禮來公司 (LLY) 2011 Q2 法說會逐字稿

Welcome to the Q2 earnings 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'd now like to turn the conference over to Vice President of Investor Relations, Phil Johnson.

Please go ahead.

Good morning, and thanks for joining us for Eli Lilly and Company's second-quarter 2011 earnings conference call.

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

Joining me today are our Chief Financial Officer, Derica Rice; our Chief Scientific Officer, Dr.

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

Since we just provided a comprehensive overview of our business at our investment community meeting on June 30, today we'll limit our prepared remarks, leaving more time for the Q&A session.

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 Q1 earnings call in April, we've had a number of significant events, many of them in our diabetes business.

On the regulatory front, we had important news for Bydureon.

The European Commission granted final approval of Bydureon, the long-acting form of exenatide, and the first once-weekly treatment for adults with Type 2 diabetes.

We launched in the UK last week, with launches in other European countries expected over the course of 2011 and the first half of 2012.

We submitted Bydureon to the regulatory authorities in Japan, and, along with Amylin, we completed a thorough QT study to support the US NDA for Bydureon.

In this study, when administered at and above therapeutic levels, exenatide did not prolong the corrected QT interval in healthy individuals.

Further, the study found no relationship between QTc intervals and plasma exenatide concentrations.

We intend to submit our reply to the FDA's Complete Response Letter in Q3.

We also had quite a bit of regulatory news on linagliptin.

The FDA approved linagliptin under the trade name Tradjenta for the treatment of adults with Type 2 diabetes.

Along with Boehringer Ingelheim, we launched the product here in the US in May.

Tradjenta is the first DPP-4 inhibitor to be approved at 1 dosage strength, with no dose adjustment recommended for patients with kidney or liver impairment.

The Japanese Ministry of Health and Welfare approved linagliptin under the trade name Trazenta.

Along with BI, we expect to launch the product in Japan later this quarter.

Continuing the string of rapid approvals, regulatory authorities in Mexico and Brazil also approved linagliptin, known there as Trayenta.

And launches in these countries are also expected in Q3.

In Europe, the CHMP recommended approval of Trajenta, and we expect the final EC approval later this quarter.

Clearly, we're very pleased with the significant progress achieved during Q2 in our diabetes business.

In non-diabetes regulatory news, along with Bristol-Myers Squibb, we submitted the sBLA for Erbitux in first line non-small cell lung cancer.

On the clinical front, at ASCO we presented positive data from PARAMOUNT, the second study to evaluate the use of Alimta as maintenance therapy in patients with advanced non-squamous non-small cell lung cancer, and the first study to evaluate the use of continuation maintenance with Alimta following first line Alimta plus cisplatin therapy.

Based on data from PARAMOUNT, we submitted our dossier in Europe earlier this year, and we plan to submit here in the US once we have more mature overall survival data.

On the business development front, we received final EC approval for, and finally closed on, our acquisition of Janssen's animal health business.

We signed an exclusive worldwide collaboration agreement with Synthes, under which the 2 companies will jointly develop site-specific bone healing products.

The companies will also conduct and fund the evaluation of additional orthopedic uses for Forteo.

In addition to the development component of the agreement, the collaboration includes the co-promotion of Forteo to orthopedic surgeons in the US and in select OUS countries.

We signed agreements with private investors to establish BioCritica.

Based in Indianapolis, BioCritica will initially focus on the continued US development and commercialization of Xigris for severe sepsis.

BioCritica will acquire the US development and commercialization rights to Xigris, and will also receive the rights to potentially acquire several critical-care compounds currently in preclinical development [at Lilly].

The collaboration agreement also includes an option for BioCritica to acquire the development and commercialization rights to Xigris outside the US at a later date.

We entered into a collaboration with Medtronic to research and develop a new approach to treating Parkinson's disease that involves delivering a potential new medicine to the brain using an implantable drug delivery system.

Specifically, the goal of the collaboration is to develop a therapeutic approach for Parkinson's disease that combines the strengths of Lilly's biologic, a modified form of glial cell derived neurotrophic factor, with Medtronic's implantable drug infusion system technology.

Lastly, on the legal front, the Supreme Court denied Lilly's petition to reconsider a federal appeals court ruling invalidating the Gemzar method-of-use patent.

And the judge for the US District Court for the Southern District of Indiana ordered all generic drug manufacturers challenging the validity of the compound patent for Cymbalta not to sell a generic version of duloxetine until the patent expires.

As a result, we do not expect generic duloxetine coming to market until the Cymbalta patent expires in June 2013, or December 2013 if we are successful obtaining the 6-month pediatric exclusivity.

