禮來公司 (LLY) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q3 earnings conference call.

Now 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, today's call is being recorded.

Your hosting speaker, Vice President of Investor Relations, Phil Johnson, please go ahead, sir.

Good morning and thanks for joining us for Eli Lily and Company's third-quarter 2011 earnings conference call.

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

Joining me today are John Lechleiter, our Chief Executive Officer; Derica Rice, our Chief Financial Officer; Dr.

Jan Lundberg, our Chief Scientific Officer; Dave Ricks, who's currently President of our US Affiliate, and as announced last week, Dave will assume the role of President of our Bio-Medicines Business upon Bryce Carmine's retirement at the end of the year, and we have Ronika Pletcher and Ilissa Rassner from Investor Relations.

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

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

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

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

Let's begin with a recap of events since our Q2 earnings call.

We had multiple developments on the regulatory front.

The European Commission granted final approval for Tradjenta for adults with type 2 diabetes.

The EU launches have begun starting with the UK.

Launches in other European countries are expected over the balance of 2011 and the first half of 2012.

Despite initial impasse, we hope to reach an agreement with local authorities that allows Tradjenta to be made available to German patients.

The FDA approved Cialis for once-daily use for the treatment of men who have signs and symptoms of benign prostatic hyperplasia, or BPH, and men who have both erectile dysfunction and signs and symptoms of BPH.

Cialis is the only medication approved by the FDA to treat both ED and BPH.

Just last night the FDA approved Byetta for use with insulin glargine.

Europe's CHMP issued a positive opinion for use of Alimta as a continuation maintenance therapy in patients with nonsquamous non-small cell lung cancer after initial treatment with Alimta plus Cisplatin.

We expect EC approval during Q4.

Along with Amylin and Alkermes, we submitted our reply to the FDA's complete response letter for Bydureon.

And the FDA assigned a PDUFA goal date of January 28, 2012.

We also submitted our reply to the FDA's complete response letter for Amyvid, a PET imaging agent under investigation for the detection of beta-amyloid plaque in the brains of living patients.

And finally we submitted the sBLA for Erbitux in first-line metastatic colorectal cancer.

On the business development front, we entered into 2 different agreements to bolster our diabetes presence in India.

First we entered into a collaboration with Lupin Limited, under which Lupin will promote Humulin in India and Nepal.

And we expanded our collaboration with Boehringer Ingelheim to include co-promotion of linagliptin by Lilly and co-promotion of Humalog by Boehringer Ingelheim.

Also in an earlier stage business development initiative, we launched a new platform called Open Innovation Drug Discovery to both build our own pipeline and identify molecules that may be useful in the treatment of multiple drug resistant tuberculosis.

On a legal front, the Court of Appeals for the Federal Circuit ruled in Lilly's favor in the Strattera patent case, overturning a prior ruling by the US District Court in New Jersey and upholding the Strattera method of use patent which will expire in May of 2017.

The Defendant filed a motion for rehearing en banc, and earlier this week, the court denied their request.

Lastly, in important news for our industry and for Lilly, the America Invents Act was signed into law.

Not only will this new law align US patent laws more closely to those of other countries, but we believe it will improve US competitiveness by reducing the backlog of patent applications, enhancing the quality of issued patents and providing greater certainty for those that invest in innovation.

Now with this background, Ronika will discuss our Q3 financial results and provide our pipeline update.

And then Derica will cover our financial guidance for 2011 and key events for the remainder of 2011 and 2012.

Ronika?

Thanks, Phil.

As we've done on previous calls, we'll focus our comment on non-GAAP results, which we believe provide insight into the underlying trends in our business.

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

We'll also provide commentary on our Q3 results excluding the effect of headwinds that were highlighted in previous discussions of both our quarterly performance and our 2011 guidance.

I'll start on slide 6 with a quick look at our Q3 income statement.

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

Excluding Gemzar outside of Japan and the affect of US health care reform, revenue would have grown 15%.

Compared to Q3 2010, gross margin as a percentage of revenue decreased 4.3 percentage points to 78.2%.

This decrease is primarily due to the effective changes in foreign exchange rates on international inventory sold and to a lesser extent, a negative mix effect.

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

This increase was driven primarily by SG&A, which increased 13%, while the increase in R&D was 5%.

Drivers of increase in operating expenses included costs related to our diabetes alliance with Boehringer Ingelheim including late-stage clinical trial expense, the effect of changes in foreign exchange rates, as well as the pharmaceutical manufacturing fee associated with US healthcare reform, which was roughly $45 million.

Excluding the effect of US healthcare reform and the Boehringer Ingelheim alliance, operating expenses would have grown 3% with this amount entirely driven by foreign exchange.

Other income and deductions was a net expense of $83.4 million this quarter, which was higher than last year.

The higher net expense was due to a partial write-down in the IP R&D value of Amyvid due to revised assumptions for the timing of a potential regulatory approval and sales uptake.

Our tax rate was 17.9% this quarter, or 4.6 percentage points lower than Q3 2010.

The largest item driving this reduction is the recognition of a discrete tax benefit of $45.4 million primarily as a result of a resolution of the Company's 2007 IRS tax audit.

