether that is in the first half such that you will be able to comment on it at your June 30 analyst meeting or not until the second half?

And then third, with respect to your long-term earnings outlook, Derica, do you expect to communicate that at the June 30 analyst meeting or prior to the meeting on a separate call?

Thank you.

David, I will take your first and third question.

This is Derica.

As I stated earlier, our guidance for 2011 does fully contemplate the animal health transaction.

In regards to the long-term guidance or construct that we put out there in December of 2009, I would see ourselves coming back to that at our June analyst meeting.

I don't anticipate us giving any more color on that prior to our June meeting.

Jan?

In relation to the timing of the futility analysis, we have decided not to comment exactly when this happened during this year.

What I can say is that the safety profile so far in these trials look better than for (inaudible) and there are actually less patients that have stopped the trial because of safety issues.

Brad, next caller, please.

Steve Scala, Cowen.

Thank you.

I have two questions.

Again, on solanezumab, how is futility defined in these trials since, at 12 months, one might not expect a material cognitive decline in any patient group?

And if that is the case, is that a risk for these trials?

And then second, when in 2013 might you file GLP-Fc?

Might it be a first-half event or might it be a second-half event?

Thank you.

Jan, you want to --?

Well, I think I have said what I want to say about solanezumab.

We now need to wait for the data.

With regards to GLP-Fc, we have provided no specifics with regard to timing on filing.

We have initiated all four ward studies, so we are pleased with the progress there, but no additional information on timing.

John Boris, Citi.

Thanks for taking the questions.

First question for Derica on the animal health business from Janssen, can you just give us some color on the size of that business, especially in light of it being incorporated in your guidance?

Second question on China in particular and your diabetes franchise there, I think the New England Journal of Medicine cited there is about 92 million diabetics there and your marketshare, relative to your competition, is a little bit lower than your competition.

What are you going to do to remedy that potentially going forward?

And then one question for Jan.

Within the 2013 time period, aside from GLP-1-Fc, what are the other one or two assets that might be positioned for launch at that time?

Okay, firstly, John, I think we are going to have Jeff comment on your first question on the animal health and the size of the Janssen business and then maybe Derica on the China diabetes question and then onto Jan.

Yes, so we have -- Janssen is represented in Vetnosis, the actual independent animal health data that is tracked by this company.

It represents $200 million this past year, $170 million the year before.

I would note, though, that outside of the US, which is about $25 million, they are distributor sales so it represents a little bit level that is higher than what really Janssen and we will recognize.

So that number is a little bit high, and then the actual margins would be very much average for the industry in animal health.

John, in regards to China, as I stated -- well, actually, it was another interview this morning -- our China business grew 23% in the first quarter.

And if you look at the diabetes opportunity, while today we are -- clearly have a smaller share of market position versus our competition, we have taken decisive actions to improve our competitive position going forward.

We have recently commissioned a new diabetes research facility, an operation there.

In addition to that we are actually -- we have commissioned also building a second manufacturing facility in China, which will be diabetes related as well.

And then, thirdly, we have more than doubled the size of our commercial footprint.

So we believe that we are positioning ourselves to take advantage of this significant opportunity in that marketplace and we see ourselves with the opportunity to gain share.

Part of the learning for that is also with what we have seen here in the US.

So even in a market where you could say it's fairly saturated in the US, we have seen a significant uptick in our diabetes share of market, both on and NRx and a TRX if you look at the last year.

Over my years I have learned to speculate on timing for launch dates is one of the most difficult things we have.

We should also remember that the two NME launches per year from 2013 should potentially come both from internal and in-licensing or acquisitions.

So those are three options.

There are some programs with the right data that could deliver ahead of time.

Potentially solanezumab could be one of them.

Bert Hazlett, BMO Capital Markets.

Thanks.

I have a one question on Japan and another on the pipeline.

First on Japan, you did have some buy-in but there do seem to be some products that are growing fairly robustly, I guess Cymbalta, Alimta, Evista, and Strattera.

Could you discuss your expectations for growth and the potential kind of countercyclical nature in terms of additional product launches that would be coming down the road there?

And then secondly, in terms of the pipeline for Jan, I see you are moving the IL-17 program forward in rheumatoid arthritis.

My count is this will be at least the third program in RA.

You'll have the oral JAK1/JAK2.

You will have the anti-BAFF antibody in RA and now the IL-17.

Could you talk about its positioning in RA and vis-a-vis the BAFF antibody in particular?

Thank you very much.

Hi, Bert.

This is Ronika.