Now with this background, Ronika will discuss our Q2 financial results and provide our pipeline update.

And Derica will then cover key events for the remainder of 2011 and our financial guidance for the year.

Ronika?

Thanks, Phil.

As we've done on previous calls, we'll 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'll start on slide 6 with a quick look at our Q2 income statement.

On a non-GAAP basis, you can see that we generated robust revenue growth of 9% this quarter.

Excluding Gemzar outside of Japan, and the effect of US healthcare reform, revenue would have grown 13%.

Compared to Q2 2010, gross margin as a percentage of revenue decreased 1.8 percentage points, but was still strong at 80.4%.

This decrease is entirely due to the effect of changes in foreign exchange rates on international inventories sold.

Operating expense, as defined as a sum of R&D and SG&A, grew 12% this quarter.

This increase was driven primarily by SG&A, which increased 16%, while the increase in R&D was 6%.

Drivers of the increase in operating expense included expenses related to our diabetes alliance with Boehringer Ingelheim; the unfavorable effect of changes in foreign exchange rates; higher sales and marketing expenses to support launches of new products and new indications; as well as the pharmaceutical manufacturer's fee associated with the US healthcare reform, which was roughly $45 million.

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 of $58 million this quarter, which was higher than it was last year.

The higher net expense was due to a write-down in the value of the liprotamase asset as a result of the FDA Complete Response Letter we received in April, in which the agency requested additional clinical data.

Our tax rate was 20.9% this quarter, or 1.6 percentage points lower than in Q2 2010.

This reduction is primarily due to the R&D tax credit that was not in effect during Q2 2010, but was in effect during Q2 2011.

At the bottom line, our non-GAAP EPS decreased 5% from $1.24 to $1.18.

Consistent with the 2011 guidance we provided in January, we saw robust EPS growth in our business in Q2, excluding US healthcare reform, the effect of Gemzar patent expirations outside of Japan, and investments related to the BI diabetes alliance.

Excluding these items, EPS would have grown in the high teens.

Slide 7 shows our reported income statement, while slide 8 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 foreign exchange and its effect on our Q2 revenue.

As you can see on slide 9, total revenue growth of 9% was, again, driven by solid volume growth of 5%.

This quarter, foreign exchange contributed the remaining 4%, while price had virtually no impact on worldwide revenue growth.

We continue to see strong volume growth from our 3 counter-cyclical growth drivers -- Japan, animal health, and emerging markets.

Volume growth in Japan was 15%, driven by the recent launches of Cymbalta and Forteo.

Recall that in Q1, precautionary buying as a result of the Japanese earthquake and its aftermath, increased Q1 sales by about $30 million to $35 million.

As expected, this was largely reversed in Q2, trimming Japan's volume growth this quarter by about 6 percentage points.

[Unlike] animal health, volume growth was 16% in Q2, driven by an increase of demand for food animal products globally, as well as the launch of Trifexis in the US, the continued expansion of our companion animal business globally, and the acquisition of certain European animal health assets from Pfizer.

Finally, embedded within the rest-of-world line is our emerging markets revenue growth of 11% in volume and 13% overall.

Particularly noteworthy was China's revenue growth of 20% in volume and 26% overall.

This quarter it is worth reviewing the effect of foreign exchange on the rest of our income statement.

While FX did not have a large effect on EPS growth, it did affect individual line items.

Slide 10 shows the year-on-year growth of select line items of our non-GAAP income statement, both with and without the effect of changes in foreign exchange currencies.

The numbers in the first column are the same as those you saw on the last column on slide 6.

Let's focus on the second column of the numbers, which drifts out the effect of foreign exchange rates.

First, you'll see the 5% growth in revenue I mentioned earlier.

Below that you'll see that cost of sales and gross margin also grew 5%.

This is consistent with the statement that the reduction in gross margin as a percentage of revenue was entirely due to the effect of foreign exchange on international inventory sold.

In total, operating expenses grew 9%, excluding FX.

This increase was driven by the BI deal, the launch of new products and indications, and the pharmaceutical industry fee.

Since the increase in operating expense exceeded the increase in gross margin, operating income declined 3%, and EPS declined 4%.

You can see that while FX had a material impact on revenue, cost of sales, and operating expense, it really almost had no impact on operating income or the EPS this quarter.

So while FX didn't have much of an impact on EPS growth, US healthcare reform, the effect of Gemzar patent expirations outside of Japan, and the investments related to the BI diabetes alliance certainly did.

As mentioned earlier, excluding these items, EPS would have grown in the high teens.

On slide 11, you'll find year-on-year growth of these same items on our income statement on a reported basis, both with and without FX.