At the bottom line our non-GAAP EPS decreased 7% from $1.21 to $1.13.

Consistent with the 2011 guidance we provided in January, we saw robust EPS growth in our business in Q3, excluding US health care reform, the effect of Gemzar patents expirations outside of Japan and investments related to the Boehringer Ingelheim diabetes alliance.

Excluding these items EPS would have grown in the mid 20% range.

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 how foreign exchange affected our Q3 revenue.

As you can see on slide 9, total revenue growth of 9% was again driven by solid volume growth of 4%.

This quarter foreign exchange also contributed 4% while price had a negligible impact on worldwide revenue growth.

We continue to see strong volume growth from our 3 countercyclical engines, Japan, animal health and emerging markets.

In total these businesses delivered 15% volume growth in the quarter.

Volume growth continued to be strong in Japan at 20% driven by recent launches of both Cymbalta and Forteo.

Elanco Animal Health volume grew 22% in Q3 driven primarily by organic growth including increased demand for our food animal products and the continued expansion of our companion animal business.

The launch of Trifexis in the US has been particularly robust.

To a lesser extent, this volume growth was driven by the acquisition of certain Anson and Pfizer animal health assets in Europe.

Finally, embedded within the rest of world line, our emerging markets revenue grew 7% in volume and 5% overall.

Although the growth in emerging markets moderated relative to previous quarters, particularly noteworthy was China's revenue growth of 22% in volume and 31% overall.

This quarter, FX had a significant effect on EPS.

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

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

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

First you'll see that the 4% growth in revenue I mentioned earlier.

Below that you'll see that cost of sales and gross margin grew 8% and 3%, respectively.

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

In total, operating expense grew 7%, excluding FX.

As mentioned earlier, the increase was driven entirely by the Boehringer Ingelheim deal and the pharmaceutical industry fee.

Continuing on, you'll see that excluding FX, operating income declined 2% and EPS declined 1%.

So you can clearly see that FX had a significant negative effect on EPS this quarter, lowering EPS growth by 6 percentage points to negative 7%.

In other words, the favorable effect of FX on our foreign operating income was more than offset by the negative effect of FX on inventory sold.

Excluding US health care reforms, the effect of Gemzar patent expiration outside of Japan and the investments related to the BI diabetes alliance, EPS would have grown in the mid 20s.

On slide 11, you'll find year-on-year growth of these same items of 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 new molecular entities and clinical development as of October 10 inclusive of changes since our July update.

Our clinical stage portfolio now stands at 66 distinct NMEs including 34 compounds in Phase 2 and Phase 3.

Biotechnology will represent half of our Phase 2 and Phase 3 assets as well as nearly half of our overall clinical portfolio.

We continue to make progress in advancing our pipeline.

Since July, we began Phase 3 testing of our new insulin glargine product and we now have 10 distinct compounds in Phase 3 testing with 2 more likely to begin before year end.

We advanced 3 assets in the Phase 2 testing including our myostatin monoclonal antibody that Jan Lundberg discussed at our June investment community meeting.

We advanced 2 assets in the Phase 1 testing and we terminated or suspended development of 6 assets across our Phase 1 and Phase 2 portfolio.

In summary, we have already achieved our goal of having 10 NMEs in Phase 3 by year end.

With Phase 3 starts expected this quarter for our innovative basal analog insulin and for our anti-IL17 monoclonal antibody for psoriasis, we could finish this year with 12 NMEs in Phase 3 testing.

We're pleased with our progress we've made building a robust, high-quality, mid-to late-stage pipeline with many potential opportunities to advance patient care and diseases with large unmet need as well as significant commercial opportunity.

As outlined in our investment community meeting in June, we believe our current pipeline provides the foundation for Lilly to return to growth post-2014.

Derica?

Thanks, Ronika.

Before providing our updated guidance, I'd like to talk through how the Zyprexa patent expiration will affect our income statement.

This may be particularly helpful as you update your models.

Now clearly this patent expiration, which is essentially a US and European phenomenon, will negatively affect our revenue and income, causing our fourth quarter results to differ substantially from those we've posted September year-to-date.

We lost the Zyprexa patent in most European countries last month.

This coming Sunday, October 23, we'll lose patent protection for Zyprexa here in the US.

Now as you might expect, during Q3 we saw the initial impact of the Zyprexa patent expiration.

Specifically, we saw some reduction in wholesaler purchases in anticipation of reduced future sales of branded Zyprexa.

In addition, we also made accrual to account for the potential future return of product that was sold to wholesalers during the third quarter.

In European markets, we've already seen multiple generic companies enter the various markets offering very large discounts.

For example, in Germany there are about 20 generic players and the initial generic pricing came in about a 75% discount to Zyprexa's pre-patent expiry price.

Now here in the US, while we expect rapid and significant erosion of the branded Zyprexa sales, the competitive dynamic will be a bit different as we will have a single generic company marketing each presentation of olanzapine for the first 6 months post-patent expiration.

Also as part of our late life cycle planning, we've entered into an authorized generic agreement here in the US with Prasco to allow them to market a generic version of olanzapine.