With regards to Japan and launches, you might remember earlier in the decade, we had mentioned -- or last decade, we had mentioned that our goal was to launch a lot of the products we had not yet launched in Japan that had already been launched in the US and those include several that you mentioned -- Alimta and Strattera, which launched in 2009, as well as Cymbalta, Forteo, Byetta that also launched in Japan in 2010.

Also keep in mind part of the countercyclical nature of Japan includes the fact that we have Zyprexa in Japan through 15, 2015.

So products that could also be launched in the near term in Japan include our partnership with BI, specifically linagliptan, as a potential launch in Japan in 2011 or approval, I should say, in 2011.

So those are the highlights with regards to Japan.

Jan?

Yes, we are very excited about our opportunities in rheumatoid arthritis and the autoimmune area in general.

Having these three agents is actually an opportunity, not a problem.

First of all, the oral JAK1/JAK2 inhibitor partnered with Incyte could be, I think, a very competitive agent in relation to Pfizer's recent Phase III agent, which have received so much attention, tofacitinib, with positive recent data.

We are currently exploring then the JAK1/JAK2 compound in Phase IIb related to dose safety and efficacy.

Oral agents will be placed earlier most likely than in the treatment of rheumatoid arthritis, competing with methotrexate as a key initial agent.

Our two biologicals, the anti-BAFF and IL-17, represents very novel agents with new mechanisms to influence then the immune system -- the BAFF against the B cells and the IL-17 more as an inflammatory cytokine that is released.

And both of these agents have positive Phase II data in rheumatoid arthritis and they will be positioned then in patients that actually are failing to TNF and we know that there is a substantial proportion of patients, up to 50%, that don't respond well enough to TNF blockers and even if you then can switch to another TNF agent, the efficacy goes away with time.

So we see both the BAFF and the IL-17 as potential new treatment options in actually quite a large patient population that have been failing TNF agents.

Burt, this is Derica.

Just to expound a little bit more here on your question regarding Japan.

If you recognize -- last year, Japan crossed the $1.5 billion mark.

So we surpassed the $1.5 billion.

That is a business that we believe we can double the size of that business over the next four to five years.

And you look at -- as Ronika said, you have got brands like Cymbalta, Zyprexa 315 and Alimta, but you are also seeing the impact of the recent launch of Forteo, as well as the continued growth around Alimta, Humalog and Gemzar.

So that gives you some idea of what we are expecting in terms of that countercyclical growth engine we have been talking about all along with emerging markets, as well as Elanco, that is helping to mute the impact of patent expirations like Gemzar in Q1 and later Zyprexa this year.

And I will still remind everyone that we -- top line we grew 6%, 5% volume and that includes the impact of the generic erosion for Gemzar in the quarter.

And the generic erosion for Gemzar has shaved about 3 percentage points nearly off the worldwide growth rate for the quarter as well.

So it is a pretty significant impact.

Next caller, please.

Seamus Fernandez, Leerink Swann.

Thanks very much.

So just a couple of quick pipeline questions.

Can you just update us on linagliptan and whether or not Lilly expects that panel to be fielded for the product prior to approval?

Looks like there won't be a panel on this drug.

Maybe just give us your reasons specifically for that.

Second, you have moved a CETP inhibitor forward, I believe, or have a CETP inhibitor in Phase II in atherosclerosis.

Can you just update us on your thoughts with regard to that mechanism and what you believe is necessary to move that product into Phase III safely?

And then the last question is actually can you just update us on the status of necitumumab?

I believe one of the studies there was actually placed on clinical hold, so just looking for an update there.

Thanks.

Okay, in relation to our DPP-4 inhibitor, linagliptan, together with Boehringer, that was filed last year and we have no further comments I think on dates or potential advisory boards, etc.

We see this agent as a very promising oral antidiabetic compound that complements our offering to patients making Lilly very broad, if not the broadest offering in the whole therapeutic area of diabetes across major pharma.

We are quite enthusiastic about our CETP inhibitor, which now are in Phase II trials in combination with statins.

We base this on our Phase I data.

But also actually as a class, the competitor molecules both from Merck and Roche, as you know, are moving ahead with Phase III trials.

We feel we have a competitive agent based on what we have seen so far.

What you need in this area is then to avoid the problems that Pfizer had with torcetrapib, namely then, increasing blood pressure.

We have not seen this for our compound and we are enthusiastically moving it forward, I think we can say currently.

Necitumumab, we are still pursuing the squamous non-small cell lung cancer indication in Phase III

Catherine Arnold, Credit Suisse.