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

On slide 12, you'll find a view of our portfolio of new molecular entities in clinical development as of July 11 inclusive of the changes since our April update.

Our clinical stage portfolio now stands at 70 distinct NMEs, including 33 compounds in Phase 2 and Phase 3.

Biotech molecules represent over 40% of our Phase 2 and Phase 3 assets, as well as our overall clinical portfolio.

Advancing our pipeline remains our number 1 priority.

As reflected by the arrows, you can see that since our April update, we received FDA approval for, and launched, Tradjenta; we advanced 2 assets in the Phase 2 testing; we advanced an additional 3 assets in the Phase 1 testing, including our basal insulin glargine; we expect to begin pivotal trials for this molecule before year end; and we terminated development of one Phase 1 asset.

As Dr.

Lundberg shared during our investment community meeting on June 30, we're very pleased with the progress we've made building a robust, high-quality pipeline with many potential opportunities to advance patient care in diseases with large unmet needs, as well as commercial opportunity.

We are on track to meet or exceed our goal of having 10 NMEs in Phase 3 by year end, and believe that our current pipeline provides the foundation for Lilly to return to growth post-2014.

Derica?

Thanks, Ronika.

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

As mentioned earlier, having now received the CHMP recommendation for approval of linagliptin, we look forward to the European Commission approval later this quarter and then launching the product in Europe later this year.

In addition to our successes so far this year, we have a number of other potential regulatory approvals in the US this year, including -- 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, the sBLA for Erbitux in first-line metastatic colorectal cancer, and our response to the FDA Complete Response Letter for Amyvid.

We continue to expect a maturing of our mid- to late-stage pipeline, as Phase 3 trials could begin this year for -- one, our novel basal insulin analog and our new insulin glargine product, as well as our anti-IL-17 monoclonal antibody.

Finally, on the legal front, at any time we could have rulings from the CAFC on the Strattera patent challenge, and from the District Court in Delaware on the Alimta patent challenge.

Now you may recall that in the Alimta case, the judge had indicated from the bench that a ruling would be issued in Lilly's favor.

Now in terms of our 2011 financial guidance, we've updated the guidance issued in April for a number of factors, including -- continued strong volume growth in revenue driven by our 3 counter-cyclical growth engines and our patent-protected brands.

Secondly, stronger foreign currencies, which drives up the expected growth rates of revenue, SG&A, and R&D.

Thirdly, very prompt approvals of linagliptin in multiple markets, which is driving an increase in expected SG&A spend in 2011, as well as some additional expected revenue.

And fourthly, the write-down of the intangible value of liprotamase, which is driving higher expected net other expense for the year.

In total, these changes result in an increase and narrowing of our non-GAAP EPS guidance.

We now expect 2011 non-GAAP earnings per share of between $4.25 and $4.35.

Our 2011 reported EPS guidance range of $3.85 to $3.95 reflects the $0.23 IP R&D charge from the BI alliance, and $0.17 in restructuring charges for the first half of the year.

Now these changes have resulted in updates to most of the individual line items as well.

Revenue is now expected to grow in the mid-single digits, while we expect the gross margin as a percent of revenue to decline by 2 to 3 percentage points.

SG&A growth is now expected to be in the high-single digits.

And R&D growth is now expected to be in the low-single digits.

Other income is now forecast to be a net loss in the range of $100 million to $175 million.

We still expect our 2011 effective tax rate will be approximately 21% on a non-GAAP basis, and approximately 20% on a reported basis.

And we expect capital expenditures to be in the range of $700 million to $800 million.

Now slide 15 provides a reconciliation between reported and non-GAAP EPS for 2010, and the associated growth rates from these numbers to our revised 2011 guidance.

In summary, 2011 continues to play out as we had anticipated.

We're making progress advancing our pipeline, and we're delivering solid financial results.

We remain on track to meet our goal of having 10 molecules in Phase 3 development by the end of this year.

And as Jan articulated on June 30, we're seeing promising signs that in addition to increasing end numbers, our mid- to late-stage pipeline is increasing in quality as well.

We firmly believe that our current pipeline serves as the foundation to return to growth post years-YZ.

We also remain on track to meet our 2011 headcount and expense containment goals, helping to create the financial flexibility to invest in our pipeline, our counter-cyclical growth engines and current brands, as well as maintain the dividend.

In Q2, we saw the impact of the headwinds that we anticipated when we issued our 2011 financial guidance in January, and when we updated that guidance on our Q1 earnings call in April.