Now upon the expiration of the 6-month exclusivity period in late April of 2012, we would expect additional companies to market their own generic olanzapine leading to further sales erosion of Zyprexa.

In summary, on the revenue line we expect to see a significant negative impact in Q4.

This is reflected in the fact that our worldwide revenue has grown 8% September year-to-date while our full-year guidance for 2011 is for revenue growth in the mid-single digits.

As you think about the impact of the Zyprexa patent expiration on other line items of our income statement, you should keep in mind a few items.

We do not expect Zyprexa-related manufacturing expenses to decrease at the same rate as sales.

While there will be some savings of variable production costs, other fixed costs that had been absorbed by the production of Zyprexa will remain.

As a result, the expected decline in Zyprexa sales will put downward pressure on our gross margin as a percent of revenue.

This is why we forecast gross margin as a percent of revenue for the full year 2011 to be between 78% and 79%, despite the fact that it is at 79.5% for the first 9 months of the year.

Now in terms of marketing and selling expenses, we currently have very little variable marketing spend behind Zyprexa during this late stage of its life cycle.

Consequently there will be minimal marketing savings post-patent expiration.

The major spend behind Zyprexa has been the sales force.

Now, you should not expect to see a significant reduction of sales force expense as a result of the Zyprexa patent expiration for 2 main reasons.

First, beginning in late 2009, we restructured our US and then our European neuroscience sales forces.

Among other factors, this restructuring took into account the C&S sales footprint needed post-Zyprexa patent expiration.

Second, keep in mind that Cymbalta is sold by the same sales forces, and we remain committed to providing a competitive detailing effort behind this very important brand.

In a nutshell, our strategy for managing costs leading up to the Zyprexa patent expiration has been to act early and not wait until the event itself was upon us.

Since 2004, we've been reducing head count and driving productivity improvements across all areas of our business.

And since 2009, we've upped the pace of right-sizing our organization for the post-Zyprexa period, significantly restructuring everything from our Senior Management layers to our back-office operations, to our sales and marketing organization.

As a result of these efforts, we fully expect to meet our goal of reducing our expenses by $1 billion by the end of this year.

This will essentially complete our restructuring efforts.

While we will continue to drive incremental productivity, we have no plans for a major restructuring.

Hopefully this additional color commentary on the impact of the Zyprexa patent expiration is helpful as you update your models.

Now let's review our updated 2011 financial guidance.

At a high level our updated guidance is very consistent with the guidance we issued on our July earnings call.

It reflects continued strong underlying performance of our business.

It also includes the discrete tax benefit and the additional charges recorded in Q3.

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

On a non-GAAP basis, we now expect 2011 EPS of between $4.30 and $4.35.

Our 2011 reported EPS guidance range of $3.89 to $3.94 reflects the $0.23 IP R&D charge for the Boehringer Ingelheim alliance and $0.18 of restructuring charges in the first 9 months of the year.

Our guidance on individual line items is largely unchanged.

Revenue is still expected to grow in the mid-single digits and the gross margin as a percent of revenue is still expected to decline by 2 to 3 percentage points when compared to the full year of 2010.

SG&A growth is still expected to be in high-single digits, and R&D growth is still expected to be in the low-single digits.

Our guidance for other income is now forecast to be a net loss in the range of $175 million to $225 million, reflecting the partial impairment of the acquired in-process R&D asset related to Amyvid.

As a result of the discrete tax benefit recognized this quarter, we now expect our 2011 effective tax rate to be approximately 20% on a non-GAAP basis and approximately 19.5% on a reported basis.

And we now expect capital expenditures to be approximately $700 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 terms of key future events, highlights for the balance of 2011 include -- potential FDA approval of Erbitux for first-line head and neck cancer; the anticipated European Commission approval of Alimta as continuation maintenance therapy in nonsquamous non-small cell lung cancer; expected Phase 3 starts for our innovative basal analog insulin and our anti-IL17 monoclonal antibody in psoriasis.

This would bring our Phase 3 portfolio to 12 new molecular entities, exceeding our goal of 10.

We also expect to present key Phase 2 data on our CETP inhibitor at the American Heart Association meeting in November as well as for our anti-IL17 in RA at the ACR meeting also in November.

And in psoriasis at the Gene to Clinic meeting in London in December.

Now in the interest of time, I will not recite the full list of potential events for 2012, but as you can see, we have made a significant number of -- we have a significant number of potential regulatory actions, Phase 3 trial completions and potential data disclosures.

We are clearly excited about the year ahead and are pleased with the progress we continue to make in advancing our pipeline.

This will remain our number 1 priority.

Now as I mentioned on our July earnings call, 2011 is playing out largely as we had expected.

We're delivering solid financial results as we head into the Zyprexa patent expiration, and importantly we are making progress in advancing our pipeline.

As expected, in Q3 we saw the impact of known headwinds, including patent expirations that are lowering sales of Gemzar outside of Japan, US health care reform, which is exacting a higher cost in 2011 than it did in 2010, and near-term dilution from expenses associated with our strategic diabetes alliance with Boehringer Ingelheim.