Hi, good morning.

A couple questions.

One, I wanted to ask you about your US price increase, if it had not been for healthcare reform impacts and then I wanted more specifics.

You guys have given numbers about the effect of the overall reform, but I wasn't clear if whether what you said included doughnut hole or how you are going to be recording those.

Is this going to be as those discounts are demanded of you or are you sort of accruing an expectation across four quarters?

And then on solanezumab, I wanted to just ask one more question that hasn't been asked yet, which is, as far as when the prespecified analysis is done at the end of the trial, is there going to be severity of disease stratification in that prespecified analysis in addition, I would presume, to carrier/non-carrier?

Okay, Derica, you want to handle the first two and then Jan, the last one on solanezumab?

Sure.

Catherine, this is Derica.

I think you are aware what the dollar impact of healthcare reform as it relates to revenue growth was in the first quarter.

It was about $90 million.

If you look at our guidance for the year, both for the revenue piece, which was -- we believe the healthcare reform impact will be in the range of $400 million to $500 million.

That includes the impact of -- the anticipated impact of the doughnut hole.

And then as you recall, the pharmaceutical excise fee will then impact us in the administrative OpEx line and that's we anticipate being to the tune of about $150 million to $200 million for the year.

Right.

I appreciate your interest in solanezumab.

It certainly could be a tremendous agent for patients with Alzheimer.

The primary endpoint here is clearly reducing then disease progression and we will look at mutation status as a secondary opportunity.

A couple of additional comments maybe, Catherine.

The $90 million impact of US healthcare reform on revenue this quarter, if you are looking at the impact on the growth rate, do recall that we had said approximately $60 million was the impact to revenue in Q1 of 2010.

I think if you look in the Q, you'll actually find it was $62.4 million was the number.

So it trimmed about 1 percentage point off of the US revenue growth rate and about half a percentage point off of our worldwide growth rate for the quarter.

And then in terms of the doughnut hole, I think there may be different practices at the various companies.

You may want to check on this, but essentially for the doughnut hole, we have done our best to try to model what we think will actually be occurring.

In other words, the charge that we would have recognized in Q1 would assume that a whole host of people would not yet have hit the doughnut hole during this quarter.

And if you look at the approximately $90 million for the year and compare it to the $400 million to $500 million for the full year, you'll see that assumes a bump-up in Q2 through Q4 compared to Q1.

That bump-up is due to the higher expected charge that we will be recognizing for the doughnut hole as more seniors on Medicare hit that part of the benefit from the US healthcare reform.

Marc Goodman, UBS.

Yes, Derica, can you give us a little more flavor on what is going on in the restructuring?

How much has been done so far?

Where is the impact and how much more there is?

And as you have gotten in there to cut costs, are you finding more areas to cut?

And just give us a little more detail on that.

And then the other question was what was the key product that was ordered so much of in Japan?

Was it Zyprexa or was it all the products?

Okay, Marc, this is Derica.

In regards to update our restructuring, as it relates to our $1 billion cost-savings goal, we are very much on track to achieve that.

In fact, I anticipate that we are going to exceed that goal, okay, for the year.

And in addition to that, on the headcount front, we have talked about reducing our headcount, excluding strategic acquisitions or strategic investments by about 5,500.

We are about 75% of our way to that goal as well.

So both of those we anticipate meeting by the end of the year, if not exceeding.

As it relates to other of additional insights, I think that we have instruments and tools like Six Sigma that we have been utilizing since 2004 where, as we approach the end of the year of 2011, that is not going to be the end of our efforts to drive further efficiency gains throughout our business.

We know that our patent challenges don't go away at the end of 2011.

So I think there will be further opportunities.

How much?

I am not prepared to define that for you guys here today.

But recognize we believe that we will have the capacity to make the investment necessary in our pipeline, as well as sustaining the dividend and that was all predicated on us achieving the $1 billion goal this year.

Jill?

In terms of the sales, products ordered in Japan, the sales were actually increased across the board driven by Cymbalta, Forteo and Alimta.

Chris Schott, JPMorgan.

Great, thanks very much.

My first question was on the quarterly progression of gross margins.

I know there can be a lot of variability quarter to quarter in your gross margins, so I was just looking for a little bit more clarity on the progression this year.

I guess based on your new guidance, it looks like you are going to average somewhere between 77% and 78% for the remainder of this year.

I guess is there any one quarter that is going to be seeing a disproportionate hit from FX?

And also just going at an earlier question, are you anticipating a meaningful drop in fourth-quarter gross margins as the generic Zyprexa impact ramps?