These headwinds are -- patent expirations that are lowering sales of Gemzar outside of Japan; US healthcare reform, which is exacting a higher cost this year than it did in 2010; and near-term dilution from our strategic diabetes alliance with Boehringer Ingelheim.

While we did see the negative impact in Q2 of these items, we again delivered strong growth in the remainder of our business.

Excluding those 3 items, on a non-GAAP basis we posted revenue growth of 13%, operating expense growth of 7%, and high-teens EPS growth.

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

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

Operator, first caller, please.

Thank you.

(Operator Instructions) Our first question comes from the line of Marc Goodman from UBS.

Please go ahead.

Yes, I was hoping you could give us a little more flavor for the volume growth of the products in Japan -- Cymbalta, Zyprexa, Alimta.

And then secondly, can you give us a sense of a little more detail on the emerging markets?

I know you mentioned the one growth rate for overall, but can you give us a sense of, besides China, what else is going on, what other launches are driving the business there?

Thanks.

Okay, Marc.

Thank you for the question.

I'll go ahead and take the question.

Derica, feel free to comment if you'd like.

For emerging markets first, as we mentioned on the call, we definitely had very strong growth in China.

But in addition to that we're seeing growth in a number of other emerging markets spread across the Asian region and also very good growth still in some of the South American countries.

We do have some upcoming patent exposures we'll begin to see, for example, in Brazil weigh more heavily.

But we continue to see very strong growth across a number of those geographies.

In Japan, the market really is still pretty widespread, good growth.

Forteo, for example, is off to a very strong start with a launch in the second half of last year.

Cymbalta is doing very well.

The insulins are doing extremely well.

Alimta's share growth has been extremely good since the launch there going back, I think, that would have been earlier in 2010, maybe in late 2009.

So really broad-based growth across a number of products driving the Japanese performance.

Marc, this is Derica.

The only thing I could add is if you look at Japan, not only did we get good growth, but it's been sustained.

We had about 40%, 41% growth in the second quarter, but we knew -- excuse me, in the first quarter, but we knew that had some buy-in as a result of the earthquake and the tsunami.

But if you were to normalize for that with the de-stocking that we saw in the second quarter, we basically were about 30% to 31% growth in each of the first two quarters of this year.

We had about, as Ronika mentioned, $30 million to $35 million of buying, we think, in the first quarter and about $20 million to $25 million probably worked its way out in the second quarter.

Ready for the next caller, please?

Your next caller comes from the line of Tim Anderson from Sanford Bernstein.

Please go ahead.

Hi, a few questions.

Pfizer says it'll be getting rid of its animal health business, and that's obviously an area that you continue to invest in.

I'm wondering why it wouldn't make sense for Lilly to go after that.

Would it just be an antitrust issue?

Second question is on your Phase 3 trials for your version of insulin glargine, are you going to have Lantus as an active comparator?

And then the last question, just on the Janssen animal health business, I don't believe we have any financial details there and I'm wondering how that ties into the 2011 guidance?

Is that deal an accretive transaction for you?

Okay.

Tim, thanks for the questions.

We'll have Derica go ahead and take maybe your first and a comment on the third and then Jill and Jan, you want to handle the glargine question, please?

Derica?

Good morning, Tim.

Tim, in regards to our animal health business, your two questions.

One, in regards to Pfizer's decision around their own animal health business, I think it's very early to speculate as to what the nature of the transaction they will be seeking, whether it will be a sale, a spin or an outright IPO, I think it's still to be determined.

So at this stage it would be really speculative on our part.

Clearly, we will watch how that situation evolves.

And if there are some assets that become available that we're interested in, then, yes, we will pursue them but we're very happy as well with the current state of our Elanco Animal Health business.

Right now, we're the fastest growing entity in that space.

We feel very good about the launches that Jeff talked about in New York where we've had 6 launches so far this year coming from our own pipeline.

With or without an additional transaction, we believe that we have the capacity to sustain the type of growth that you've seen through this point.

In fact, in the second quarter here Elanco grew actually 20%.

In regards to the impact of the Janssen deal that we just closed this year, it's basically neutral to the bottom line.

And, Tim, in terms of the financials, this is one that if you look at industry sources like Vetnosis you'll likely see that Janssen sales will be indicated at roughly $200 million or so for 2010.

We would encourage you to keep in mind that that does include sales of their products in markets where they are actually going through a distributor.

So the actual sales that they would have prior or we going forward would be booking would be less than that $200 million type level.

Jan?

In relation to our insulin glargine product, which just has entered human testing, we will use Lantus as a comparator in Phase III trials.

Linda, our next question, please.

Thank you.

Our next question comes from the line of Jami Rubin from Goldman Sachs.