Now while these headwinds negatively affected our Q3 results, we again delivered strong underlying growth in the rest of our business.

Excluding these items, on a non-GAAP basis we posted revenue growth of 15%, operating expense growth of 3% and mid-20s% EPS growth.

As you think about our future revenue, you'll clearly need to factor in the patent expiration of Zyprexa in the US and Europe, but I also like to highlight that in Q3, our countercyclical growth engine of Japan, emerging markets and animal health collectively grew 19%, and we had a number of key brands that posted double-digit worldwide revenue growth including Cymbalta, Humalog, Strattera, Forteo, Cialis and Alimta.

We've already achieved our goal of having 10 molecules in Phase 3 development by the end of the year.

And we expect to begin Phase 3 testing of our innovative basal analog insulin and our anti-IL17 monoclonal antibody in psoriasis before year end.

We firmly believe that our current pipeline serves as a foundation for Lilly to return to growth post years YZ.

Moving forward we will continue to focus on executing our 3-part strategy as we stated in June, replenishing and advancing our pipeline.

As for innovation based bio-pharmaceutical Company, this is our future.

Second, investing to drive growth in our countercyclical growth engines and key currently marketed brands, particularly those that do not lose patent protection in the YZ period.

And third, continue to drive productivity gains across our business that allow us to fund R&D necessary to fuel our future growth, recapitalize our physical assets and maintain our dividend.

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

Operator, first caller, please.

(Operator Instructions) Steve Scala, Cowen.

Thank you I have 2 questions, both of which are on solanezumab.

Does the delay and the futility look allow for a view of the data reflecting a longer duration of treatment such as say 15 months as opposed to had the look occurred in the current quarter when perhaps it would have been more like 12 months?

Or regardless of when the look was taken, is the duration of treatment the same?

That's the first question.

And then the second question is for Dr.

Lechleiter.

Do you view the final solanezumab Phase 3 results in the second quarter of 2012 as just another Phase 3 read-out or is this perhaps the most important data point for Lilly in years and will dictate where you lead the business?

And perhaps asked differently, is your current course viable, if solanezumab should fail?

Thanks.

Great, thank you, Steve.

I'll go ahead and take your first question, have John answer the second.

The futility analysis had been originally scheduled for December and for purely logistical reasons, the DMC rescheduled that to January.

So there is no particular change in the number of months, number of patients type data that they would be reviewing at that particular review.

It was simply a logistical change that led to the movement from this year to next year.

John?

Steve, with respect to your second question, obviously we're very interested in those results, and we're very interested frankly in anything we can do to advance the cause of developing new therapies to treat Alzheimer's.

I will mention we have other molecules as well in various stages of development in our portfolio looking at to the beta-amyloid and other mechanisms associated with Alzheimer's disease.

While this is a very important read-out for us next year, it's not something whether it's positive or negative that's going to change our strategy or change the basic underlying assumption set that we're carrying forward as we go through YZ.

Our future does not depend on any single molecule including solanezumab, there are soon to be 11 other molecules in Phase 3 and we'll go where the data takes us and proceed accordingly.

But we're really interested in prosecuting and moving forward that entire portfolio.

Steve, this is Phil.

Before we go to the next caller, as you're thinking about solanezumab also in relation to the financial projections that we had discussed in Derica's section of the investment community meeting in June, we have said all along this is a high-risk program.

It's very interesting science.

We're very hopeful of the potential outcome.

But we have recognized that it's high risk.

Essentially for the financial modeling what that means is it's a sign of relatively low probability of actually hitting, if you will.

So that means for our financial projections that low probability goes to 0 it really does not take them down very much.

If on the other hand, it were to go ahead and go from that low probability to 1, it would have a substantial potential upside to those numbers.

Hope that's helpful.

Operator, next caller, please.

Seamus Fernandez, Leerink Swann.

Thanks very much, another pipeline question.

As we think about the prospects for the spend as you move through and into some of these new trials, I do see that you have a potential move forward of the CETP inhibitor into Phase 3.

Maybe John can you just talk a little bit strategically about your interest in the CETP inhibitor and perhaps even there are many, many CETP inhibitors in development across the industry, would there be any interest in basically saying okay let's look across the difference CETP inhibitors, take the data and perhaps partner with someone else who has this and share the development costs given the risk profile associated with this still untested mechanism?

Seamus, what-- I can't speak specifically the CETP inhibitor because we really need to wait and see the data as we share that in November.

But I think as we look at our pipeline, obviously we're making decisions and looking at different things all the time that say should we go alone with this 1 or should we partner that 1.

Obviously we've got to huge benefit I think from the deal we struck with BI earlier this year where we've in essence got 4 potential assets, 1 of which is now launched, linagliptin shared between the 2 companies on a global basis.

And as we move new molecules into Phase 3, other programs begin to wind down.

So we're looking at this all the time, and obviously we'll do what we think is in the best interest of the Company and the shareholders as we make these decisions.

Kevin, next caller, please.

Marc Goodman, UBS.