Second question just was can you also, with the mGlu, walk through the timelines and the scope of that Phase III program?

And in that answer, would you also touch on any incremental data that might be requested by the FDA to address some of the earlier seizure data points the product saw that might be included in that Phase III program?

Thanks.

Okay, Chris.

I will go ahead and try -- let me start with the mGlu 2/3 first.

We don't have with us the specific timing for the trial.

The one thing I would highlight is Ronika had mentioned the presentation earlier this year of the six-month safety data.

We will have probably late this year, at the best maybe early next year, the opportunity to present the 12-month safety data from that trial, so that will be the next major data readout that I would point you to for mGlu 2/3.

And then in terms of the gross margin percent dynamics, with the strengthening of foreign currencies here in the first quarter, particularly of the euro, we would expect that, for the full year, we would have a substantial additional cost booked to cost of sales from this FX impact on international inventory sold.

If you recall there were some pretty different dynamics last year quarter by quarter.

Probably the best thing I can do is point you to slide 17 in the supplemental portion of our slide deck for today where, at the bottom, you will see for each discrete quarter how much FX affected gross margin in those particular quarters for the year.

At a high level, we had a modest benefit to cost of sales booked Q2 last year, a significant benefit to cost of sales booked in Q3.

So at current rates, you have a very unfavorable compare to the Q3 number.

And then actually we flipped then to having a modest addition booked to cost of sales in the fourth quarter.

I hope that helps.

Brad, next caller please.

You had a question about Zyprexa and its impact on gross margins.

So yes, when we lose Zyprexa and as we go throughout the year, but more profoundly in the fourth quarter when we lose the US, it will also have a detrimental or negative impact on our gross margin.

Damien Conover, Morningstar.

Yes, thanks for taking the question.

I just wanted to follow up on your comment of the acquired products coming from the animal -- into the animal health division coming in at industry average margins.

Could you just remind us what those margins are, and also how Lilly's margins in the animal health business stacks up to the industry average?

Sure, thanks, Damien.

Yes, so industry averages -- if you look at kind of at a higher level, what you have is usually in animal health lower SG&A, so lower sales and admin costs, higher manufacturing costs, so we are slightly off from the bottom line.

So the industry averages somewhere on the margin line between 20% and 25%.

So Janssen is on the lower end of that range and we would be in that range as well.

When you step back and look at the business though, I think why we are quite excited about going forward, first, Janssen does give us more of a global footprint, gives us more capability inside of Europe, as well as we have got 100 pending registrations of different products across all the countries internationally.

So it was a very European business we are going to take global.

And then at kind of a macro level, how we are going to continue to see margin improvement and above-industry growth rates in Elanco is just looking at the three big areas in animal health where there is higher margin companion animals, we are at about 10%.

The industry is at 40%.

Europe, we are at about 10%, 11% exactly and the industry is about 30%.

And vaccines, we are very small with our Pfizer acquisition and the industry is at about 25%.

So we see tremendous upside in high-margin areas in these three segments.

So that is what gives us a lot of optimism and growth as we go forward in the next three to five years in animal health.

Great, thanks.

Having exhausted the callers on the line, I will go ahead and turn it over to Derica to close our call for the day.

Thanks, Phil.

I first want to say thanks to all of you for joining us today.

We very much appreciate your interest in our Company and we hope that you found the information we've shared today about our products and our pipeline to be very helpful.

Once again, just so far this year in 2011, it is playing out as we anticipated.

We are clearly making progress in advancing our pipeline, standing at nine Phase III molecules versus our goal of 10 by the end of this year.

I think our solid financial results is evident and we continue to see the countercyclical growth areas performing as we had anticipated as well as I talked about Japan, animal health and our emerging markets.

These are the things that are going to allow us to be able to weather the impact of the patent erosions of products like Gemzar, and Strattera, going forward.

So hopefully, you found this to be insightful.

We look forward to seeing many of you at our investor meeting in New York City on June 30 and to our continued interaction throughout the year.

Our IR team will be available to answer any questions that you guys may have at the conclusion of this call.

I hope everyone has a great day.

Take care.

Ladies and gentlemen, this conference will be available for replay today after 11 a.m.

lasting through midnight on April 25.

You may access the AT&T Executive Teleconference replay system at any time by dialing 1-800-475-6701 entering the access code 197298.

International participants may dial 320-365-3844 and again, those numbers are 1-800-475-6701 and 320-365-3844, entering the access code 197298.

That does conclude your conference for today.

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

You may now disconnect.