Please go ahead.

Thank you.

Derica, my question relates to the Boehringer Ingelheim deal.

So Tradjenta sales posted $5.6 million this quarter, obviously, very early to tell.

But if you could just remind us how that deal works because I think you had talked about achieving accretion next year or the year after, I don't remember.

But I'm wondering if that is dependent on you reaching a certain level of sales with Tradjenta or is there flexibility built into the contract to reduce spending if you are not getting to the level that you anticipate?

And also so you're increasing your SG&A spend for the back half of the year.

I'm just wondering what's changed because the BI deal has been known.

The pharmacy fees have been known, et cetera, et cetera.

If you could just provide a little bit more granularity on what additional levels of spend and is it behind the Tradjenta launch?

Thanks.

Sure, Jami.

In regards to the BI deal, essentially it's a profit share if you look, in terms of the deal structure itself.

Clearly, we've had very good news around that brand, so we received an earlier than expected launch both in the US as well as in some of the key markets outside of the US like Mexico, like Brazil, like Japan.

So when you look at our SG&A spend guidance for the year, the primary driver of the increase is FX related, similar to what we talked about on the top line.

But at the same time, we are supporting the earlier launches of Tradjenta in those key markets that I highlighted.

So those are the 2 factors.

And in terms of the characterization we've given in the past, we had talked about there being dilution, obviously, higher this year driven by the upfront charge that we had in the first quarter, then lessening between 2012 and 2013 and then turning positive 2014 and beyond.

We, obviously, would have liked a little more dilution this year given the incremental investment because of some of these approvals and launches coming towards the earlier end of the spectrum of what was contemplated.

However, we're essentially making up for that and more in our full-year guidance by the raise that you've seen on the non-GAAP basis.

Linda, next caller, please?

Thank you.

We'll go to the line of Steve Scala from Cowen.

Please go ahead.

Thank you.

In the Zyprexa commentary in the press release, Lilly states it is difficult to predict the precise timing and magnitude of the impact on Zyprexa sales from the introduction of generics.

This language was not in the Q1 release to my knowledge.

May I ask why Lilly believes it is difficult to predict the timing and the magnitude?

What is unusual about this situation?

There was no similar language, for instance, in the Strattera paragraph.

What percent of US Zyprexa sales are protected by contracts that extend into 2012 and, therefore, will not be impacted by the patent expiration?

Thank you.

Sure.

Steve, what's really centered around that is the nature of the erosion curve.

We know exactly the date that we lose the official patent.

But what you will see, probably as we go through this, there will be an impact on our returns policy.

So for at the time when the product goes generic, how much inventory will actually be sitting out in the retail channel which creates an exposure in terms of returns.

The second is what the actual adoption rate in terms of generic utilization will be in terms of buying patterns of wholesalers as well as formularies.

That's where the unpredictable nature of this comes in.

We think we've accounted for a reasonable estimate of that in the guidance range that we've provided.

Even with those types of uncertainties, as you heard from Phil earlier and on the call, we still have a strong enough underlying business fundamental that has enabled us to be in a position to raise our guidance overall.

Linda, next caller, please?

Thank you.

Next caller goes to the line of David Risinger from Morgan Stanley.

Please go ahead.

Thanks very much.

I have three questions.

And I apologize if any of these have been asked, I joined the call a little late.

First of all, is a financial question for Derica, and then I have two product questions.

With respect to slide 9, it indicates that US price had a 0% impact on year-over-year revenue growth.

Can you just explain to us how you reflected the negative impact of healthcare reform in that line?

I'm assuming that that is what brought that down to 0% given numerous list price increases for US products.

Second, how do you see Effient competing with Brilinta and could you characterize how we should think about the competition playing out in the US differently from ex-US markets?

And then, third, how much of a positive read should investors take away from a futility analysis later this year that results in solanezumab continuing to completion?

Meaning; could you give us a sense for how low or high the efficacy bar is in the futility assessment?

Thank you.

Derica will take the first one and Jan will handle your second two questions, David.

David, in regards to the US price it's really being affected by two factors.

One is the incremental impact of US healthcare reform, both the full-year effect of US healthcare reform as well as the introduction of the doughnut hole provision.

The second thing that's impacting it is also the erosion of Gemzar in the US, the price erosion.

Those are the two things that are allowing our net effective selling price impact to be zero.

Jan?

Right.

So let me start with the antiplatelet agents.

As you all know, Effient is an irreversible once daily antiplatelet while brand Brilinta is a reversible twice daily agent.

A key difference is that in the Effient studies which, of course, are not the same as the Brilinta studies, and to really compare them, we need direct head-to-head studies.