First, can you give us a little more color on the emerging markets, maybe just talk about why it had slowed a little bit, maybe talk about a couple of the countries?

And then second of all, maybe you can talk about some of the products that moved into Phase 3 a little bit.

Is there any color you can give us, mechanism of action and maybe just a little bit more color there?

Thanks.

Great.

Derica you want to handle the first question, maybe Jan comment on the second, please?

Sure, Phil.

Marc, this is Derica.

We still are very pleased with our performance in emerging markets.

And as I stated it's really playing out as we had expected.

What we saw in the third quarter is the beginning effect of Zyprexa patent erosion in the emerging markets and specifically in Brazil.

In markets like China, where we haven't seen that, that's why you saw the 22% volume growth there and the 31% growth overall.

So the growth that you saw in the third quarter is according to the expectations that we had laid out.

Jan?

In relation to the new Phase 3 starts as you see on the pipeline slide, we have a new insulin glargine opportunity that we have moved into Phase 3.

This will fit very well into our diabetes portfolio overall and then help actually the choice for the physicians then to different patients.

We believe we have a very good agent, and we are comparing these to Lantus then in 2 Phase 3 trials, both in type I and type II diabetes for non-inferiority.

Furthermore, with our expertise and in manufacturing and advance devices, we think we can be really competitive in this area.

Marc, the other thing that you will see are some new names for what was previously on the chart as mGlu2/3 and NERI.

So you've got [pulmaglumatabmythyamil] which is mGlu2/3, so new name but same molecule.

And then edivoxatine which is NERI.

Kevin, next caller, please.

Chris Schott, JPMorgan.

Great, thanks very much.

First question was if you could just elaborate a little bit more on the European pricing environment and how it's trending relative to your expectations?

I think most importantly kind of as we go forward, how are you seeing 2012 and 2013 shaping up from a pricing perspective relative to 2011?

Second question was on the insulin business.

Can you talk about the competitive response you see in the market?

You're obviously doing very well with volume trends here, could you just talk about, again, are you seeing any different competitive response as you've regained some share?

And then finally just color on TRADJENTA and how you see the EU opportunity for this product given some of the challenges I think you highlighted in Germany?

Thank you.

Great and Derica will handle your first question.

I'll take a shot at the second 2, Chris.

Okay, Chris, in regards to the current pricing situation in Europe, it's actually playing fairly consistent with what we've seen historically.

As you look at our Q3 results, you can see price was down about 1%.

Historically we typically see about a 1 to 2 percentage point erosion on an annual basis year on year, so very much aligned.

Now obviously each government is acting at different points in time, but we continue to be able to manage our way through that.

As I think about 2012 and 2013, at least in Europe, we still see things playing out more or less along those lines.

Probably the biggest question from a pricing standpoint still remains in the US, and what emerges from the discussions around the super budget committee and if there's any change as it relates to health care reform and dual eligible and so forth, the increases in rebate.

That's probably the biggest unknown from a pricing standpoint facing the industry at this stage.

Great.

Also on European pricing, Chris, probably since our last call, the 1 thing that would have changed that would be the largest impact was in Spain, where they instituted a couple new measures, 1 for those products that had been on the market for more than 10 years and for which there is no generic reference pricing group because there is no generic competition, they had asked for a 15% rebate essentially on those products.

That compares to the 7.5% that they had been requesting prior.

And then probably the more materially for us here, they went ahead and said that innovative formulations, even if they are protected by patent protection, would still be subject to reference pricing.

So specifically for us, Velotab, the rapid dissolving form of Zyprexa, while it will not have generic competition in Spain its price has now been pegged to the reference pricing for the generic olanzapine group broadly.

For insulin competition, this is a sector that we've dedicated a lot more focus to over the last couple of years and particularly I say with the formation with of our diabetes business in early 2010, and we intend to maintain that focus on that business.

We have said before, we are seeing that it is more competitive.

I think Novo is now seeing more a competitive Lilly.

And as we would expect, they're going to react.

And I would say though while the insulin business is 1 that's extremely important, it's going to be a very large part of the overall diabetes treatment market and 1 that we intend to go ahead and be very competitive in.

Our goal of regaining leadership over time in diabetes is not predicated solely on insulin's, it really does encompasses the [GLP] space as well as orals.

So our focus on building that broad-based portfolio and leveraging that is intact and we'll continue to execute that very diligently.

TRADJENTA it's really very early days.

You may have been also referring to the decision made in Germany, where there were some very difficult comparables being applied to what the government was espousing they would like to reimburse the product path, it did not make it appropriate for Boehringer Ingelheim or Lilly to move forward at this time.

We definitely do anticipate we'll be able to reach some agreement with the government that provides this product to patients and also recognize the innovation, the benefits that it brings and appropriately compensates Boehringer Ingelheim and Lilly.

So we remain very optimistic about this class and about this product.

Again very early days in Europe on this particular front.

Kevin, next caller, please.

Catherine Arnold, Credit Suisse.

Thanks very much and good morning.

I wanted to ask you guys about the insulin diabetes market.

And first of all more broadly, now that you have this broader portfolio, some assets homegrown, some assets are obviously from other innovators.

Are you in the position that you can actually use that portfolio for contracting purposes either to governments particularly outside the United States or from the standpoint of private payers, if you could just comment on what you're able to do as you approach the customer on payment?

And then I wanted to ask you on your insulin glargine aspirations, have you considered doing a combination with BYETTA and would you need a separate contract with Amylin to move forward on that idea?

Okay, Catherine, I'll go ahead and take a shot at the first 2 and if others want to chime in feel free to.

So I don't necessarily believe that we're able to go ahead and leverage this in terms of bundling, if you will, or the using different products to go ahead and gain leverage with payers that way.

I think 1 of the main things that we have been focused on is the ability to approach the physician and talk about what their patients' needs are, and those patients do have different needs over the course of their disease.

So this clearly positions us to offer products that go from earlier stages with the oral treatments into the injectable phases with [GLP] initially and then obviously you've got people who eventually will progress to and will need insulin therapy and obviously we have very strong offerings which we hope to expand in the future with the 2 Basal's that we're developing.

In terms of the combo, to my knowledge there have not been active discussions.

I'm not familiar, Catherine, with the [Contract].I would think if you introduced another molecule into that collaboration, we would need to probably have some discussions to figure out how that would work as the current collaboration really is focused on the exenatide molecule whether that's BYETTA, BYDUREON or subsequent formulations.

Kevin, next caller, please.

Tim Anderson, Sanford Bernstein.

Thank you.

You talked about having already pulled much of the sales and marketing spend from Zyprexa.

On the variable spending unrelated to the sales force, can you give us an idea of when you started to make these cuts in earnest, and can you quantify how much these spend savings annualized to compared to when you fully resourced the brand?

And then looking forward to maybe the end of 2013 when Cymbalta looks like it's going to go away, that seems like it's going to have an impact on Lilly that's about the same as what Zyprexa is likely to have in the current year.

Can you just confirm that the Cymbalta impact will be about the same as Zyprexa's a few years from now?

How about Dave comment on the Zyprexa variable marketing spend.

And if you don't mind maybe, David, talking about how you're thinking of not necessarily the comment on the sales decline, but just the management of the sales operations as we go off Cymbalta?

And we'll come to Derica for the financial piece.

Great, thanks for the question.

So with Zyprexa, this is a brand that for many years has had a very [entrenched] positioning in the minds of physicians, and we've been able to begin taking down expenses as early as 2007 in the US on the variable side of the equation.

In the last calendar year, we can just say that they were a fraction of that peak level already in 2010.

In 2011 they were even lower, per Derica's earlier comment.

Cymbalta will see a very different picture in the US.

This is a brand in a very competitive, highly genericized market with less clinical differentiation in the minds of physicians.

We do plan on having a robust sales and marketing effort much closer to the loss of exclusivity.

And therefore, as you think about modeling, after LOE there will be a more significant expense impact post-LOE with Cymbalta.

Tim, when you think about the financial impact of -- well so how do the numbers play out, some of that is still also going to be predicated on how our pipeline emerges.

So remember in our late-stage pipeline, we have 3 [new] key neuroscience assets, solanezumab for Alzheimer's disease, mGlu2/3, our-- Phil pronounced the new name, I won't try it, but for schizophrenia, as well as NERI still for depression.

So as those play out we may see a re-purposing of some of those Cymbalta assets and resources to these new brands as we anticipate gearing up for their launches, assuming that we're successful in bringing those through the regulatory process.

So this is how we're trying to manage our way through this period, and seize the opportunities as they emerge.

Kevin, next caller, please.

David Risinger, Morgan Stanley.

Thanks very much.

I have 3 questions for Derica and then 1 for Enrique if he's on the line.

So with respect to animal health, Derica, can you comment on what the organic growth was in the quarter?

And then second, I was just hoping that you could rephrase or maybe add a little bit more color on your comments about Zyprexa product returns and what investors should expect in terms of fourth quarter US Zyprexa sales?

And then third, with respect to SG&A obviously spending continues to rise as you build businesses, and that's clearly working to drive the top line, but maybe you could just comment on the outlook for SG&A spending growth in coming years.

Should we expect SG&A to continue to rise post Zyprexa going generic?

And then if Enrique's on the line or maybe somebody else can comment, I was wondering if you could just provide any more color on the diabetes formulary pressure going into 2012 and your ability to offset the loss of CVS Caremark as a partner?

Thanks very much.

Okay, let me try to-- the first 3.

In regards to the animal health organic growth it was about 18% in the quarter.

As we think about Q4 and the US Zyprexa sales, as you know we do not provide product levels projections or forecasts.

But we can anticipate when we think about just returns, we probably took about a third of the impact and anticipating impact in the third quarter, and we would anticipate about another 60% impact of returns in the fourth quarter.

Clearly as you have-- we go through the brunt of the erosion-- the initial phase of the US erosion curve.

In regards to the SG&A expenses, if you look at the third quarter, it was really driven by 3 elements if you look at our total [OpEx] growth.

FX was about 3 percentage points.

The remaining 2 items was the pharma fixed fee, okay, and the third was the expenses both in SG&A as well as R&D behind our BI collaboration.