But the US patients in the Effient studies did better than Plavix.

For some still unclear reason in Brilinta, the US patients actually did better on Plavix than on Brilinta, which is a discrepancy for Brilinta to the whole world data.

There is also some dyspnea side effects with Brilinta that Effient doesn't have.

So for the moment, I think we have here 2 effective antiplatelet agents in the more whole world populations while in the US population Effient did better.

And the FDA, I think, took that interpretation into actually saying that Brilinta should not be used when you have a high aspirin dose, which clearly Effient can be used when you have.

Since I think the US treatment paradigm today has a high number of high-aspirin in combinations it actually would favor Effient.

But, overall, we need the head-to-head studies to really make a direct comparison.

In relation to solanezumab and the futility analysis that will come up later this year, this is a judgment then of the DMC of the benefit to risk component.

They will look clearly at safety as well as futility of efficacy.

This is their judgment, but my interpretation is that Alzheimer's disease is a very serious disease.

There is no real treatment to stop progression of the disease.

We don't really know today when would the potential effect start of preventing amyloid.

My feeling is this will be a judgment call for the DMC.

Whatever the outcome, we need to wait for the full study before we can draw any clear conclusions.

Great.

Linda, next caller, please.

Thank you.

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

Please go ahead.

Thanks for taking the questions and congratulations on the results.

First question, just in light of budget negotiations in Washington there is some risk, at least some would believe, that has been weighing on the group that the government may come back and look for some additional funds and, obviously, the dual eligibles I think have been pointed to, that they believe that provision potentially could be pulled during budget negotiations.

Just your thoughts around what the risk is around that and what the impact would be?

And then one question for Jan has to do with the SGLT-2, the profile.

Does he believe the increased bladder cancer risk is a class effect?

Is that something that we might see with the Boehringer compound along with the liver toxicity that we'd seen?

Then one final question just has to do with AG, using an authorized generic strategy on Zyprexa and Cymbalta, just your thoughts around that.

Thanks.

Great.

We'll have Derica take your first question, John, and then Jan for the SGLT-2 question and I'll handle your AG question.

Good morning, John.

As it relates to the debate or discussions around the deficit reduction challenge in the US, clearly, it's still very early, and it's hard to draw any conclusion based upon the dialogue, at least that I'm aware of.

But for the kinds of things that are being debated if they were to want to introduce Medicaid-type rebates into Medicare Part D that would be a profound impact not only for Lilly but for the industry.

So that's something we would not support, and I don't think our industry peers would either.

Along those same lines, we also would not be supportive of reducing the data protection for biologics or the strengthening of the position of [iPad].

These are all concerns that we have and, obviously, we continue to engage in discussion and dialogue with the parties at hand.

If any of those were to move forward, then they would clearly have an impact on jobs in the US.

And I don't think that's where we all want to go given the budget discussions that's being had in trying to stimulate the economy.

Jan?

With regards to the SGLT-2 class, it is important to remember that this is an agent which has quite a unique action that is independent of insulin secretion.

Also this agent is lowering blood pressure and body weight.

So it has clear beneficial attributes.

In relation to the reported increase in cancer then for the BMS/AstraZeneca compound, we have no evidence so far that this is happening with the empagliflozin.

Clearly, we only have more short-term observations and we really need to have all of the Phase III data before giving any definite answers.

The observed also single case of the [highs/low.] We have not seen that in our studies.

Just a final comment to come back to the cancer reports here that there is no clinical data or mechanistic hypothesis that would support that there is an increased risk of, for instance, bladder cancer.

It's a finding, like always, safety is paramount and we need to observe it and be cautious about the future.

And, John, with regard to your question on potential authorized generic for Zyprexa or Cymbalta, let me answer sort of generally with what we will be doing each and every time that we do have patent expiration, whether it be an injectable like we have with Gemzar or an oral small molecule like Zyprexa or Cymbalta.

We will definitely look at a host of different options.

I think it is safe to assume that we have in both those cases already done planning, looking at different things to see what is the most appropriate late lifecycle strategy for the molecule.

I would say that it is not a case where an AG would always be a preferred approach, so it really will be a molecule by molecule basis.

If we were to elect not to do one on the next one up, for example, I wouldn't take that as an indication that we didn't like the way the AG went with Gemzar.

In fact, we felt that has gone quite well.

If we would do one, for example, on Zyprexa I don't know that would mean necessarily that we would do one on Cymbalta.

It really does come down to what are the lines of business, the customer groups that these products go to, capabilities of partners, et cetera.

We'll keep you posted but at this time we have no comment specifically on what would be planned that would be likely for Zyprexa.