If you exclude those 3 items, our expense growth in the quarter was essentially flat or 0, in fact, it was slightly negative in real terms.

So when you think-- projecting forward, we're not at a stage of putting out guidance beyond this period from a line item standpoint, but what you can expect is we're going to be managing our SG&A very tightly, okay.

And just a little color commentary on that 7% non FX [OpEx] growth, that Derica mentioned is 2 factors, the BI, the Boehringer Ingelheim strategic diabetes alliance, as well as the pharmacy.

You got approximately 5% of total [OpEx] growth being driven by the Boehringer Ingelheim collaboration and about another 1.5% or so is driven by the pharma fee.

And then your last question, Dave, on the diabetes formularies access here in the US, each and every year there are some contracts that are up, not all of them.

And each and every year we have seen a dynamic where we've maintained probably the majority, vast majority of those that we have had, we've gained some additional ones and then we've lost a few.

That dynamic we expect to continue.

In terms of talking about specific contracts, often in agreement with the actual customers, we don't disclose the specific contracts that have been won or lost until they actually take effect.

So I can't provide specific commentary on ones that we may anticipate could come off in 2012 or that we may be gaining in 2012.

We'll have that information probably for you in the January call with the Q4 results.

Next caller, please?

Tony Butler, Barclays Capital.

Thank you very much, good morning.

2 brief questions.

1 is Derica, while the volume in Japan has been quite spectacular, the question is with price cuts assumed to come in the spring of next year, what are you currently anticipate those price cuts to be, that is how are you modeling it?

And then second back to the Zyprexa returns, can you tell us what you're actually accruing for-- the amount that you're accruing for those returns?

Thank you.

Okay.

Tony, in regards to Japan, and we continue once again to be very pleased with our performance there and the launches of Cymbalta and FORTEO continue to go very well, we're not in the position of providing our pricing projections for Japan for 2012.

Clearly on our call in January, we'll be in a position to provide overall guidance for our outlook for 2012, which would include Japan and the potential pricing.

So if we can if we can put that off til then.

John?

Yes Tony, this is John.

1 comment I would make is although this is still being implemented in Japan on a trial basis, in the last year or 2, pricing has been liberalized there to better recognize true innovation.

Now how is that going to continue to play out and how will other products that don't fall in that category be effective remains to be seen, but actually in contrast to some other parts of the world we actually see in the last 2 years in going forward, a more favorable pricing environment in Japan as the government there recognizes the need to call out innovation and to value innovation and also continues with its intent to ensure that more medicines that are approved in Europe and the US are approved and made available to Japanese patients in a contemporaneous way.

And Tony to your last question, the returns was a little bit less than $50 million charge in the third quarter.

Kevin, next caller, please.

John Boris of Citi.

Yes, hi, can you hear me?

We sure can, John, yes go ahead.

Okay, first question is for Dave Ricks.

Dave, can you maybe help frame or characterize the opportunity for Cialis in BPH, what percent of the business have you already shifted to the once-daily size of the market opportunity in reimbursement going forward?

Second question, for Derica, you'd mentioned on the sequential growth for the emerging markets that it was largely attributed to Zyprexa, can you maybe give some color of the 500 basis points, sequential decline, what percent of Zyprexa sales accounted for that in rest of the world?

And then third question just for John very quickly, in the environment in Washington, what do you find, John that the industry is winning on going forward and what do you think some of the challenges are in Washington that the industry continues to face?

Thanks.

Dave?

John, thanks for the question on Cialis.

We're excited about the recent approval for Cialis for use in men who suffer from BPH as well as men who suffer from both ED and BPH.

We're now out detailing to physicians and are looking forward to this launch.

To your question about the once-daily formulation, which is specific to this indication, you need to take the medicine every day.

Prior to the BPH launch, about 1 in 4 Cialis prescriptions in the US were for the once-a-day form.

And we would anticipate with BPH uptake that to continue to grow and we see the BPH opportunity as a nice growth driver over the remaining life of Cialis in the US.

John, in regards to your emerging markets sequential growth, I don't have the specific data with me at this stage, at this meeting, but we can follow up with you on that, if that's okay?

John?

John, I think the Washington environment remains very fluid.

I think when you couple the ongoing health care reform with the deficit reduction focus.

In terms of wins, patent reform is a huge win.

It should in the medium to long term restore a great deal of confidence for investors that our patents can be-- can remain valid, can be enforced and can be the basis for investor confidence in addition to clearing this huge backlog.

I think there is still strong support for maintaining 12.5 years of data protection for biologic's, this was part of the Affordable Care Act and we-- it's the law and we want to keep it that way.

And I think there's a general recognition appreciation to the fact that this industry employs directly and indirectly between 3 and 4 million people in this country and is the only way we're going to attack diseases like Alzheimer's and cancer, which not only cause immense suffering but it helped drive up a lot of the health care costs today and in the future.

I think the area of concern for us right now is Part D.

We're fighting and we're quite adamant in our opposition to imposing government price controls in Part D.

This is a program that's working, premiums for seniors have remained low.

The overall cost of the program is stunningly lower than anyone forecast 5 or 6 years ago, and most seniors in Part D today have access to medicines.

In terms of deficit reductions, Part D is making a difference there, too.

A recent study published in JAMA showed that for every person enrolled in Part D, they have $1,200 a year less costs in other parts of the medical delivery system.

That's more than $10 billion a year in savings that I think we have to attribute to that program that's currently structured.

So we're going to continue to make sure that message gets heard and understand as we go forward.

We'll continue as well to express concerns we have about IPAD, the Independent Payment Advisory Board, as well as the way this 340B program is being expanded we believe inappropriately.

Kevin, next caller, please.

Gregg Gilbert, Bank of America Merrill Lynch.

Thank you.

First I was hoping you could attempt to quantify your dual eligibles exposure, and maybe John you can handicap that specific item, what will happen there?

Secondly for Jan, as we head into AHA, can you frame your latest thinking on how your CTP product stacks up against others in the category based on info that's been made public over time?

And third, perhaps for Derica or Dave, and congrats Dave by the way, on AXIRON, was there any abnormally high discounting or couponing in the quarter that will abate over time?

Thanks.

Thanks, Gregg, this is Phil, I'll actually take your first question.

So in terms of the exposure on the dual eligible low income subsidies, to date we've not provided a specific quantification.

I guess 1 thing I would point you to consider as you're trying to bracket how large this could be, for the original health care reform that was to have been an $80 billion cost of industry over a 10-year period, we'd actually estimate is probably closer to $115 billion cost over that 10-year period of the industry.

And as we talked about earlier, we've estimated that this year, you're probably talking about a $600 million to $700 million cost to Lilly in 2011 from health care reform.

Numbers I've seen from the CBO, I guess, who scored the Medicare dual eligible low income subsidy going to Medicaid pricing I believe has scored this at around $105 billion, $110 billion over a 10-year period.

So as far as order of magnitude without getting into specific numbers, I'd have you consider that.

Jan?

Right.

Well the main thing I can say is that listen to the presentation at the American Heart Association.

And secondly what I stated in June was that in the interim analysis or the current study where we now have the final data, the data monitoring committee said accelerate progression of these agents.

Dave, AXIRON?

AXIRON in the US as you know we launched the drug in Q2 and in June in primary care against the entrenched competitor.

Like any launch in the U.S, your main mission in early days is to drive trial and a good use experience for patients we believe are doing that very successfully.

Today in the US about 1 in 4 of new starts in the testosterone class are going onto AXIRON just 6 months into the launch.

Obviously co-pay cards, vouchers, samples are a key part of ensuring that positive early use experience, but through time, those dissipate as you get more refills.

So we're tracking right according to our plans and pleased with the early uptick.

Great, Kevin, we have time for 1 more caller.

Barbara Ryan, Deutsche Bank.

Well good morning, thanks for taking my question.

Question is really on China, where obviously you've been very successful in showing very strong sales growth.

Although we read about various government initiated programs to reduce price, et cetera, and I wonder if you could just share with us what you're seeing there, what your outlook is and maybe some split between what is actually part of the reimbursement list and what percentage of your business is private pay?

Okay, John?

Barbara, I think that-- we think for us to be successful in China in the long run, a formulary state is at the national level, the provincial level and at the hospital level is going to be key to that.

So we work very hard to ensure that our medicines are included in those formularies all the way down to the local level.

I think that there are going to be, today and going forward, situations where we have price decrease in China.

I think in some cases those are focused on classes that we don't participate in, and in some cases, they're likely to affect us.

I think as we look at our long-term model in China, we've tried to account for that.

Obviously not only is the delivery of health care changing in China, but I think the way in which health care is managed by the government will continue to evolve.

And under any circumstance, our enthusiasm for the opportunity we have there to reach more patients with our products and to grow our business profitably has not diminished.

Great, thank you very much.

I'll go ahead as we approach the top of hour and turn it over to Derica to close the meeting.

Sure, thanks.

Barbara to close out, 1 thing I would say to add to John's comment is if you think about the therapeutic areas in which we compete where we have a strong competitive position, Diabetes, Oncology and Neuroscience, those are also 3 of the fastest growing therapeutic areas in the China market.

So today this is a lot of what's driving the strong volume growth that you're seeing in that business in spite of the pricing environment that's resident there.

Thanks for everyone spending your time with us here this morning.

And I guess in closing, I'd like to just maybe reiterate a few points.

1, Q3 was another strong quarter of our underlying revenue growth and financial performance for Lilly.

And it was punctuated by double-digit growth from our countercyclical growth engines from 6 of our key brands.

As we head into the teeth of our patent expiration period, we have positioned the Company to fund the R&D necessary to fuel our future growth, re-capitalize our physical assets and maintain our dividend.

I guess finally, we continue to make progress in advancing our pipeline, which is the foundation of our future growth.

We look forward to keeping you informed as we execute our strategy and we thank you for your interest in Eli Lilly and Company.

Our IR team will be available to answer any additional questions you may have following this call.

Have a great day.

Thank you.

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