Linda, next caller, please.

Thank you.

We'll go to the line of Seamus Fernandez from Leerink Swann.

Please go ahead.

Thanks very much.

So just two questions.

One for Jan.

Jan, I didn't know if there was any reason to think about the molecular structure of dapagliflozin as a C-glucoside versus the molecular structure of the Boehringer Ingelheim compound relative to possible liver effects.

So maybe you can weigh in on that.

And then separately, can you just update us on any price changes that have occurred incrementally in Europe versus your expectation.

And update us on any proposals that may actually be out there as we work through the incremental possibilities of the debt crisis?

Thank you.

Okay, Seamus, thank you very much.

We'll go to Jan for your first question and I'll try to answer your question on looking forward in Europe, what we're going to be expecting and what's happened very recently.

In relation to structural activity relationships in relation to potential liver effects of the SGLT-2 agents, I think it's too early to make any conclusions based on a single case.

That's the first comment.

Secondly, I think history tells us that liver effects can be direct but they can also be indirect versus where the immune system, et cetera, could respond.

But I think for the moment, we have to get our data for our compound before we do any conclusions about liver risks.

Seamus, in terms of Europe, there really have not been any substantive changes of late.

We have seen, for example, as we had been expecting sort of the next round of publishing of price referencing lists in Greece in this June period.

That was very much in line with our expectations and did not have a significant impact on Lilly's products.

The newest one that I'm aware of probably would be some legislation passed in Poland that will take effect actually in January of 2012, so no impact to this year.

Where there will be agreement to go ahead and cap the government's expenditures on pharmaceuticals as a percent, I believe, of the overall healthcare spend with the industry providing some rebates if spend exceeds those levels.

Clearly, with continued budget pressures in a number of countries, we'll continue to monitor the situation.

We do think that there are already some pretty substantial cuts taken particularly on the pharmaceutical side of some of the healthcare and broader entitlement spending in European nations.

I wouldn't expect that to be necessarily the first place for them to go.

But, again, we'll monitor that situation as we're clearly not out of the woods with the overall situation for the global economy.

Linda, next caller, please.

Thank you.

We'll go to the line of Catherine Arnold from Credit Suisse.

Please go ahead.

Thanks a lot.

I'd like to ask a question or two about the pipeline.

If you could comment on where we are on the TRILOGY study for Effient and if that's still on track.

I think it's supposed to complete in the first half of next year and if data could be presented in the second half of next year.

Was there anything about the Brilinta label that would be surprising relative to what your expectations were internally?

And then lastly, Arxxant is on your pipeline chart but I don't know if we've heard anything about that for a long time and I'm wondering why -- what's happening with this particular product?

Thanks, Catherine.

We'll have Ronika take your first question on the status of TRILOGY and I'll handle the last two.

Hi, Catherine.

With regards to TRILOGY, keep in mind that that's an event driven trial, but the current estimate, and we typically stick to what's estimated in clinicaltrials.gov, and that's estimated right now to complete in April of 2012.

So that trial is progressing and we look forward to that data.

And with regard to the label on Brilinta, we'll probably actually a little bit later today after we finish the call have a chance to debrief more fully with the team who evaluated that when it came out after the close yesterday.

So at this point, I don't have a specific comment for you.

I don't know any items that were surprising.

Let me ask Jan if you've heard anything from the team yet or not?

I think for the moment, we are still discussing.

And in terms of Arxxant, Catherine, as you are probably aware, a number of years ago we had submitted to the FDA for the diabetic retinopathy indication, had received, I guess, what now would be called a Complete Response Letter basically asking us to provide them with more substantive data around visual acuity.

We're in the process of completing the last diabetic macular edema study that could potentially furnish the data that the FDA is looking for.

The last update that I had was that trial would conclude sort of late this year, I think the latest, maybe early next year.

Once we have that data in hand, then we'll either decide do we submit to the FDA, ask them to reconsider the application, or do we pull the NDA with the agency.

Linda, next caller, please.

Thank you.

We'll go to the line of Gregg Gilbert from Bank of America.

Thank you.

I have two questions.

First, I was hoping you could offer any preliminary thoughts on how a Medco/Express combo could affect Lilly.

And if you don't have anything specific to say yet, maybe you could offer up conceptually what types of things you're going to look into to be able to answer that question down the line?

Secondly, Derica, can you offer any color on SG&A and R&D lumpiness between 3Q and 4Q?

Thanks.

Gregg, thanks.

In regards to the Medco/Express, it's still early.

We do not anticipate that it's going to have a material impact on Lilly.

I think the bigger impact may actually be on the health plans themselves that they service in terms of going from reducing the number of players.

For us, we obviously feel very good about the attributes of our brands and in many of the therapeutic areas where we compete today there's already low-cost generic options available, yet our brands have held up very well.

So in cases like depression or even in schizophrenia with Risperdal being generic.

So we're not anticipating that this is going to have a material impact on Lilly at this stage, but once again, it's still early.

In regards to the Q3 or Q4 impact of SG&A and R&D, I think it's pretty much embedded in our guidance and in the color I provided earlier.

If you are looking at our SG&A, primarily what you're seeing in terms of our change in our line item guidance is the impact of exchange rates both in SG&A and R&D, and then more specifically for SG&A it's also the impact of the earlier launch spin behind Tradjenta.

We consider that to be a huge positive for us.

Linda, next caller, please.

Thank you.

We'll go to the line of Chris Schott from JPMorgan.

Please go ahead.

Great, thanks.

Just the first couple of questions were on Zyprexa.

Maybe the first one would be, as we think about Zyprexa in Europe can you talk about the severity of generic erosion you're anticipating here given that some of these markets obviously historically have had lower rates of generic penetration?

My second question on Zyprexa was with the upcoming patent expiration can you just help us to understand a little bit better the impact to gross margins and quantify how much of an impact to gross margin we should expect due to the loss of that franchise?

Thanks.

All right, Chris.

Thanks for your questions.

We'll have Ronika handle the first one.

I think Derica will take a shot at your second question.

With regards to Zyprexa and the patent expirations in Europe, you might keep in mind that in major Europe, we actually lost patent in Spain and some smaller other countries in this past quarter.

We didn't see much erosion but expect to see additional erosion as we go through the year.

With regards to the rest of major Europe, the patent will actually expire in September.

And keep in mind we would, again, expect to see additional erosion as that occurs.

Derica?

Chris, in regard to the impact to the gross margin, while I will not quantify the specifics, I can give you a clear directional impact and it's detrimental.

When we lose a brand like Zyprexa and with its level of profitability, you'll see an unfavorable impact to our gross margin line as that plays through our P&L and financial results.

One other thing, Chris, I'd have you keep in mind for European erosion, we may be in a little bit different environment now.

And some of the countries in the past had slower erosion.

I think it became pretty apparent to many of the payers that there would be very large brands and a large number of them coming off patent.

And they've effectively positioned themselves to benefit, as they should, from those patent expirations.

So much of the action that you saw in 2010 even was really directed against reducing prices of generic and setting up situations where once a branded product goes generic, those initial prices for generics will come out lower.

You've probably looked at this in detail, but in many products you've seen in the past that branded prices would be lower in Europe than here in the US.

But actually the generic prices would be substantially higher in Europe than here in the US.

So, again, I think you're going to see a stronger push to use generics more quickly and more fully and some of the markets in the past may have been slow erosion markets.

Linda, next caller, please?

And we'll go to the line of Tony Butler from Barclays Capital.

Please go ahead.

Thank you.

The question has been asked.

Thank you.

And then our final question comes from the line of Seamus Fernandez from Leerink Swann.

Please go ahead.

Just a quick follow-up on the Effient versus the Brilinta situation.

Can you just, at least in terms of the launch trajectory and the percentage share that you currently have of the incident ACS patient population, can you guys update us on that?

I think earlier you had given us an estimate of, I think, about 11% share at one point.

I'm just wondering where we sit today at least in the US market on a relative basis?

Thank you.

All right, Seamus, we'll have Ronika, (inaudible) you found some of the updated data?

Right.

You might remember, Seamus, we've gotten some, excitingly so, traction with regards to prasugrel over the last couple quarters.

What we've seen there is we've seen quarter-over-quarter nice trends with our TRx.

We're still seeing continued growth with regards to new to brand which has been very impressive given where we are in the current launch.

Right now, that exceeds about 13%.

Again, we are seeing about 1 in 5 ACS patients in STEMI-type specifically are receiving Effient which is pretty impressive.

And so we hope that traction continues.

Again, we are seeing quarter-over-quarter growth in our NRx and our TRx and are excited by this trend as doctors continue to accept and try prasugrel, or Effient.

With no further callers in the queue, I'll go ahead and turn it over to Derica to wrap up the call.

Well, let me conclude by first of all thanking all of you for joining us for this morning's call and more specifically for your questions.

We hope that the information we've provided today is helpful for your assessment of Lilly's financial performance and for our future prospects.

As always, the IR team will be available to answer any additional questions you may have.

I look forward to our continued dialogue and I hope you all have a great day.

Take care.

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